They tell me that immediately following the pre-budget report announcement yesterday that dealing rooms of some banks began to empty in disgust. Maybe and who could blame them given the manner that in order to attempt to clear its back the Brown government appears to have succeeded persuading the public that bankers are the pits, that they alone caused the problems last year and that they alone deserve nothing but disdain.
As has become typical in recent years following pre-budget report publication levels of confusion tend to increase as we search through the small print in the ‘green book’ trying to work out how various moves will be funded plus other raw detail of cuts within the Treasury document. PBR didn’t make for good reading as one read deeper into the pages but even more difficult to comprehend was the thirty-one page Bank Payroll Tax document that attempted to lay out the proposed draft legislation for implementing a special one off tax on banks and bonuses.
I will come back to the bonus issue another day. Meanwhile, having published a basic opinion on PBR last evening, with ample additional pre budget report analysis in the press today, much of which makes for excellent reading, plus plenty of negative opinion to run alongside, it is quite frankly not worth dwelling further on the financial aspects of yesterdays’ actual event. However, the political aspects of what took place yesterday are clearly formidable and cannot be ignored. My concern is the neat basis on which New Labour effectively transferred all responsibility for paying down the near £1.5 trillion debt to the next government. Typical I here you say but it is far more serious than that. Let us assume that the next government will be led by David Cameron and thus in his first budget the process of tightening begins. Accuse Gordon Brown of whatever you will but as the great survivor of the past two years Britain’s Prime Minister is politically adept. He knows as do we all that paying down that debt let alone bring the UK budget out of deficit will likely take two as opposed to a single parliament. Yesterday was of course a non event when it came to providing signals to the international community that Britain really was serious about balancing the books and putting forward a plan of the debt mountain would eventually be paid down. Darling told us that government spending would actually rise. None of this will be music to the ears of the rating agencies and having already done so to the ratings of both Spain and Greece, Britain could soon find itself losing the current AAA rating on its sovereign debt and thus be forced to pay higher for the extensive level of borrowings built up. Brown well knows that from an economic perspective the next five years will be amongst the toughest that any British government has faced since the 1970’s. True, as Mrs Thatcher and then Chancellors Howe and Lawson proved, Tory governments are pretty adept at paying down inherited debt. But this time is different. Firstly the debt itself will over the next few years continue to rise. Secondly, while some small scale recovery appears to be on the cards for a couple of quarters, we take the view that the economy is unlikely to begin growing seriously within the next three years. Thirdly, given that in general it is probably fair to assume that a great many economies across the world are likely to have resumed growth we must also consider that demand will also increase bringing with it additional problems and pressures. One fear that we have is a very old one here – rising inflation caused by increased global demand fro commodities such as oil. True, Britain should in point of fact be a beneficiary of global growth particularly with sterling likely to remain low against the dollar, Euro and Yen. Note here that we have avoided talking about a specific double dip recession in the UK although we continue to believe that this is a real possibility. Fourthly if we are right that rating agencies lower the current UK sovereign debt rating an incoming government will need to find extra resources to pay the interest on the debt.
The situation faced by an incoming government today may be considered almost as bad as any since the early post war period. Readers may remember that a couple of weeks ago I wrote a warning piece that reminded of the 1964 election scenario when a late bout of economic news improvement allowed sitting Conservative Prime Minister Alec Douglas Home made a last minute dash up the polls only to lose to Harold Wilson by a whisker. The concern is that even if they do win with a sufficient majority next year we could be talking of a single term Tory administration. It seems to me that it is absolutely imperative that somehow Messrs Cameron and Osborne turn the situation created by Labour in the Pre-Budget Report and that has cleverly laid a minefield for the next government to tread around. Clearly this will not be easy and it cannot be done by reversing policy such as abandoning the half percent rise in employer and employee NHS payments that come into play in 2011. Cameron and Osborne should play Labour at there own game of cause saying that whatever pain they intend to create will be very short term. While they are about it and while they are talking the idea of the UK being traditionally a very entrepreneurial nation they should design a menu that both aid and encourages business start ups together with tearing up New Labour policies that have significantly reduced the ability of the City of London to win against the rest of the world.
