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.