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How not to solve the financial crisis
The past really is sweeping back to haunt Gordon Brown. If you wrote the film script of his career, no one would believe it – it’s far too loaded with poetic justice to be true.
He clearly didn’t realise while he was Chancellor that he was setting all these little tripwires for his future incarnation as Prime Minister. Now everywhere he turns, there’s a brand new mine waiting to go off under his feet.
The latest is the Golden Rule fiasco. When he came up with the Golden Rule and the 40% rule and the whole “prudent fiscal framework”, it must have seemed like a good idea. And it may well have been a good idea – if he’d stuck to it.
But the rules have been battered and bent out of shape until the whole idea has become yet another stick to beat the government with, just when it needs it least.
It’s enough to make you feel sorry for the man. But then again, it’s extremely unusual to see a politician genuinely get what’s coming to them. So enjoy it while it lasts – after all, it may be the only entertainment going during the recession…
The idea behind Gordon Brown’s ‘rules’
Gordon Brown’s rules were always pretty arbitrary. And they were always going to be easy to fiddle.
I’m sure you have a rough idea of what the rules are, but just for posterity’s sake, here they are. The basic idea is that the government borrows only to ‘invest’ over an economic cycle. It has to balance its books over the business cycle as a whole. Meanwhile, the ‘sustainable investment rule’ means it has to keep debt to a ‘prudent level’. At the moment, public borrowing isn’t meant to rise above 40% in each year of the current cycle.
To put it more simply, the rules were meant to ensure that the government – unlike Labour governments in the past – wouldn’t simply tax the blazes out of the electorate and then pump the cash indiscriminately into the public sector. Past Labour governments have run the economy like a drunk with a stolen credit card, merrily buying round after round for his fair weather friends until he realises he’s spent so much that he can’t pay the bill. At which point he and his friends are all thrown out of the bar.
This carelessness has, in the past, tended to end up in a sterling crisis. And that memory was one of the things that kept Labour out of power for so long up until 1997.
Mr Brown wanted to get rid of that impression. Hence the rules. These made it sound as if he at least had some understanding that balancing a budget was important, and that getting some sort of return for the money spent on the public sector was needed. The rules gave the idea that there was some sort of restriction on government spending, exactly what the public and the City needed to hear.
And why it’s all meaningless in practice…
Of course, in reality, there was no restriction at all. The Government gets to decide when the economic cycle begins and ends. So in practise, they can spend as much as they want, as long as they can still pretend that it’ll all balance out come the end of the cycle.
But despite the incredible degree of flexibility built into these ‘rules’ – perhaps it should have been called the Golden Guideline – the Government is still on course to bust them. And now we’re heading for recession. That means the tax take is going to fall, but at the same time, the Government feels it can’t stop spending, because that would make the downturn even worse (although the idea of cutting taxes to boost consumer incomes doesn’t seem to have occurred to them).
So the rules are being revised. We don’t know exactly how yet – that’ll probably be announced in the pre-Budget statement in autumn. The Chancellor will probably try to flannel his way out of trouble by saying that the current economic cycle is over, and so we need new rules for a new cycle.
But the long and the short of it is that the Government will be allowed to borrow more money. Never mind that borrowing and spending too much is what got us all into this trouble in the first place.
Even assuming that borrowing more to spend is the right thing to do, what is the money going to be spent on? Most of it has been blown on adding layer upon layer of bureaucracy to the public sector. How many more quangos do we need? Why borrow more money when you could save a pile and lose nothing at all by simply taking a metaphorical axe to anyone with the word “co-ordinator” in their job title?
Why the unions are excited about higher Government borrowing
That’s not the way the Government thinks sadly. And there’s no chance of it changing its tune for as long as it’s reliant on the unions for its funding. And now that they realise the Government is going to borrow more money, the unions are cawing like baby chicks at the sight of a worm.
Tony Woodley of Unite tells The Telegraph: “We are not going to let a pay cut be imposed on our members purely because of an economic crisis coming from elsewhere in the world. If a change to the Government’s borrowing rules makes that easier then so much the better.”
And Adam Lent of the TUC has a great idea. “Given that one way to boost the economy is to ensure public servants have higher pay – it might be worth considering borrowing extra to afford this.”
That’s a cracker, Adam. Tell you what, another way to boost the economy would be to deposit quarter of a billion pounds sterling in my bank account. I promise to blow the lot on flat-screen TVs and buy-to-let flats, and will only keep a small 10% consultancy fee for my pains.
The unions know they’ve got it made – but only until the general election in 2010. So expect them to step up the pressure between now and then – it’s much harder to reverse a pay deal once it’s been made. So that’s one more thing for the Bank of England to worry about.
And for Mr Brown? Well, the rocks he founded his Chancellorship on, his Golden Rules, have now crumbled, along with any reputation for good governance he had left. As The Times puts it, regardless of how they spin it: “for the financial credibility of Gordon Brown and Alistair Darling, this is not the end of the beginning. It is The End.”
Turning to the wider markets…
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UK shares advanced another 0.5% as the FTSE 100 index gained 28 points to 5,404. Property stocks were in the spotlight as Minerva received a takeover approach from a Dubai sovereign wealth fund, helping to push Land Securities up 6%, Hammerson 3% and British Land 4%. Banks also did well generally, with Royal Bank of Scotland and HSBC both climbing 3% and Barclays 1%, although HBOS sank 6% as the underwriters were left with 62% of its rights issue stock. Mining stocks were firmer on higher metals prices, with Vedanta 4% better.
European markets also moved higher, with the German Xetra Dax adding 0.3% to 6,403 and the French CAC 40 advancing 0.8% to 4,333.
US stocks slipped back after its recent rally, with the Dow Jones Industrial Average dropping 29 points, or 0.25%, to 11,467. The wider S&P 500 was again flat at 1260, but the tech-heavy Nasdaq Composite eased 0.1% to 2,280.
Overnight the Japanese market had a good day with a 3% rise to 13,185 while in Hong Kong, the Hang Seng was slightly up, climbing 29 points to 22,561.
Brent spot was trading this morning down at $132, while spot gold was at $973. Silver was trading at $18.60 and Platinum was at $1881.
In the forex markets this morning, sterling was trading against the US dollar at 2.0023 and against the euro at 1.2581. The dollar was trading at 0.6284 against the euro and 106.55 against the Japanese yen.
And this morning, Vodafone has said that its sales this year are likely to be “around the bottom” of the range of City forecasts from £39.8bn to £40.7bn. Sales have been hit by weakening economic growth, particularly in Spain.
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