Last Wednesday, amidst the worst economic crisis since the Great Depression, the British Chancellor of the Exchequer Alistair Darling stood up in the House of Commons and announced the the UK’s budget for 2009. If the reactions of his fellow MPs are to be believed, it was a bit like watching a horror film; albeit one where the crazed axe murderer has been replaced with a boring Scotsman reading out numbers. The ranks of Labour sat in stunned silence, while the Conservatives reacted with a series of theatrical shocked gasps that accompanied the announcement of each new gruesome piece of economic news. Meanwhile the media, who had known most of what was in the budget days in advance, had a lot of fun being shocked all over again by the poor state of the government’s finances and the woeful growth predictions for the UK.
Thanks to the current economic maelstrom, this budget was arguably like no other in living memory. It was certainly like no other in recent living memory. The usual budget questions – “how much do I have to pay for my cigs and beer now?” and “why did my national insurance just go up?” – are out and a new set of much more, uh, exciting questions are in: “Is Britain going to default on its debt” “now their taxes have gone up, will those rich city bastards find some new ways to avoid paying them?” and “is that the average winter temperature in Iceland, or Britain’s growth estimate for this year?”
But what exactly was in the budget, what does it mean for Britain and can we make an incredibly complicated topic really simple in order to give the Chancellor a pointless high-school style grade? Find out over the fold!
Britain’s Chancellor of the Exchequer Alistair Darling will present the UK’s budget on Wednesday. I think it’s fair to say that in the current depression-era climate this will be a fairly difficult task for Darling, akin to playing Scrabble in Aramaic or amputating a leg with a pair of scissors. As if his problems weren’t bad enough, his challenge is compounded, as we shall see, by the fact that he’s well and truly stuck between a rock and a hard place.
On the one hand, the latest figures on growth make alarming reading. Despite Darling’s predictions in last November’s pre-budget report of a contraction of Gross Domestic Product this year of 1%, the Bank of England now forecasts contraction of 3-4%. Given that private investment has all but seized up, this means that the case is extremely strong for a significantly large fiscal stimulus – a Keynesian style government spending spree aimed at creating thousands of new jobs and bringing the economy back to life. That’s the rock.
However, along with the latest figures on growth come equally depressing figures on government borrowing. Over the next two years the government is set to borrow around £170 billion, or around 12% of GDP. The Institute of Fiscal Studies thinks that government debt could be a whopping 82% of GDP by 2015, or about the same amount of debt as your average teenager with a credit card. That’s the hard place. And it’s really, really hard.
So the Chancellor is caught between the need for a stimulus and the need to avoid adding to the current levels of government borrowing. Now, many economists would argue that the need for a significant stimulus is more important than the risk of growing government debt. After all, if you don’t get the economy growing again then public borrowing will increase anyway. This argument is fairly sound, especially when you consider that when compared to other major countries Britain’s current debt level isn’t quite as scary as many like to claim (while ours is 48% of GDP, Germany’s is 65% and Japan’s is a stunning 170% of GDP, which is approaching two teenagers with a credit card). In fairness, however, it’s worth pointing out that Britain can’t afford to do the massive, pile-on-the-deficits stimulus package of the United States, who are able to sell endless amounts of their debt to China.
Indeed, Britain’s problem is this: in order to sustain its borrowing levels, it needs investors to keep buying government debt. If borrowing gets too high – or to be more accurate, if it appears to investors that it might get too high, then those same investors get scared and stop buying the government’s debt, which then has the knock on effect of raising the interest rate (or yield) which has to be paid on the debt it’s already sold. So the government ends up paying more for their debt they have and unable to sell any more. Bummer.
As far as I can see, this leaves the Chancellor with three options, none of them safe and none of them pleasant:
It’s now been a whole week since the G20 met (an event which, if it was a Friends episode, would surely be called The One Where The Canadian Prime Minister Missed The Group Photo Because He Was In the Toilet) and yet commentators are still very much divided on the deceptively simple question: Was the summit a success? This isn’t really surprising, since the answer depends on how you define success. For example, if you were looking for a demonstration that in the midst of global recession the world’s leaders are able to get together, put aside their differences and promise to sort stuff out then the summit was very successful indeed. Alternatively, if you were looking for a solid commitment to prevent a global crisis like this from ever happening again, then you must have come away very happy with the result. And if what you were after was a bunch of vague commitments that will probably/maybe be ratified in the future but more importantly look very good in the present, then you’re probably still doing triple backflips of joy.
But if you were hoping for a substantive commitment to lifting the global economy out of recession – and doing it now, rather than later – then it’s hard not to see the G20 summit as a bit of a let-down, albeit a very glamorous and show-stopping one. It’s true that restoring growth and getting people back to work was never the sole aim of the summit- in the final communique it’s merely listed as an equal pledge amongst eight others - but lifting the world out of recession is nevertheless the first thing you’d expect someone to say if you asked them what the summit’s main goal was. And with good reason – the current numbers coming out of America alone suggest that we might have to soon start switching out terminology from talk of global recession to the use of the dreaded “d” word (”depression” that is, though doom and devastation work quite well too).
To prove my point, let’s examine what have been touted as the main substantive achievements of the summit – the clampdown on tax havens, the new regulatory framework and the headline-grabbing sum of $1.1 trillion.
“The world should consider adopting the Nordic approach to capitalism and learn from the region’s response to its financial and economic crisis in the 1990s in the attempt to stave off recession, according to the chairman of two of Europe’s biggest companies.
Jorma Ollila, chairman of Nokia, the mobile phone maker, and oil major Royal Dutch Shell, said the Nordic style of capitalism was characterised by openness to globalisation balanced by strong government programmes to protect people from its excesses and an egalitarian education system.”
I’m a huge fan of the nordic model for Government, economics and to some extent even society. The Scandinavian economies and even their welfare system have proved remakrably resilient in recent years, despite being targets for right-wing attacks (particulalrly in the US) and bizarrely O’Reilly feels Sweden is a nightmare communist state.
They’ve shown that globalisation need not be a negative as long as the state acts as a levelling tool, of course such engineering would be far harder in more economically diverse countries such as the UK and France, but in principles the direction is a positive one.
If you Read Ed’s article on the need for stimulus packages in Europe you may have come across a debate Ed and I had over the nature and merits of a stimulus. Regardless of which side you fell on, there were further issues at stake than just economics. Economists like to see their subject as a science: numerical and evidence based, rational and objective. No doubt, many of their research tools are scientific but economics is also the backbone of the modern world and often not an end in itself, more a vehicle for achieving other ends.
As James Surowiecki argues in the Financial Page of the New Yorker, economics is by no means a science and as the recession draws on, we’re able to examine the cultural memories that can and do direct economic courses of action. From recessions and inflations, each country will have its own preferences and fears that alter the importance attached to different parts of the economy.
In the US, the focus has fallen on the stimulus package and Paul Krugman has made the case that europe should follow suite. He makes a convincing case for a European stimulus package, but is it correct to lampoon European economic policy and decision making as woefully inadequate or to equate US economic policy so readily with Europe? Well in some sense yes, it’ s perfectly fair, the rationale for the stimulus is not so difficult, it could even lead to greater gains if correctly invested in infrastructure which could grow economies in the future, from transport to broadband aswell as tiding Europe over during a recession. In fact, many economists, (despite what many think) advocate deficit spending. They argue that if done correctly it will more than pay itself back through the higher tax-receipts of the economic growth it will yield.
Remember the old Chinese curse “may you live in interesting times”? It’s worth keeping in mind as we head towards April and the meeting of the 20 richest nations in the world: London’s G20 summit is going to be very interesting indeed. As Mark Bailey reported in his recent post “G20 Preview: Gordon and Goliath”, Gordon Brown and Barack Obama are both calling for a global fiscal stimulus. The likes of France and Germany, however, are rejecting talk of more stimulus, choosing to focus solely on bank regulation – specifically the regulation of hedge funds and tax havens.
Now I like a good campaign against hedge funds and tax havens as much as the next man, yet it must be said that Gordon is completely right to demand that global stimulus packages be pursued at the same time as international bank regulation. As far as Europe is concerned, a large influx of government public spending would work particularly well, as thanks to the free trade policies of the European Union any stimulus one country puts in place will immediately benefit their neighbours. This, however, is what concerns the likes of France and Germany: the fear that heavy national spending will simply leak out and end up as international spending.This particularly irks Germany who are already gritting their teeth at the prospect of having to bail out the troubled states of Eastern Europe (who, it turns out, are just rubbish at that capitalism malarkey).
But what the likes of Sarkozy and Merkel are forgetting is that with more and more Europeans losing their jobs, governments are facing lower tax revenues and higher welfare costs. The higher cost of paying benefits is particularly onerous on European governments, as unlike America the welfare systems of Europe are commendably generous (Britain excepted). Large stimulus packages, therefore, are essential to get people back to work and kick start Europe’s economy.
However, though Gordon Brown’s logic is sound his pan-European ambitions are leaving a bitter taste in the mouth – well, in my mouth anyway – because, despite his calls for a global stimulus, Britain has hardly had one worth the name. Indeed, so far the only “stimulus” we’ve had is last November’s £20 billion scheme, the majority of which went on a much derided cut in VAT. Let’s compare this with other countries, shall we?
When Barack Obama’s economic stimulus package passed into law last month, it was mostly greeted by economists as a much needed influx of government spending that should help to get the economy back on track . But among the plaudits were concerns about the effectiveness of the stimulus: specifically, it should’ve been bigger.
Now you might well question whether an $800 billion package could be described as “not big enough”. But it’s important to remember that around $300 billion of it was in the form of tax cuts – helpful to the families they were aimed at, no doubt, but not particularly useful in terms of job creation. Therefore, only $500 billion was actually in the form of direct government spending, and so when considering how much is needed to create enough jobs to get the economy back on track, only two thirds of the stimulus is actually “stimulus”. But even so, surely $500 billion is enough to get the job done?
Well, uh, no actually. It isn’t. The inadequacy of the stimulus, however huge it was, is made clearer every week as increasingly disastrous figures about the economy continue to be released. In his Monday New York Times column, nobel-prize winning economist Paul Krugman, calling for a second stimulus, points out that:
The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February — and it’s rising fast.
But isn’t Obama’s stimulus meant to make 3.5 million new jobs by the end of 2010?
3.5 million jobs almost two years from now isn’t enough in the face of an economy that has already lost 4.4 million jobs, and is losing 600,000 more each month.
Oh. Bummer. Okay, so the situation’s really bad, but do we really need another stimulus package? Martin Feldstein, professor of economics at Harvard, has looked at the numbers and concluded that yes, we do. His article’s worth a read but I am nothing if not a prolific summariser, so here’s the cliff notes version, which includes the “things Feldstein doesn’t say because he forgets we’re not all economists”:
Today the Bank of England announced that, along with slashing interest rates to a new low of 0.5%, they were also going to engage in something called “quantitative easing”, a rather unconventional tool of monetary policy that the Americans have been using for some time. What the hell is quantitative easing, I hear you ask? Well it’s actually fairly simple. The Bank of England simply, uh, invents some new money out of thin air, then uses that to buy up things like government bonds and the assets of other banks; the idea being that by doing this there’ll be lots of cash flowing round which will help to kickstart the economy. Of course, this only benefits said economy if the banks which are getting all this new cash use it to start lending again rather than just hoarding it in their reserves. And that’s a big if… Oh, and then there’s the fact that Britian’s never really used quantitative easing before. So we don’t know when it will work or, indeed, if it will work at all.
So here’s my question. Instead of making lots of money to go to the banks – who may not even use it in the way we want – why does the government not simply give a massive pay-out to the general public? Sure, some people will hoard their share but most people will spend it – especially the poor and the lower middle class who are being squeezed hardest by the recession. People have loans to pay off after all – and in this way it would directly help the banks as well. And it’s got to be better than just crossing your fingers and hoping that the stricken banking giants will start spending and lending again.
Over in the US, the Federal Reserve has been playing around with quantitative easing for months now, with mixed and uncertain results. But there’s also been a massive $800 billion stimulus package which includes tax cuts for the poor and middle class, higher benefits for the unemployed and other provisions that provide relief to the people being hardest hit by the recession.
So why, here in Britain, do we only have an eye for pumping the banks full of cash?
On Tuesday night I was watching Channel 4 news when they aired an interview with Wall Street “legend” Jim Rogers, who the reporter described as “one of the world’s leading financiers” . The build-up to the interview was interesting: Rogers, it was ominously announced, thinks the economic rescue plans being put forward by Gordon Brown and Barack Obama are “ludicrous and insane” and that “the politicians could be leading us into another Great Depression”.
Well you can imagine my surprise at hearing this, given that I was under the impression that the deficit-spending, government-stimulus strategy being adopted by leaders like Obama was meant to stop another Great Depression, not start one. If I’d been drinking coffee, you can be sure that I’d still be wiping it off the TV instead of writing this. But I thought I’d see what Rogers had to say before coming to judgement on the man. Big mistake!
I’m not going to post every article I think is good, but this article by Steven Pearlstein, Business Columnist for the WashingtonPost is a king among among articles. Read it here.
