Friday, July 18, 2008

Wise Men In Semi-Detached Reality

They're really sorry now for what they've done

They were three wise men just trying to have some fun...

And now they've escaped from Gordo's iPod

So who were the three - for want of a better term - "wise men" who concocted Gordo's Gold? Well, there was Gordo and Balls of course. And then there was the Third Man, now known to be Geoffrey Robinson. In case you don't know, he's a multi-millionaire ex-Paymaster General who owns the Park Lane penthouse where most of this nonsense was cobbled together before the 1997 election (he's also the high-roller who bunged Mandy for £373 grand - a snip at the price).

Robinson's been on the wireless today saying that the Fiscal Rules should be abandoned. After all, we are in unprecedented conditions totally beyond anything that could possibly have been foreseen. Global kreditkrunch, oil and commodity prices, giant snakes roaming the streets... nobody could have anticipated any of that.

Oddly, the fully and comprehensively independent chairman of the Treasury Select Committee, John McFall (Labour and Cooperative MP for West Dunbartonshire) agrees. He says since Brown's "Golden Rules" were never any more than an arbitrary collection of numbers designed to fool the electorate and the City into thinking the economy was safe in Labour's hands, what the hell?

Quite extraordinarily, Darling also agrees, pointing out our borrowing relative to GDP is much less than most other major economies, so what the hell?

And on the face of it, they're right. Here's a chart showing the European Commission's track of where our borrowing ranks relative to the EU average, and against the Maastricht limit of 60% of GDP (data here and note that Eurostat's definition of government debt is gross, whereas HMG nets off borrowing to finance various loans and investments):

So yippee! We're out of jail free. we could increase debt by at least another 15% of GDP and we'd still be within the EU's Good Housekeeping 60% rule: that's at least another £200bn of borrowing we can do.

Hmm. Before breaking out the celebratory Vimto, we ought to note a couple of key points.

First, the average of other EU economies has been coming down, whereas we're most decidely going up. Do they know something we don't?

Second, the official debt figures barely scratch the surface of our real debt. As we've blogged many times, once you add in all Gordo's off-balance sheet Enron debt - like PFI and public sector pensions - you come to a very scary total for our real debt. Last time we ran the calcs, we reckoned it amounted to £1.85 trillion, or 130% of GDP.

In the immediate future our debt is heading up whatever Gordo may say or do. It's clear from last month's public borrowing numbers that tax revenues are falling way short of what was forecast. Just three months in, we've already borrowed more than half of the total forecast borrowing for the entire fiscal year, and short of an emergency tax raising budget (OMG), borrowing is going to overshoot.

Does it matter?

Keynesian economics says in a recession governments should cut taxes and increase spending. And that sounds kinda reasonable. Except that 30 years of accelerating post-War inflation eventually told us that in practice, governments are not much good at it. They'll do the reflation bit all right - fine, no problem - but then they find it impossible to rein back again when times get better. Instead, we get a upward ratchet in the size of government, and a downward ratchet in the wealth generating part of the economy.

Brown's actually done even worse than those post-War governments. He ramped up spending during a boom, and now has nothing left for a recession.

In the pit of the early-80s recession, Maggie increased taxes to put the public finances back on track. It wasn't very popular - not least with academic economists -but she was at least grappling with reality (she was also laying the foundations for twenty-five years of prosperity). This lot wouldn't recognise reality if it crept up and bit them on the James Blunts.

PS D'you reckon Gordo has Blunt on that famous iPod of his? Blunt certainly sounds more likely than the Monkeys, and just like Gordo, he attracts nothing but criticism (well, apart from his multi-million record sales that is).

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