Coalition Cuts

THURSDAY, APRIL 22, 2010

Coalition Cuts

Helmut delivered coalition cuts... but we haven't got Helmut... or Germany's other politicos

As we hurtle towards our Jedward style election, the prospect of a hung parliament and some kind of coalition government looms ever larger. And the key question is whether such a government could possibly deliver the cuts we must have?

Because what we all need to remember is that these cuts are unavoidable. Depending on whose figures you believe, HMG is living £70-140bn pa beyond its means. And the only real question is whether we make the cuts in a consideredway - attempting to safeguard the more valuable bits of public spending - or whether we make them over a single weekend of panic with an IMF gun pointed at our head. 

We think a hung parliament will make the latter much more likely. As Ken said yesterday:

“The bond markets won’t wait for all the discussions and horse trading. Sterling will wobble. If Britain doesn’t deliver a Government a working majority, markets don’t think that we can tackle the problem, then the IMF will have to do it for us.”

Which sounds spot on to us. We'd be straight into a re-run of 1974-76, when a wobbly Labour government failed to grip a huge fiscal deficit, until forced to do so by a melt-down financial crisis and an IMF visit. And in that case, the government had actually started out with a majority - albeit wafer-thin (3 seats).

But despite that grim experience, there are those who reckon a coalition would actually be better at making the cuts, because it would have broader legitimacy. After all, our strained first-past-the-post electoral system means that no modern government ever has majority support (the current one only got 35% of the votes). So wouldn't it be better to combine the support for two parties?

Frankly, nobody has any idea. While it is true that coalition governments overseas have from time-to-time managed to implement substantial cuts programmes (eg Germany in the 1990s), we have no modern experience of such governments. A coalition would be trying to invent the rules at the same time as tackling the biggest peacetime fiscal deficit ever. Which doesn't sound at all reassuring.

And there's another key point. Minority and coalition governments only ever seem to have been able to succeed after a prolonged period of failure and crisis. For example, a minority government in Ireland managed a successful consolidation in the late 80s, but only after nearly a decade of failure during which government debt interest payments soared to 30% of revenues (eg see here, and see here for excellent Policy Exchange overview of selected fiscal consolidations in the UK and around the world). 

Of course, as we've blogged before, there is absolutely no guarantee that even a majority Tory government would actually make the cuts required. And it may be that nobody will do all that's required until we as a nation have suffered our Dunkirk moment. 

But a coalition government - probably with the increasingly unconvincing St Vince as Chancellor - would be the least likely to grip anything. Sooner or later we'd face that IMF gun, and a slash and burn emergency package that would make no discrimination between what we do and do not need. 

PS If you missed yesterday's Chancellor's debate, you should definitely catch up on the demolition of St Vincent da Flipflop. Guido has the key clip here.

PPS On those German cuts, they were necessitated by the bill for German reunification. Kohl had initially promised reunification could be achieved without the need for tax increases. When that turned out to be nonsense, he was forced to introduce a string of increases in social contributions (aka hidden taxes - cf NICs), sell off government assets, and even fudge the budget numbers (thank God that could never happen here). Only after taxpayers started getting seriously pissed was he forced into serious action on spending. And he was further pressed by the need to meet the strict fiscal criteria for joining the impending Euro - a kind of external IMF-style cosh (only later did it emerge that half the other joiners, like Greece, cheated their way in).

WEDNESDAY, APRIL 21, 2010

Labour's Legacy Of Misery

We've blogged the Misery Index before. It was first devised when Labour last had a go at wrecking our economy, back in the 70s. It comprises the sum of the annual increase in the RPI and the unemployment rate, which are two key statistics in gauging economic misery.  

The latest reading has pushed the index up to 12.4%, comprising 4.4% RPI inflation and an 8% unemployment rate.

So they really have done it again. When Labour came to power, the index was running at 10% and falling. It is now 12.4% and rising.

And today's unemployment stats show quite clearly that Brown's apparent miracle of stabilised employment in the teeth of recession was no more than a cruel illusion. And the unemployment rate of 8% compares to the 7% they inherited.

What a disaster.

PS Tyler lunched with a friend who has now completed his contingency arrangements to bail out on 7 May. He has a private pilot's licence, and even if the air space eco police have again closed us down, he's off. He reckons remaining here with Brown still at the controls will be far more hazardous to his health than any conceivable cloud of volcanic ash. But he'll need an early start - our guess is that the runways could be pretty packed that day.

TUESDAY, APRIL 20, 2010

Poorer By The Day

So much for deflation

One of the ways that you're being made to pay for Brown's catastrophe is via higher prices. And today's worse than expected inflation numbers underline just how painful it's getting.

All the official measures of inflation have jerked back up again, and are almost back at the levels last seen before the financial crisis broke in 2008. 

It's being driven by higher energy prices on world markets, but also by the fall in the value of sterling which is increasing the prices of everything we import. And these days, that means virtually all the goods you need to survive day-to-day (eg I'll bet you're not wearing a single item of clothing manufactured here - Tyler's currently wearing India, Bangladesh, Sri Lanka, and Egypt... although his socks are of unknown origin).

But while inflation is running between 3.4% and 4.8% (depending on which of the government's various measures you pick), average earnings are only rising by 0.9% pa. Which means that over the last year, the average worker has had his real income squeezed by between 2.5% and 3.9%.

And it looks set to continue. Earnings rising very slowly, while prices rise very quickly. 

But in truth, wage earners should consider themselves lucky. Many people no longer have a job to generate any earnings at all - another million have found themselves in that position since the recession began (official unemployed plus inactive). And of course, pensioners dependent on fixed savings have seen their income walloped since the Bank of England fired up the printing presses and abolished interest on savings accounts.

As we've blogged many times, anyone with money - be it earned income or savings - is a sitting duck. And there is no way that a LibLab coalition will have the steel to do what's really needed - ie a substantial cut in public spending.

Which means the pain will land squarely on those with earnings and/or savings. Some of it will come via much higher taxes, and some from higher inflation (Darling's decision to freeze personal tax allowances actually combines the two, with people lifted into higher tax brackets by inflation itself).

And yes we know, given that everyone will have to tighten their belts (made in Cambodia), it's only fair that those with money contribute their share of tightening. Fine. Just so long as the state and its clients remember that they ultimately depend on those who earn and save in order to generate the income and the taxes on which they depend. 

And that's something our campaigning politicos seem to be keeping awfully quiet about.

PS You know all that stuff about how HMG could lose its AAA credit rating? You can forget it. In reality, the bond market reckons HMG has already lost it.According to Credit Market Analysis, HMG's debt is already trading at prices below AAA (based on Credit Default Swaps). The market believes there is now a 1-in-15 chance HMG will default within 5 years. So the US is still AAA. Germany is still AAA. France is still AAA. Australia is still AAA. Even Gruniad Sweden is AAA. But we're not. Somewhere down there, Gladstone will be spinning.