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Britain’s Fiscal Mess -Why we need some discipline

JR Max Wheel & Graham Reid

24 March 2011

Another Budget and another media circus about winners and losers, outrage from the middle class, savers, motorists and the usual special pleading from whichever interest group you support, work for or care about.

Whether we like it or not, the UK is going to have to go through an extraordinarily painful period of adjustment and if we are unlucky and commodity prices remain high we will soon have an interest rate rise as well, which means even slower growth than forecast by the OBR. We need to wake-up from our dream-world and possibly even grow-up about our current economic environment.  The Japanese people have been an object lesson in calmwhen faced with a much greater calamity compared to our grasping citizenry.

When the oil prices quadrupled in the 1970s thanks in part to OPEC and the US struggled for energy independence, President Carter made his now infamous MEOW speech. The actions taken were he said “the moral equivalent of war”. The result of a major external price shock had nasty consequences as oil prices jumped from roughly $19 per barrel (1973, following the Yom Kippur War) to $94 in 1980 ( Iranian revolution). The result was a nasty recession and eventually a fierce squeeze to hold off inflation.

The point here is simple enough; the UK has the kind of deficit as if we had fought a major war (exclude Iraq & Afghanistan). To fix this requires the same kind of commitment from the public that you might conceivably expect in wartime. We are not getting it, in part because of the PR efforts of every interest group imaginable and because the there was no common enemy; the public can blame whomsoever- overpaid bankers, greedy politicians, multinational companies. immigrants, globalisation, in short everyone except ourselves. Since roughly the period in which Carter was speaking (1979) and apart from a brief interlude of utterly necessary deregulation in the 1980s, the UK economy has lurched from crash to euphoria to crash again, mostly fuelled by excess debt, usually related to our national obsession –property- and near total failure in economic management. In the same period we have built upon a post war welfare system designed to cope with genuine poverty, lost educational chances and ill-health,  one which is rightly labelled the entitlement society. The cost of this social spending is colossal (£152bn) and the results still demonstrate a costly failure. Even in the boom years educational standards were failing and youth unemployment was a scandal. As historian Corelli Barnett wrote in the Audit of War the dream of a New Jerusalem has become ‘dank reality of a segregated, sub-literate, unskilled, unhealthy and institutionalised proletariat hanging on the nipple of state maternalism’

If the people get the Government they deserve, well we have had some appalling ones, what is missing is not merely leadership but vision and will. Three Labour administrations have expired bequeathing crippling debt and political sleaze, weak Tory administrations in the 1990s presided over economic collapse thanks to economic mismanagement of (yet) another housing bonanza.

If we are to restore the UK to any resemblance to a first world country we need to accept radical change and in the course of the next few years some straightened circumstances.

Ed Balls’ siren voice is wrong and self-justificatory. Brown and Balls’ judgement was poor at the Treasury and their regulatory regime a major cause of the banking crisis, as well as levels of Government overspend. The banks did not need encouragement and international regulation was arguably even worse, where it was not absent. The public sector expanded unsustainably, approximately 700, 000 jobs over 13 years and now has to be brought down to appropriate levels, equally the costs of pay and pensions. There have to be cuts and all Governments know they have to begin early, thanks to our political cycle.

The economic dogfight between neo-Keynesian and Monetarist over level and timing of cuts and monetary easing is a side show. The latter is another example of debasing a currency as is the persistence of negative interest rates. Its sole justification was temporary protection of the housing market and by extension the banks’ loan books. Now it looks like a cynical piece of the old game of inflating the debt away.

The Coalition has made a start on a long overdue fix of Education and Welfare State. Some positive pro-business moves have been made to encourage enterprise and shift away from over-reliance on the grotesquely distorted financial service sector. Equally all Governments need some luck: this one needs both to be able to hang together if and when the AV referendum is lost and most especially if interest rates now rise to thwart inflation. This Coalition may not be what you voted for, but it is compelled to act, anything else would be dereliction.