It is an iron rule of politics that the more ecstatic the immediate reviews of a Budget, the more disastrous it is likely to prove for the country over the long term. Last week’s effort by Gordon Brown may yet prove to be in the grand tradition of Denis Healey’s 1975 performance — which was instantly popular, but ended with Britain begging for alms from the IMF. If you want evidence of the Budget’s ephemeral magic, it is there in the opinion polls. After weeks of closing the gap, the Tories appear to have sunk back to an eight-point deficit, according to a Guardian/ICM poll. After months in which the press have teased Gordon about his dwindling role — and his mysterious trips to China and Africa — he is back there at the centre of events, controlling the Labour narrative, steering his party, it seems, to an inevitable third term. In all the hosannas, it has been easy to miss the cheep of the canary in the mineshaft.
The warning of an impending cave-in has been sounded in the City, where governments have borrowed since the days of William and Mary, and where previous Labour governments have come so catastrophically adrift. The statistic in question is the yield on long-term gilts: the interest rate charged by the moneymen to the British government on the enormous loans which, for instance, allow Gordon to watercannon our money at the NHS and employ another 850,000 public sector workers. This yield is a good indicator of the City’s confidence in the nation’s financial position, and in the last month it has risen from 4.3 to 4.8 per cent. The City, in other words, is taking fright. After years of sucking up to Gordon, and pretending to be enthusiasts for the Third Way, it appears that the markets are beginning to lose confidence in Labour, and are therefore charging more.
It should be stressed that this is not yet a disaster for the British government, and that Britain is not alone in causing concern. The markets are also worried about rising deficits in the public finances in America, where the bills for the war keep coming in and George Bush seems incapable of vetoing a spending Bill. It has hardly added to the credibility of the finance ministries of other European countries that they collaborated last week in the destruction of the Growth and Stability Pact. It will be recalled that this was the feeble attempt by Brussels to impose rules on borrowing and spending, to prevent profligate countries from free-riding on low euro interest rates. That straitjacket has now been abandoned, along with much of the euro zone’s fiscal credibility. But in charging Gordon more, the gilt markets are making a judgment about Britain alone, and they do not like what they see.
They have turned to the Budget Red Book, and they have found that the £12.5 billion current deficit forecast four months ago, in the pre-Budget report, has risen to a £16.1 billion deficit, thanks to spending overruns in several departments and higher contributions to the EU. To make so colossal a forecasting error over so short a period is positively Healeyesque; and it means more government borrowing. The central government net cash requirement — as it is known to the men in teddy-bear braces — has increased by £3.2 billion for this year and by £4.2 billion next, taking gilt sales to their highest since the year after Britain was expelled from the ERM. It is, if you think about it, pretty astonishing that after 50 quarters of growth, the British government should be running a deficit at all.
That is certainly the view of Standard & Poor’s, the rating agency, which warned this week that Western governments had failed to plan sufficiently for the rising bills from an ageing population, such as greater pension and healthcare costs. The national debt is now 34 per cent of GDP and it could reach 150 per cent by 2050, said S&P. If that happens, British government bonds would be downgraded to junk status and the Treasury would have to pay yet higher rates of interest. That may sound alarmist, but if anything it could be an underestimate, because S&P failed to take account of the increase in off-balance-sheet liabilities under Mr Brown, such as the £60 billion of debts run up by private finance initiatives, or the £14 billion of unfunded projects in the MoD’s procurement budget. Whoever wins the next election will have their work cut out to avert a financial crisis.
Those who underestimate Mr Brown do so at their peril. He may yet be in the advanced stages of a glacial progress towards being prime minister. Like him or loathe him, he has a serious world view, and a belief in big government that the Conservatives have failed properly to challenge. But that very belief is now producing a major deterioration in the nation’s finances, and it should be a lesson to those misguided Tory MPs — some of them too young to remember Denis Healey’s downfall — who think it is enough to imitate New Labour economics. The bond market reminds us that the risks of high borrowing include higher interest rates, as government borrowing crowds out the rest of us. As for Gordon Brown, the wonder is not whether he will be the next prime minister, but that he should want to be.