The current UK Government is suffering from a serious case of ‘We can’t face reality’. The situation is dire because the Chancellor of the Exchequer, Alistair Darling, is predicting economic growth of 1.75% – 2.25% for this year and next, when all around him are finally getting nearer the mark, such as the IMF who are predicting 1.4% economic growth for 2008 and 1.1% economic growth for 2009, and the CBI (Confederation of British Industry) now predicting 0.4% economic growth for 2009.
This is very bad because if the UK Treasury can’t come to terms with the reality of a collapsing economy, they can’t set policy to deal with next years lack of money. No reality = no policy.
The situation will be a minimum inflation of 5%, lower tax receipts from the financial sector, housing sector (Stamp Duty) and retail sector; interest rates that are on the rise (or they should be if the BoE have any sense) and a rapid increase in unemployment which will increase government spending on benefits. This squeeze on incomes and increase in outgoings will leave the government with the same choices that we’ve had in the past.
1. Raise Government borrowing
2. Raise taxation
3. Cut public spending
Option 1 is out because the 10p tax debacle has already put us way past the safe borrowing limit that indicates a net outgoing of revenues on interest payments that will restrict economic growth.
Option 2 was tried in the late 1970’s under a Keynesian structure of tax and spend, which never works, because increased government spending when inflation is on the rise only fuels further inflation and, on top of our current high borrowing levels would result in both double digit inflation and interest rates, such as those in 1979.
Option 3 is just like Margaret Thatcher’s early 1980’s approach, rolling back the state and cutting government spending. However as the above analysis shows, we are entering a period of low government tax revenues and higher government spending on unemployment benefit, which would only leave spending cuts in other government departments such as the Department for Health (with spending up from £35 Billion in 1997 to £90 Billion in 2007), to achieve a reduction in government spending. Cutting 3,000 hospital beds while cutting back on Local Government services will be as popular today as it was during the 1980’s.
The big problem with option 3 however is it will cost too many votes in the run up to the next general election in 18 months time, and for an already very unpopular Prime Minister (Gordon Brown), this would finish him off as Prime Minister and the Labour Party as the UK Government. Besides, as Alistair Darling’s comments show, the current Labour Government doesn’t have the stones to deal with reality, let alone present a potential cure to mitigate against the coming problems, that would then cost them the next General Election.
As a result of all this we are left with infuriating persistence by the Treasury that they are right about GDP growth, and pretty much everyone else is wrong – me included.
This current problem at the Treasury is confounded by the worst offender of all, the chief turd-polisher herself, Housing Minister Caroline Flint, who in the middle of a housing collapse keeps coming up with wonderful statements to prove how this housing crisis isn’t actually a problem at all.
When speaking on Radio 4’s Today program on 10th July she made the following housing market comments:
“In terms of consumers we’ve seen a modest fall in house prices” - This comment comes 3 weeks before UK house prices showed their biggest annual fall since the Nationwide began its housing survey in 1991. The 8.1% annual decline came after house prices dropped by 1.7% in July, the building society said.
“We’ve seen an increase in repossessions, but nowhere near the sort of repossessions we saw years ago” - Home repossessions have risen by 48% in the past year. There were 18,900 repossessions in the six months to June (2008), up from 12,800 in the same period last year. While this is still not as big as the 75,540 repossessions seen in 1991, we have not yet even entered recession in 2008, while the 1991 figure was taken at the bottom of the last housing market crash during a bad and deep recession. As things stand at the moment the 75,540 mark could well be broken as unemployment rockets out of control.
“In some cases flats were necessary for first time buyers” - (1 month later) A fall in flat prices has become a key factor in the slowdown of the housing market, UK government figures show.
“And most of those people being taken to court hold onto their homes if they are given the right advice”. (5 weeks later) Last week the regulator (FSA) warned it would take action against lenders who were too aggressive to customers in arrears. But the Council of Mortgage Lenders (CML) said the FSA was wrong to suggest the whole industry was at fault. The FSA replied that potential problems with repossession policies were found with all types of lender. “There were issues discovered across the piece with all lenders which is why the warning was addressed to the whole market place,” said an FSA spokeswoman.
Between the lack of reality from the Chancellor and the Treasury, and the ridiculous comments from the Housing Minister Caroline Flint, Merv King at the Bank of England will have his work cut out bringing these two down to earth.
Posted by ullrakesh 
Posted by ullrakesh 