Reforming The City
December 22, 2009
Collectively our nation was lulled into a false sense of security by the clement economic conditions that prevailed for a decade from the mid-1990s, alongside a delusional sense that the good times would be here forever.
In this sense at least, government has been in tune with public sentiment. There is an almost primeval human urge to avoid confronting the unpalatable in the hope that today’s problems will simply fix themselves. ‘Something will turn up’ – the watchword of the cheerily optimistic and insanely reckless alike.
One of the underlying characteristics of the deep financial and debt crisis in which we find ourselves is that continuing state of denial. Part of this is understandable. Two years of grim daily news on the financial crisis has not been matched – except for those who have lost their jobs – by any sense of financial sacrifice. This continues as the government pumps more money into the economy. The time of reckoning will soon be upon us.
Too few of my parliamentary colleagues have woken up to the enormity of the debt crisis that follows hot on the heels from the economic downturn. Yet the seriousness of what will follow cannot be long denied.
For sure, technically the worst of the economic recession may now be behind us although it would be premature to conclude that a ‘double-dip’ recession is not on the cards as the effect of the continued stimulus dies off probably just after the General Election. Amidst some of the glib green-shoots commentary, we should also understand that the banking crisis represented nothing unusual. Indeed it signalled the end of another in a long line of boom/bust cycles (positively commonplace in the second half of the last century) caused by speculative euphoria and an excess of credit.
It is in the government’s narrow interest to present this as being an entirely unprecedented type of downturn caused by modern financial alchemy gone wrong, failure by regulators or rank unforeseeable misfortune. This is not so. It is true that the global nature of the economic crisis has made things worse. But there are also clear lessons we can learn from the past. One of the grand old names of British banking, Barings, collapsed owing £780 million only fourteen years ago; today RBS survives courtesy of a £45.5 billion bailout. But it is only the extent of the economic downturn, not its cause that is so very different.
Arguably it is the credit/debt bubble along with the China’s aggressive desire to build market share in global trade rather than inadequate regulation that have been the cause of the economic calamity that has beset the global monetary system. As a result the solutions do not require – whatever our government may tell us – a bewildering racking-up of unimaginable levels of debt for future generations of taxpayers. Indeed nothing will more certainly hinder our prospects of rapid economic recovery and a sustainable return to improved living standards.
The biggest threat in the years ahead is that the indiscriminate pumping of money by the Bank of England into the economy will bring with it an unsustainable combination of inflation, rising unemployment, weak growth and diminished competitiveness. This will produce a toxic mix of stagflation – truly a ‘back to the 1970s’ phenomenon. The worst case scenario here is that a future government may regard a sustained dose of inflation as the quickest and most politically expedient way of helping bring down the level of public debt. Moreover, inflation provides a convenient route to enhancing the tax take as fiscal drag is allowed to run its course. The inflationary pressures brought about by the fiscal stimulus and quantitative easing may in any event make this path difficult to avoid in the years to come.
In truth, any UK government that is regarded as popular in 2011 and 2012 is probably not administering effective economic medicine. To do the right thing on tax and expenditure in the years to come will not be seen as a politically easy option.
The billions being borrowed now by the government to ease the impact of the downturn for today’s electors will be repaid by future generations in the form of higher spending, higher inflation and reduced living standards. Yet the true cost of all this will not become apparent in the months ahead. The government is desperately hoping these sands of time do not run out before it has to face the voters. Which makes talk of economic recovery now so very dangerous. Contrary to the Prime Minister’s fatuous claims, this is not a simple, binary choice of ‘Tory cuts’ set against ‘Labour investment’. There is a hard slog ahead for any UK political administration.
Only the Conservatives have truly begun to wake up to the enormity and seriousness of the debt crisis that will underpin domestic politics for much of the decade to come. In essence this is why, with our Party riding high in the opinion polls, the bond and currency markets have been calmed into quiet confidence about the nation’s economic prospects as we look to the General Election. For it is certainly not some miraculous solving of our dire public finances that has soothed the markets over the past few months. Indeed the IMF has calculated that over the course of the next decade, the UK government should ideally impose a fiscal tightening of 12.8% simply to restore the national debt to pre-crisis levels – an option considered by most to be so extreme that it would prove politically impossible to implement.
The prospect of a hung parliament and further delay to the required radical decision making, pending a second election, risks tipping sterling and the gilts market into a catastrophic state. Nothing would be more damaging to our economic outlook than for a layer of political uncertainty to be added to our economic uncertainty. The markets have factored in firm action in the near future and risk being tipped over the edge if further delay results from an inconclusive election result. Just imagine the unseemly horsetrading that would result from a hung parliament simply to form a government.
In the absence of firm political decision making about expenditure or tax, market activity would certainly fill the void. The currency and bond markets would probably turn sour; there is a substantial risk of a sterling crisis; long term interest rates would soar and the nation’s essential triple-A gilts credit rating might even face a downgrading. If political leaders – concerned only in gaining tactical advantage – showed themselves unwilling to face up to the stark facts of this long march back to fiscal balance and economic recovery it could even prove necessary to bring in the IMF. A political class unwilling or unable to take responsibility or court unpopularity may in this way be forced to bring in such a neutral umpire to administer the really tough decisions on public spending.
So how to bring about the decisive leadership on the economy that the country so desperately needs?
Opposition parties have spent the past few months systematically discrediting the government’s record for economic management. This has been an unqualified success. The Conservatives in particular have also been upfront about the collective task that lies ahead and we have made some difficult statements about the need to pare back public spending. But there remains a fundamental disconnect with the public – as well as a lingering sense of fear – that could well prove the difference between a working majority and a hung parliament. Any party aspiring to govern now requires a sweeping, positive, uplifting vision to counteract the dismal deficit of aspiration in today’s Britain.
From now on politicians need to promote a consistent and well articulated case for sustained economic growth. The truth is that rapid action to correct the deficit will be the quickest route to the promotion of growth and recovery. A well thought out timetable to sort out the public finances boosts confidence and – as all the international evidence shows – promotes more rapid recovery. Note too that nothing will choke future growth more conclusively than tax rises. Cuts in public expenditure, rather than additional taxes, especially those on income, are more likely to result in economic expansion.
Above all let us not forget that the opportunity this financial crisis lends any party hoping to govern is incredibly exciting. Far more enthralling than the prospect of holding office during the past decade. Success in the battle of 2010 has the potential to provide the victor with explicit consent to reshape the entire country, redefining the government’s role in Britain and Britain’s role in the world. Politicians must now articulate that sense of excitement as to the challenges ahead. For sure, the public needs to know the scale of our problems and have a taste for the solutions. It now falls to me and my colleagues to give our fellow Britons something to believe in.