CBI urges fiscal restraint

As a merry-go-round of cut or not to cut continues this morning's latest participant is the CBI which has told the Chancellor that he should balance the public finances sooner rather than later but is right to avoid big cuts this year to protect the fragile recovery.

CBI Director General Richard Lambert presenting the CBI's budget recommendations said that.

"The degree of fiscal tightening we'll need is more challenging than other G7 countries. But one real advantage is that the maturity of government debt is longer than other countries, and we're confident the UK's credit rating is sustainable,"

Writing to the Chancellor they recommend that the budget is balanced two years earlier than forecast by Darling by the end of fiscal year 2016.

An earlier date for budget balance should be achieved through a combination of lower overall spending and public service reform, rather than resorting to damaging tax rises at time when the economy is still fragile.

Cut or spend? A political football

As the unofficial election campaign continues the race is on to name the date that fiscal cuts begin and Shadow Chancellor George Osbourne was off the mark yesterday at the LSE.

Announcing that spending on tax credits and child trust funds for better-off families would be cut immediately if the Tories won the general election,he told the audience

“The message could not be clearer – if you find yourself on the wrong road, you take the first available exit instead of carrying on.

This is going to be one of the elections issues,the Tories trying to demonstrate immediate fiscal prudence with Labour arguing for small steps in line with economic recovery.

The dangers of the Tory line are clear in plunging a fragile economy back into recession,whilst Labour's plans to raise spending by £31bn in the 2010-11 financial year, also seem unduly risky.

But the issue has to be faced.As the Economist says today,whilst everyone says the deficit is the big issue of the campaign,no one wants to talk about it much.

Nick Clegg attempts to in the FT

It is very clear that, as in the US, current levels of borrowing cannot continue without putting Britain’s credit standing at risk. We should not forget that at present, government borrowing is being artificially sustained through quantitative easing whereby, in effect, it buys its own debt. That is why I regard bringing stability back to public finances as the first big building block of our plan to re balance the economy and build it up again on firmer foundations than before.

A decade of disaster for Gordon

Tom Clougherty is definitely not a fan of Gordon Brown.

Writing on the Adam Smith insitute blog he says that

Next year, government spending in Britain will reach 54.1 per cent of gross domestic product (GDP), up from 36.6 per cent in 2000. This devastating statistic, buried on the OECD’s website, has been largely overlooked; yet it is one of the most important facts that everybody should know about today’s Britain. It demonstrates that almost an extra fifth of our economy (17.5 per cent, to be exact) has come under state control on Labour’s watch since the start of the century.

Cameron v Osborne over 50p tax

As Peter Hoskin points out over at Coffee house it appears that David Cameron and his sidekick are getting rather confused over the issue of the 50p tax rate.

Whilst Mr Cameron predicted that Alistair Darling's measure would not be staying in place if elected,Mr Osborne told this morning's conference that

The new 50p tax rate and associated changes to the taxation of higher earners should be kept in place for at least as long as the public sector pay freeze, in order to ensure that the richest in our society pay their fair share of the burden of tackling Labour's debt crisis."

Doubts over QE

It is difficult to understand what the Bank of England's decision to raise the stakes in the quantitative easing measures actually signals for the economy.

Yes the £50b expansion in the next three months will no doubt stimulate demand in the economy and yet does it signal that the downturn is worse than expected?

The bank, which left interest rates unchanged this lunchtime, says that it is still concerned with the world wide banking system.

“The world economy remains in deep recession,The global banking and financial system remains fragile despite further significant intervention by the authorities.”

The gilt market was certainly taken by surprise by the announcement as the move brought a hike in the price of government bonds.

There isn't as yet any definitive proof that the measures are working although next week's inflation figures will give a better indication but today's measures surely indicate that the bank itself is not convinced.

Over at the Times,David Wighton believes that the bank should

turn its focus from buying gilts to buying corporate debt, which would have a more direct impact on the credit markets.

Gap in tax revenues shows the problems

Jim Pickard over at the FT's Westiminster blog shows just how tax revenues have plummeted against forecasts as the recession deepens,one of the major reasons for the worsening fiscal deficit.

Projections for 2009/10 are:

Income tax £140bn (against an estimate of £152bn in 08/09)

VAT £63.7bn (£78.4bn)

Capital gains tax £2.2bn (£7.8bn)

Stamp duties £5bn (£8bn)

Inheritance tax £2.3bn (£2.9bn)

Petroleum revenue tax £1.1bn (£2.6bn)

That is a gap of £33b against the forecast

The third way on tax

The Lib Dems have today proposed changes to the income tax system which will significantly move the onus of payment onto the higher earners.

The scheme effectively replaces their old proposal to cut 4p off the tax rate.Instead the lower threshold rate would be increased to £10,000 resulting in everybody up to earning £100,000 effectively having a £700 a year cut in income tax.

This is of course going to be dismissed in terms of how you can have tax cuts during a recession with a rspidly growing public sector deficit.

The Lib Dems argue that it can be funded quite easily by closing all the loop holes and taxing the wealthy.This would mean cutting pension relief and raising capital gains tax

Is the G20 going to turn into a damp squid?

As usual,Steve Richards asks some searching questions in this morning's Independent on the consequences for Gordon Brown if next weeks G20 turns into a damp squid.

The build-up to next week's G20 in London has echoes of the excitement about the early election in the autumn of 2007. Famously the election never happened, although the prospect of one was talked up foolishly by Gordon Brown's allies. In a similar fashion two weeks ago Mr Brown was hailing "a grand bargain, a global deal" as he looked ahead to next week's international gathering. Now the bargain looks a little less grand and not altogether global. Like the election, the grand bargain is postponed.

The case for fiscal stimulus is unravelling by the day and as Steve says

An increasingly independent and therefore more impressive Chancellor, Alistair Darling, is battling it out with the reckless Prime Minister. He got the support of a brave Mervyn King. At the same time international co-operation is blocked by those wise Europeans who, like the Conservatives here, are against a fiscal stimulus.

The dilema for an incoming Tory government

To comprehend the scale of the sickening task awaiting George Osborne if he becomes chancellor, consider the following. If he were to raise VAT to 25 per cent, double corporation tax, close the Foreign Office, cancel all international aid, disband the army and the police, release all prisoners, close every school and abolish unemployment benefit he would still be unable to close the gulf between what the UK government spends and what it raises in taxes.

Writes Fraser Nelson in the Spectator this week

Failed bond sale

Just how significant was the failure today of the sale of government bonds?

It is the first time that it has happened since 1995 and many will see it partly as a reaction to Mervyn King's comments yesterday.

The U.K. failed to find enough buyers for £1.75 billion of bonds coming up short by around £100m.

Bonds are the way that the government will fund the public expenditure deficit over the next two years and hopes to sell £146b this year and £147b next year.

According to Bill Jones, professor of politics at Liverpool Hope University. Brown’s “whole strategy is based on borrowing and now he can’t get anyone to buy his gilts. This means the prospect of going cap in hand to the IMF hovers increasingly into view.”

Part of the reason could also be laid at the door of yesterday's inflation figures as potential investors were wary of buying debt that would not mature for four decades.

Ominous signs?

it is clear that the Trident submarines are not much of a deterrent to a suicide bomber.

With the fiscal deficit spiralling out of control and the possibility that more may still need to be pumped into the economy,maybe there is one way to plug the gap.

Cancel the replacement for Trident.

Rachel Sylvester's column in this morning's Times asks the question

It is estimated that the replacement will cost between £15 billion and £20billion, but with annual upkeep of £1.5 billion, the total over 30 years could rise above £65 billion.

This saving would decrease the whole somewhat and pales into significance any costs savings or tax increases that could otherwise cover the black hole.

The nature of warfare has changed as Rachel writes

it is clear that the Trident submarines are not much of a deterrent to a suicide bomber.

So maybe the time has come finally to end the days of the independent nuclear deterrent

Why the RPI will widen the Gulf between Darling and Brown

Andrew Neil has an interesting perspective on the inflation figures.

Writing on the Spectator Coffee House,he argues the following

The political fallout from this morning's surprise figures is clear: the Chancellor's attempts, with the backing of the Treasury, to see off Gordon Brown's pressure for yet more fiscal stimulus in his April 22 budget have been strengthened. Yesterday the Chancellor could point to the support of the head of the European Central Bank, who came out against further stimulus, as have the President of France and the Chancellor of Germany. Last night the boss of the IMF was also sniffy about another boost. Now the Chancellor can point to an inflation rate over 50 percent above the government's official target as another reason why he shouldn't take any more risks with the economy.

Bagehot on why Tory fiscal policy may not be safe

There has been much said and written about the so called divisons which have appeared in Tory Fiscal policy over the last few days satrting with David Cameron's pledge to honour Labour's 2011 top rate of tax increase.

The Economist's Bagehot takes a look at the dilema that the party has over whether to

cultivate a strategic ambiguity, saying they will only be able to reveal detailed policies on taxing and spending after a victorious election, when they see the books.

and thinks this is not sensible for two reasons.

1.Labour will portray such an opaque stance as an omen of brutal Tory cuts and

2.that they have already offered some specifics. These make it very difficult to stick to the ambiguity formula without looking shifty and imbalanced. adding that

The options therefore may be to scrap the existing pledges, or provide some more clarity on medium-term policy.

Between a rock and hard place

That is Fraser Nelson's analysis of the position of the Chancellor in his News of the World column thus morning.

He has two problems. A collapse of tax revenues—and a Prime Minister who wants him to spend even MORE.

However according to Fraser he is fighting his corner.Amidst rumours this week of splits between the treeasury and No 10

Darling’s message to No10 is simple: “Sorry, there’s no money.” Brown replies: “Well, tell the Bank of England to print some then.”

And the Chancellor is worried,

He knows just as there’s no such thing as a free lunch, there’s no such thing as free money.

What is the difference between Gordon Brown and Bernard Madoff

The answer is very little if you read what Jeff Randall writes in his Telegraph column this morning.

one has drained fortunes from gullible victims, plundering their income and savings to create an illusion of prosperity. The other is going to jail.

Rather harsh you may think but Randall thinks that as for Madoff's nickel-and-dime swindle

when set alongside the 12-year con trick perpetrated by Mr Brown on British taxpayers. That, too, has been a form of Ponzi, but with many more zeroes and little chance of the mastermind ending his days in what Americans call Crowbar Hotel.

adding that

Every year, the sums required to shore up the house of cards became bigger and bigger. But while the good times rolled, too few cared to notice what was really going on.

Americans set to scupper Gordon's grand plan

If Gordon Brown thinks that the G20 summit is going to propel him back up the popularity ratings,there are some worrying signs ahead.

Especially it seems from our American cousins who just a week ago were being lauded by the Prime Minister as a beacon of the free world.

It seems that according to this report in the Times that there has been

a candid admission by Britain’s most senior civil servant that it was proving “unbelievably difficult” to liaise with the Obama Administration to prepare for the meeting.

It seems to centre around Gordon Brown's grand scheme being scuppered by the Americans whose fiscal stimulus scheme dwarfs anything that Europe has done and appears intent on going it alone

Against quantitative easing

The arguments for and against quantitative easing will continue no doubt.

This from the Adam Smith institute not surprisingly comes out firmly against it

Purely in theory, it sounds possible. An omnipotent and omniscient central bank could perfectly replace the lost money supply, prevent deflation, and stabilize the economy. But unfortunately no such central bank exists.
The trouble is that monetary changes take time to work through the economy. It will be at least a year, for instance, before we can see the impact of the interest rate cuts. So it's really more or less impossible to get a policy like quantitative easing right. It might not have much impact (as in Japan). It might result in another inflationary boom a year or two down the line, followed by another crash like the present one. It could even result in hyperinflation, and the complete economic destruction that would entail.

Britain may lose its credit rating

Creating pounds out of thin air is no way to nurture faith in sterling. Purchasing tens of billions in gilts and stockpiling them in Threadneedle Street will eventually create a huge overhang that will unsettle future demand.

Patrick Hosking writes in this morning's Times

He is worried that following the decision to go down the route of quantitative easing the country may well lose its AAA credit rating

But as he points out

Losing the triple-A badge would be largely symbolic. Japan has got by without it since 1998. Canada went without for eight years until 2002. But Gordon Brown would be wise to stay indoors if and when it actually happens.

The final throw of the dice?

So as expected the Bank of England has cut interest rates to half a per cent and has announced plans for quantitative easing amounting to £75b.

Interest rates have now been cut six times since October but their cutting has had little effect on the bank's willingness to lend money and has irked those that rely on the returns savings and investments for income.

This new policy will be a last chance to kick start the money supply and those green shoots.

The day for quantitative easing

So it seems likely that the Bank of England will announce the beginning of quantitative easing after recognising that interest rate policy will not work if the money supply is not there.

Quantitative easing is quite simply printing more money to increase the money supply to encourage spending.

It is not physically printing money but involves the bank buying up assets from the banks usually government debt to free up some of the money supply.

Edmund Conway writing in the Telegraph this morning says that we are still a long way from the depths of the recession

Yet for all the sound and fury, the full scale of the impact has yet to be felt. It will only be at the end of this year, when unemployment is closer to three million than two million, that we will truly know how it feels to be in the thick of a recession. Sir Fred Goodwin may consider himself a victim of unreasonable public recrimination now, but I dread to think how the revelation of his pension would have gone down six or eight months hence with 10 per cent out of work for the first time since the 1980s.

It is also likely that interest rates will once again be cut down to around 0.5 per cent.

It is a daring strategy.At its worse it could trigger hyperinflation but if successful it may well trigger the start of recovery.The measure though shows how deep this recession is