Fiscal policy is too lax — the government is spending wasting and borrowing too much. Markets fear that the government is going to borrow far more than in the budget. Each day brings more evidence of a loss of financial discipline in the public sector.
Monetary policy is still too tight – the banks are still short of cash. The collapse of the mortgage market will mean further falls in house prices, a low level of construction activity, more losses of jobs in the building industry, more declines in commercial property prices and falls in land values.
The squeeze will primarily affect individuals and families. High energy prices, council taxes, the income tax rise and the impact of higher food prices are beginning to hit real incomes. This is going to get worse over the rest of this year, as relatively low wage increases meet rising bills.
Companies have so far been able to pass on quite a lot of their cost increases, with the pain mainly concentrated in financial and property companies. If volumes fall then the squeeze will affect a wider range of commercial businesses.
What could the government do? It could ease the squeeze by cutting out some of its own wasteful excess, and using the money freed partly to cut borrowing and partly to take fuel taxes down to offset some of the price rises. It could with the Bank of England provide more liquidity and lower interest rates to the money markets. Above all it could return what is left of Northern Rock to the private sector, so that once important mortgage bank could stop shrinking its loan book and the taxpayer could get more cash back.
What should the Opposition say? It should keep well ahead in the polls thanks to the economic worries and the gathering dissatisfaction with the squeeze. It could start saying in general terms what action needs to be taken to start to adjust the huge imbalances in the economy created by the wasted Labour years. Gordon has presided over his own version of boom and bust – today it is boom in public spending, and bust in many family budgets.We need some economic stability, which requires a different approach to running the public sector, to get us better service for less cost. We need a government which doesn’t just talk about making long term decisions, but gets on and takes them to provide more water, energy and transport capacity, and deals forcefully with an agricultural system which still does not encourage sufficient production.