Might David Cameron be a one-term wonder? The pendulum of British politics does tend to move slowly and as little as 18 months ago the Tories could expect two terms at least. But the economic stars are aligning in a way that will make sensible Conservatives shudder. Cuts – real ones, not the type Gordon Brown accuses the Tories of – are looking inevitable. Those Dublin protests could be coming here next. Brown may borrow just enough to avoid making cuts, leaving Cameron to burst the public spending bubble. I outline this scenario in my News of the World column today. I’m not saying it’s likely, just that it should be taken seriously. Here are a few factors to consider.
1) China may save Brown from the IMF. There’s a reason Hillary Clinton is in China – to kiss the ring of her new creditors. China still has a massive savings surplus and nowhere to put the cash other than government-issued securities. In another era, the US and the UK would face a buyers’ strike – no one would buy their bonds, or demand huge risk premiums. It’s becoming increasingly clear that the imbalance of the East Asian savings glut (which many blame for the Western debt crisis) is now encouraging government profligacy in the way it used to encourage private borrowing. The cash is there: mountains of it. So Brown may well be able to keep finding buyers to enable state spending at about £100bn a year more than he’s generating in tax. The IMF bailout scenario Osbrone has spoken about is indeed real – but it might happen after the election.
2) Cuts are inevitable Even if the Chinese would keep lending us money, it is immoral to keep saddling the next generation with debts just because the current generation didn’t want to face reality. As we saw last week, the tax base has collapsed in Britain. Even Darling’s PBR suggested it would be 2014 before the tax base caught up with spending – I’d say we’re now looking at 2017, perhaps even later. State spending is the road runner that has jumped over the cliff, but has not yet looked down. The government is still in denial, as we see in the Sunday Star today (not online) which reports that Lord Mandelson spent £80,000 redecorating his office.
3) Cuts can be deeply unpopular. Even Schwarzenegger is afraid to make these types of cuts in the nearly-bust state of California. His compromise, signed a few days ago, gives half-baked tax rises and half-baked cuts leaving an un-tackled deficit. The Irish government is facing protest marches right now. You can get the unions will attack Cameron with every piece of energy they can muster. So might the Tories be left to wield this hatchet amidst massive protests?
4) The economy may not rebound The more we learn about this crisis, the less likely a 2010/11 rebound is. I’ve blogged before about how the UK economy could be turning Japanese, with a decade-long (so-called L-shaped) downturn. Remember, sharp tax hikes are slated for 2010 and these may push the economy into a second recession. In the 1980s and 1990s we had inflation-induced recessions that are easy to cure. Debt-induced busts take years to heal.
5) Saviours are not always thanked at the time. Remember how uncertain the first few years of Thatcher’s government were. The electorate almost spat out the medicine. If it were not for the Labour/SDP split and the Falklands war, she may well have lost after the first term. And she was entirely honest with the public about what she would do – whereas the Cameroons are in danger of being overly optimistic. Their current spending plan – no real terms cuts – is, I believe, unsustainable. If Osborne is not careful, his message will be ‘read my lips – no new cuts.’ We all know how well that worked for George HW Bush.
There are many ways to avoid this, but the most important thing is honesty. Much worse is in store for Brown, Cameron will win and he should expend some political capital now telling it like it is. His plan to spend less than Labour’s 1% spending growth is, in effect, a plan to copy Labour’s spending plan. It’s unaffordable, and he knows it. If he does intend to make cuts, Labour’s message will hardly change –Brown has been saying ‘Tory cuts’ since 1994. He’s cried wolf on this, the electorate will be bored of hearing it. And given every household is making cuts, they should ask, why not the government?
If Osborne intends to load up the nation with £100bn of debt a year, as Brown does, he should say so – and admit that the country would be at the mercy of the Chinese and Arab buyers. If he’s going to make cuts, he needs to explain clearly why. There are precedents for thriving in a downturn. Roosevelt’s popularity increased, even though economy nosedived. John Howard won time over in Australia after its debt crisis. It can be done, but honesty is the prerequisite. The ‘more for less’ agenda, the moral and economic case for curbing state spending, has to be made now.
Comments