Robert Buckland Weblog

Another November, another defeat of Wales by New Zealand, followed by a Pre-Budget Statement from the Chancellor.  The difference in 2008 is that tomorrow’s statement will be of greater importance than any other financial announcement made by this Government since they took office in 1997.  It will set the financial and political agenda for the next several years.  At the back of the much-trailed tax cuts and VAT reductions,  I can hear the voice of Labour’s last Prime Minister but one telling his Party that “you can’t spend your way out of a recession”.  Jim Callaghan had learned the hard way about the damage that can be done to the UK economy by excessive fiscal irresponsibility.  The IMF’s intervention in 1976 shattered Labour’s economic credentials to such an extent that it took twenty years to recover, and then only because of Black Wednesday. 

The Government is preparing to accept a budget deficit of up to £120 billion by 2012.  This figure isn’t merely surprising, it is jaw-dropping.   Last year, public borrowing stood at £35 billion.  This financial year, it has nearly doubled to £65 billion.   The PBS will mean that in 2009/10, it will be between £90 and £100 billion and in 2010/11, it will be £110-120 billion.  Borrowing nearly doubled this year; it will increase by about a third the next, and then by a further £20 billion the next year.  These figures are staggering, phenomenal, frightening.  Prudence is not only dead, but damned.  The Conservatives are right to sound the alarm.

By 2010, the cost of servicing the debt interest on the growing deficit will be £34 billion,  which is more than is spent on schools.  This is unsustainable.   They indicate that tax rises will have to follow later, but are blandly unspecific.  Already, there is enough for the more sensible amongst us to realise that any money handed back to us now should be retained in readiness for its return at a later date.

What effect will all of this have on interest rates and sterling?  We have presumed that rates will continue downward, but the MPC decided last week that they would reassess the situation after the PBS.  In other words, if the prospect of an astronomical budget deficit sees a run on the pound, interest rates will stay firmly where they are.  A weak pound will lead to price increases and inflation, wiping out the transient benefit of any fiscal giveaway. 

We are constantly told by Mr. Brown that a fiscal stimulus is what is being done by Governments accross the world.  What he does not say is that every other country that is taking this approach has more to draw upon than Britain.  We are in a particularly weak position when it comes to borrowing.  Labour’s failure to prepare for harder times when the going was good means that large packages like the one tomorrow carry very great risks.  The Prime Minister and the Chancellor are behaving like inveterate gamblers at the roulette tables of Monte Carlo,  getting some credit from the bank but then putting it all on one number.  As we too are part of the play, then we deserve to be told the full and detailed impact of future tax rises.

Another image that all of this throws up is of a set of bath taps, turned on to full and left running for seven years.  Instead of easing the flow, Gordon Brown is about to jam them open.