Britannia Radio

The advice from four ex-chancellors is almost unanimous.  I can only pick between them on the simple grounds of - lucidity!   On that test  Nigel Lawson wins by a head!

Even now today we have calls from commerce to postpone the ending of the VAT abatement.    I can sympathise if that postponement would enable retailers to get over the Christmas and New Year’s trading period - say a month’s delay - but not if they are really asking for its indefinite continuation.  We’ve got to face the cuts - and I’ve been saying this since well before the recession - since the longer they are postponed the deeper they will have to be. 

GUARDIAN 24.7.09

1. Verdict from former chancellors: painful cuts are only remedy

In the first of a special two-day report on the crucial party battleground of public spending, four ex-chancellors offer their advice

• Nicholas Watt, chief political correspondent

Four former chancellors of the exchequer have warned that Britain faces many painful years ahead and that stringent cuts in public spending are inevitable to get the country through the recession.

Speaking to the Guardian, the former cabinet heavyweights – one Labour and three Tory – drew on their own experiences during the turbulent financial crises of the 1970s, 80s and 90s and suggested that the next government would not be able to duck difficult decisions because the scale of the problems ran too deep.

Nigel Lawson, who has been advising the shadow chancellor, George Osborne, urged the Tories to introduce an emergency budget within 40 days of coming to power, to outline swingeing cuts.

"The public finances are in a terrible mess," Lawson said. "How much you do on the public expenditure side and how much you do by raising taxation, different people will have different views about it. My opinion is you need to do it very substantially on the public expenditure side."

Lawson, Denis Healey, Geoffrey Howe and Norman Lamont compared many of the current difficulties being tackled by the Treasury now to the tumultuous times they faced between 1974 and 1993.

The oldest of the four, Lord Healey, who is 91, faced the humiliation of going to the International Monetary Fund in 1976 to prop up the pound. He believes it is fair to make comparisons to the 1970s when the financial crisis led to massive cuts in public spending. "It is always painful to many people depending on what area you cut. It will be very painful for those who get the money at the moment."

Healey's warning about cuts will have a particular resonance in the Labour movement which remembers how, at the height of the sterling crisis in September 1976, when he was due to fly to Hong Kong for a Commonwealth finance ministers' conference, he turned back at Heathrow. He had decided to apply for an IMF loan and, two days later, made an emergency flight to the Labour conference in Blackpool to plead with the party to support him.

Healey is uncertain whether Britain will once again have to apply for an IMF loan. Asked if history would repeat itself, he said: "It is very difficult to say. I don't know. You'd have to make inquiries, try to find out what the conditions are likely to be, and whether they are acceptable."

Healey believes Gordon Brown has adopted the right strategy so far. "He's done it very well [handling the financial crisis]. He's had a lot of bad luck recently. But the IMF said we were handling it better than anybody else in Europe." [They said that a long time ago! -cs] 

But Healey warns that Britain will have to cut the deficit. "There is a lot of international pressure on us to reduce our borrowing."

Lawson, appointed as financial secretary to the Treasury after Healey left in 1979 and then as chancellor in 1983, agrees with him. The public finances are in a "terrible mess", he says, and an incoming Conservative government would have to send an immediate signal to the markets that it would tackle the fiscal deficit. "I do think the most important thing is to make a really big start right at the very beginning. They should do it straight away, not least because the markets are watching it very carefully. There is a huge borrowing requirement to finance. If the markets do not believe this is going to be financed honestly – that is to say without having to resort to inflation – then the government is going to find that the rate of interest it has to pay on its borrowing is going to be substantially higher. That is going to make the problem even worse. Therefore simply to contain the problem, you need to make a very, very, substantial start."

Lawson expects David Cameron to follow the example of Howe, Margaret Thatcher's first chancellor, who held an emergency budget within 40 days of the Tories' 1979 election victory. "To wait until the following March or April would be disastrous," he said. "They have probably got to do what we did when we came in in 1979. We came in, in May, and had a budget 40 days later."

Osborne, the man who is on course to step into Lawson's shoes, has been seeking advice from the former Tory chancellors. Lawson indicates this has been wise as he says a Tory government will have to impose the sort of public spending cuts introduced by Howe. "There is going to have to be a period of very substantial public expenditure stringency."

Describing the current fiscal deficit of nearly 12%, which is nearly twice the level of that in 1979, as "unbelievable", Lawson says people will feel they are back in the early 1980s. "I think it will feel very much like the way it felt … in the early 80s when we were clamping down very severely on public spending. There is perhaps a wider recognition among the public today that it has to be done. It doesn't mean they like it but they know it has to be done."

Howe said: "The situation is even more difficult than it was [in 1979] because of the scale of the debt. That is the essential thing. But it is less difficult because there is not inflation. The general shape is pretty forbidding. It is not a question of whether there will be public spending cuts. Public spending has got to be restrained if you are going to address the debt problem." But Howe believes that Britain is not quite yet in the "last chance saloon" – his famous description of the country's plight during  1979.

"It is different now," he said. "We are pretty much the next thing. It has not built up in the same way as it did. From 1970 on, government after government had been tackling the same agenda and had been defeated. It isn't anything like it really as it was then. There was a widespread sense of unease that it was overtaking us."

Lamont, chancellor between 1990 and 1993, believes that Britain is heading for a "pretty unpleasant" experience as it deals with a recession that dwarfs the one he had to handle in the early 1990s. "This recession is a lot worse than the 90s. The drop in GDP in the first quarter of this year was almost as great as the entire recession of the 1990s."

Lamont believes people are making a mistake if they think they will escape lightly, on grounds that interest rates are lower in this recession.

He said: "Interest rates have come down, the exchange rate has come down in this recession, and so people have felt …ah, things are easing, things will get better. I am afraid that could be a bit of an illusion. The effectiveness of interest rates will possibly be slower and longer than in previous recessions because this is a more organic, a more cyclical, recession. It is the result of accumulated debt and so it has to be worked off."

Spending cuts will be grim as the next government deals with the "horrendous" public finances. "I think it will feel painful everywhere," he added.

Lamont, who famously said "Je ne regrette rien" when challenged about his joke that he had sung in the bath after Britain's ejection from the European exchange rate mechanism, on Black Wednesday, 1992, tries to strike a light note as he describes the shape of the recession. "I prefer saxophone-shaped. We are reaching the up before another down, followed by a short flat. It could just be a long flat bit after that."

2. Decade of pain predicted for public services

Institute for Fiscal Studies forecasts 16% cuts across Whitehall

• Nicholas Watt, Patrick Wintour and Allegra Stratton

Britain will face spending cuts of more than 16% to key public services, such as law and order and higher education, if Labour and the Tories deliver on their goals to protect schools, hospitals and defence, the Institute for Fiscal Studies has warned.

As the two main parties gear up for a bitter general election battle that will be dominated by this issue, the IFS says Britain is facing a decade of pain that will see the tightest constraint in public service spending since 1977.

Concern has grown already this week about immediate shortfalls in the culture and education budgets, but the Guardian is publishing research by the IFS at the start of a two-day series on the future of public spending which reveals that spending on a majority of public services will have to be cut by up to 16.3% over the next three-year spending period – 2011-14 – if the next government is to deliver real-term rises for health, schools, defence and overseas aid.

Labour and the Tories have both said they would like to protect these four areas. They have also agreed, at a minimum, to cut Britain's record fiscal deficit from 11.9% of GDP next year to 1.3% by 2018.

Carl Emmerson, the IFS's deputy director, said: "It could be eight years of pain ... Unfortunately that is the kind of choices we are looking at. It will be very difficult for public services. Under the Labour spending plans at the moment it is the tightest three-year period since 1977 when the IMF were involved in setting spending plans in the UK."  [It will be more than that.  I’m expecting it to last a large part of the rest of my life, oif not all of it! -cs]

 

Gordon Brown and David Cameron are warned by Four former chancellors – Denis Healey, Geoffrey Howe, Nigel Lawson and Norman Lamont – say Britain is facing the most far-reaching public spending cuts since the 1970s. Speaking to the Guardian,   [- - - see above for full report! -cs ----]

Sir Michael Bichard, former permanent secretary at the education department, who is advising both the Treasury and the Tories, tells the Guardian that the political debate on public spending is still "pretty undeveloped". He also calls for a"jolt to the machine" to shake up Whitehall.

"We all are currently guilty of engaging in a debate about tactical issues when there are some huge strategic issues,"he said. "I think the debate about public spending is pretty undeveloped. But you've also got an election in less than a year and there aren't many politicians who want to be seen with an axe in their hand in the year before an election."

He and other recently retired mandarins have urged the two main party leaders to consider a complete overhaul of Whitehall to avoid costly duplication in the distribution of public spending.

Public spending has already become the key election battleground. The row erupted when Gordon Brown claimed the Tories would threaten vital public services after Andrew Lansley, the shadow health secretary, said public spending would have to be cut by 10% if NHS spending were to rise in line with inflation, as the Tories have promised, and social security and debt interest payments were maintained.

The government softened its position last week, with Lord Mandelson saying that Britain faces years of spending restraint, after it became clear that Lansley made his comments on the basis of government and IFS figures. The IFS is to go a step further and explain how the 10% cuts will be increased to 16.3% if similar spending safeguards are offered to schools, defence and overseas aid.