Frank Field MP
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Gilt-trip

27
Mar
Is the failure yesterday to sell the next modest tranche of Government debt due to the Governor of the Bank of England's call against further reflation? Or something much more serious at work? It will be sensible to plan for the latter scenario.

The magnitude and force of this financial and economic crisis is throwing the public accounts into even greater disarray. Governments of all parties have never found ways of taxing us beyond 38 per cent of GDP. Yet we as voters like governments to spend up to 50 per cent of GDP on public services. This growing gap between expectations and tax revenues was apparent before the banking implosion, and these two forces alone put at risk our entire economy.

For it is on to these fast disintegrating public accounts that the Government is set to borrow at an unprecedented peace-time level. The Government's early estimates of this borrowing spree always looked unrealistic at 7 to 8 per cent of GDP.

Ernst and Young's item club group now forecasts borrowing at 12 per cent of GDP by 2009-10, but I wonder what odds one would get for the Government exceeding even this level. The country is well and truly in uncharted territory with worse news coming with practically every new batch of statistics.

Tax receipts have plummeted by 9 per cent over last year, and last month's figures show a 10 per cent decline. Contrast this with the Chancellor's prediction of only a 2.6 per cent fall in revenues.

Expenditure is up. Last week's claimant count when revised will show that the unemployment level for February surpassed the level the PBR predicted for the end of the year, i.e. it was ten months ahead of planned expenditure levels. The failure to sell all the gilts on offer yesterday is probably a judgment on how fast the public accounts are disintegrating.

If that wasn't bad enough the Government remains hampered in grappling with an unprecedented crisis by its failure to deal effectively with the banking crisis. Much of the poison of those wretched toxic assets remains in our banking system. With bankers deeply distrustful of other bankers, believing them to have larger stocks of these poisonous assets than they have publicly admitted, inter bank lending remains stalled and the hope of getting working capital to viable businesses remains blunted.

Into this economic and financial maelstrom the Government has added the new dangerous ingredient of printing of money. No-one knows what the longer-term consequences will be of such a strategy.

Yet cheers went up when the first venture of using this new cash to buy back government debt was five times over subscribed. That institutions and countries are quitting holding what is supposed to be this country's safest of assets, is surely grounds for alarm and not congratulation.

Now wind the clock forward. Soon the Government will be trying to offload what many expect to be at least £180bn of debt in each year, for as long as it dares to predict.

Yet we are not the only government set on this course. The Americans, to take the largest example, will be attempting to sell over $1,750bn of government debt this year and for many a year to come.

Even if the credit is out there, we cannot assume that Britain necessarily ranks high on the list of safe destinations. And it certainly won't be if the failure to get a grip on the widening imbalance in the public accounts leads to the loss of our AAA credit rating. The results of yesterday's efforts in the gilts market suggests that there may well be growing difficulties in selling government debt as each new tranche is issued.

Our currency has too often in the past been our Achilles' heel. And this weakness may not necessarily the time around be countered by a floating exchange rate. What will happen to the price of sterling if the debt management office reports that it is unable again to sell all the next tranche of government debt, or only if long-term interest rates rise?

These are treacherous days for the Government and they make the delayed Budget perhaps the most important one in living memory.

Will the Government be able to float new debt on its projected scale without convincing the market that it is dealing now, and not after the next election, with the huge structural imbalance in the national accounts? I doubt whether the international money market will wait for ‘resolute' action for another year.

Here is the test for both Gordon Brown and David Cameron. The test of the Government will come in April's Budget which needs to contain announcements of immediate tax increases for this financial year, over and above those already set out in the PBR for after the next election. If we are to have any hope in the shorter run of raising the debt we need to have an agreed timetable within which to balance the accounts. Similarly, and as a first move, the public expenditure budget has to be cash limited.

David Cameron will soon have to declare his hand that the appalling state of Government finances makes the introduction of tax cuts in the next Parliament, or the one after that, an unrealisable possibility.

British politics is being transformed. For well over one hundred years a central belief has been that social progress comes from expanding government expenditure.

Government expenditure will be cut in real terms, not just now, but over the next two Parliaments. So the drive must be to get better results for less money. That is the least that taxpayers are going to demand as their tax bills soar.

A progressive centre left will insist that any tax increases go onto those with the broadest shoulders. A cool additional £6bn revenue would result from allowing pension tax subsidies at the standard rate only. Surely this must be just one of the measures to increase tax revenue in the next Budget.

Likewise, we need to take seriously Aneurin Bevan's assertion that Socialism is the language of priorities. While events already unfolding look like testing this belief to the point of destruction, its sentiment still offers the best prospect there is of protecting the poor from the economic gales now besetting us.
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