G.Brown discredited?

An unlikely source wrote yesterday, "Britain's credit rating is on the danger list - and so is Gordon Brown's credibility". The author was Larry Elliott, economics editor, in the Guardian.

He further added that in the present circumstances it is both dishonest and foolish to fight a general election on the basis of Labour investment against Conservative spending cuts. The dishonesty is because, as virtually everyone else knows, the governments' own plans imply real cuts in spending. The foolishness, which would be revealed in the event, is that further massive borrowing would endanger of national credit rating - the AAA rating.

On the same day Richard Wellings posted a message on the website of the Institute of Economic Affairs that the cuts could need to be much more severe than those blurted out by Andrew Lansley. This was reinforced by a Policy Exchange paper, which calculates that cuts of £40 billion in addition to the 7% all round cuts admitted by Lansley to restore stability.

In this situation balance may be restored by one or more of three things:

1) Yet more borrowing. This is a non-starter, partly because it will crowd out private investment at a time when this is needed to promote growth, but mainly because of the decision announced on 21st May by Standard and Poors, - that they had assessed our situation still as AAA but on a negative watch, that is an early notice that we may soon lose the AAA rating.

Losing the AAA rating is not merely a loss of some national virility symbol, and damage to our national pride, nor mere humiliation even. It means that international lenders will react by requiring higher interest rates on their lending to us, and so for still further borrowing and hampering of our private sector growth rate. Next year nearly a quarter of government expenditure is financed by borrowing, and this cannot be left to go on.

2) Increased taxation. The government's plans already envisage this happening, with VAT, income tax and national insurance taxes set to rise. These increases are far too small, and will make little impact on the huge debt, although they could put a brake on recovery from the recession. Taxes would have to rise dramatically, and would have to reach down to almost the poorest. The figure of £1,600 per family is an average figure mentioned. The problem for the Chancellor in the near future is that increased corporate taxes are a good stealth tax but again would inhibit enterprise and growth.

3) Serious reductions in government spending. The £40 billion I mentioned above as an extra needed cut would equate to approaching half the sum spent on the NHS. That is the magnitude.

Lansley was right, there will have to be significant cuts. We have been living on increasing public sector debt for several years, and at some point we shall have to pay for it.

It was perhaps slightly unfortunate that the Standard and Poor's announcement was made in the middle of the MP expenses scandals, otherwise more than a few experts would have been aware of the size of our debt and the dishonesty and stupidity of G.Brown.