The more politicians talk tax cuts, the more sterling slides
Another day, another grim economic statistic: it's just been announced that (on the broad, internationally-recognised definition) increased by 140,000 to 1.82m between July and September; the number of people claiming jobseekers' allowance last month increased by 36,500 to 980,900, according to the Office for National Statistics. It is clear to most economists that the jobless total is heading remorselessly north of 2m sometime after Christmas.
Nobody should be surprised by these gloomy figures: simply by aggregating the job losses in yesterday's newspaper headlines it was possible to identify 4,000 lay offs at major companies in one day. Signs of labour market weakness are everywhere: average earnings increased by 3.3% in the year to September, 0.1% down from the previous month. Now that inflation is falling fast again the biggest fear is now recession; so workers seem more concerned about holding on to a job rather than pushing for big pay rises.
Recession is also standing our politics on its head. For years Gordon Brown has taunted the Tories for supposedly proposing "unfunded" tax cuts -- ie not financed by cuts in public spending or offsetting tax rises. Now Mr Brown is an enthusiast for unfunded tax cuts paid for by extra borrowing (indications are we'll get some in the forthcoming pre-Budget report) and he is attacking the Tories for proposing funded tax cuts! How the world turns ...
The Tories' "tax cut" -- the partial holiday in national insurance payments if employers take on extra labour -- is actually a job subsidy and was meant to show the Tories care about rising unemployment. But with the air thick with calls for tax cuts and a seeming consensus in their favour, the Tories turned their labour market subsidy into a tax cut too.
Journalists -- and voters -- should be sceptical when the political elite on the right and left is broadly shouting for the same thing. An interesting corrective to the tax-cutting consensus is provided this morning by the Guardian's economics editor, Larry Elliot who argues that and that we can't afford them anyway.
They are certainly not a free lunch. Yesterday on the Daily Politics , the employment minister, admitted that tax cuts financed by extra borrowing now would have to be paid for by higher taxes later. The Times editorial points out this morning that "the government has yet to find between £3-4bn to pay for this year's stamp duty holiday, fuel duty and 10p tax cut packages" before it considers further tax cuts in its pre-Budget Report.
The risk for the government is that it has mishandled expectations about any forthcoming tax cut. To have a real impact on the recession it would likely have to be very large -- perhaps as much as 1% of GDP or £15bn -- but the markets would take fright at such a huge increase in borrowing; so any cut will be much smaller and run the risk of disappointing.
The markets are already taking fright at the government's borrowing plans, despite Mr Brown's claim that there is scope to borrow more. The money-men do not believe the PM's claims of prudence and think the real level of Britain's indebtedness a lot higher than the published figures (43% of GDP at the latest count, NOT the 37% Mr Brown claimed yesterday) because it does not include off-balance sheet borrowing such as the public finance initiative. When off-budget borrowing is including, the national debt rises to around 50% of GDP.
The markets are baulking at the prospect of more borrowing on top of that. This concern is now been taking out on the pound, which tumbled to a 12-year low yesterday against a basket of the currencies of countries with which we do most trade -- and to a new record low against the euro.
Sterling is plummeting because there is new evidence that investors are shunning UK government bonds (or gilts, the means by which HGM borrows) and reluctant to fund much more borrowing. Huge inflows of funds into gilts in recent years have abruptly reversed.
Mr Brown may have ditched prudence for now and the government's self-imposed limits on borrowing are no longer clear. But the markets are imposing a discipline of their own: the more the government tries to borrow, the more sterling will likely slide -- and you cannot rule out a time when the markets simply say: not a penny more! Then the government will be unable to borrow further, except at huge cost.
You will have gathered from all this that the economy is still very much on the agenda today. We'll be looking at the latest snapshots of the sinking economy with former Lib Dem leader Charles Kennedy, leading Labour left-winger Jon Cruddas and the Conservative's shadow Business Secretary, Alan Duncan.
We've also got the first of our special reports on how the downturn is affecting the real economy and we'll hear from Dragon's Den businessman James Caan on doing business with the United States.
All that plus a report on Gordon Brown's attempts to instil discipline among his beleaguered backbenchers and, as always, live coverage of the latest Prime Minister's Questions.
It's Wednesday so we start at 11.30 this morning and we're on all the way til 1pm. Hope you can join us on the Daily Politics, here on ³ÉÈË¿ìÊÖ 2.
Comments
or to comment.