It was heralded as a big change of direction for the Labour Government.
No more prudence. No more attempt to balance the books. Instead, in these “extraordinary” times, the rule book is being thrown out of the window, and the Government is letting rip.
More borrowing, more spending, and – eventually – more tax to pay for it all. A radical turnaround plan for Britain’s future.
But hold on a minute. Have I missed something? Because that’s exactly the same bilge that we’ve been dished up at every other Budget since the turn of the century…
Governments should have been prepared for this
The quantities have got bigger, but the recipe remains the same. The Chancellor stands up, cherry-picking statistics that suggest that Britain is better than lots of other economies around the world, and is better-placed for hard times than any of them.
Then he says that borrowing is going to be a bit higher than he said it would be the last time he stood in front of us all (£118bn next year rather than £38bn). And that economic growth is going to be a bit weaker (UK GDP will shrink by 0.75% to 1.25%, rather than growing by 2.25% – 2.75%). But don’t worry, because it’ll also recover faster than everyone else is saying (by 2010, we’ll be back to positive growth).
And the key point, of course, is that any problems affecting the Government’s earlier predictions are nothing to do with them. The crisis began, “as America itself has said, in the US housing market.” According to Mr Darling, “the causes of instability are global” and in case you don’t get it yet, “the root of today’s problems are failings in the global financial system.” Nothing to do with us, ladies and gentlemen.
This is tripe. The crisis might be global, but individual governments should have prepared for it. The financial crisis is not some random unforeseeable “black swan” event. Most people in authority around the globe – politicians, bankers, some central bankers – want you to think that it is. That’s because they were in charge when it happened, and they should have seen it coming, and they should have done something about it.
Why was nothing done before the bubble burst?
I’m not saying that anyone could have predicted the exact timing of each and every turning point in the credit crunch (though it was always clear that housing would be the first link in the chain to crack). But it wasn’t hard to see a bit of a problem with the direction we were taking. We borrowed too much money, without a thought for how it was going to be paid back. That is a course of action which will always end in disaster. The size of the disaster will depend on the scale of the borrowing that preceded it – and that means we’ve got a long, painful slog ahead of us.
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So why didn’t anyone do anything before the bubble burst? Because everyone took the path of least resistance. No one wants to be seen as the spoilsport, or the doomsayer. And everyone was making money – or thought they were at least. House prices were soaring, City bonuses were piling up, tax revenues were flowing – it was much more pleasant to believe that this was down to some miraculous new era, rather than the predictable result of gambling on an ever-rising market with borrowed money.
It’s understandable. If someone had somehow stopped the merry-go-round early – the Bank of England, say – they’d have been pilloried. We’d still have had painful adjustments to go through, and would never have understood just how bad things could have become until much later, if at all.
Keep selling sterling
But if we want to avoid this happening yet again, we need to take a look at why the boom got out of hand. So trying to pretend that everything was just fine until those pesky Americans started giving homeless people money to buy McMansions isn’t helping anybody.
However, we can’t expect any soul-searching from the Government. Gordon Brown doesn’t do mistakes. He won’t admit he’s wrong on his path for the economy. And that’s why we haven’t actually seen any massive change in direction here – it’s just more of the same. We’ll carry on as we were before – more borrowing, more public spending, and more taxes. And judging by previous experience, the current forecasts will be ludicrously optimistic. So who knows how deep the debt hole will really be next year. £130bn? £150bn? £200bn?
Where does it end? Bankruptcy. Don’t be fooled by the stock market bounce yesterday – that was down to the Citigroup bail-out in the US. Investors should keep selling sterling – see our recent cover story for more: The great currency crisis – and what to do about it (if you are not already a subscriber to MoneyWeek, subscribe to MoneyWeek magazine).
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