Ten years ago, and presumably without any sense of risking fate, then-Labour Chancellor of the Exchequer Gordon Brown declared he had exorcised boom and bust. Next week, Prime Minister Brown will end the phony political war Britain has been engulfed in for the past year and likely announce a general election. The election will be held in the midst of the most terrifying bust the country has experienced since the Jarrow March and the Great Depression.
Britain’s economic plight—its sky-rocketing public spending, massive borrowing, huge debt mountain, falling exports and slumping currency— will be the main territory this election will be fought over. But if any British voters had expected to secure from the three main parties a clear statement of intent on what they would do, if elected, to dig Britain out of bankruptcy, the long run-up to the election announcement should have disabused them.
Last week, Britons who cared to find out more about the choices on offer had the opportunity to watch a debate pitching the Chancellor Alistair Darling, the Conservative George Osborne and the Liberal Democrat Vince Cable.
Judging by the audience ratings, and hardly surprisingly, many Britons decided to escape the “debate of the century” by watching a competing episode of the popular soap, “Eastenders,” or its well-followed rival “Coronation Street.” They wouldn’t have missed anything—those who chose the soaps over the debate would be as informed as those who braved a debate of obfuscation, avoidance and smallness. Details? Forget that. It would be hard to disagree with the guess Edmund Conway, the economics editor of the Daily Telegraph, hazarded that the debaters were clearly under orders to “talk about economics as little as possible.”
The insipid debate came just days before the U.S. bond fund PIMCO warned that Britain risked being caught in a “debt trap” and locked in a near-future vicious circle of rising debt costs with global investors demanding a penalty fee on gilts to protect against inflation. And warnings have come thick and fast—from the IMF, OECD and the rating agencies, who have hinted that Britain’s AAA rating will be downgraded—not quite to junk status—if something isn’t done and soon.
Officially, Britain’s recession ended in the last quarter of 2009 when the country secured an anemic growth rate of 0.4 percent. For ordinary people it would have been hard to tell the difference. Weak earnings growth and high inflation meant that the average UK household was 3.8pc worse off in February than it was the year before. Most of the growth was dependent on public spending and company inventories being stocked ahead of Christmas.
The slump in the value of the pound sterling—it is down about 25 percent against the dollar since the start of the financial crisis and has slid against the euro precipitously too —is hurting UK households, making imports more expensive. So far there has been no upside from a weak pound—British exports have not fared well as had been hoped and there is no sign yet of an export-led recovery. Britain’s trade deficit, both with Europe and the rest of the world, widened considerably in January to its highest level since August 2008 with exports dropping sharply and imports rising. That leads to the question of how low does the pound have to go before there is a pick-up in exports?
On public finances, Britain’s position looks increasingly perilous. The budget deficit as a proportion of GDP is the highest since the Second World War and is the biggest of any G20 economy. The budget deficit for 2009/10 will be about 167 billion, almost 12 percent of GDP. The investment markets are getting increasingly nervous, despite the fact that Britain has never defaulted on debt in its history. Yields on 10-year gilts have already crept up to 4.14pc, compared to 3.94pc for Italian bonds, 3.48pc for French bonds, and 3.19pc for German Bunds. Yes, you read that right—the markets trust the Italians financially more than the British.
Total UK debt—public and private—looks even scarier. The management consultancy McKinsey reckons that total British indebtedness amounts to 380 percent of GDP. Of the ten most advanced countries, only Japan is higher at 459 percent.
So what is to be done according to the political combatants? Hard to tell. All the parties are careful to avoid announcing any numbers—how much will have to be cut from public spending, how many jobs will have to be lost from Britain’s bloated public sector, how high taxes may have to be raised and what the balance should be between spending cuts and tax hikes, if Britain is going to secure the economic growth it needs to get out from under mounting debts.
Under Labour tax rates have gone up remorselessly and hiking tax rates further for business or high earners will run smack bang into the law of diminished returns—namely, raise little revenue and likely cost jobs. A recent hike to 50 percent in income tax for those earning more than 150,000 pounds ($225,000) a year is expected to raise no new revenue, just prompt more sheltering and talent flight. Even so, hardliners in the Labour Party such as Ed Balls are calling for the new top rate of 50 percent to be applied to those earning 100,000 pounds ($150,000) a year.
Cutting public expenditure substantially is the only way forward. But where and by how much? Labour politicians on the whole avoid the word “cuts” and prefer to talk about public investment. Conservative leader David Cameron and Osborne have followed their Labour counterparts and promised to ring-fence health care, defense and Britain’s overseas aid budget. In fact, Labour goes even further and the Prime Minister has insisted that all “front-line” services—education, the National Health Service and the police—will be unaffected, if he is re-elected.
Every so often over the past year, a senior politician has let something more concrete slip. Ten months ago, Andrew Lansley, the Conservative shadow health secretary, pointed out that if the Tories’ did protect spending on health and overseas aid, then all other government departments would face cuts of at least 10 per cent.
Brown pounced on the statement and told the House of Commons that voters would face a choice between a Government that’s “increasing public spending” and an Opposition whose policy is “spending cuts”. Increased public spending! The public sector has ballooned under Labour to make up more than half of the economy and state spending now accounts for 53.4 per cent of GDP compared to 40 per cent when Labour came to power in 1997.
More recently, Darling admitted that Labour’s post-election planned cuts in public spending would be “deeper and tougher” than under Margaret Thatcher in the 1980s. No, he didn’t go into details. And neither did the Budget he unveiled last month which foresees public spending shrinking from 48pc of GDP to 42pc in only four years. Where and how is not made clear and the Chancellor’s economic growth forecasts for the same period are not taken seriously by private-sector economists.
According to Andrew Lilico, chief economist at the think-tank Policy Exchange: “Markets had hoped for more detail—for instance on where the spending cuts would be. They didn’t get it.”
The Conservatives are not forthcoming either. On Thursday, Osborne ducked detailing the specific cuts needed to meet the cost of his election pledge to cut the deficit quicker than Labour while cancelling payroll tax rises Brown and Darling have announced. He says reducing government waste will offset the loss in revenue.
This shying away by Labour and Conservatives—the Liberal Democrats are marginally more forthcoming but they can be because of their third-party status—comes down to trying to trick their way to victory.
For the Conservatives, detailing the scale of the public expenditure cuts risks undoing their recasting of themselves under David Cameron as friendly towards the public services—cuts will mean massive layoffs. More than 6 million Brits draw public-sector wages and add to them their spouses and other family members and there is a sizeable chunk of the electorate ready to vote for the party they think will preserve their jobs. Likewise, there is little mileage in talking about reductions in benefits—that would put middle class voters off.
But while the two main contending parties avoid and evade others are watching—the financial markets. The clock is ticking. They are spooked already by opinion polls suggesting neither Labour nor the Conservatives will win enough seats in the House of Commons to secure an overall majority. The prospect of a hung Parliament is a worst-case scenario for the money markets –sterling falls a little more each time the Tory lead is shown to be slim. But the lack of serious and detailed talk by the two main parties of how to dig Britain out of the financial hole isn’t reassuring either.
Jamie Dettmer is a former political writer at The Times and Sunday Telegraph. He blogs at www.jamiedettmer.com