Reasons to doubt Brown's proposal - 3

What happens elsewhere in the economy as the result of extra borrowing by the government?

The government will greatly expand the borrowing it has been undertaking for a few years already. This will mean a capital inflow, as the only real source of such large borrowing is foreign. We are here talking about adding up to £100 billion for the present tax year, to cover the widening gap between Government income and expenditure, plus a similar figure next year, plus his give away of possibly £30 billion. Such money has to be borrowed abroad.

Will Brown be able to achieve this without paying higher interest rates and a risk premium to cover any future further depreciation of sterling? Possibly, but at a cost of making it more difficult for British commercial borrowers. Some describe this as "displacement" or "crowding out" of the private sector. Firms already have credit difficulties, and they could do without this.

The government is sailing blindly. The Treasury economic forecasting model, (- a set of some 200 mathematical simultaneous equations which link a similar number of variables), will not be much help in these "unusual times", as relationships between variables will have changed. Steering the economy has just become a lot more difficult because forecasts will have become less reliable.

The Bank of England report on the situation suggests that they withheld a larger base rate cut when they recently cut the rate from 4.5% to 3.0% until they see what fiscal splurge Brown has decided upon. There seems to be a caution of the need to make subsequent changes, rather than an all-in effort with no fall back or further stimulus. If so much is tried, with disappointing apparent result, and nothing further can be done, then confidence would fall catastrophically and we would be in severe trouble.

In the longer run we know that if the Government borrows something like £250 billion in addition to its accumulated budget deficits, then we are looking like an annual extra revenue need of £7.5 billion merely to service the debt, assuming very generously that the government can borrow at 3%. This comes out at very nearly 2p on standard rate of income tax, and unless the government can actually increase taxes during a prolonged recession this interest due will begin to ad to the accumulation immediately. If an attempt is made to pay back some of the loan, then still higher taxes will be needed.

Whatever happens, we are in for a hard time for several years to come. It becomes all the more necessary to cut out government and other waste, to enable us to continue to grow our central services. It should be pointed, as well, that several American studies have shown that, for their situation at least, whenever government expenditure increases economic growth is reduced slightly and unemployment rises. But we have Wizard Brown!