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.