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NOT every day does the finance minister of a leading country walk into a casino and decide to bet his country on red. Metaphorically, though, that is what was on view in the House of Commons today as Chancellor Alistair Darling, egged on by his boss, the Prime Minister, delivered a dramatic range of measures designed to stimulate the economy, including a reduction in VAT and other tax cuts.
It is a gamble because no one can know whether it will work, and while the costs are obvious, the benefits have to be taken on trust. The costs are a further weakening of the Government's already shaky hold on financial reality - a further increase in the gap between what the Government spends and what it manages to raise in taxes - and at the very least an increase in the public-sector debt to be borne by future generations.This year government will borrow £78 billion, next year £118 billion and it will be 2015 before the budget comes back into balance.
Critics led by David Cameron argue that this verges on the reckless when set against Britain's current debt position. It leaves far behind the levels of prudence laid down by the European stability pact for government borrowing. Indeed, as the deficit soars, it will exceed the seven per cent of gross national product last seen in the depths of John Major's 1990s recession, or when the IMF was called in back in 1976. Who in the past 15 years dreamed for a moment that we would ever see such days again?
To work, the measures will have to mitigate the economic downturn so that more people stay in work, fewer businesses go bust, people successfully hold on to their homes and the fabric of society holds together. Whether it works depends on if it boosts confidence enough so that banks, businesses and consumers all start behaving more normally and start believing once again that the future will be more prosperous than the past.
This is a tall order - so tall, in fact, that to ask whether it will work is to ask the wrong question. Clearly, all those pessimists are not going to change into optimists overnight. As the economy slows down there will still be insolvencies, foreclosures, bankruptcy, unemployment and probably the odd riot. But the hope is these will be far fewer than they would have been without the measures.
The case for government action is that the problems in international trade and banking are sucking billions out of the economy and forcing it to contract. Confidence is so low that cutting interest rates will not work in time and there is no one else in a position to step in to keep the economic wheels turning. The risk of doing nothing and watching the engine seize up is far greater than the risk of playing fast and loose with the public finances and running the risk that it might overheat. This is why it is so difficult for the Tories to oppose.
So the question should be not whether it will work, because something is surely better than nothing. The more damaging question for Labour, in fact, is whether it is enough. A stimulus of £20 billion over this year and next amounts to one per cent of GDP per year - but how many people will change their behaviour because £1 in their pockets becomes 101p? And if people save rather than spend, then the measures will fail. There are many economists, including plenty in the City who are no fans of big government, who say the stimulus needs to be four per cent of GDP - or in excess of £60 billion - to be properly effective.
This is where the Government could be embarrassed. A bigger stimulus is out of the question because under Gordon Brown the public finances have become so weak that such a move would blow the remaining faith in the credit-worthiness of the country out of the window and cause the pound to collapse. That could be a prelude to our following Iceland into bankruptcy or another IMF rescue. His past profligacy has imposed a very real constraint on the Government's freedom of action now, however loath Gordon Brown is to admit it.
Rather than nail him on this, though, the Tories have been sucked into a debate about whether even £20 billion is affordable. This is irrelevant: no voter believes the country will go bankrupt over 1p in the pound - and even an extra £78 billion of total new borrowing is not an impossible sum when set against existing levels of government debt and a total GDP of about £1,500 billion.
There may be much huffing and puffing about the debt burden on future generations but the fact is future generations won't notice - any more than we notice that we are still paying for the debts run up by government to pay for the First and Second World Wars.
Gordon Brown is betting that they will notice even less if spending this money now pulls the economy out of its nosedive. It will still have to be paid for, which is why the Tories are warning about a tax bombshell in the future, and why Darling announced a 0.5 per cent increase in National Insurance from 2011 and a new top rate of income tax of 45 per cent for those on more than £150,000 - reminding the voters that all this seeming largesse comes at a price.
However, the bigger Tory problem is more likely to be that the bulk of taxpayers will benefit from the immediate measures, most of which will also be politically popular because they strike a chord of fairness. Such targeted measures are economically as well as politically smart because the quickest and easiest way to boost an economy is to put money in the hands of poor people, who spend it quickly, whereas richer people may put it in the bank or go on holiday.
Similarly, making permanent and increasing the rebate to compensate for the ending of the 10p tax band puts money in the pockets of those most likely to spend immediately. The 13-month long VAT cut of 2.5 per cent complicates life for retailers but should also work and if together they kick-start Christmas spending, they may save some of the high street from going bust in January.
The root of the Tories' problem is that the economic crisis has turned everything on its head and many of the traditional emotional touchstones simply don't work any more. The Prime Minister is clearly relishing this. Thus, in a speech to the CBI this morning, he said that "extraordinary times require extraordinary actions" and that this "was not the time to become prisoners of the old dogmas of the past".
That may be true but one of those old dogmas, which he used to preach, was the virtue of fiscal prudence. The Tory challenge is to get him to admit that he has nothing to put in its place.
Reader views (4)
A dead loss. If the tax increases had come now at least it would have shown willing. Now they may never come into force if 2010.Darling should never have let Brown push him into such an irresponsible stimulus which will do no good.What would we have needed in the kitty to cover this and the banking crisis if Brown had followed "prudence".I suggest a trillion and if less the opposition would have lambasted him for not having set enough aside. I do not think any government would have expected to have a trillion around so y ou just cannot win.
- Peter Ellis, Bushey herts England, 24/11/2008 19:50
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Kr (Italy): no, am not sure how this will end, but I'd put my money into Britain as compared with Italy any day of the week. Think you'll find that the books look a lot worse there than they do here, and have been on the boil for a lot longer.
- Alan, London, 24/11/2008 16:16
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Brown is not interested in the country, just his job and his legacy. Any sensible stimulus would require an end to thousands of meaningless public sector jobs that increase taxes and produce nothing but costs, and a low tax push, an end to inheritance tax, stamp duty and a low uniform tax rate like Slovakia has which will encourage new businesses to come here. Stop immigration without a job to go to as well. Not likely, these are the people that vote Labour.
Brown is back fighting a class war against the rich by bribing voters with their own money to keep on electing him.
Oh and forget your pensions people, what he has not already stolen will be made worthless by his ten years in charge of this economy.
- Stephen Rothbart, Prague, Czech Republic, 24/11/2008 16:00
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UK's current deficit is close to 20% of total govt budget. A shocking amount equal to all of the NHS, schools and defence budgets combined. How will the UK ever make up this structural deficit? Can you cut out the NHS+schools+defense? Can the UK accept that it is not the "world player" that it thought it was and that its actual quality of life is much lower than you have come to believe living on borrowed money? Can the UK cut 20% plus of govt spending (forced upon it by foreign lenders as happened 30 years ago) and survive as a society? Now UK Labour party is also alienating any rich who may have set up businesses in the UK (45% tax is absurd given other countries, non doms, etc). How do you think this will end for the UK?
- Kr, Florence ITALY, 24/11/2008 14:42
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