From Money Week http://www.moneyweek.com/
The buck passing has already begun.
Gordon Brown said yesterday that 2008 will be a “decisive year for the economy”. (I think it’s fair to assume that in this case, ‘decisive’ is politician-speak for ‘nightmarish’). Now he wants us all to judge him and his government “on whether we take the right long-term choices for the British economy” in the long 12 months ahead.
It’s a clever move, an attempt to wipe the slate clean, as though the previous ten and a half years or so of his Chancellorship had nothing to do with the state the economy’s in now. I imagine we’ll see a lot of finger-pointing this year – the Bank of England has already taken the flack for Northern Rock. Now poor Americans, careless bankers and bloated City fat cats will be blamed for starting the credit crunch, and Britain will be told that it’s up to Big Gordon to clean up the mess. It’s a classic attempt to erase history and start with a clean page – Stalin himself would be proud.
But Mr Brown won’t be able to find a clean page that easily – he’s spilled far too much red ink for that…
Why life is getting much more expensive
Gordon Brown is right to say that 2008 will be hard for the British economy. Our country’s growth over the past ten years has been founded on overly cheap debt, supported by statistical fiddling and cheap goods from China.
Now debt is becoming more expensive – and so are the cheap goods from China. A Bank of England report last week showed that since the credit crunch, lenders have cut back sharply on their willingness to dish out more money. And that’s showing itself already in rising mortgage costs. In November last year, the average mortgage rate was 6.02%, the highest in seven years, up from 5.94% in September. Credit card rates have jumped too.
Meanwhile, the Chinese are steadily tightening their monetary policy in response to rapidly rising inflation. As life becomes more expensive in China, that ability of manufacturers to pump out cheap goods for the West is coming under pressure.
And of course, with sterling weakening rapidly, general inflation is set to become more of a problem. When the pound was at $2.10 a few short months ago, rising oil prices didn’t seem to matter quite as much – as oil is priced in dollars, a strong pound kept the impact to a minimum.
But now that the pound is sharply lower against the dollar, suddenly $100 a barrel oil looks a lot more painful, and those Chinese imports start to become more expensive too.
We’re already seeing these costs pass through to consumers, just as rising debt servicing costs squeezes them on the other side of the equation. Fuel surcharges on flights are rising; food suppliers and supermarkets are set for an almighty battle in the next couple of months over who pays for higher food costs; petrol is more expensive; and energy bills are about to jump yet again – Npower raised rates on Friday, and British Gas is set to do the same this week, reckons The Telegraph.
A tough choice for the Bank of England
Higher costs mean rising inflation. Higher debt costs mean slowing growth. That means the Bank of England has a tough choice on interest rates this week, but either way it loses. Cut rates, sterling falls, and inflation gains the upper hand. Keep rates on hold, and asset prices will keep falling, there will be a mass outbreak of whingeing in the City, and huge political pressure will be brought to bear on the Monetary Policy Committee.
I’d say it’s better to keep rates on hold and at least attempt to resist inflation – but judging by central banks’ actions across most of the rest of history, the MPC will chase short-term comfort at the expense of long-term stability, and cut rates sooner rather than later.
But none of this should be a problem. After all, the UK has just been through its longest period of growth in history, or so the GDP statistics say. And the Government has been the biggest beneficiary of all that. Nobody got more out of the housing boom than the Government - almost everyone pays stamp duty these days, and more and more people have been sucked into the inheritance tax net.
The Government has also done rather well out of rampant oil prices, raking in tax from both consumers and the oil producers. And then there’s the boom in the City, which also made a tasty packet for the Treasury, despite the perception that Labour has given the Square Mile an easy ride. Then of course there’s all the tax increases that have hammered the rest of us over the past decade.
So there should be plenty of money left in the coffers to pay for tax cuts and increased public spending and all sorts of things to prop up the economy during the hard times.
Don't expect gratitude from the public sector
Except there isn’t any money left in the coffers at all – in fact, the Government is massively in debt. Why? Because Mr Brown spent all the money and more on inflating an already unsustainable boom even further by splurging on huge public sector pay rises, with little corresponding service improvements to show for it.
Now, with no more money in the pot, he’s having to demand that the same public sector employees who’ve enjoyed his largesse for ten years suddenly rein in their pay demands to below-inflation levels. He might have thought that they’d be grateful after the boom years – but not a bit of it. Suddenly there’s talk of strike action in the air – just when he, and the UK, needs it least.
So forget about what Mr Brown does this year – he already made the big decisions that will make this a horrendous year for the British economy a long time ago.
The buck passing has already begun.
Gordon Brown said yesterday that 2008 will be a “decisive year for the economy”. (I think it’s fair to assume that in this case, ‘decisive’ is politician-speak for ‘nightmarish’). Now he wants us all to judge him and his government “on whether we take the right long-term choices for the British economy” in the long 12 months ahead.
It’s a clever move, an attempt to wipe the slate clean, as though the previous ten and a half years or so of his Chancellorship had nothing to do with the state the economy’s in now. I imagine we’ll see a lot of finger-pointing this year – the Bank of England has already taken the flack for Northern Rock. Now poor Americans, careless bankers and bloated City fat cats will be blamed for starting the credit crunch, and Britain will be told that it’s up to Big Gordon to clean up the mess. It’s a classic attempt to erase history and start with a clean page – Stalin himself would be proud.
But Mr Brown won’t be able to find a clean page that easily – he’s spilled far too much red ink for that…
Why life is getting much more expensive
Gordon Brown is right to say that 2008 will be hard for the British economy. Our country’s growth over the past ten years has been founded on overly cheap debt, supported by statistical fiddling and cheap goods from China.
Now debt is becoming more expensive – and so are the cheap goods from China. A Bank of England report last week showed that since the credit crunch, lenders have cut back sharply on their willingness to dish out more money. And that’s showing itself already in rising mortgage costs. In November last year, the average mortgage rate was 6.02%, the highest in seven years, up from 5.94% in September. Credit card rates have jumped too.
Meanwhile, the Chinese are steadily tightening their monetary policy in response to rapidly rising inflation. As life becomes more expensive in China, that ability of manufacturers to pump out cheap goods for the West is coming under pressure.
And of course, with sterling weakening rapidly, general inflation is set to become more of a problem. When the pound was at $2.10 a few short months ago, rising oil prices didn’t seem to matter quite as much – as oil is priced in dollars, a strong pound kept the impact to a minimum.
But now that the pound is sharply lower against the dollar, suddenly $100 a barrel oil looks a lot more painful, and those Chinese imports start to become more expensive too.
We’re already seeing these costs pass through to consumers, just as rising debt servicing costs squeezes them on the other side of the equation. Fuel surcharges on flights are rising; food suppliers and supermarkets are set for an almighty battle in the next couple of months over who pays for higher food costs; petrol is more expensive; and energy bills are about to jump yet again – Npower raised rates on Friday, and British Gas is set to do the same this week, reckons The Telegraph.
A tough choice for the Bank of England
Higher costs mean rising inflation. Higher debt costs mean slowing growth. That means the Bank of England has a tough choice on interest rates this week, but either way it loses. Cut rates, sterling falls, and inflation gains the upper hand. Keep rates on hold, and asset prices will keep falling, there will be a mass outbreak of whingeing in the City, and huge political pressure will be brought to bear on the Monetary Policy Committee.
I’d say it’s better to keep rates on hold and at least attempt to resist inflation – but judging by central banks’ actions across most of the rest of history, the MPC will chase short-term comfort at the expense of long-term stability, and cut rates sooner rather than later.
But none of this should be a problem. After all, the UK has just been through its longest period of growth in history, or so the GDP statistics say. And the Government has been the biggest beneficiary of all that. Nobody got more out of the housing boom than the Government - almost everyone pays stamp duty these days, and more and more people have been sucked into the inheritance tax net.
The Government has also done rather well out of rampant oil prices, raking in tax from both consumers and the oil producers. And then there’s the boom in the City, which also made a tasty packet for the Treasury, despite the perception that Labour has given the Square Mile an easy ride. Then of course there’s all the tax increases that have hammered the rest of us over the past decade.
So there should be plenty of money left in the coffers to pay for tax cuts and increased public spending and all sorts of things to prop up the economy during the hard times.
Don't expect gratitude from the public sector
Except there isn’t any money left in the coffers at all – in fact, the Government is massively in debt. Why? Because Mr Brown spent all the money and more on inflating an already unsustainable boom even further by splurging on huge public sector pay rises, with little corresponding service improvements to show for it.
Now, with no more money in the pot, he’s having to demand that the same public sector employees who’ve enjoyed his largesse for ten years suddenly rein in their pay demands to below-inflation levels. He might have thought that they’d be grateful after the boom years – but not a bit of it. Suddenly there’s talk of strike action in the air – just when he, and the UK, needs it least.
So forget about what Mr Brown does this year – he already made the big decisions that will make this a horrendous year for the British economy a long time ago.
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