Category: Blog

Today George Osborne tabled a formal request for urgent debate on the Budget,and the Speaker wisely granted it for tomorrow.

Nigel Griffiths, Labour MP, raised a bogus point of order, complaining about just how many Conservative MPs had “piled into the Chamber” to suppoprt this request. Nigel, it is called Parliamentary democracy. It used to be automatic that we had a long debate on budget proposals. Are you so out of touch? Is Labour now the enemy of democracy? Why did we have to ask for what is the nation’s right?

My concern about the UK economy has centred around the large banking sector relative to National Income and tax revenue, the large consumer deficit, and the growing government deficit. I have felt the government has been running too much financial risk, whilst the economy itself will enter a period of no growth followed by relatively slow growth.

All this seems to be endorsed by the government’s own heavily revised forecasts, published yesterday. They foresee growth for 2008 at 0.75%, with falls in quarters 3 and 4, followed by a fall of 1% next year, and growth of 1.75% in 2010.
Private sector forecasters are likely to see this as optimistic, with more fearing a continuation of the downturn beyond the second quarter of 2009. The UK’s growth in the last decade owed a lot to the success of banking, property, financial and business services, areas which are entering difficult times.

The government’s own finances are deteriorating sharply. The Chancellor told us he planned to borrow £78 billion this year compared with the last Budget forecast of £43 billion. The back of the new Forecast book shows that when the bank share buying and other financial transactions are taken into account, his cash requirement from markets and National Savings amounts to £157.7 billion. This will be followed by borrowing well over £100 billion the following year. This will be a big burden on the UK gilt market, even allowing for the demand from pension funds. Much of it will be borrowed for relatively short periods, leaving a refinancing hump early in the next decade. The trajectory for getting things under control again is long and leisurely, with the current budget not reaching balance until 2015-16.

How has he got into such a position? There are three main reasons, The biggest increase in borrowing comes to buy bank shares and nationalise smaller banks. I have been using the figure of £58 billion for 2008-9 for this programme. For the first time the government sets out more detail. Their current estimate for this year is now £69 billion. Apparently there is a £5.7 billion working capital facility for Bradford and Bingley, and £8.1 billion for the Icelandic banks to add to the amounts in my figures, whilst the government figures do not appear to include the extra share capital for Northern Rock as this was a transfer from lending to them. We agree about the £37 billion for the three banks in the share buying programme and the £18.2 billion paid to Abbey for Bradord and Bingley.

The second biggest change is the collapse of tax revenues. This year they anticipate a revenue fall of £30 billion, to be followed by a huge dip of ££64 billion next year excluding the policy change on VAT.

The third change is a series of policy alterations in favour of more spending and lower taxes. The £8.6 billion next year off VAT is the largest.

The figures reveal too much financial risk and too much borrowing. The government is now in the hands of the money lenders. It was once famously said “We do not own the nationalised industries, they own us”. The government will have to learn that lesson all over again with its expensive habit of buying banks.

Borrow, borrow, and borrow again. The government is living in a fantasy world, where foreign investors and rich British people have to lend to the government to spend like there was no tomorrow. Their political strategy seems geared to a Spring 2009 election which they will back away from when they see the opinion polls, after a winter of job losses and factory closures.

This government will drown in a sea of red ink. Never have I seen the public accounts in such dire straights. The government assumes a mild and short recession, with recovery beginning in the middle of next year. Even so, they anticipate tax revenues plunging by a massive £73 billion in 2009-10 because the economy will be weak, and anticipate borrowing £157 billion this year and £126 billion next year. This year’s borrowing including buying bank shares amounts to more than 10% of national income. If they turn out to be too optimsitic in their forecasts , it will be worse.

The Opposition talks of the government flashing the national credit card. They are also taking out a huge national mortgage, and will soon have us deep into negative equity, unable to pay the interest bill easily.

If this were a company it would be time for the Non executive Directors to have strong private words with the Chief Executive. They would tell him or her that the strategy was taking the company quickly to a position where it could not afford the interest and all the other bills. They would demand cost cuts and raising more revenue. They would warn that if the company did not do it for itself, the bank manager would take over or eventually the Administrator would be called in by the creditors to do it. It is time for the rest of the Cabinet to warn the PM and Chancellor in private, and time for Parliament to raise the roof beams, warning this government there are limits to how much a country can borrow.

Labour’s crude political strategy is to say they will take care of the victims of recession through spending more public money, whilst the Opposition just wants spending cuts. Please do us a favour. The Opposition welcomes – and urges – action to ease the plight of the victims of recession. We have asked for schemes to help small business struggling to pay the bills, to help Council taxpayers faced with another large public sector demand, and pensioners. More can and should be done. What we cannot afford is the VAT cut, the bank nationalisation, the ID cards, the unelected regional government, the public sector’s rich list, the surveillance society and all the panoply of Labour’s illiberal state.

As I have commented before, what we really can’t afford on top is a long and deep recession. That is why yesterday was such a wasted opportunity. Sensible action to improve the terms of the bank support in a way which cut taxpayer risk and made it more effective would have helped. Tax cuts of the right kind to target money to the lower paid would have helped. Tax cuts for business struggling with insufficient cashflow and restricted borrowing would help. Instead Crash Gordon went for broke with a VAT cut which will do little good, and could be the final weight which pushes this government under in the sea of red ink it has created.

Tradition has it that immediately following a Budget statement the Commons gets to vote on urgent tax changes, and then proceeds to a debate extending over several days to go in to all the detail of the Budget.

Today we has a so called Pre Budget Report, which warrants a Ministerial statement followed by a few questions from those MPs that manage to get called. Yet today’s PBR was in effect a huge Budget. The Chancellor plans a large urgent tax change on VAT.

I and three other Conservatives in the Chamber asked for a debate and a vote on all this. We were told there were no plans for one today, as the government had other business. We will return to this matter, as it is a democratic disgrace.

According to the Pre Budget book the revenue loss next year, 2009-10, will be a stunning £72.7 billion. £8.6 billion of that is the policy change on VAT. The rest is the impact of the recession on Stamp Duty, NIC, Income Tax, Corporation Tax and the rest.

The borrowing this year was said by the Chancellor to have almost doubled to £78 billion. This figure left out buying bank shares and other expensive financial transactions. At the back of the Budget book it tells us the “Net financing requirement” is an astonishing £157.7 billion for just the current year. The Gilt market is going to be working overtime to try to supply all this money.

I was forecasting £140 billion (my £120 billion forecast plus the £20 billion budget packages). Gilt redemptions and other items take it over that to nearly £160 billion. The Treasury is gloomier than I have been about the outlook for revenue, given the downturn.

Just about the worst tax cut they could design is a VAT cut. It’s costly on the revenue, but will have little impact on the problem. People do not feel well off. Offering them 2.5% off dearer items at a time when the shop and showroom prices are already 10-20% down is not going to do much.

It’s not fair on the poor. Essentials that make up most of the budgets of the lower paid are already VAT free. The biggest gains will be for those who buy expensive wines, flashy cars and use lots of petrol. If markets do not like the borrowing figures we will lose more from the higher long term rates of interest the markets will demand of the government.

An income tax cut on low incomes would do a lot more good, giving people more cash in hand to pay off the credit card and Hire Purchase money they owe and handle the bills for the basics that are overwhelming them. Far from showing the government is in touch or in charge, a VAT cut shows just how far they have lost the plot. Whilst any tax cut is better than none, too big a cut in the wrong tax is not going to solve anything.

To:Prime Minister
From Political Adviser

I am writing today because your political strategy runs the risk of being undermined by events.

Of course you are good at crafting an economic policy to make it as difficult as possible for the Tories. It was one of your best victory rolls, after all those years of condemning some Tories for wanting tax cuts, to go for broke by offering tax cuts the Tories cannot match because of the financial position. Following this up by making public spending plans much tighter for the years after the election, and warning of tax increases then too, puts the Tories into a bind which the BBC will try to tighten round their necks. We can get the interviewers to taunt the Tories, asking them, if they will really cut spending by more than the figures we are proposing, and asking them which taxes they will increase to cut the deficit after a year or so of our extra spending and borrowing.

You should be aware, however, that some of the Tories are no longer playing that game. There might be some salvation for them by pointing to the need for restraint and tough decisions, if the policy we are following does not start soon to fire some economic recovery. They can concentrate their fire on the repossessions, the job losses, the large borrowing figures, and any weakness in sterling and bond markets that we experience from here. Events do matter, and sometimes events can overwhelm the best political strategy or the most successful spin.

I know you now have two brilliant spin doctors on board and making a difference. I think you have done a great job getting attention to yourself and getting people to change their image of you. However, the image of crisis leader will only be sustainable if there are signs that the crisis is passing.

The crisis has two related characteristics. There is the banking collapse, and then the deep problems in the rest of the economy. Unless we can sort out the banks, we cannot recover the rest of the economy. If the banks cannot or will not lend to the everyone else, we will see many more business failures and job losses.

You set out a three part programme for dealing with the banks. The main money was to be committed by short term loans and guarantees. Apparently little of this has happened. You need to revisit the terms, as the banks will need this money and help to start them lending again. The third part, the bank share purchases, is very popular with our left wing, but will mean increasing pressure on you, and blame, if the nationalised banks have to repossess and are unwilling to lend to all and sundry. We are also losing lots of money on the shares. You need to reconsider this part of the deal as well.

You are now proposing a reflationary package. It will not work until the banks are fixed. The banks are the mechanism by which the reflationary money circulates and multiplies, to create and maintain jobs and businesses. It would be better to fix the banks before overcommitting. Markets can be spooked by a government which wants to borrow too much. The more long term support you give the banks the more you need to borrow anyway, so there is the danger of overload.

You have put a lot of political capital into your plans for rebuilding the banks. You also need to help do this to get the economy going again. Please have another look, as the current programme is not working. The spin was great. The reality is undermining it. There will be no recovery until you really fix the banks, however much you borrow. And whilst it hurts me to say so, the Tories are right when they say there are limits to how much you can borrow, given the commitments you are taking on for the taxpayer.

This morning the Today programme kept repeating that the Conservatives have done a U turn on public spending.
Instead what they did was do exactly what they promised – agree to Labour spending up to 2009, and then review it. They have now reviewed it and decided spending has to be lower than Labour plans thereafter – and rightly so.
We were also told the Conservatives do not know what to do about the banking crisis – yet I heard them say, again rightly, the government needs to change the terms of its massive bail out package, because it is not working.

On September 13th 2007 I posted a blog which was very critical of the Chancellor’s important remarks on banking. Mr Darling told us:

“Institutions have in some cases been prepared to lend to people without checking if they were ever going to repay it”
“Institutions themselves need to open their eyes and be more honest”
There needed to be a return to “good old fashioned banking”

This “Moral hazard speech” lasted just one day. Having warned banks there would be no bail out where they had made lending mistakes, the following day he began to go to the aid of Northern Rock.

This week Mr Darling has told the banks they must lend more to small business, or else.
Does that mean they should no longer consider if the businesses can repay it? Does it entail closing their eyes and lending regardless? What if they honestly think the small business concerned cannot get through the recession because it has too little revenue coming in?

Is this a case of different conduct for a nationalised bank from a private sector one? Do private sector banks still have to obey the dictats of the Moral hazard speech, and nationalised ones the requirement to lend regardless? Or has the latest requirement replaced the enthusiasm for good old fashioned banking?

As someone who does want the banks to help small businesses as much as possible, I understand they can only do so on a big enough scale if the government is more successful in offeirng the prospect of recovery from recession. The government faces a dilemma. If it does not start to lift us out of recession, lending too much to people and companies who cannot repay just weakens the banks more rather than saving the businesses we want to save. Weak banks and weak small businesses both need the same thing – more success from the economic policy.