There was one really encouraging thing in the Chancellorâ€™s remarks to the Times. He thinks oil prices will remain high. As heâ€™s been wrong on practically everything else, that is very encouraging! It is possible the big falls in the oil price this week will trigger further declines and some unwinding of the substantial â€œinvestmentâ€ positions that many funds have taken in oil. That would help relieve the immediate inflationary pressures, and might persuade eventually even the slow moving Monetary Policy Committee that it should fight recession rather than inflation. The long term trend in oil and other commodity prices is up, but that does not mean it will happen in straight line with no periods of weakness and decline. World demand growth is reducing, and even China and India are having to cool their economies to combat inflation.
It is also good news that at last the Chancellor recognises that he has been too optimistic about the state of the economy, about the likely pace of economic growth and the state of the public finances. Unfortunately he still seems to think in Labour soundbites and seems incapable of proper analysis of the situation.
He tells his colleagues through the pages of the Times that there will be no more money for â€œschools, hospitals, defenceâ€. What does that mean, and why put it like that? The budget figures for 2009-10 and 2010-11 show more money for all three, especially the first two. Defence is in great need of additional money for equipment. There is plenty of extra money washing around in the budget estimates for the next two years in programmes without the same priority, which should be switched to the important and sensitive areas. There are huge amounts of over administration, over regulation, over computerisation, and over provision of consultancies which should be flushed out. That would free money for priorities, and allow cuts in overall spending. Non front line staff costs should be brought down through a strict policy of no recruitment.
The Chancellor needs to wake up to the bleak reality of a large budget deficit and borrowing overshoot which will prove difficult to finance and will be damaging to the rest of the economy. If he persists in continuing with so much wasteful spending in the public sector it will squeeze the private sector even more. That will produce more political misery for him amongst the voters he is squeezing, and will induce more job losses in private sector companies who will have to cut costs the painful way because the public sector is unable or unwilling to cut its costs in less painful ways.
The huge surge in borrowing in the last quarter took most commentators by surprise. My forecast of a Â£10 billion overshoot this year now looks quite low. The public finances are deteriorating more rapidly than I have ever seen, and still the government carries on spending as if there were no problem. The Chancellor talks tough â€“ and foolishly â€“ in the Times interview. Who believes him? The best thing is to watch what he does, not what he says. In the last few weeks he has spent an additional Â£2.7 billion on the 10 p tax rise compensation, (and promised more to come), Â£1.5 billion on North West transport, an unspecified amount on Northern Ireland for the 42 day vote, Â£4 billion over several years for two new aircraft carriers (work for Scotland) and hinted that he will raise less in revenue for fuel duty and car tax than planned. That is hardly evidence of a man with an iron grip on spending, or with a clear sense of direction on taxation. This budget deficit problem is going to get a lot worse and will need additional measures to control it. Borrowing is just deferred tax with interest! The public doesn’t want a bigger collective mortgage.
Meanwhile the commentators write about the breaking of the fiscal rules as if it were sudden and new. Any sensible commentator can tell you the rules were broken years ago by fiddling the figures.