Gilt-trip

Is the failure yesterday to sell the next modest tranche of Government debt due to the Governor of the Bank of England’s call against further reflation? Or something much more serious at work? It will be sensible to plan for the latter scenario.

The magnitude and force of this financial and economic crisis is throwing the public accounts into even greater disarray. Governments of all parties have never found ways of taxing us beyond 38 per cent of GDP. Yet we as voters like governments to spend up to 50 per cent of GDP on public services. This growing gap between expectations and tax revenues was apparent before the banking implosion, and these two forces alone put at risk our entire economy.

For it is on to these fast disintegrating public accounts that the Government is set to borrow at an unprecedented peace-time level. The Government’s early estimates of this borrowing spree always looked unrealistic at 7 to 8 per cent of GDP.

Ernst and Young’s item club group now forecasts borrowing at 12 per cent of GDP by 2009-10, but I wonder what odds one would get for the Government exceeding even this level. The country is well and truly in uncharted territory with worse news coming with practically every new batch of statistics.

Tax receipts have plummeted by 9 per cent over last year, and last month’s figures show a 10 per cent decline. Contrast this with the Chancellor’s prediction of only a 2.6 per cent fall in revenues.

Expenditure is up. Last week’s claimant count when revised will show that the unemployment level for February surpassed the level the PBR predicted for the end of the year, i.e. it was ten months ahead of planned expenditure levels. The failure to sell all the gilts on offer yesterday is probably a judgment on how fast the public accounts are disintegrating.

If that wasn’t bad enough the Government remains hampered in grappling with an unprecedented crisis by its failure to deal effectively with the banking crisis. Much of the poison of those wretched toxic assets remains in our banking system. With bankers deeply distrustful of other bankers, believing them to have larger stocks of these poisonous assets than they have publicly admitted, inter bank lending remains stalled and the hope of getting working capital to viable businesses remains blunted.

Into this economic and financial maelstrom the Government has added the new dangerous ingredient of printing of money. No-one knows what the longer-term consequences will be of such a strategy.

Yet cheers went up when the first venture of using this new cash to buy back government debt was five times over subscribed. That institutions and countries are quitting holding what is supposed to be this country’s safest of assets, is surely grounds for alarm and not congratulation.

Now wind the clock forward. Soon the Government will be trying to offload what many expect to be at least £180bn of debt in each year, for as long as it dares to predict.

Yet we are not the only government set on this course. The Americans, to take the largest example, will be attempting to sell over $1,750bn of government debt this year and for many a year to come.

Even if the credit is out there, we cannot assume that Britain necessarily ranks high on the list of safe destinations. And it certainly won’t be if the failure to get a grip on the widening imbalance in the public accounts leads to the loss of our AAA credit rating. The results of yesterday’s efforts in the gilts market suggests that there may well be growing difficulties in selling government debt as each new tranche is issued.

Our currency has too often in the past been our Achilles’ heel. And this weakness may not necessarily the time around be countered by a floating exchange rate. What will happen to the price of sterling if the debt management office reports that it is unable again to sell all the next tranche of government debt, or only if long-term interest rates rise?

These are treacherous days for the Government and they make the delayed Budget perhaps the most important one in living memory.

Will the Government be able to float new debt on its projected scale without convincing the market that it is dealing now, and not after the next election, with the huge structural imbalance in the national accounts? I doubt whether the international money market will wait for ‘resolute’ action for another year.

Here is the test for both Gordon Brown and David Cameron. The test of the Government will come in April’s Budget which needs to contain announcements of immediate tax increases for this financial year, over and above those already set out in the PBR for after the next election. If we are to have any hope in the shorter run of raising the debt we need to have an agreed timetable within which to balance the accounts. Similarly, and as a first move, the public expenditure budget has to be cash limited.

David Cameron will soon have to declare his hand that the appalling state of Government finances makes the introduction of tax cuts in the next Parliament, or the one after that, an unrealisable possibility.

British politics is being transformed. For well over one hundred years a central belief has been that social progress comes from expanding government expenditure.

Government expenditure will be cut in real terms, not just now, but over the next two Parliaments. So the drive must be to get better results for less money. That is the least that taxpayers are going to demand as their tax bills soar.

A progressive centre left will insist that any tax increases go onto those with the broadest shoulders. A cool additional £6bn revenue would result from allowing pension tax subsidies at the standard rate only. Surely this must be just one of the measures to increase tax revenue in the next Budget.

Likewise, we need to take seriously Aneurin Bevan’s assertion that Socialism is the language of priorities. While events already unfolding look like testing this belief to the point of destruction, its sentiment still offers the best prospect there is of protecting the poor from the economic gales now besetting us.

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6 Responses to “Gilt-trip”

  1. Nick Says:

    For someone who’s supposed to be an expert on pensions, this statement is not correct

    A cool additional £6bn revenue would result from allowing pension tax subsidies at the standard rate only.

    You have already picked the pockets of pensioners by raiding their pensions with the tax raid on dividends. Now pensions pay the tax on the way in and on the way out. Double taxation of one of the poorer sections of society.

    Now you talk of ‘subsidy’. There is no subsidy, its tax deferal. You don’t pay the tax on the way in, but you do pay it on the way out.

    Again, you’re proposing taxing one of the poorer sections of society.

    Why don’t you look to the real reason as to why this is being proposed?

    It’s because of the gross incompetance of this government in particular. Others too.

    You’ve run up massive debts, and now you need to raid people’s pension funds to pay for it. At the same time you continue porking it on expenses, and gold plating your own nests.

    Here is a potted list of the debts.

    1) State pension. If you take money from people, you owe them the pension just like banks taking deposits. It’s only your false accounting that keeps it off the books.

    2) State second pension – see above

    3) Gilts

    4) State employee pensions

    5) State Guarantees – Post office for an example. Another 12 billion spent when it doesn’t need to be spent.

    6) Nuclear decomissioning

    7) Bank Guarantees

    8) PFI

    and now we are in to the relative small change.

    You’ve run up debts of 5+ trillion, when the state only earns 0.5 trillion a year by stealing money from people.

  2. Nick Says:

    Lets do the sums.

    Borrowing – an extra 200 billion a year

    Increases in taxes – an extra 6 billion a year.

    End result, you are still up the proverbial creek.

    Where are you going to find the other 194 billion from?

    Are you going to tell people you’re going to tax them in the future to get the 194 billion times X years?

    Somehow I doubt it.

  3. Nick Says:

    The problem is that you aren’t saying at all how you are going to pay back the 200 billion of borrowing this year. With no cuts, or tax increases, its going to be more than 200 billion next year.

    Just what’s going to be cut?

    Just which taxes are going to increase?

    How much of a dent does that make in the overall level or debt?

    Or is the only plan to rip off savers via inflation?

    If so, how do you deal with all the inflation linked debt such as state pension, benefits, RPI, …

  4. wendy Says:

    Take all those with incomes below £10,000 p.a. out of the tax system.
    Tax all those with an income in excess of £100,000p.a. at,say,45%.
    Crack down on tax avoidance,which is still more or less ignored by the government.
    Increase council tax levies on second homes;crack down on offshore tax havens.
    Finally,as suggested in a previous blog:do something about MPs’ expenses claims:the whole system is a disgrace and does not stand up to public scrutiny:Jacqui Smith and Tony McNulty take note.

  5. Nick Says:

    The problem Wendy is that that will not raise 200 billion, which is the short fall between tax and spend.

    You need to put VAT up drastically to 30%. You need to increase all income tax to 60% across the board, and even that won’t bridge the gap.

    The government is spending too much, and it has to be cut. If it isn’t the inevitable bankruptcy makes the disaster catastrophically bad

  6. Jon Pols Says:

    I think we were all so relieved when Baron Mandelson told us that accepting money from strangers wasn’t something we needed to worry about any more, IMF here we come!

    The word that dare not speak its name is “inflation”, perhaps 8-10% for a few years would reduce that debt nicely (and everybodies savings).

    Presumably Lord Mandelson’s Royal Mail privatisation are to raise a much needed £3bn. But there is a wild rumour circulating that the under funded pension scheme has £17bn in it (rather than the £25bn needed). Does the privatisation plan include the government “looking after” the £17bn? That story may be a completely baseless rumour, of course.
    But I wonder if there any possibility of other funded (or partially funded) public sector pension schemes being appropriated by an increasingly desperate state?

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