Frank Field MP
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The Four of Horsemen of the Apocalypse

For some time now it has been possible to see the four horsemen of the apocalypse on the horizon. Most economic commentators ignore their existence and the potential damage that could be inflicted on our economy if they all swept through at once.

Horse one symbolises the ruinous state of public accounts. The government first claimed the deficit to be around £85bn. This was revised in the pre-budget report then revised again to £175bn in the budget itself. I argued that these estimates looked conservative and the latest guesstimates on the deficit this year come in at £200bn and maybe even £220bn.

This sum has to be borrowed this year, and for the foreseeable future. Whether there are any lenders out there who will lend to this tune we do not know.

The government has busily been printing money and practically the whole of this funny money has been used to buy government debt.

So those economists employed directly by banks, or those dependent on bank contracts, again mislead when they prattle on about long-term interest rates being held. We simply do not know to what level long-term interest rates will go once the game of printing money stops.

Horse two is the harbinger of inflation. It simply isn't possible to increase the money supply by 300% and for there not to be a megadose of hyperinflation built into the system. Inflation is the cruellest of redistributors taking away from those who have saved and penalising most those on low earnings who have limited or non-existent collective bargaining powers.

Horse three warns of a rapidly collapsing tax base. Hamish McRae - one of the few commentators who doesn't buy the current cosy consensus - has been looking at the catastrophic fall in income and corporation tax.

VAT receipts are running 8% lower year on year which is perhaps understandable given the cut in VAT, but taxes on production - mainly income and corporation tax - are down by around 16% year on year.

There is going to have to be a mighty change around in the economy for this falling collection of tax-revenues to be reversed. Falling tax revenue means an even longer period in debt with the budget deficit in this country continuing to be far worse than any of our competitors in the G8.

Horse four sounds a jobless recovery. One of the reasons why thankfully unemployment has not risen to the level the government projected is that employers have been hoarding labour. On all counts this is welcome. But it does mean that when the economy starts to grow again - assuming it doesn't bob around the bottom for too long - employers will be using this hoarded labour to match increased output rather than enter the recruitment market.

The economic and political outcome is too grim to describe if all four horses of the apocalypse swoop down at once.

Failure to convince the markets that UK Ltd is a going concern will initially result in the rising of long-term interest rates. A killer to long-term recovery.

Then we stand to lose out on credit rating. Worse still would be if the government cannot then, even at record long-term interest rates, raise the necessary capital to bridge the huge deficit on the public accounts.

At this point it is a fight to maintain the currency.

That is why the present debate about maintaining the so-called stimulus is so naive. If only the world were that simple.

I believe we need to cut, and cut quickly, if we are to prevent the scenario I have just described coming into full force. It isn't a choice between protecting the recovery by keeping in and cutting at a later date. If we don't convince the market how serious we are about cuts soon, there simply won't be any recovery whatsoever and that is putting out future prospects using the most moderate of language.
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Showing comments 1 to 3 of 3

With a bit of luck, the inflation will revive the "buy it now before it goes up, and pay for it later out of our inflated wages" syndrome that we had all through the 70's. This should lead to increased production, increased employment and rising profits so rising tax-take. But it is one * of a gamble. Neither of Messrs Brown or Darling strike me as being the gambling sort, and the others don't seem to have the bellies for a fight. Hopefully, we will get a hung Parliament, and Vince Cable will get the Chancellorship. He's the only one who seems to have seenthe problems before they started, and had the nerve to say so.       
Comment by Anonymous on 15 Jul 2011
As a first time reader of your blog, I commend your erudtion and (if you will forgive the pun)frank acceptance of reality.
Comment by Anonymous on 15 Jul 2011
Frank,Thank you for expressing the dangers we face so clearly. If only your party leaders were so honest. You are a voice in the Labour wilderness but please keep making your voice heard.        
Comment by Anonymous on 15 Jul 2011

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