Accept That We're Ruined, Plan How To Rebuild...

Following this morning's Spectator Business function - and the subsequent damp-squib budget announcement - you could not help but conclude that the UK's public finances are in ruins, yet politicians on all sides want us to wait until after the General Election before they begin to take any action (the Lib Dems would wait til 2011). They're in denial, and anxious that the electorate remains in denial too.

But there is no point waiting for the politicians. We're missing a golden opportunity. The election should not be about expressing anger and blame for New Labour's systematic destruction of the public finances. Instead, the election should be a choice between competing visions for how to rebuild the economy. All sides must be forced into saying how they would do it.

To make the most of this opportunity, we must first resign ourselves to the parlous state of our finances and accept the world has changed.

So let's accept that Britain isn't simply 'facing economic disaster'. It is one. Britain is not 'in decline'. It has fallen. There is nothing more we can do to 'save the country's finances', because there are none to save. Politicians can't make 'savings' here that may be 'spent' there. As Liam Halligan pointed out, the only choice is between more appalling over-expenditure, or less of it.

Let's also accept this wasn't an accident that might somehow rectify itself. Patience Wheatcroft (now at the Wall Street Journal), rightly points out that David Cameron has been too nice in merely saying Gordon Brown has merely failed to repair the roof. He should've been constantly and furiously berating Gordon for "removing the roof tile-by-tile": grabbing pension money, auctioning mobile spectrum for insane prices that damaged telco balance sheets, concealing public infrastructure costs in government-guaranteed PFI programmes, growing the public workforce by 20%, and deliberately borrowing more and more so that, in the bitter end, the Bank of England was forced to print £200bn.

But Cameron blew his chance. The time for anger and blame is over. We have to resign ourselves to the fact that we are stuck - our kids are stuck - with a £170bn public deficit, £80bn of which is a seemingly immovable millstone...

In planning how to proceed, we should not be distracted by hand-wringing about "cuts" and "higher taxes", and the timing of those. They must happen. But there are other critical issues that remain unaddressed. For instance, where is the incentive for investment in new export markets to redress the ever-widening trade deficit and the fact our biggest export market (the Eurozone) is in a similar, and worsening economic state? The UK must have some strengths and opportunities, and we need the political leadership focusing on those rather than playing for time.

Rant ends, for now ;-)

Britain: No Pain, No Gain

Here are my takeaways from the Spectator Business breakfast debate, sponsored by DLA Piper in the City this morning. The issue was whether political paralysis is the major obstacle to economic recovery. The speakers were MPs Vince Cable, Frank Field and Philip Hammond, along with Fraser Nelson, editor of the Spectator, and financial columnist Neil Collins. Martin Vander Weyer, editor of Spectator Business, was in the chair.

The politicians concede there is a £90bn structural deficit, that is currently driving unsustainably high public borrowing. They agree a clear mandate is required at the next election if the new government is to be able to administer the 'tough medicine' required to reduce or eliminate that deficit. Technically, they disagree on the detail of how and when to disconnect the economic life support systems currently in place (quantitative easing etc). However, they say little of this is actually 'discretionary stimulus', so their debate doesn't really amount to much. Most of the stimulus is the result of monetary policy that is out of their control and is being well-handled by the experts, even if no one is sure how beneficial it will turn out to have been. However, concern remains that not enough of the stimulus is resulting in finance for solvent borrowers.

Households are in no position to absorb much pain in the short term, due to the £1.4 trillion consumer debt mountain. That would seem to rule out a return to the 'bleak and blunt' Thatcher budgets of the early '80s. So it appears we're in for a long period of monetary and fiscal responsibility. In fact, there will be an 'Office of Fiscal Responsibility', to put an end to the farcical gamesmanship around growth and other fiscal estimates at budget time.

Politically, shrinking the structural deficit will require policies that demonstrate everyone is 'sharing the pain'. Realistically, even the Tories have only found £3bn in potential cuts, so higher taxes are a certainty. The Tories say the 50p top tax rate will be a temporary measure that may not raise enough taxes to make a difference, but will show the 'rich' are sharing the pain - in the same way MPs are being told to repay whatever the Legg inquiry finds they owe, even if they disagree with the reasoning. All agreed that the electorate will not accept much pain while there's a perception that big bonuses are being awarded in the City (or the pubic sector retains generous pension entitlements).

The financial regulatory framework will be restructured, probably to ensure that riskier wholesale banking activities require so much reserve capital as to make them either prohibitive or at least sufficiently low risk for the taxpayer. It's suggested that the protectionist elements of the current EC attempts to regulate hedge funds etc will be successfully resisted by UK MEPs, making it 'irrational', or at least premature, for any funds to leave the UK/EU... good luck with that.

Public sector pensions are going to be cut. Heathrow won't be expanded, and there's a big issue about how the delivery of Britain's energy needs can/will be funded.

While the election provides an opportunity for change, its timing is delaying political focus and agreement on the detail of how to reduce the structural deficit and balance the competing economic and social interests. However, the paralysis goes well beyond the politicians to financial and economic experts and the media.

Against this backdrop, there is concern that confidence in the British economy amongst the investment community may evaporate.

Without real agitation by individual voters, I doubt we will see any real economic detail from the politicians until some time after the general election. Even then, any detail we're given prior to the election will be subject to change after it.

I created the word-cloud of this post at Wordle.