AAA rating safe for now but is there a trap for the Tories?
2034, when I’m the spritely age of 57, is when the public finances will return to Gordon Brown’s previous definition of prudence (debt less than 40 per cent of GDP), according to the long term fiscal projections released with the budget.
There can be no doubt about the weighty burden of debt afflicting Britain’s younger generations. But there is a remarkable fact about yesterday’s numbers.
Despite the pre-emptive warnings from the credit ratings agencies, the chancellor dared to increase, not decrease borrowing – compared to April’s Budget forecast – over the next three years before a slight relative payback in 2014-15.
Incredibly he chose to raise taxes, but then spent all of that money, and he spent the material bonus derived from higher stock and house prices, and he spent even more than that too. So he raised taxes, and chose not to pay off debt. I would call that a snub to the credit rating agencies.
On top of that, his rhetoric was unapologetic about the need not to contract immediately. He seemed to be referring directly to Richard Koo’s argument about Japan, made to me on Monday’s show, in his PBR speech.
The chancellor said: “When Japan tightened prematurely in the 1990s it pushed the economy back into recession, making debts and deficits much higher, not lower.”
Koo said on Channel 4 News that the Japanese deficit reduction plan which aimed to cut 15 trillion yen from Japan’s borrowing in 1996 ended up adding 16 trillion yen instead. See the full interview here.
On top of that Mr Darling made pointed remarks about the need for an “orderly” deficit reduction. So it was a clear message: yes we’ll cut the deficit, but in our own time, thank you.
And here’s the crucial fact: the gilt markets did not hammer UK sovereign debt yesterday, although this morning there was a bit of a delayed reaction. Having said that, the ratings agencies said the PBR had “not materially changed” the picture on the UK’s credit rating.
In many ways the Treasury and the chancellor got away with something that I had thought might “test the market” more.
Perhaps they were just relieved that there was no further stimulus package announced, as is the case in Japan. Maybe they are waiting until a post-election flash of clarity and honesty. But as it stands, it is almost impossible that the UK will actually lose its AAA credit rating before the election.
We’ll find out today from the IFS about the savage cuts implied, though not outlined, by yesterday’s numbers to non-priority areas such as transport, housing, and universities. There is a clear democratic argument for a spending review to occur with the budget.
But I’m increasingly of the opinion that this PBR has given the opposition a serious headache. Markets didn’t care about the extra debt as much as the opposition has claimed. And as opaque as the Labour deficit-halving strategy is, the Tories have to find even more cuts or tax rises to cut it faster.
So as a matter of basic mathematics, George Osborne’s will necessarily be as opaque as Darling’s, and then some. That is why the Tory frontbench have opposed absolutely nothing that the Chancellor announced yesterday.
If Mr Osborne is serious about faster deficit reduction he will have to choose to either 1) de-prioritise schools/police, 2) savage transport/housing even more or 3) raise taxes.
Labour will hammer them on an alleged plan to raise VAT I’m told. Liam Byrne is already flashing around a suggestion that quickening the pace of deficit reduction by one year will cost £26bn in spending cuts or tax rises, which he is convinced will come from a secret Conservative VAT rise.
Tory insiders say they “don’t recognise” Liam Byrne’s £26bn number and that it’s “ridiculous”.
The other option, of course, is to cut back benefits even more. As Labour have already bagged the “easy” tax rises, and some of the “easy” spending cuts, that’s where I bet that an Osborne Treasury would have to find the money to pay down the national debt more quickly.
Numbers would be great. From both parties.
Off to the IFS now, live tweets from one-ish on: twitter.com/faisalislam
Watch out for the international reaction to the bonus tax. The Wall St Journal, bible of capitalism says bonus tax is “entirely justifiable response to the sector’s failure to exercise self-restraint”.
France has just introduced it. US Democrats absolutely love it: Darling, I love you http://bit.ly/8lY1oI.