The Independent’s Hamish McRae – who’s been on the money more often than most commentators during this downturn – today outlines the reasons to be wary of a Government spending boom in the PBR. They’re worth quoting in full:
“The first is international. Trust is vital and there is a danger of a systemic loss of confidence in British financial management. Already sterling has fallen by as much as it did in 1992 when it was ejected from the ERM. We are going into this downturn with an exceptionally high budget deficit of around 4 per cent of GDP and that could rise to 6 per cent or more in the next financial year. It is plausible that the deficit could be even greater proportionately than the deficit run up by the Tories in the early 1990s.
The money has to be borrowed from the international financial community – there are not enough savings in Britain to do it. At some price a sovereign state (with the possible exception of Iceland) can always borrow, but the rates will reflect the risk, and the danger is long-term sterling rates rise sharply.
Second, there is the practical need to keep something in reserve. If you fire all your shots now, you are out of ammunition if they don’t hit the target. Imagine a situation in the autumn of next year. We will be in the pits of the downturn. Interest rates will be down to 2 per cent or below. There will have been a temporary tax hand-back but the end of that will be in sight. House prices will still be falling and the economy will still be shrinking. And there will be nothing else that the Government can do.
We may not get there and let’s all hope we don’t but we cannot be certain that this recession will be short, or that there won’t be a second leg to it after the initial downturn.
That is what happened to Japan in the early 1990s. It cut rates to near zero and had a huge public spending programme. Initially it did avoid a recession but at the cost of a deep one in the late 1990s and another in the early 2000s. Now it has debts of 180 per cent of GDP (against our 40-50 per cent) and is back in recession again.
Third, we don’t want to make the mistake of America in the early 2000s of failing to make the essential adjustments that a recession forces on us. We have to save more. As individuals we have to do it, and people actually are making quite a bit of progress to that end. We are no longer, for example, taking out the equity of our homes and using it to support consumption. That change has been forced on us by the mortgage famine but makes sense anyway.
Companies are having to cut back, savagely in financial services and other vulnerable industries, including newspapers. And yesterday’s statement by the Leader of the Opposition acknowledges that government will have to drive up its efficiency too.” As McRae goes on to observe, recessions – despite their undoubted ills – do give policymakers an opportunity to move to a more efficient economy. For all Alistair Darling’s talk of efficiency savings, the Government’s high-spending-high-borrowing approach suggests that’s an opportunity they’ll fail to take.
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