My mate Mervyn told me...
The Governor of the Bank of England is only saying what a lot of us think - whoever administers the forthcoming fiscal austerity risks making themselves so unpopular they'll be out of power for a generation.
It almost happened to the Conservatives last time round. Yes, Thatcher sorted out the economic basket case we had become in the 70s. And yes, Clarke sorted out the mess left after our ill-advised experiment with the European Exchange Rate Mechanism. But only at the cost of making lifelong enemies among those who lost out, and of course among the genteel romantics who staff the Grun and the BBC.
So assumimg Cam wins, he's got one helluva problem on his hands. And doubtless there will be many advising him to stay the axe - just like the wets did back in 1979-81.
But that would be a serious mistake.
First, he needs to remember that the markets really are expecting serious action. As we blogged here, they have already effectively cut our credit rating from its traditional AAA status, and they will be going through George's June emergency budget with a fine tooth comb.
There'll be no room for shilly-shallying - the cuts will have to be commensurate with the scale of the problem. And just in case anyone's forgotten that scale, a BOM correspondent in Singapore has recently sent the following chart produced by Citi Global Markets to advise their clients.
It shows the amount of fiscal tightening needed by each of the major economies in order to get government debt back to the maximum safe sustainable level relative to national income (the maximum level reckoned by the IMF and others to be 60%):
As we can see, with the single exception of Japan, we in the UK have a bigger mountain to climb than anyone else. According to Citi's analysis we need to tighten fiscal policy by a whopping 12% of GDP. In plain English, that means the next government needs to cut spending or increase taxes by £180bn pa (in today's money). Which in round numbers is the equivalent of:
£7000 pa extra taxes/ lower spending per household;
increase in the basic rate of income tax to 65p; or
increase in the standard rate of VAT to 57%; or
25% off total public spending;
So there is no room for hesitation. And no time either. The longer we leave it the worse it's going to get, as mounting debt interest compounds the problem.
And for the those who say it would be better to call in the IMF and blame them, we invite you to watch the TV coverage of the Greek riots. The IMF is no easy option, and the IMF will give us little leeway to set our own priorities.
Comfort there was none?
Well, there is some comfort, and it comes from that old standby in times of trouble: the good sense of the British people. Just consider what one particularly sensible British person said to our ghastly Prime Minister last week:
"I said to him, “What are you going to do about the debt, Gordon? Greece is down and now Spain and Portugal have lost their credit rating. Who’s next?” I’m going on holiday to Canada and I used to get $2.50 to the £1. When I go to change my currency this time I’ll be lucky if I get $1.50."
Gillian Duffy is no swivel-eyed small state economist like yours truly, but she knows there's a serious problem and something pretty major has to be done. I'm betting she speaks for millions of us.
Tyler is now up to his neck in the local campaign, so posting next week will be light. The good news is that the Clegg effect seems to be fading, and although our manor is still awash with LD posters, positive feedback from the doorsteps has put a spring back in our step. Like the man said, trust the people.