Friday, 15 January 2010

Osborne Should Learn His Recession Highway Code

"Mirror, signal, manoeuvre."

That is the order of actions to be taken over overtaking, changing lanes etc whilst driving a car. The equivalent, "look, announce, move" may well be said of a Chancellor driving an economy out of recession. Such a warning that the Conservatives party are not going to do this has come from Vince Cable, the Liberal Democrats Treasury Spokesman.

"It's foolish to set a political timetable with no regard for the state of the economy. There's a big risk that if cuts begin suddenly and on a purely political basis the economy will be plunged back into recession.

"What is needed is a set of clear economic tests, which include the growth of the economy and employment, as well as conditions in international markets, to judge when contraction of spending should begin or be accelerated."

The reason for such a call is the announcement that George Osborne is liable to make cuts within the first 50 days of a Conservative Government. Speaking and the London School of Economics he said:

"Programmes that represent poor value for money, excessive spending on things like advertising and consultants, spending on tax credits for people earning over £50,000, and spending on child trust funds for better-off families will all have to be cut during the financial year."

Adding:

"Everyone knows the government's spending plans for next year are driven by a looming election and not economic reality. So, with the date of the general election increasingly likely to be after the beginning of the next financial year, that means we will need to make early in-year reductions in existing plans."

Therein lies not one but two problems. The first is as Vince has pointed out what George is actually doing is also announcing a budget 'driven by a looming election and not economic reality'. Some of the cuts that may well be representing poor value for money may well be important ones for the economy. Just what value of money is the Tory party going to use?

The second is that he has now announced where he is targeting cuts. Expect a little bit of accelerated budget spending on some of those programmes that fear they are at risk of cuts at the start of the financial year. Commitment to spend the money before it can be taken away. If the election is May 6, that would mean George's quick budget would come by 25 June. So spending may be accelerated first quarter of the financial year to avoid it being taken away, then a slow down in the remainder of the year for fresh spending.

Therefore it is possible that the acceleration and contraction of spending may well be outwith the control of a Conservative Chancellor. He is hinting that the two-thirds cut and one third tax to cut into the deficit he is looking at an 80:20 ratio to accelerate this reduction himself. Of course Vince is merely reiterating the opinion he took over the weekend when he said;

"My party takes the view that the government's eight-year plan, with a four-year halving of the deficit, is a reasonable starting point.

"My judgment is that we will probably discover that it is not enough, but we have to start somewhere and it is a reasonable working assumption."

Vince was ignored over the issue of Bank deregulation that got us into this mess. He's sized up the situation and cast his eye over the best way to now bring us out of it at present that needs careful care. It is the reason that the Lib Dems have cut back on new spending commitments, even though they are dear to our heart. It's about the economy, stupid. First and foremost at this time it is about making that flow as smoothly as possible.

Of course the rapid budget is nothing new in Conservatives taking over from Labour they did just that in 1979. It was a radical shift to try and lift the UK out of recession, spending was cut and taxes were raised. Of course then the Government was fighting inflation, but the effect was falling aggregate demand and reduced growth. Unemployment quadrupled in those early years to the height of 3m. Then it lead to a full scale recession, now it could plunge us back into one.

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