The Overspend Gets Bigger

See you at the airport

So what do we make of the budget?

Given his starting point, George did a reasonable juggling job, and managed to sound as if he's serious about getting the economy moving again. His moves on company taxation and fuel duty are welcome, if relatively small... er... beer. His fresh attempt to inject life into the housing market is also potentially helpful, although we need to see more detail before we can be sure it won't simply re-inflate the property bubble and/or expose taxpayers to a huge Freddie and Fannie style default crisis. 

However, looking at the big picture, he failed once again to tackle the rampaging elephant that's still smashing up the fiscal room. That is, he did nothing to bring government spending back down into line with sustainable tax revenues.

Yesterday I took part in a TPA/IEA panel discussion on the budget, and the excessive level of public spending was by far the main concern for both panellists and audience. Unfortunately, nobody could see the current government gripping it this side of the 2015 election, and a Miliband government - with or without the Lib Dems - won't even try. 

By the end of the session I was ready to book a one-way ticket to... well, to where exactly? Cyprus would now appear to be out, and Mrs D's arachnophobia rules out the more exotic destinations. Must get back to researching it.

The following is a summary of my own presentation (some bits are updates of recent blog posts, and I'm afraid there are quite a lot of numbers).

As the Chancellor highlighted in his speech, government departments have been significantly underspending against their original budget allocations. The underspend for 2012-13 is now put at £11 billion, an unprecedented shortfall which has narrowly prevented this year's borrowing increasing above last year's (£120.9bn vs £121.0bn). However, of much more significance is the continuing overspend against the government's revenue base, a problem he did not address in the budget.

The Coalition's first budget in June 2010 set out a path for public spending that saw it rise from £669bn in 2009-10 to £757bn in 2015-16, an increase of 13%. Given the urgent need for fiscal consolidation, many commentators - including the TPA - thought that not nearly tough enough. However, it was justified on the basis that economic recovery would boost revenues and close the deficit, just as it had done after the recessions of the early 1980s and 1990s.

Unfortunately, that hasn't happened. Growth has been feeble, and the economy is now (2012-13) 4% smaller than it was forecast to be back in 2010. Worse, according to the OBR's latest forecasts, the shortfall is expected to go on getting bigger, reaching 7% in real terms, and 9% in cash terms, by 2015-16. Over the whole of this Parliament (2010-11 to 2015-16), the OBR now reckons the economy will grow by just 6%, compared to its June 2010 forecast of 14%.

Relative to our economy and its capacity to bear taxation, government overspending is even worse than it appeared in June 2010.

Spending still planned to increase

The following chart shows spending in cash terms (Total Managed Expenditure - TME) since the start of Labour's reckless spending surge. As we know, that surge more than doubled spending in cash terms and even in real terms increased it by one-half. From 2009-10, it compares three plans:

• Labour's final plan
• The Coalition's first plan - June 2010
• The Coalition's latest plan - March 2013 

Key points to note:

• All three plans incorporate a sharp slow-down in growth from the surge years, but there's not a huge difference between them. 
• Spending in 2013-14 is now planned to be £720bn - almost exactly in line with the £722bn "spending envelope" set out in June 2010. Which in the narrow terms of public spending control is pretty precise management, and much better than most previous governments have managed.
• However...

...because economic growth and revenue have both fallen well below what had been expected, as a percentage of GDP spending has turned out higher than planned, and revenue much lower. Spending is now running at 45% of GDP, a mere two percentage points lower than what the Coalition inherited back in 2010. Revenue will once again fall well short of spending, at 38% of GDP, leaving government borrowing an unsustainable 7%.

Spending already far too high

The following chart puts the budget spending and revenue forecasts into context, again showing the entire period from 2000-01 through to 2017-18. The gap between the two lines represents government borrowing.

Key points to note:

• Since the privatisation of Britain's big nationalised industries (which removed a large chunk of trading profits from public sector revenues), no government has managed to raise revenues of more than about 38% of GDP: that seems to be the limit on what is politically acceptable and economically sustainable. 
• The public spending envelope remains substantially oversized relative to sustainable revenue. 
• The projected convergence of spending and revenue over the next five years depends crucially on the OBR's growth forecast being realised. 

The OBR is forecasting average growth over the next five years of 2.1% pa. Given recent growth performance, the continuing problems in Europe, our broken banks, and high energy prices, that may well turn out to be optimistic. If so, the convergence of spending and revenue may not happen at all.

Return to the 70s? 

For example, if instead of 2.1% pa growth, we get a prolonged period of 0.5% pa 1970s style growth, the gap remains stuck at 7% of GDP*. All of which will have to be borrowed.

In its first three years the Coalition has already increased the official government debt (PSND) by well over £400bn. By 2017-18, even on the OBR's forecasts, their increase will be nearly £900bn - more than doubling the debt total they inherited. And the official debt is only one small part of the government's overall liabilities.

Debt piled on debt

According the Office for National Statistics, the government's overall liabilities amount to well over £7 trillion, equivalent to five times GDP. The following chart shows the main components:

Interest on the official national debt is currently running just under £50bn pa. The OBR now forecasts it will increase to over £70bn by 2017-18. 

However, all of the government's liabilities require servicing, and if we add in those public and state pensions payments, along with PFI payments, total debt servicing is already running at £170bn pa, and is set to increase to £220bn by 2017-18. 

That means that by 2017-18, over 30% of government revenues will be earmarked to service past liabilities rather than to pay for current services.

Public spending that doesn't add up

With an increasingly large chunk of public spending earmarked for debt servicing, and NHS, Schools, and Aid spending protected inside their preposterous ring-fence, only around one-third of the spending is available for cuts. Nobody has a clue how that can be done inside George's existing spending envelope, including George himself. 

If we don't get a big shot of growth soon, we are facing a massive spending crunch. Forget public sector pay and benefit freezes: we are talking Irish-style 15% across the board cuts for everything. 

*Note I have calculated the impact of lower growth on the public finances using the OBR's own ready reckoner. It's almost identical to the old Treasury rule of thumb blogged here, and it says that a one percentage point shortfall in GDP raises public sector borrowing by 0.7% of GDP after two years. That comprises 0.5 percentage points on the spending ratio, and 0.2 percentage points off the revenue ratio.

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www.gudanggrosiran.com Categories: debt, fiscal policy, tax and spend

Facing Up To The Doomsday Machine

So what have we learned from today's autumn fiscal report from the Office for Budget Responsibility?

First, the OBR under Chote still thinks George is on track to deliver what he promised in June:

"Our best judgement is that the Government has a better than 50 per cent chance of meeting its mandate for a cyclically-adjusted current budget balance in 2015–16 and of achieving its supplementary target of seeing public sector net debt fall between 2014–15 and 2015–16."

Spot that "better than a 50% chance"? To listen to Will Hutton and the BBC's other "neutral commentators" you'd think the OBR had said "less than 50% chance". The fact is that despite everything previous Chancellors have promised, there are never any certainties in fiscal forecasting. "Better than 50%" really does mean George is on track.

Indeed, on the OBR's forecasts, things could well turn out better, because they reckon the downside risks to growth - the ones stressed by the BBC - are evenly balanced by the upside "risks". That is, growth could turn out higher than the central forecast, boosting tax revenues and cutting welfare payments. The OBR thinks there's a 1-in-3 chance that the government will actually be in surplus (ie repaying debt) by 2015-16:

As for the OBR report itself, it's in a different league from anything HM Treasury has previously published. It provides much more detail on the underlying assumptions, and for the first time gives some chapter and verse on BOM's old friend the Doomsday Machine (aka the risk that debt interest payments grow faster than the government's ability to finance them out of current revenues).

On that, the headline message - trumpeted by everyone from the Chancellor down - is encouraging. It is that debt interest payments are now expected to be lower than forecast in June - £18.6bn lower over the forecast period as a whole (2010-11 to 2015-16). So that's definitely good.

But we shouldn't get carried away. Debt interest still increases from £43bn this year to £63bn by 2015-16. Moreover, the OBR lifts the lid on the underlying drivers of its debt interest projection. And there we discover that what's driving the reduction in costs is not some big cut in borrowing, but a cut in the assumed interest rate the government will have to pay.

Here's the OBR's chart comparing June and November's assumptions on the average interest rate HMG will have to pay on the majority of its new bond issues (so-called conventional gilts):

As we can see, November's assumed rate is lower throughout the forecast period (by an average 0.24%). And it's the assumed lower rates that drive the bulk of the saving.

Now those lower rates reflect what has happened in the gilt market since June, so fair enough. Especially since George can argue that it's his "tough choices" that have given the market confidence to cut his borrowing rate.

But as we all know, rates that go down can also go up - especially if the market gets the jitters on inflation. So what happens then?

Again, the OBR report tells us. It includes a handy ready reckoner (Table 4.20) that shows what happens if the interest rate on gilts increases by 1% from what has been assumed. An it's not pretty - a 1% increase throughout would add £15bn to debt interest costs (and although we can't quite tell from the OBR table, with higher gilt yields there would almost certainly be other associated increases, reflecting for example, higher interest rates on National Savings).

One of the most interesting sections is on the long-term fiscal outlook, where an unchecked Doomsday Machine at full revs can do some real damage.

The key long-term issue is one we've blogged many times - too many old people, and not enough workers to support and look after them. The healthcare and pension costs of the old people increases inexorably, the tax revenues generated by the young fail to keep pace, and government borrowing goes through the roof.

The OBR has cranked some numbers looking out to mid-century showing how this could impact public sector debt. It reckons that even if all future governments maintain the same degree of fiscal restraint as George (a highly unlikely proposition given past experience), the cost of all those old people will push debt up to 100% of GDP by 2050:

But concerning though it is, that projection almost certainly understates the problem. Not only does it exclude all those off-balance sheet Enron debts, but others have projected much higher debts by mid-century (eg the Bank for International Settlements recently projected UK official public debt at 550% of GDP by 2050 - see this blog).

This is a serious problem - and Tyler speaks as one who will be part of that problem. Something will have to be done, and none of the options are going to be popular.

The OBR says it is taking a much closer look and will be reporting back next year. We very much hope that they give it to us straight - much straighter than the "fiscal sustainability" reports the Treasury have issued in the past, which have basically made out everything's fine.

Minds need to be concentrated on Doomsday.

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www.gudanggrosiran.com Categories: debt, fiscal policy, pensions

IMF Slams The Pink 'Un

And to think it used to be the voice of finance

Yesterday the IMF published its latest assessment of the UK economy. It is a ringing endorsement of the coalition's tough fiscal measures and a clear rejection of the crass Keynesianism practised by the late Mr G Brown and his scary apprentice Mr Balls.

In one particularly interesting section the IMF specifically takes on the Financial Times, which has been right at the forefront of the Ballsian calls for postponing the cuts (see numerous articles such as “Why the Balls critique is correct,” September 2, 2010, and “The IMF’s foolish praise for austerity,” September 30, 2010). Having considered the FT's various arguments for delay, the IMF rejects them all, saying:

"...a significant fiscal tightening with frontloading in 2011/12 is appropriate to secure confidence in the UK’s debt sustainability."

Which in IMFspeak is saying to the FT - and to all those who take its Ballsian line - that they really have lost the market plot. So much for the FT being the authoritative voice of finance and business*.

In terms of the overall score, the IMF gives the coalition's fiscal plans pretty well a perfect 10:

• "Although this consolidation effort involves painful decisions and dampens shortrun growth, it is necessary to enhance credibility and ensure fiscal sustainability" - without it the UK would have been exposed to a potentially devastating loss of market confidence
• "The budget contains an appropriate mix of concrete spending and revenue measures, lending credibility to the government’s consolidation plan" - "The focus on spending measures is appropriate in light of the significant run-up in spending over the last decade and international experience showing that expenditure-based consolidations lead to longer-lasting budgetary improvements"
• The focus on welfare reform - especially pension entitlements - is absolutely correct
• The establishment of the OBR as an independent fiscal monitor is also welcome

The one area where they call for further action is in the establishment of clear fiscal rules - just like we have repeatedly called for.

As always, the IMF's report contains a host of interesting charts. And here's one that shows how the total fiscal squeeze over the next few years breaks down between what George has announced and what was already in the pipeline from Darling's last budget:

As we can see, the bulk of the planned squeeze in all years was already planned by Darling. Cumulative over the period to 2014-15, George's squeeze amounts to 8% of GDP compared to 6% planned by Darling. Although of course, Darling never told us quite how he intended to deliver it - ie what he was actually going to cut.

A key point that the IMF stresses throughout is that the fiscal squeeze is not expected to stymie the recovery. It is true that they're a little less bullish on GDP growth than either the Treasury or the Bank of England (and more on the Bank's latest Inflation Report tomorrow), but they still expect growth close to 2% both this year and next. And they go out of their way to say it could be higher as well as lower - unlike what some commentators say, the IMF assessment is that the risks are evenly balanced:

So should we be cheered?

Yes certainly.

The IMF may have it wrong - nobody has yet found that fully functioning crystal ball - but this is their best objective assessment, It is not a forecast conditioned by some ideological desire to bash the evil Tories.

Update (12/11/10) - The FT's Martin Wolf (who wrote every one of the FT articles singled out for attack by the IMF) responds here. Wolf is always worth reading, but he is a full-on Keynesian, highly dismissive of BOM-style concerns about our ballooning national debt. Unsurpisingly, he describes the IMF position as "penny wise and pound foolish". Goodness only knows how much debt we'd run up with him at the controls.

*Footnote - It has never been entirely clear what happened to the FT. Back in the day, it was the City's paper, sound on finance, sound on business, and sound on world affairs. But then in the early 90s for some extraordinary reason, it lurched to the left, backing Kinnock in 1992. Kinnock! And then it proceded to back Labour in every single election right up to 2010, when they finally and reluctantly switched back. Sure, it is still the UK's definitive business newspaper. But Tyler knows a number of City types who consign the pink front end - the FT's editorialising end - straight into the WPB unread.

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OECD Supports George

Labour left us with hugely over-priced public services

Contrary to what the BBC and Labour would have you believe, the mainstream economic consensus strongly supports George's assault on the fiscal deficit. They support his plans to squeeze public spending and cut welfare benefits, and moreover they urge him to get on with cutting business and income taxes.

The latest OECD commentary is a striking addition to this support. The OECD says:

"The comprehensive budget announced by the government on 22 June was courageous and appropriate. It was an essential starting point... OECD shares the UK government’s position that fiscal consolidation is a policy for growth...

UK productivity is hampered by slow or partially implemented structural reforms to public services and low levels of resource utilisation. Healthcare and education services are relatively inefficient... The cost of producing public services in the UK is well above the OECD average and has risen significantly over the past decade..."

So the OECD agrees that cutting the deficit is the way to boost sustainable growth - not undermine it as the left claim. They also agree that our public services have grown inefficient and costly under Labour, and require serious surgery.

On taxes, they support George's move to cut the Corporation Tax rate, but urge him to go further. In particular, they want him to reverse Labour's crackpot increase in the top rate of income tax to 50% (as we've blogged previously, it will damage incentives and may well end up reducing tax revenue).

The only question now is WTF the OECD - who we pay £15m pa for BTW - didn't say any of this while Labour were still at the controls? It might have saved a lot of grief if they'd told us then, before we'd mortgaged the grandchildren.

It all comes back to that independence thing. The OECD is an excellent organisation in many ways, and employs a lot of very talented people. But unfortunately, any organisation directly funded by politicos is always going to have problems speaking the unvarnished truth unto power - especially in public. And doubtless Labour could argue that very point applies equally well to this latest report.

Which brings us back to the unfortunate events surrounding Alan Budd and the Office for Budget Responsibility. Here was a genuine attempt to establish some independence from government, headed by a man of apparently unimpeachable integrity with absolutely no ambition to do the job long-term. But it's still come horribly unstuck. Yes, it's cock-up rather than conspiracy, but the damage has been done.

As we've always said, the OBR must be put on the same footing as the National Audit Office. It must be accountable to Parliament and funded by Parliament, not the Treasury. Of course, there could be problems with Budget secrecy, but the NAO (whose staff sign the Official Secrets Act*) has managed to be a fairly leak-free zone, and there's no reason to think the OBR couldn't be the same.

Somebody needs to be to cracking on with this right now. So let's just hope they are.

*Footnote - Just for interest, here's Alan Budd's appointment letter, setting out the various secrecy conditions applying to the role. Along with his pay of £2885 per week.

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Marks Out Of 10?

Most of the work is done by rising tax receipts

We'd give George's Emergency Budget 7½ out of 10.

Naturally we liked the £1000 increase in the personal tax allowance, the promised 4% cut in Corporation Tax rate, the tax cut for small businesses, and the cuts in payroll taxes.

We also liked the faster progress back to fiscal balance, the squeeze on ballooning welfare, the two year public sector pay freeze, and the promised cuts in departmental spending limits.

However, we didn't like the increase in VAT, and we didn't like his various other smaller tax increases.

We also remain concerned by the lack of detail on what exactly gets cut in terms of departmental spending.

All he told us today was that he's intending to cut something like £65bn pa by 2015-16, around 15% in real terms. However, given that the NHS and international development are ringfenced against any cuts, and that education and defence will be protected against the worst cuts, every other department is facing a 25% cut.

Cuts on that scale have never ever been achieved by in peacetime. Clarke achieved 6% in the mid-90s, and even that was hugely assisited by peace dividend cuts in defence. Callaghan managed just 4% following the 1976 sterling crisis, but that only with the IMF supporting him. Even the famous Geddes Axe following WW1 only delivered its 25% cuts in central government spending because local authorities increased theirs.

George says the autumn spending review will fill in the detail. We'll take him at his word.

Let's hope we don't have to downgrade his score when we see the results.

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Will George Do Enough?

When it comes to deciding whether individual governments are over-indebted, the financial markets have long had a rule of thumb, one that has been taken up by international organisations like the IMF, the OECD, and the EU. It is that an individual government should not run up debts equal to more than 60% of its country's GDP (the maximum under the original Maastricht rules).

Why 60%? Well, it's not cast in concrete, but history tells us that once governments go above that level, they are in the financial danger zone. Debt interest is burdensome, and there's no more wiggle room. Unforeseen problems like future recessions can leave them highly vulnerable to a collapse in market confidence - struggling to convince investors they should lend more, undermining their bond markets, and plunging their currencies into the abyss.

Right now (2010-11), the UK is on 78%, so already well above the safe limit. And according to last week's forecasts from the Office for Budget Responsibility (OBR), our debt ratio is set to rise to nearly 90% by 2014-15.

Except of course, it's even worse than that. As regular BOM readers will know, once we add in Brown's off-balance sheet Enron debts, like PFI and public sector pensions, HMG's total debts more than double from the officially declared level (a point highlighted by the OBR themselves).

And that is the scale of George's task. He has to chart out a credible path to get our government debts - our real government debts, that is - back below 60% of GDP.

How?

First, and foremost he has to cut spending. And we'll be watching his delivery on that score very closely (including a credible commitment on those expensive public pensions).

Second, he has to get the economy moving. A bonfire of red tape for sure, but critically, he has to cut business and payroll taxes, and not fund those cuts by increasing other taxes.

Third, he has to be radical on public sector reform. What that means more than anything is letting go - a wholesale move to choice and competition and away from state monopoly (see many previous blogs). Only by doing that, can we ever hope to cut waste in the public services and improve productivity.

Tomorrow we'll be following this landmark budget from the TPA's office, and we'll post some reactions on the TPA website.

England expects, George.

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Budget Responsibility

Early bath for the team but no early pension for anyone

Back from France, which despite our close and painstaking investigation, still manages to baffle.

Take the fiscal crisis. Just like us, they are wrestling with a deficit. But whereas ours is 11.5% of GDP, theirs is only 6.9% (latest OECD forecast for 2010). Despite the fact that they're the ones whose government has always spent money like water - government spending is 55% of GDP this year, even higher than ours.

Last week the French TV news reports were full of Sarko's formal announcement that their state pension age is to be increased. But whereas Cam is trying to find some way of telling us ours will soon move to 70, the French are rioting over having to accept an increase to just 62. 62!

Still at least Les Bleus have flopped in South Africa, causing much wailing in les rues and subjecting the French nation to appalling humiliation in the eyes of the entire world. Thank God our guys would never do that to us (how've they been doing, by the way).

So what's been happening here since we've been away?

Plenty of pre-budget spin, obviously, and it sounds like George really is going to go for the full austerity package straight off the bat. Good.

Last week also saw the publication of the Office for Budget Responsibility's first ever Pre-Budget Report. While not yet quite the finished item, it's a vast improvement on anything we've ever been given before.

To start with, the economic assumptions are properly explained, and there is an explicit recognition of the uncertainty surrounding the central projections. The fiscal projections also feature an explicit range of possible outcomes, neatly summarised in a Bank of England style fanchart:

Thus, on the basis of current policy, the OBR forecasts Public Sector Net Borrowing (PSNB) in 2014-15 of 3.9% of GDP, down from 10.5% this year (2010-11).

However, there is a 50% chance it will be higher than that, and around a 25% chance it will be higher than 6%. Which suggest George needs to err on the side of bigger rather than smaller cuts - especially since the OBR also notes that previous budget forecasts going back to 1987 have on average been far too optimistic (quelle surprise).

The OBR also spells out some of the spending detail signally omitted from previous budget publications.

For the first time, they include the controversial numbers for debt interest payments (forecast to increase from £42bn this year to £67bn in 2014-15).

They also break down total spending out to 2014-15 into Departmental Expenditure Limits (DELs) and Annually Managed Expenditure (mainly welfare benefits). Unfortunately they can only give the figures implied by Darling's last overall spending projections since new ones have not yet been set (they've used a very similar residual methodology to that previously employed by the IFS). But the projections are still striking.

In particular, the OBR says that current plans imply a £6bn cash cut in Departmental spending by 2014-15. Adjusting for their inflation forecast (GDP deflator), that implies a real terms cut of over 10%, or around £40bn pa.

And do you know what that means?

It means that to fill his c£80bn fiscal hole, George needs to find the same again from somewhere else.

Which is why welfare is squarely in the firing line.

And why we still feel very nervous about his tax plans.

PS The scariest table in the OBR's report is not concerned with the short-term fiscal outlook at all. It's a summary of the burden we are facing over the next four decades from our ageing population (Mr and Mrs T included). It shows the increased proportion of GDP currently set to be gobbled up by public pensions, healthcare and long-term care. Total age-related spending is set to increase from 22.5% of GDP last year to over 26% by mid-century. Which means pushing up the retirement age to a mere 70 may not be enough:

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There's No Money Left

The cupboard is bare... except for these guys

Following yesterday's post, Mrs T and others have once again warned Tyler to quit moaning and give Dave's new team a chance.

So we will. From now until the Budget on 22 June, we'll be following a new operating rule - we'll only look for the positives.

And in that spirit, let's immediately record that today's Osborne, Laws, and Budd Show was most encouraging.

For one thing, George suddenly sounded a lot more comfortable and credible. Yes, he did have an opportunist political bash or three at Labour for the mess they've left behind. But in the circs, that's surely fair comment. More importantly, for the first time he actually sounded like a senior pilot capable of flying us through an ash cloud back to safety.

We especially liked the fact that he'd brought along Sir Alan Budd in person to underline the importance of the latter's new job as head of the Office for Budget Responsibility (OBR). And to repeat his pre-election assurance that all future budgets will be based on projections produced by the OBR. And that the OBR will publish independent assessments of whether the Chancellor's policies will actually deliver what he claims.

(Yes, yes, of course - there are lots of unanswered questions about how this will work in practice, and you might wonder quite how independent Budd's seconded Treasury officials will turn out to be, but we're not going there - we're accentuating the positive, remember?).

Laws came over very well as Chief Secretary. He sounded focused, tough, and entirely unphased by the letter left on the desk by his predecessor helpfully informing him there's no money left.

And we like the urgency: the Budget brought forward to 22 June, and announcements on this year's £6bn savings early next week.

What else? What else do we like?

Well, reopening all those scorched earth decisions made by Labour in the run-up to the election, that has to be sensible. If we can get out of them, we should.

And what about those skeletons reportedly clattering out of cupboards all over Whitehall? What can we say positively about them? The biggest and scariest of them is the simple fact that Darling's fiscal forecasts were fiddled, meaning that the overall position is even worse than he admitted. But in truth, that shouldn't have come as a shock to anyone (eg see this BOM post).

But no, genuinely, we did think the new Treasury team came across convincingly today. There may be no money left, but for the first time in many years we seem to be facing up to some reality.

PS As you will doubtless have spotted, despite our brilliant new Chancellor, sterling has been going for a bit of a walk lately:

The market seems to be betting that George will succeed in cutting spending. You may think that ought to be good for sterling - after all, haven't we been told we must cut in order to head off a sterling collapse? But the market is figuring that if George delivers real cuts, then the Bank of England will be able to hold down interest rates for longer. Which means sterling gets less support from short-term money flows, and therefore sags. Funny chaps markets... although longer-term, sound public finances will certainly mean stronger sterling.

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www.gudanggrosiran.com Categories: fiscal policy, good news

Words and Deeds

They seem to have cracked the words bit

Thank you to everyone who commented and emailed yesterday telling me not to be so depressed about the Condem Coalition. As you pointed out, instead of moaning about the destruction of the old Tory Party, we ought to be looking at what the coalition is promising to do.

Fair comment.

So let's pull ourselves together and take a look at the joint Con-LD manifesto. And guess what - a lot of it turns out to be stuff we support. Although a lot of BOM's priorities are still missing:

1.  Deficit Reduction - they are promising to "significantly accelerate" Labour's deficit reduction plan "with the main burden of deficit reduction borne by reduced spending rather than increased taxes", to cut that contentious £6bn this year, to cut some middle class welfare, and to base their forthcoming budget on independent forecasts produced by the new Office for Budget Responsibility. All of which gets a great big tick, both from us, and by the sound of it, the Governor of the Bank of England. MISSING: although they promise "long term deliverability", there's no mention of quantified fiscal rules - including that all-important "third rule" to limit spending.
2. Spending Review - there's now an even longer list of protected areas- the NHS, schools, overseas aid, Trident, and restoration of earnings-linked state pensions. MISSING: detail on what gets cut.
3. Tax - partial rescinding of Labour's jobs tax (but not as much rescinding as the Tories promised), and a pledge for "a substantial increase in the personal allowance from April 2011". Both good. But against that, CGT is being whacked up, and the promised IHT cut is being ditched. MISSING: there is a worrying silence about VAT. Plus there is no acknowledgement of the vital need to reduce the overall tax burden built up under Labour.
4. Banks - new bank levy (aka liability insurance premium), and restoration of the Bank of England's supervisory powers. Both good. Euro entry ruled out, although given the rioting PIGS and the squealing German taxpayers, anything else would have been preposterous. MISSING: nothing substantive on splitting our too-big-to-fail megabanks.
5. Immigration - cap on non-EU economic migrants - good. MISSING: any limits on other non-EU migrants like those overstaying students (eg see this blog).
6. Political Reform - widely discussed elsewhere - fixed term Parliaments (but sensibly subject to a Commons override), referendum on AV, MP recall. MISSING: English parliament, radical reform of the Barnett Formula, fiscal decentralisation (ie decentralisation of tax raising).
7. Pensions and welfare - bring forward increase in state pension age to 66, simplify welfare to work programme, stronger incentives for private contractors to get claimants back working, and tougher line with dole scroungers - all good. MISSING: concerted attack on middle class welfare, abolition of welfare incentives to breed, increasing state pension age to 70 soonest.
8. Education - full free-school Gove with brass LD knobs on (ie pupil premium for poor kids). Hurrah. MISSING: explanation of how we fund pupil premium.

There are also various other headings, but as we can see, most of what the document says, we can support.

The problems come with the missing bits, especially the lack of content on spending cuts and just how we're going to manage our future public finances to deliver the lower tax burden vital to our future prosperity. NHS reform - one of Labour's biggest failures - also remains a complete mystery.

All of which is concerning. Because when it comes to spending cuts, the devil is always in the detail.

The joint manifesto's words say the coalition is starting off pointing in the right general direction. But only by their deeds shall we really know them.

PS The word fairness got a lot of use yesterday. Cam included it in his strapline pledge - "freedom, fairness and responsibility". To Tyler, fairness is a motherhood word that totally fails the opposites test - ie you cannot imagine any politico of any persuasion ever arguing for the opposite, which makes it pure waffle. But yesterday evening when Tyler suggested this to a non-Tory friend, he was told that actually there is a politico who would be prepared to argue the opposite: to wit, Lady M Thatcher. Is that right? Did she argue for unfairness? Can't say I remember it, but this friend seemed pretty sure. Must look it up, but whether she did or not, it just goes to underline how tough spending cuts always are. Because there are always losers, and it's impossible to ensure everyone takes the same hit. We may all be in this together, but some are going to suffer more than others, and whatever words Cam may use, they most definitely will not consider it fair.

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www.gudanggrosiran.com Categories: 2010 Election, fiscal policy, politicos

Destroying Jobs

It seemed like a good idea at the time

A very interesting new report from Policy Exchange today. Andrew Lilico and Hiba Sameen have been looking at the effect of various different types of tax on economic growth and employment, and have come up with some striking conclusions.

They've used the Oxford Economic Forecasting model - which is very similar to the Treasury's model of the economy - to analyse the impact of various tax changes. And they raise a big red flag over Labour's planned increase in National Insurance Contributions (NICs).

Now as we all know, National Insurance Contributions are a tax on jobs - pure and simple. They make it more expensive for companies to employ people. When Labour came to power, the standard rate of employers NICs (contracted in) was 10%, but after a string of increases, as from April 2011, they will be 13.8% - one percentage point higher than now.

So Policy Exchange has run the model, and discovered that a 2 percentage point increase in employers' NICs after three years produces a one million increase in unemployment. Which would imply that the planned increase of one percentage point next year will cost half a million jobs.

Now, sure, you can argue with the detailed assumptions built into the model, but this must be pretty close to what HMT discovered when they ran their own model. And yet Brown went ahead with the NICs increases anyway.

When Darling gets up on Wednesday and tells us how they don't need to increase VAT because they've already taken the tough tax decisions, you want to remember this. Labour's planned tax increases are just about the most jobs destructive of all.

PS The Policy Exchange report also has a good summary of the increasing volume of research showing a link between the tax burden and long-term GDP growth (see page 20). For example, a 2008 study of OECD and EU countries over the period 1970 - 2004 found that a one percentage point increase in the share of total tax in GDP reduces output growth by 0.12 percentage points.

PPS Several correspondents have drawn attention to today's report that UK government spending has now reached 52% of GDP, as opposed to the 48% quoted on BOM's sidebar. The 52% comes from the OECD and differs somewhat from HMT's definition of public spending - the source of the 48%. But we're investigating further and will report back.

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www.gudanggrosiran.com Categories: fiscal policy, tax

Labour's Fiscal Fantasyland

Public sector efficiency experts on the job

As they keep reminding us, Labour's Big Fiscal Pledge is to halve the deficit by 2013-14. In Darling's own words:

"Backed by legislation... the Government will ensure public sector net borrowing, as a share of GDP, falls every year and is more than halved by 2013-14."

And according to their latest numbers that is precisely what they will achieve - Public Sector Net Borrowing (PSNB) falls from 12.6% of GDP this year, to 5.5% in 2013-14.

But even if the markets can live with that speed of retrenchment - and many think it's not fast enough to maintain confidence - there is still a serious problem. Because Darling's projections are based on a range of assumptions that bear virtually no resemblence to the real world - it is a fiscal fantasyland.

Part of the fantasy is their assertion that they can achieve their projected retrenchment without cutting so-called frontline services, and without increasing taxes beyond what they've already announced. As we've blogged many times, given their abysmal track record on public sector "efficiency" that's going to be impossible. Moreover, so far they have even failed to specify where their assumed "savings" are coming from - which specific spending programmes are going to face the budget axe?

But there is another even more dangerous strand of fantasy - their assumption that Britain's economic growth will soon bounce back to 3.25% pa:

So according to the Pre-Budget Report, over the five years from 2010-11, GDP growth is supposed to average 3% pa. But in a world of over-indebtedness, zombie banks, and tax increases, that is extremely unlikely. Consider:

1. The average of independent forecasts for more or less the same period (2010 to 2013) is just 2% pa - and that was collected and published by the Treasury itself (see here page 18).
2. Last time we had to tackle a fiscal crisis even remotely like the current one - in the 70s - GDP growth was pretty close to zero for the following five years: in fact between 1976 Q4, when the IMF arrived, and 1981 Q1, when Geoffrey Howe finally completed the necessary fiscal consolidation, UK growth averaged just 0.4% pa.
3. Japan's notorious Lost Decade of stagnation, following the collapse of its financial bubble in 1989, lasted... well... a good decade.

So what happens to Labour's halving of the deficit when their fantasy GDP growth doesn't materialise? Because as we all know, growth is the vital driver of fiscal health. Without growth, tax revenues remain depressed, welfare spending increases, and Darling's borrowing pledge won't be worth the legislative paper it's printed on.

The Institute for Fiscal Studies attempted to answer this vital question in their recent Green Budget. They are naturally too polite and circumspect to accuse the government of spinning a fantasy, but they did take a close look at the fiscal consequences of slower growth.

The model a range of possible GDP scenarios - all more pessimistic than Darling's growth assumption.

Their central case is that GDP growth will average 2% pa over the next five years rather than Darling's fantasy 3% pa - pretty much the consensus view among independent forecasters. And on that basis they project that the 2013-14 borrowing requirement will be about 1.7 percentage points of GDP bigger than Darling forecasts - ie 7.2% of GDP (see page 125). Which means Labour miss their solemn and binding pledge to halve the deficit.

Personally, Tyler reckons 2% pa GDP growth still sounds too optimistic, and is more convinced by the IFS's pessimistic case. That assumes average growth of just 1.3% pa over the period - more than we got following the 1976 IMF visit, and more than Japan got in the 90s, but closer to the likely outcome than the IFS central case.

And on that basis, the IFS project that borrowing in 2013-14 will be around 8.2% of GDP - way higher than Darling's 5.5%. Far from halving the deficit, Labour would only have cut it by one-third. We'd still be having to borrow £120 - 130 bn pa, and our official national debt would be well in excess of £1.5 trillion. We'd have long since ceased to be a AAA credit, and the likely level of gilt yields doesn't bear thinking about.

So is Darling going to correct his fantasy projections in the forthcoming budget?

No sorry, that's another stupid question.

The real question is WTF does anyone believe them? Why doesn't everyone just laugh at such preposterous nonsense?

Because if these clowns somehow get re-elected, I tell you, we won't have much to laugh about then.

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www.gudanggrosiran.com Categories: fiscal policy, politicos, spin

Tax And The Tories

Wanted: a shaft of sunlight

Once upon a time we all knew where the parties stood on tax. Labour stood for increases, and the Tories for cuts.

These days it's not so easy. Two years of sharing the proceeds blurred the old clearcut Tory tax brand beyond recognition. And now a full-on fiscal crisis has swept away all hope.

The dismal result is that voters no longer associate the Tories with tax cuts, or it seems any clearcut tax policies at all. Last week, ICM asked voters which party has the best policies on setting taxes, and on this vital touchstone issue found the Tories actually trailing Labour. For those of us who are desperate to see Labour out, it's nothing short of tragic.

It's especially tragic when we recall that in between the fog of sharing the proceeds and the cataclysmic onset of fiscal Armageddon, we briefly glimpsed a shaft of brilliant sunshine.

At the Tory Conference in 2007, George transformed the political landscape with a single tax pledge - to abolish Inheritance Tax on all estates of less than £1m. At the time, the Tories were facing electoral anihilation at the hands of the Big Clunking Fist, but that pledge changed everything. We were actually there in the hall, and it nearly brought the roof down. You knew immediately it was a game changer (see this post), and within days Brown had bottled the entire election.

What's that? There's no money left to cut taxes?

Hmm. The point about the IHT announcement was less the amount of the tax cut that it represented (IHT will only raise £2.2bn this year), and more the fact that it was a clear and convincing declaration of intent - a declaration that the Tories were returning to their traditional faith in low taxes.

In truth, everybody knows our fiscal position will not permit big tax cuts any time soon. But we need to know that the Tories will make cutting taxes a higher prority than public spending. We need to know they will resist the pressure to balance the books with higher taxes next year. And we need to know that over the next five years, tax cuts will be delivered ahead of any return to higher spending.

PS One other thing to remember is the lesson of history. As we blogged here, successful programmes to cut big fiscal deficits like ours have always emphasised spending cuts above tax increases. According to research by Policy Exchange, successful consolidations (as squeezes are known in polite company) have typically placed around 80% of the burden on spending cuts and only 20% on tax rises. Consolidations based on tax increases almost always prove to be unsustainable (like Labour's ultimately failed attempt following the 1967 devaluation).

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www.gudanggrosiran.com Categories: fiscal policy, tax

Better George

No time for a proper blog today, but Tyler has just read George's Mais Lecture. Overall, it's rather encouraging - in fact, Tyler almost feels he could have written long passages himself.

True, we have heard much of it before, but he leaves us in no doubt that he sees the rapid build-up in government debt as being a much more significant threat to continued growth than early cuts in public spending. Specifically disagreeing with the left-wing economics establishment, he says:

"A credible plan is not really credible unless you're prepared to make a start on it this year.

Otherwise we are trying to persuade people that we will be virtuous, just not yet - and when you've been as irresponsible as Britain has been, that isn't easy.

That is my hard-headed assessment.

And it is driven by three things:

The nature of confidence; the realities of financial markets; and the practicalities of government."

And on the dangers of debt, George highlights some scary projections recently published by the Bank for International Settlements. They reckon that on current policies, the UK public sector has the worst fiscal outlook of any major economy.

In particular, the BIS homes in on the interest costs of our debt build-up - the key issue we have to worry about. They forecast that by 2025 public sector debt interest payments will have increased from the current 3% of GDP up to around 15%. And by 2040 it will be a bed-wetting 30% - three times the level that nearly triggered a revolution in the aftermath of the Napoleonic Wars (see this blog). Here's their chart (public sector debt interest as % of GDP):

Tyler is somewhat reassured by this speech. It is a weightier offering than the kind of politicking stuff George has sometimes served up in the past. It may not have quantified targets for spending cuts, and we still need to see him adopt clear fiscal rules - including that all-important third rule to govern spending - but this speech does have the makings of a serious plan for government (and see the TPA view here).

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www.gudanggrosiran.com Categories: fiscal policy

OMG (Cont)

So.

The first January fiscal deficit since the Black Death. The month when all those lovely Corporation Tax payments, and all those lovely self-assessment income tax cheques are supposed to come in, has instead turned into the Black Hole of Death.

Tyler's back-of-envelope says that we're now on course for 2009-10 total borrowing of £180-185bn, compared to Darling's latest forecast of £178bn.

Well, that's not so bad, you say. Only another few bill. Hardly the Black Hole of Death.

Which just about says it all - we are now so used to fiscal meltdown, even borrowing in January can't shock us.

I've just watched Prof "Happiness" Blanchflower on C4 News telling us once again why we should just carry on borrowing. Apparently the government can spend and borrow us back to prosperity. And the alarming thing is that a lot of normally quite sensible people are still saying exactly the same thing.

I'm currently taking another long look at our debt history to see if I've missed something. Blog to follow.

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www.gudanggrosiran.com Categories: debt, fiscal policy

Fear Of Clowns

More than a passing resemblance to Bliar Imp.

Tyler has just discovered what's been ailing him all these years. It's called coulrophobia - a morbid fear of clowns - and apparently P Diddy (whoever he is) suffers from it.

Suddenly it all makes sense. As you will not need reminding, the country is currently in the clutches of the most terrrifying bunch of clowns ever to escape from a high security Big Top. Coulrophobia - no wonder we're hiding under the bed.

And what a petrifying routine our clowns have subjected us to these last 13 years. They've robbed us blind, screwed up our public services, undermined our culture, taken us into dodgy foreign wars, and left us with an old jalopy of an economy that can't even make it out of the ring.

But you know, the really scary thought is that the next act might not be a whole lot better. Whereas you and I hoped we'd be rescued by a lion-tamer, or at the very least a fire-eater, you can't help worrying it might just be another bunch of scary clowns.

What's especially scary is the thought that they might shy away from actually fixing the jalopy, settling for yet more tinkering instead. And recent statements about repairs not needing to be "particularly extensive" have given our nerves a right old jangling.

Or are we being irrational - another bout of coulrophobia?

No. The danger is all too real, and this morning we've got another of those famous open letters from the economics establishment spelling out why. Its 20 signatories include the former chief economist of the International Monetary Fund, a former deputy governor of the Bank of England and head of the Financial Services Authority, and a former permanent secretary to the Treasury and cabinet secretary. For balance, they also include a Labour peer, who is also Britain's best-known Marxian economist.

They write:

"...there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.

In order to minimise this risk and support a sustainable recovery, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report.

...the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case... for the first measures beginning to take effect in the 2010-11 fiscal year.

The bulk of this fiscal consolidation should be borne by reductions in government spending...

...introduce more independence into the generation of fiscal forecasts and the scrutiny of the government’s performance against its stated fiscal goals."

So... an immediate start, elimination of the entire structural deficit (10% of GDP) over 5 years, emphasis on spending cuts not tax increases, and independent fiscal oversight.

True, there's nothing here we haven't blogged many times on BOM. But the point about these 20 economists is that they can't all be coulrophobics.

We need a lion-tamer, and we need him quick.

PS There's been much talk over recent days about the vital need to coordinate monetary and fiscal policy. Sounds kinda sensible, but what does it actually mean? Presumably, the idea is that as the government tightens fiscal policy over the coming years, the Bank should not tighten monetary policy at the same time, for fear of a double-whammy impact on demand in the economy. Fair enough. But what if inflation starts to be a problem, as we very much fear? Should the Bank stand aside? Surely we all learned back in the 70s that we cannot afford to let inflation get a grip, however awkward it may be to raise interest rates. And surely we also learned that a weak economy is no protection against rising inflation - a weak economy means a weak currency, and before you know it you've imported a whole bucketful of inflation. Add in a panicky globalised bond market re-sensitised to monetary incontinence, and suddenly interest rates in all but the very shortest maturities shoot up pretty well irrespective of what the Bank does with its monetary policy. Far better to let the Bank carry on focusing monetary policy on inflation, and not divert it into doomed attempts to stabilise GDP against the spending cuts (Note that the 20 economists don't mention this monetary and fiscal coordination idea. And the Bank Governor was also pretty sniffy about it when our Steph asked him to comment during his press conference last week. So hopefully it's no more than a vacuous soundbite.)

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www.gudanggrosiran.com Categories: cuts, fiscal policy

How To Stop Britain Going Bust Again

Getting this guy away from the controls would be a good start

I've just read George's piece in today's Times, How to stop Britain going bust again. And you know what? It's good.

He says we must turn away from "the failed model of debt-fuelled growth that led us into this mess", and develop "a new British economic model that learns from the mistakes of the past".

Yes, of course, talk is cheap. But here's what we like:

1. First and foremost, the "new economic model requires government to live within its means... The overriding objective of fiscal policy must be to provide [a] credible deficit reduction plan... That credible plan must eliminate a large part of the structural deficit over the next Parliament, starting in the coming financial year."
2. "Britain’s new economic model must be built on saving and private sector investment, not the unsustainable public spending and consumer debt of the past ten years. Exports and business investment provide the key to a sustainable recovery... We need to become competitive again. Simpler taxes with lower tax rates, removing employment taxes on new businesses employing new staff, stopping the remorseless rise of red tape on small businesses."
3. "The private sector must take the lead, but government must help with a modern planning system... and providing modern transport infrastructure. Above all, with a record one in five young people out of work, government must provide the education, training and welfare reform we need to get Britain working."
4. We need "a new banking system... a regulatory system that commands confidence, with the Bank of England in charge instead of the old failed tripartite regime... Britain becoming a champion of internationally agreed structural reforms of the kind President Obama proposed last week, rather than remaining wedded to the old unstable structures that the current Government has encouraged."

And what do we not like?

Well, despite the manifold climate swindles that are now coming to light on a daily basis, George still wants to spend more of our money on "green investment"; there's still no indication of what spending he'll cut, or how he'll stop himself raising Vat; removing "a large part of the structural fiscal deficit over the next Parliament" may not be ambitious enough to head off the rise in interest rates; and there's no mention of serious money-saving public sector reform, such as fiscal decentralisation, or breaking up the NHS, or even ending national pay bargains.

Still, for all that, this is a distinct whiff of that old time religion - government to be be hacked back, both in terms of spending and regulation; growth to be driven by the private sector, fuelled by lower taxes and a bonfire of controls; working age benefits cut to reduce indolence and vice; structural reform to stop too-big-to-fail bankers gouging taxpayers via open-ended guarantees.

All he's got to do now is deliver.

Which we will be watching very closely.

PS Does it matter that tomorrow's ONS report will (probably) show our recession ended in 2009 Q4? Well, clearly it's better that we're no longer heading down, but apart from that, there won't be much to shout about. We will still have lost around 6% of our GDP since the peak, and we'll be 10% below where Clown Brown predicted we'd be by now. What's more, GDP growth from here on is likely to be pretty sluggish, even with our improved competiveness from sterling's collapse. Apart from anything else, government spending has to be cut, taxes are heading up, and there's no way interest rates can stay down at current levels. So let's see how much puffing the Clown attempts.

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www.gudanggrosiran.com Categories: cuts, debt, fiscal policy, red tape, tax and spend

For Real

Circle of unreality

According to the Major, the crisis has moved way beyond the handling capacity of our dysfunctional democracy.

"Here we are, the country bankrupt, ruled by a Scottish communist, stuck in a war we can't win, overrun by mad mullahs nobody does anything about, and our only alternative is a lightweight PR man. Gah! We need a leader - someone who can get a grip." He fixed me with those bloodshot eyes of his, and tapped the side of his nose meaningfully. "It won't be long now - you just wait."

Well, obviously the Major is a tad right of centre, but he sure ain't the only one casting round for Another Way. And watching PM's Questions today, you can see why.

What exactly is the point of PMQs?

"Will the Prime Minister admit he's crap?"

"I'll tell him who's crap! The party opposite is crap, crap, crap!"

"Once again, the Prime Minister has ducked the question. The IMF says he's crap, the OECD says he's crap, and even his own personal Hoon says he's crap! Why won't he admit he's crap?"

"The only crap round here is the party opposite. It's crap! And if it was left to them, we'd be in the crap!"

Errrrugghh...

I've just read the Treasury Select Committee Report on the preposterous Pre-Budget Report. Here's what it says:

• The GDP assumptions underpinning the PBR's fiscal projections are ludicrously optimistic
• The unemployment assumptions are ludicrously optimistic
• The housing market assumptions are ludicrously optimistic
• The bank lending assumptions are ludicrously optimistic
• The projection of the structural fiscal deficit is ludicrously optimistic

The Committee - Labour dominated, remember - also highlights the shameful lack of information on the government's future public expenditure plans:

"There is a sense that the Treasury are using uncertainty to suit themselves. Despite substantial uncertainties they still produce some forecasts out to 2014-15 and illustrative projections out to 2017-18. We can see no good reason for the Treasury failing to produce illustrative figures for future expenditure... We recognise that there will be uncertainty in these figures, but they are produced as part of the Spending Review process so there appears to be no argument of principle against their publication."

To summarise, the Committee is saying the government is not levelling with us over the true magnitude of our fiscal crisis, and the full horror of the medicine we'll have to take.

Why is that?

Well, because they figure if we knew the truth, we'd never re-elect them.

Fine. But couldn't Her Majesty's Loyal Opposition tell us the truth?

Well, no, because if they did, we might associate the nasty medicine with them, and not elect them either.

So we're stuck.

And you know the really worrying bit?

Once Cam is in No 10 - once he's Seen The Books - he'll have to decide whether he can risk telling us the truth without us turning on him. And judging by the evidence to date, you'd have say that's a longshot.

Instead, we'll get an update of the preposterous PBR, slightly tweaked in the direction of reality, and with slightly more information on spending. But it won't be the unvarnished truth. We won't get that until we run into the inevitable sterling/gilt market crisis and the IMF pitches up on the redeye from Washington.

It will be Obamba Part Deux all over again - yes, it's a fresh new start with me, I'll close Gitmo, and everything will be cool... OMG, you mean these are the secret files... OMG... what should we do? ...we haven't closed Gitmo yet, have we?

Is it black-hearted deception, or simple naivety? You know - if we just whistle to ourselves and carry on as if everything is OK, then maybe something will turn up.

Yeah. That must be it.

Remind me, what's the point of our politicos again?

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www.gudanggrosiran.com Categories: debt, fiscal policy, politicos

Fiddling While Blighty Burns

There goes our future prosperity

The Pre-Budget Report (PBR) has to be one of the most disreputable documents ever to emerge from HM Treasury - and that's against some pretty stiff competition over recent years.

As we blogged here, it failed on all three critical counts:

• Borrowing - no progess on reducing it faster
• Taxes - higher taxes on jobs and a risky low yielding tax on bank bonuses
• Spending - unbelievably, spending was actually increased rather than cut

But it's worse than simply failing to deliver. The PBR is riddled through with fiddles and outright deceit.

To start with, we have been told that schools, hospitals, the police, and overseas aid will be ringfenced. But there has been absolutely no explanation of how that squares with the overall spending projection. Not for the first time, it's been left to the indispensable Institute for Fiscal Studies to pick apart the entrails, and point out that other programmes, like Defence, will have to be slashed by an implausible 12% in two years, and perhaps 16% by 2014-15. How on earth will that work?

And then, as we blogged here, the PBR's forecasts for tax revenue and welfare spending rest on wildly optimistic assumptions about future economic growth. A realistic projection of the public finances would show a significantly worse picture, implying either much higher borrowing, even higher taxes, or further spending cuts.

We've also discovered the PBR contained a disguised provision to uprate welfare benefits by more than the RPI just before the election, and then downrate them again afterwards. Which is breathtaking cynicism even for this bunch of black-hearted shysters.

The latest twist is that "sources" have "let it be known" the PBR was not the Treasury's at all. The Treasury now claim they wanted to be tougher. They didn't want to increase spending, and wanted an increase in VAT rather than job-destroying NI. But they were overruled by Brown and Balls.

In other words, the government's own experts have disowned the PBR as an outrageous exercise in low-grade politicking.

Unsuprisingly, the markets are losing their nerve. We had always assumed they would give us the benefit of the doubt until George took the controls, but their reaction to the PBR suggests we may not even have that long. Yesterday, the gilt market sold off sharply, amid mounting concern that our rulers are in denial about the need for drastic action. One bond market strategist put it this way:

"UK bond investors should look at Greece, where the bond markets have crashed this week. The bond markets in the UK could crash too, unless the government starts to initiate serious debt reduction policies."

Another said:

“The PBR seeks to create a fiscal fiction that the deficit can be resolved solely by tax hikes on a relatively small share of the population – the few, not the many – and without painful public spending cuts. The revenue forecasts again look over-optimistic, and there are no public spending plans after 2010-11 – only vague forecasts.”

Of course, we can never know exactly what the markets are thinking - they don't even know themselves. But it's a fair bet a lot of players are now thinking what we're thinking: has George got the balls to do the necessary? And even if he has, will Cam overrule him like Brown has just done with poor Darling?

Because it will be tough enough to grip our public finances as it is. But by concealing the true scale of the problems, this shocking fiddled PBR just made it that much harder.

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www.gudanggrosiran.com Categories: cuts, fiscal policy