November 26, 2009
One of the most depressing aspects of the Government’s record over the past 12 years has been their unwillingness, bordering at times on the foolhardy, to take long-term decisions. One thinks in particular of nuclear energy or our transport infrastructure. The flagrantly tactical rather than strategic nature of the Queen’s Speech represents more of the same.
Collectively, the 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 feeling that the good times would last for ever. In that sense at least, the Government may have 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” is the watchword of the cheerily optimistic and the 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 it is understandable. Two years of almost constant news headlines have suggested that we are living in a massive financial crisis, yet those headlines have not been matched-except for people who have already lost their jobs-by any sense of financial sacrifice among the public at large. More and more Government money is being pumped into the economy, so the sense of denial continues. Far too few of us in Parliament, across party divides, have woken up to the enormity of the debt crisis that will follow hot on the heels of the economic downturn, yet the seriousness of what will follow cannot long be 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 fiscal stimulus dies off-probably just after the general election next spring. Despite some of the glib green-shoots commentary, we should understand that the banking crisis represented nothing unusual. Indeed, it signalled the end of another in a long line of boom and bust cycles-positively commonplace in the second half of the last century-caused by speculative euphoria and an excess of credit.
It is of course in the Labour government’s narrow interest to present the current downturn as entirely unprecedented, caused by modern financial alchemy gone wrong, failure by regulators or rank unforeseen misfortune. That is not so. It is true that the global nature of the economic crisis has made things far worse, but there are clear lessons we can learn from the past. One of the grand old names of British banking, Barings, collapsed owing £780 million only 14 years ago; today, RBS survives courtesy of a £45.5 billion bail-out. It is only the extent of the economic downturn, not its cause, that is so very different.
The UK economic downturn began when the household debt and housing bubbles burst simultaneously. Our house prices rose 88.5 per cent. in the decade to 2007. Even in the sub-prime enhanced US that index rose by only 64 per cent. Similarly, our average household debt leapt from 105 per cent. in 1997 to 177 per cent. of disposable income a decade later. In both continental Europe and the US, the overall levels and the increases during that period were significantly lower.
For the first decade of this Labour Administration, we seemed to be living in the very best of times. However, in our complacency we planted the seeds of catastrophe. Consumer consumption in the US and Europe was maintained by unsustainable levels of public and private debt. The dotcom revolution of almost a decade ago was hailed as a new paradigm. Almost imperceptibly, the wages of middle income earners stagnated, while consumption in a low-inflation, low-interest-rate economy remained apparently robust.
In truth, as we have seen, the erstwhile Chancellor’s new economy was sustained by an old-fashioned private debt bubble. Cheap mortgages remained eminently affordable by virtue of the deflationary effects of China and India’s emergence on the global economic scene. Given the colossal sums of taxpayers’ money that have been spent globally, and given that immense Government guarantees continue to underpin the financial system, it is remarkable how little agreement there is on what constitutes the point at which the banking industry can be said to be fixed. To that extent, I agree with what Mr Meacher said.
Less still is there any emerging consensus on the ideal future landscape of the financial services world. That is no mere academic issue. The imperative to start repaying all that borrowing at the earliest opportunity cannot be overstated. However, commercial lending is unlikely to return to anything like normal until the second half of 2011, because toxic assets are being removed only gradually from bank balance streets. The credit crunch will be with all small and medium-sized businesses for some time to come. Extending quantitative easing beyond £200 billion would put our medium-term economic prospects at great risk, so when can the Treasury and the Bank of England call time on their short-term fixes? Despite all the euphoria of a narrative suggesting that recovery is perhaps within sight-the FTSE index has been back above 5,300-I fear that we are still a long way from being out of the woods.
I have spoken before in the House about the root causes of the global imbalances brought about by the west’s financial calamity. In many ways, those causes are the credit and debt bubble, along with the east’s aggressive desire to build market share in global trade. China’s policy of suppressing its currency to soak up the west’s debt in the bond markets further helped to keep down interest rates, yet the resultant over-investment, excess capacity and vast structural debt in the west remains in place. I agree that the underlying causes of the crisis have not yet gone away.
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. If we are not careful, that toxic mix will bring about stagflation-truly a back-to-the-1970s phenomenon. The very worst case scenario is that a future Government may regard a sustained dose of inflation as the quickest and most politically expedient way of helping to bring down the level of public debt.
In truth, any UK government who are regarded as popular in 2011 or 2012 will probably not be 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 that will not become apparent in the months ahead. The Government are desperately hoping that neither the sands of time, nor the patience and good will of an increasingly alarmed gilt and bonds market, run out before they have to face the voters. That makes talk of economic recovery now very dangerous.
Contrary to the rather fatuous claims by the Prime Minister, there is not a simple, binary choice, in which Tory cuts are set against Labour investment. There is a hard slog ahead for any Administration. The trouble is that much of the debate on banking regulation has focused on how we should have prevented the last crash. That has not been helped by a Government whose recent economic policy pronouncements are governed less by national interest and more by a scorched-earth approach, designed to limit the room for manoeuvre for years to come of any incoming Conservative Administration.
The fact is that the stuffing has been knocked out of this Parliament-and, in truth, all parliamentarians-by the implications of the allowances scandal. Only the catharsis of a general election can end the expenses saga. Nothing would be more catastrophic for trust in our democratic institutions and processes than for that toxic controversy to be prolonged into the next Parliament. As a result of party managers’ repeated abject failure to clear up a discredited system, which many of us regarded for some time as illegitimate, the matter came to a head only when the country was in deep recession. That has made the parliamentary obsession with expenses and allowances even less palatable. The public have rightly asked, “If parliamentarians have not the ability to put their own house in order on allowances and expenses, how can they be trusted to regulate and legislate for the rest of the country?”
The political class needs to face some harsh truths. The impact of this economic downturn, to paraphrase Churchillian rhetoric, may not even be at the end of the beginning. We have been living through a phoney war, and the shock of the economic crash has been only to our senses: we are, as I said, wallowing in a lake of Government-funded cash.
I am not sure that politics in this country has ever before experienced anything quite like the current situation. We have a discredited, exhausted Parliament that shuffles on to its day of destiny with the electorate, and it is very sad that the Queen’s Speech reflects that intellectual bankruptcy and physical exhaustion. There is no flair, no vision, no passion, no conviction and no leadership-to the detriment of all whom we seek to represent. The 54th UK Parliament will not be much lamented.