Brown's Gilt Trip

Mark Bathgate warns that Brown faces a major headache next month. The cost of Britain's debt is creeping up, especially after PIMCO decided to dump UK gilts, making it more and more expensive to fund, as Bathgate calls it neatly, Brown's "fiscal debauchery". As Bathgate says:

With inflation continuing to "surprise" on the upside, how long can the Bank of England keep justifying printing money? Now we learn that the Bank of England had printed £193.5 billion to finance government spending by the end of last week. So we are only four weeks to the next MPC meeting – but there is only £6.5 billion of new money left for them to pump out before they hit their £200 billion limit. Then we enter the scary territory I outlined in an earlier post. And Brown is still left needing around £15 billion of Gilt sales a month to finance his fiscal debauchery.

The Gilt market was fine while Brown's appointee's to the MPC were willing to keep the printing presses rolling to the tune of £1 billion a day through the summer. But...as inflation has started to rise quickly, the pace of money-printing and Gilt purchases has had to slow.

This has become a race for Brown, between the general election and a visit from the IMF. How long can he keep hosing borrowed money away, with no cogent plan to bring spending under control, or, in fact, no apparent acceptance even of the need to do so? The truth is, he can't face up to reality, but reality is about to bite. However, his head is currently buried deep in the snow. In what appears to be yet another classic Brownian displacement activity, he's taken personal control of the nation's dwindling grit supplies. Well, Gordon, this country and your diabolical premiership are on life support. And it's about to be switched off.

Seems to me this is an argument for a March election, but I reckon Brown is running another kind of race in his fevered imagination. He thinks that if he hangs on long enough, then the recovery will have begun and he will be able to take credit for it.
It won't matter to him that we were first in and last out (by a mile).

What he doesn't seem to realise is that the rest of the world, especially the parts having to fund his economic lunacy and political dishonesty, couldn't care two hoots about his political destiny, or the financial stability of Britain, for that matter. Why should they? But they could well be about to pull the plug, and yet the Bank of England has no choice. With inflation rising, adding to the strain on an economy mired in debt and still, officially, in recession, it will not, as Mark Bathgate suggests, be willing to go beyond the £200Bn funny money level. Next month will therefore be crunch time for Brown. He's gambling with the British economy and people's livelihoods just to save his own political skin.

But even if he thinks he's got away with it, with the start of a limited recovery (after the longest, deepest recession in the world, remember), he will not be forgiven for his behaviour and for the disastrous state he has left Britain in. That's the misjudgment he, and many of his jellyfish Labourist co-conspirators, have consistently failed to comprehend.

Give us the election so that we can explain it to them.

Meanwhile, as Bathgate says:

The market has already started to push up the cost of borrowing for the UK. It's risen by 0.6 percent over recent weeks. Despite having official rates over half a percent lower, UK borrowing costs are now 0.7 percent higher than those of Germany. I suspect the Gilt market will be very vulnerable in coming weeks.

Hang on to your hats, folks, we're all on Brown's gilt trip and it's gonna be one hell of a bumpy ride.

UK Debt: Junk Bonds?

Today, the international (and all-powerful) New York credit rating company, Moody's, warned that thanks to Gordon Brown's disastrous financial policies over the past decade, which has left our public finances in a catastrophic condition and still worsening, UK government debt could be tested in the very near future and downgraded from AAA to A1. This would make government bond sales - its out-of-control borrowing, in other words - much more expensive and, as a consequence, would put Britain firmly on the road to debt default. In terms of the long term future of the British economy, however, this prospect is a serious but minor detail when compared to the scale and the cynicism of Brown's scorched earth policy in his attempt to dupe the population into thinking there is some form of economic recovery in his attempt finally to get elected. He's willing to risk the downgrade - and will go on spending us into oblivion - just to secure a mandate.

If the UK does emerge from recession this quarter - and, after today's terrible manufacturing figures, there must remain some doubt about even that modest hope - it will be a fake recovery fuelled by astonishing and, as the Moody's announcement today says in no uncertain terms, a totally unsustainable level of borrowing. My view? Well, it's difficult to express how troubled I am by polls which suggest that Brown's utter, utter dishonesty, delinquent economics and vicious political tribalism might somehow be starting to turn people's heads. But I suspect that that is more to do with the re-emergence of Alastair "David Kelly" Campbell and his narrative of triangulation, expediency, smears, spin and lies, which were all-too evident at last week's PMQs with the use by moron Brown of that ridiculous 'Eton' jibe.

Even if Campbell thinks he can lie Labour all the way to a fourth term, (and that's all he's ever achieved, beyond poisoning and corroding British politics during his terrible career - namely, to lie Labour's way into power three times) one thing even a complete stranger to reality like him can't do is spin his way out of a debt default, a currency collapse and a total meltdown in the public finances. He might have been able to lie his way into a major war, and out of responsibility for Kelly's suspicious suicide, but even Campbell can't mask a cataclysm of the scale of Brown's economic bust. Can he?

Finally, as is my wont, I'll quote David Blackburn's post earlier this evening on the subject of Brownomics and the credit downgrade in full. Because it's rather good.

Moody’s AAA sovereign monitor was published today, and whilst the UK’s AAA status remains ‘resilient’ the situation is far from rosy. The report states:

‘The UK economy entered the crisis in a vulnerable position, owing to the (overly) large size of its banking sector and the high level of household indebtedness. Both continue to weigh on economic performance. Net bank lending to the UK business sector has continued to contract through Q3 2009, and repairs to household balance sheets (i.e. the rising savings ratio) may weigh on demand for some time to come.

The depth of the crisis has been mirrored by the ongoing deterioration of public finances (with gross debt/GDP having risen from 44% at the end of 2007 to an estimated 69% at the end of 2009). It also raises considerable challenges going forward, as the downward adjustment of potential output during the crisis will result in a recurrent shortfall in tax revenues, which, if not compensated by a parallel adjustment in expenditure, would leave the government with a permanent deficit.’

First into recession because of Brown’s profligacy, Britain’s recovery is stunted by continued spending and the government’s inability to address the credit freeze. Moody’s assert that Britain’s AAA status will be endangered unless fiscal retrenchment is implemented soon, something that global bond markets are relying upon too. Moody’s assert:

‘While assumed capacity for fiscal adjustment currently supports the maintenance of the Aaa rating of the UK government, this assumption will have to be validated by actions in the not-too-distant future to continue to provide support for the rating.’

Britain cannot sustain this level of debt. We near an Ireland-style downgrading followed by an era of ruinously expensive borrowing. Labour’s political and economic strategy dictates that fiscal adjustments will not be undertaken until 2011. Tomorrow’s Pre Budget Report will contain time saving measures, in the form of further cheap, low yield gilts and perhaps more Quantitative Easing, to allow the government to execute its strategy, borrow cheaply and prepare for future retrenchment. Will the markets wait that long?

The need for a new Conservative government has never been more desperate - at least, not since 1979 and the last Labour economic implosion. Let us pray that Cameron knows how to make that case. But because he's now up against forces so cynical and so calculating, that job just became a lot tougher. Perhaps a credit downgrade, in the long run anyway, could end up being just the reality-checking medicine an electorate, still hoping against hope that Brown's crisis (if not Brown) will just magically go away, now requires.

Perhaps, in the long run, it's be the best thing that could happen to the UK, if nothing else than to snuff out Brown as a political possibility and save us from the total horror story five more years of his economic nihilism would guarantee. The stakes are that high.

The Emergent Osborne

Critical though I have been, almost constantly, of George Osborne since I began to write this stuff, I am happy to admit that all recent evidence points to the fact that I was, in truth, wrong about him. My lack of faith in his ability to engage with the zeitgeist, judge the political temperature and seize the moment was thoroughly weak-willed, it seems. Oh fickle me.

Yesterday was good (today will be better). Osborne railroaded Brown and trainwrecked Mandelson with the devastating timing of that leaked treasury document - and many excellent anti-Brown bloggers explained just how (I didn't). Today he's going for Labour's jugular, according to the DT's chief Conservative party news conduit, Benedict Brogan. Now that he's trumped Labour on the argument, he's going to stick it to them on policy. Public spending and debt levels are a national emergency, he will say, and that calls for an emergency budget. Excellent.

The last time the Conservatives returned to power with an emergency budget, there were no surprises. The Economist declared, "It's what you voted for", while the Daily Mirror said, "No one who voted Conservative can complain". It was 1979 and Margaret Thatcher had prepared the groundwork with a manifesto that addressed directly the twin challenges of the day: "Any future government which sets out honestly to reduce inflation and taxation will have to make substantial economies, and there should be no doubt about our intention to do so."

George Osborne is aiming to do the same again. By the time you and I vote, he hopes to have made it plain as a pikestaff that he intends to introduce sweeping measures to get the public finances back within reach of reason. It may not all be done in that first "emergency" Budget he plans to present within weeks if the Tories are returned, but he will go fast and furious, I'm told. The window of opportunity for doling out the bad medicine is narrow.

Quite what he tells us between now and polling day is another matter. He is weighing up calls for candour against the risk of showing a hand that can be trumped by a desperate Labour Party. He is aware of the need to prove there is more substance to his programme than making MPs pay more for their Commons salad, but is mulling the "how much is too much" dilemma. His conference speech in three weeks' time needs to impress the City with its maturity. He knows he should display the soberness of Geoffrey Howe rather than the showmanship of Derren Brown. It must be the address of a chancellor, and not of his shadow.

Yesterday, though, Mr Osborne was still demonstrating his knack for political coups. He released a leaked document that reveals the Government is assuming spending cuts worth 9.3 per cent between 2011 and 2014. This breach of confidence has had a devastating impact inside the Treasury. Labour exploited leaks in opposition, and is being undone by them now. This one has turned Gordon Brown's retreat from "Tory cuts v Labour investment" into a rout. To have shifted the ground of the political debate while in opposition is some feat. How far have we come if a shadow chancellor can accuse the Prime Minister of lying without provoking even a murmur of outrage?

What to cut is the new frontline in a war of attrition between the parties. But now comes the hard part. The Conservatives are committed to closing the deficit more quickly than Labour, which leaves the shadow chancellor having to explain how much greater than 9.3 per cent his spending cuts will be. As Ronald Reagan said in his first inaugural address: "All of us, together, in and out of government must bear the burden."

But do we even understand what reducing debt and reforming the public sector might mean? Glib talk of axed programmes, redundant civil servants and slashed benefits takes little account of the difficulties the politicians implementing such cuts will face. Vital? Yes. Do-able? Of course. But easy? No, and yet Mr Cameron and his shadow chancellor are being egged on as if restoring us to fiscal health is as easy as 1, 2, 3.

The Conservatives face four obstacles that cannot simply be wished away, the first of which is the public sector unions. Mr Cameron may be trying to seduce Brendan Barber, the TUC's general secretary, but the noises from its conference suggest no takers among the brothers for his olive branch. He is right to highlight the regiments of public sector employees who, like him, believe more can be done for less. But three in five workers in the public sector are unionised, and the BMA can be just as reactionary when it comes to protecting the largesse lavished on its members by Labour.

Then there is the Civil Service. Senior officials are desperate to be rid of this Government – yet, over time, Whitehall has developed its own addiction to unlimited money, coupled with an aversion to risk. A generation of mandarins has grown up fearful of delivering hard truths face to face, and of challenging poor performance. As a result, what a private company would find straightforward – the removal of failure – in Whitehall has become complicated and mired in treacle. Teaching civil servants to address poor performance with the same kind of brusque efficiency that obtains in the private sector must be part of the next government's programme of reform.

Mr Cameron, in his pronouncements so far, not least his promise to go to war with the educational establishment, shows all the signs of a politician who is not afraid to suffer the scars on his back that Tony Blair so famously complained of.

Which brings me to my next obstacle: the politicians themselves. Whitehall is gripped by short-termism, yet in a world dominated by the targets culture introduced by Labour, is this any surprise? When ministers themselves prioritise short-term results that can be ready for the Six O'Clock News or the autumn conference, how can the Civil Service hold out for the long view? Take the permanent secretary I know who was asked by Gordon Brown to deliver a 5 per cent real terms cut in his departmental budget (long before the Prime Minister was prepared to admit such a thing), only to have his ministers – all cronies of Mr Brown – veto every suggestion for shedding jobs, for fear of alienating the militants in the PCS union.

It's not just a Labour problem. Last week, Michael Fallon argued cogently in The Daily Telegraph that the shadow cabinet does not have the faintest idea of the commitment needed to cut public spending, and is still racking up spending pledges rather than offering savings.

And then there's us, and by that I mean the political and media classes of which I am a part. Are we truly ready for reform? What will we make of the grind of austerity, of the complaints from angry constituents and furious readers who have lost a hospital or a surgery, or seen their children refused a university place?

Mr Cameron proposes a long-term project of restraint and reform, but will face resistance, not just from the machine in the centre, or from the demoralised manager of a Leeds benefits office baulking at making a 10 per cent headcount reduction, but from top to bottom, an accretion of human resistance, born of short attention spans, lack of imagination, special pleading, and the siren calls of an economic recovery. How easy will it be for a Cameron government to argue austerity, when others are emerging into the sunlight and thinking: "It's over, why bother?"

Still, I remain an optimist. The public gets the need for "more for less". It's what they have always done, in the kitchen, with the home finances, and in running their small businesses. With the right leadership they can be persuaded to support a national endeavour to spend less and run things better. But it will require candour from government. In 1979, Mrs Thatcher was returned with a majority of 44, not a landslide. Her side wavered and came close to throwing her out when things got tough, until a gamble in the Falklands rescued her. We should not make the next government's job any more difficult by pretending that what lies ahead will be easy.

Great writing, especially the concerns - all of which I share. But once Labour get theirs and are kicked out of power - preferably forever - Osborne and Cameron will be given a free rein, and they'll bloody well need it to overcome those obstacles to which Brogan so eloquently refers. If they are honest with the people from the beginning, then they will. They must be honest.

It's all about faith, you see - the faith I didn't have in Osborne/Cameron initially but am rapidly discovering I now have. From faith comes a mandate; from a mandate comes leadership and strong government. None of these things has Brown ever enjoyed or deserved or, indeed, sought. And that's why he is doomed. The sooner he goes, the better for everyone.

So I say to the inheritor, Osborne: well done! But you must stick to your guns in order to rescue the country from the terrifying, deep, black hole that Brown, thanks to his catastrophic incompetence, mismanagement and world-beating, unbalanced arrogance, has dug for us.

Tories: over to you, then. You've won the argument.

Don't blow it.

Cuts And New Structures

Cuts in government expenditure is one issue that has dogged the Tories for nigh on a decade of Brownian dictatorship. As long as Brown was able to fool people into thinking that there was endless money available for massive growth in government spending, then any Tory even suggesting that it was not only desirable but essential to peg back what they argued was an unsustainable expansion of the state was laughed off the stage. Not any more. The bust has come and Brown has not only been made to look a fool, his mismanagement of the economy has been revealed in all its stark reality, with the consequent pain being felt throughout the country. [Check out this devastating article in today's DT, if you want to know how bad that pain is and how much worse it is going to get.]

The Tory predictions of the 2005 general election have come true in spectacular fashion. As Mervyn King said only yesterday, running a structural deficit during what turned out to be little more than a property bubble - ie, a period of unsustainable growth - has just about ruined the UK. The myth of Labour's reputation for economic competence has been exploded once and for all. All we have had, in fact, is a near ten year explosion in state spending with little or no return in terms of improved productivity in virtually every targeted sector. In fact in some areas, such as the NHS and schools, standards have fallen, despite gargantuan chunks of money being thrown at them. One area where there have been improvements, if you can call it that, is in state wage levels. An NHS GP can now earn twice as much as an MP; a state school teacher in his first year, after gaining a fairly modest degree followed by a year of PGCE indoctrination, can expect to clear £30,000 plus, depending on the school. I simply do not believe these people are worth that kind of money. (I know from my own experience that many NQTs certainly aren't!)

It's difficult to cut state salaries, but they can and must be capped. That will help, but genuine, capital cuts are also required if the country is to avoid a return to the disease the last Labour government caused: stagflation. Brown has lost the argument on cuts - even his own party knows that now. He has been caught out lying about, among many other things, Labour cuts, something for which he will never be forgiven. Further, the mood of the public has altered and there are signs that Tory proposals will be taken seriously, as long as they are constructive. There is such a thing as constructive cuts, as long as the new spending levels are managed professionally, something which has been sadly lacking in the chaotic Brown years of profligate waste and corruption.

Fraser Nelson this a'rtnoon has written another decent piece on this subject. I like Nelson, by the way. If Guido caught Brown out on the smears thing, it's Nelson who's really got him on the economy - and deserves as much credit as the former got for his expose. In his piece today, though, he made some interesting observations about how the Tories might re-organise goverment spending in their first years in office, which are likely to be, thanks to Brown's nation-breaking levels of borrowing and debt, extremely difficult (no change there, then). According to Nelson, however, the first thing to reconstruct will be the mechanisms of cabinet government smashed to pieces by Brown as a consequence of his dictatorial style of what can be loosely described as leadership "where ministers are handed their budgets and told to eat it."

Here’s how it would work. The spending envelope would be set, in the Budget – but it won’t just be the Chancellor demanding cuts. The Office for Budget Responsibility would be up and running too. Very little attention is being given to the OBR, perhaps because it sounds like some spivvy quango which will be an irrelevance. But Americans perhaps thought that about the Congressional Budget Office before Nixon set it up in 1973 – it now has huge authority, and is a powerful check on the administration. If Britain had a CBO then Brown would not be able to lie through statistics so much. The Tories genuinely regard the OBR as a shift in power, removing the ability of the government to vandalise the public finances (and conceal debt) to the extent that Brown has done.

Crucially, the OBR would be responsible for telling the government when it needs to start repaying the debt. Mervyn King yesterday argued for prompter repayment—in the Tory era, we will have an OBR saying “quite right, and here is what we demand of the government.” It would be apolitical, and would not specify if these cuts were to come from extra tax or lower spending. It may (I hope) produce a model for dynamic tax forecasting – thus giving a realistic assessment of the options available to the Treasury. At present, HMT does “ready reckoners” which don’t account for the fact that higher taxes lower the incentive to work. The Treasury is programmed with false, zero- sum, high-tax logic. The OBR has the potential to take a real-world view of taxes – and hopefully a Tory Treasury will too.

Who would do the talking? Sir Alan Budd has been advising the Tories on the OBR, and I suspect that he may well end up chairing it (although other candidates are in the frame). So when the OBR speaks, the Chancellor will respond - in the Budget. That will set out a general spending envelope. Then, the Tories will start to work out who will eat the cuts.

To me, this is very significant in that it implies that after nearly a decade and a half of one, unanswerable man spending the country into oblivion, ably assisted by a constant stream of over-promoted and under-qualified, low-grade ministers given entire departments to play with, that game is over. No longer will ministers be beaten into submission by an all-powerful Chancellor/PM, it seems. And no longer will the Chancellor/PM be able to do such a thing even if he was corrupt enough to be so-inclined if this new quango really will have the kind of power the Tories claim.

However, surely there are constitutional issues involved, which Nelson does not discuss, preferring instead to continue revealing details of the Tory proposals, which, he says, are almost certainly going to be implemented. But the constitutionality of this OBR quango is an issue that must be explored. An elected Prime Minister is also First Lord of the Treasury and he appoints his Chancellor to run the country's finances, who is also (but not necessarily) elected to the House of Commons. At least with this arrangement it can be argued that, however superficially, the will of the people in the area of state expenditure is represented. The same cannot be said were Prime Minister Cameron to go ahead and create this committee, appointing unelected, paid experts ostensibly to oversee the government's performance in the area of budgetary management (presumably in a similar way to the Bank of England's oversight of monetary policy).

In fact, this body, assuming it has powers of censure, will have more authority than, possibly, it is within the gift of the elected guardian of the nation's treasure to cede. But without Cameron giving-up that authority, then the new organisation will be toothless rendering the proposal as little more than a political move to deflect some of the blame for budgetary errors away from the government ("Ah, but, the OBR said this. We did what they said so don't blame us that it's gone wrong." And so on). Clever, but dishonest. Rest assured, it is something the Left will seize upon with typical, breathtaking hypocrisy.

For myself, I agree with the idea in principle. Anything that can restore the reputation of government and parliament and offer genuine transparency and scrutiny after the utter disasters of the Brown years must be a good thing. But I do believe this new proposal for a new uber-quango must be examined from a constitutional standpoint before it is created, and it must be proved to me that it is not just a stunt.

Incidentally, there is one other 'constitutional' issue worth mentioning: how will this affect the 'authority' of the supra-national EU budgetary committees, one wonders? It seems to me there might well be a very wily ulterior motive for the creation of the OBR: to limit the influence and interference of EU policymakers in UK spending plans. In other words, this is Cameron and Osborne's way of cocking a snook at the interventionist Eurosocialists.

If this is true, then for almost the first time with the New Tories, I'm genuinely impressed.