Sunday, 23 November 2008

Be gentle with me Darling

Over the last few weeks the dire state of the British economy has been exposed more and more every day. That really is a most extraordinary sentence. But it is true.

Recession was denied all through the summer now it is present and biting hard. We need go no further back than the budget in March to find the government boasting of low inflation, stabilised banks, government borrowing and debt at lower levels than predicted four months before in the 2007 pre-budget report and expected growth of the UK economy of between 1.75% and 2.25% in 2008 followed by 2.25-2.75% in 2009 and 2.5-3% in 2010. The full budget speech is reported here, today it seems utterly detached from reality. Every single prediction or forecast has been blown out of the water. Every criticism of the previous Conservative government for economic performance prior to 1997 looks like praise in light of the current situation. Mr Darling got everything wrong, absolutely everything, not a single figure he quoted about the state of the British economy between March 2008 and March 2009 bears any resemblance to the true position today.

On Monday he will make his second budget speech of the year, this one dressed in the sheep's clothing of a pre-budget report. Because poor Gordon announced with pride that under his stewardship the government will announce policies to Parliament rather than leak them to the press, we already know what Mr Darling is going to say on Monday. We know it because it has been leaked to the press. Neither Mr Darling nor poor Gordon knows what type of tax cut will go down best so they have leaked two in the hope that commentators will commend one over the other. Their first idea is to reduce income tax the other is to reduce VAT. Whichever is chosen they hope it will be enough to increase consumer spending in the run-up to Christmas and avert the loss of many thousands of jobs in retail businesses.

In one respect I can see how a tax reduction can help. As soon as "recession" is shouted from every newspaper and television news report people feel a need to retrench. They might be safe in their jobs but no one can be sure so attention switches from spending on optional items to saving in case the worst happens. Not only is the new television put on hold but the weekly supermarket shopping trip finds own-brand items being substituted for more expensive alternatives and the ham for Saturday lunch at £1.20 for 100g being replaced by luncheon meat at 53p. Lots of little savings occur at every level of the family budget so that an extra £50 can be found to reduce the credit card debt and an extra £100 to make an additional payment against the HP on the car. Reducing tax can encourage a loosening of retrenchment. Ham is again on the table and beanz still meanz Heinz.

Mr Darling's problem is that he cannot control what people do with the extra few pounds they no longer have to pay in tax. Some of it will undoubtedly be spent but not all, not by a long chalk. This is not just a consequence of the prevailing mood of retrenchment, it is also a consequence of increasing realisation of the reason for this recession. Despite government waffle about it all being caused by events in America, the message is getting through that the UK has been living a lie for many years. The increased wealth of which poor Gordon boasted throughout his time as Chancellor is being exposed as pretend money. "My house has gone up £10,000 in value, I'll borrow £5,000 for a new kitchen and still be better off" has turned into "my house has gone down £10,000 in value and I'm an extra £5,000 in hock". This hits people hard. What appeared to be a net gain of £5,000 now appears to be a net loss of £15,000. In fact the extra £10,000 added to the value of the house was just a pretence, it was bubble value not true value and losing it makes no difference to real wealth so all that has happened is that the householder has borrowed an extra £5,000. But that is not how it feels, it feels as though he has lost a lot more. He also worries about how much more his house will fall in value and how that will affect his future. It is these feeling which will dictate his spending patterns today.

Any reduction in tax has to battle against the increasing realisation that the whole country has been living beyond its means. Encouraged by a government that needed the additional tax arising from fictitious wealth to pay for its profligate spending plans, far too much was borrowed and far too little was saved. Today we find that the spending plans remain set in stone and the modest tax reductions announced on Monday will be said to be purely temporary, Mr Darling is taking a little less this year and is making clear that he will want it all back with interest in a year or two's time. That is not a sound foundation for sustained spending by Mr and Mrs Ordinary. It might make a little difference in the short term, by which I mean until Christmas, but thereafter retrenchment will continue and possibly deepen because of the threat of substantial extra tax in 2009-2010.

What Mr Darling cannot change is the need to remove billions of pounds of fictitious wealth from the British economy. Much of that will come from reductions in house values. Tell someone his £300,000 house has gone up 10% and he is happy, tell him his £330,000 house is now worth £300,000 and he starts to worry. That worry translates into action, cautious action, non-spending action, repaying debt action, saving not borrowing action. The one thing Mr Darling could do to maximise the benefit to the economy of modest reductions in tax is make them permanent by cutting government expenditure. Cull quangoes, garotte gimmicks, annihilate advisers, incinerate identity cards, reduce red tape, bin bureaucrats. Tell the people you are doing that and they can see light at the end of the tunnel because they have an extra £20 a week not just for a year but for the foreseeable future. The pressure to retrench will be reduced and retail businesses might see a benefit. Leave the massive waste of the state unaffected and the people will see the tax cuts for what they are, jam today paid for on a credit card with a very high rate of interest. And, more than that, leave in place an enormous state machine which grew to its present size on the back of perceived but non-existent wealth and taxes have to rise even further in the future to pay for the machine from a diminished pool of available money.

No doubt he will put a fine gloss on Monday's announcements. Many will be fooled into thinking he is doing the right thing. They are the same people who applauded his predictions in March. He and they were wrong then and they will be wrong on Monday.


Mberenis said...

New government grants and relief for lower and middle class, initiated by the Obama administration prior to inauguration.

Obama's Bailout for US

ziz said...

Big problems require big changes.

The UK economy is like GM cannot support the bloated payroll and it's income is declining lickety split.

We need to get the Gubment off our backs, slash payrolls, defer expenditure, cut projects like the Olympics, Trident, aircraft carriers we neither need nor can afford.

That is what Joe Average is doing ...

Then we need to earn our way in the world ... having spent 40 years allowing manufacturing industry to decline ..... but thenour wonderful Financial Services were going to replace that weren't they ?

Bluntly the acceptable levels of taxation cannot sustain the Government payroll and expenditure.