In the FT, John Kay has written one of those columns that quietly sums up the calamitous cost of Brown/Balls fiscal model. He concludes that we’ll have to raise some £70bn of taxes and then inflate our way out of debt—and this is a theme worth looking at in greater detail because I suspect it is what George Osborne will end up doing. “This year, Britain is likely to incur a fiscal deficit of more than 12 per cent of national income,” Kay starts. “This figure is completely outside the normal experience of developed countries in peacetime. How did it happen and what are its implications?” How it happened is that Brown and Balls used their verbal tricks to conceal their reckless leveraging up of the British economy. “The British government, ostensibly committed to this principle [of running surplus in the good times], has obfuscated to abuse it so that Britain entered the recession with a large underlying deficit. The downturn turned a substantial gap in public finances into a chasm. This situation was aggravated by the speed and scale of the recession and the realisation that many of the earnings from financial services, which had previously boosted tax receipts, had been illusory. The contribution of financial services to public finances has been not only removed but reversed.”
So we’re in a mess – and we may have to vandalise the value of sterling to get out of it painlessly. After all, these “cuts” could be “below inflation increases” if inflation was as high as it was in the 1970s. I always have a bit more trust in people who were there at the time (and not in short trousers) like Kay. He says:-
“Inflation reduces the value of public and private debts and makes many adjustments easier. It is much easier to fail to keep wages and salaries in line with inflation than to reduce them outright. It would be a pity to throw away the gains from a successful struggle over two decades to squeeze inflation from western economies. But the governments of Britain and the US may separately and privately conclude that such a choice is less bad than the other options they face.”
CoffeeHousers have long argued about inflation, fearing the Bank of England’s QE programme – which has churned out £1 billion a day – will lead to far greater inflation than the Bank of England’s Monetary Policy Committee seems to think it will. There’s quite a bit of research now backing up this scenario. Take Citigroup’s inflation forecast, for example, which differs distinctly from the Bank of England and forecasts inflation overshooting that 2 percent target for some time to come.
But Kay continues that inflation will not be enough – for either Britain or America.
“Both countries are going to have to reconcile themselves to substantially higher tax rates. A tax package to raise £70bn, probably the minimum required to stabilise Britain’s public finances, might put four points on the rate of income tax, take VAT to 20 per cent, freeze personal allowances and tax thresholds, add five points to corporation tax and collect a bit of extra revenue from the usual suspects such as alcohol, petrol and cigarettes. I wouldn’t want to be the political front person for that package. Perhaps the Conservatives should give the finance portfolio back to Kenneth Clarke. In 1997 he lost the election no chancellor would want to lose. Whoever succeeds in 2010 will have won the election no chancellor would want to win.”
I hope the Tories give this piece a long, hard read – many of them are still not quite adjusted to the reality they’ll have to face in office. The cuts, sure – but the tax rises? Think about that first budget: 4p on the basic rate? VAT at 20 percent or higher? Brown will be laughing heartily: the Tories will be raising tax used to pay for Labour’s pre-election spending boost. In his head, Brown will see this as some kind of stroke of political genius.
Another piece is what happens to a country when it is run by people who view government as a tool of party political warfare, who vandalise the public finances so as to deny the oncoming enemy any advantage. The Times is doubtless absolutely correct in its splash this morning, that Brown wants to flog off Northern Rock to Tesco before the election so he can claim some huge victory and stop the Tories fetching a better price for it later. Few major politicians in recent years would have been so unpatriotic as to deploy a scorched earth strategy on their own country: it really does require a kind of tribalism that only Brown and his clan are capable of. As Kay indicates, we’ll all be paying the price of Brown’s failure for decades.
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