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Johnstone's View 28th November 2008

I  have to confess my admiration for Chancellor Alistair Darling as he struggles to cope with the unique economic circumstances before us. Faced with demands to act in the face of an economic tidal wave, he has put together a scheme which he presented to the country in his Autumn Statement this week. The pressure on him, individually, to cope with the mounting international crisis and its direct effects on the UK economy must be enormous and I do not envy his position. The actions he has chosen to take, however, leave me less than impressed.

In its simplest form, our problems have come from small beginnings but events have driven the agenda on with increasing vigour. We have a Government who set out their stall early with plans to push up public spending on the back of strong economic growth. When they realised that the growth would not cover their spending, they borrowed the difference. To push up tax revenue, they encouraged retail spending which would boost their VAT income but all too often was based on personal debt in the form of credit card borrowing. We also had massive house price inflation based on the availability of cheap credit which further fuelled our appetite for personal borrowing. The Government itself enthusiastically embraced the Private Finance Initiative, re-branded as “Public Private Partnership” but nevertheless, it was simply a vehicle to facilitate further public borrowing while, at the same time keeping it hidden away so that it did not have to be included in the figure for national debt.

Then came the ‘sub prime debt’ problem. This was caused by lenders in the United States first lending money to buy houses to people who couldn’t afford to pay it back. They then re-packaged the debt into bigger units and sold it on to other banks around the world as an ‘investment opportunity’.   Only later, when the rate of default started to shoot up, did the investors realise they had been sold a pig in a poke. That then precipitated our own banking crisis and others around the world.

So we have a Government which has based its economic philosophy on borrowing.   We have a crisis which is driven by borrowing.   We now know what the chancellor’s solution to the problem is to be – more borrowing!

The numbers are huge, so big in fact that they are difficult to even comprehend. Seventy-eight billion pounds this year. One hundred and eighteen billion pounds next year, and then what? One of the statistics which the Chancellor may not like to hear is that every borrowing projection made by this Government in the last twelve years has been an underestimate. On top of this, Mr Darling admits that all this money will have to be paid back, and soon, but claims that this can be done by increasing taxation when the economy recovers. In his statement he tells us that he has revised his estimate for growth in tax receipts in the year 2011/12 from 2.8% up to 4%. I admire his optimism since this Government’s projections for tax revenue have consistently been overestimated.

One more thing causes me growing concern. I believe that we got into this mess by making some bad decisions and that we should learn the lessons of the past and try to avoid repeating them. Alistair Darling seems to believe that his goal is to return us to the economic position we were in a year or so ago.

If there is anything positive to come out of these recent momentous events, it is the chance to reassess and re-focus the responsibility of Government and really make things better in the future. A move away from “Big Government” towards a more stable future where the creation of wealth is at least as important as its redistribution through taxation would a good start.

Five years from now, even on the Chancellor’s very optimistic forecasts, more than 5p in every pound spent by the Government will go just to pay the interest on borrowing. That is money that cannot be spent on pensions, health, education or economic development.

Like a gambler who has lost everything at the roulette table, Alistair Darling has pawned everything the country owns and put it all on the one square.   The stakes are massive and if he is lucky, he will be a hero. If his luck has run out, however, the consequences for the rest of us are unimaginable.