Wednesday, January 21, 2009

Knock Knock

Knock knock.

Who's there?

I M F.

I M F who?

I em efraid we've come to repossess your public services, your pensions, and your standard of living for the next twenty years.

Unfortunately, they won't be joking. In exchange for bailing out Britain, the IMF will demand big cuts in public spending, both now and in the future. They will demand much higher taxes, and an end to living off foreign credit. The righteous and the unrighteous will be squeezed dry. It will be dire.

True, we have been here before - in 1976 under the last Labour government. So maybe you're thinking it wasn't all that bad: we still had food on the table, and we still enjoyed first class entertainment from Red Robbo and the Bee Gees.

But last time through we actually escaped quite lightly. When Callaghan called in the IMF, they provided a £2.3bn loan (just under 2% of GDP) in exchange for a public expenditure cut of 4% in real terms. It felt tough at the time, and the associated public sector pay restraint did end in the Winter of Discontent, with all those unburied corpses in the street. But compared to the howling gales we now face, it was a walk in the park.

Oh, if only we could go back there now.

Back then (1976-77), public sector borrowing was only 6.2% of GDP and falling. This coming year it will be 8-10% and rising.

Back then, public sector debt was only 52% of GDP and falling. This coming year it will be 60-70% and rising (and that's on the fiddled official definition).

Back then, our banking system was not collapsing, and taxpayers had not been forced to guarantee its entire balance sheet. This coming year taxpayers will be supporting bank liabilities equivalent to four times our GDP.

Back then, we had a Prime Minister and a Chancellor who had come to understand - however reluctantly - that the governments cannot simply spend us out of recession. This coming year we will have a PM and poodle who seem to believe they can pretty well spend what they like.

So grim though an IMF bailout would be, as a taxpayer, Tyler is now thinking a return visit may be preferable to the alternative. These clowns have clearly lost the confidence of the markets, yet they still have another 16 months to run. God knows what further damage they'll have done by then.

A year ahead of the 1976 IMF bailout, Wislon's favourite economist wrote to him secretly, warning that a collapse of market confidence could lead to "possible wholesale domestic liquidation" and "a deep constitutional crisis".
With sterling plummeting, the public finances wrecked, and the printing presses being warmed up, we may be about to find out what he meant.
*Footnote - a quick scan of this month's public finance stats is enough to have you reaching for the Major's gin bottle. All the dials are pointing in the wrong direction, with spending up, revenue down, and borrowing through the roof.

PS So why hasn't Brown nationalised RBS outright? The only coherent explanation we can think of is that he's worried about RBS's huge overseas liabilities. As long as RBS remains nominally a private sector company, Brown could still walk away from its liabilities. That would be very difficult if it was nationalised. Confidence rating? Minus 17.5.

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