Magazine article Public Finance

Time to Get Tough

Magazine article Public Finance

Time to Get Tough

Article excerpt

After the past turbulent month and this week's bailout of high street banks, the financial system and the wider economy are clearly playing a greater role than ever in voters' perceptions of politicians' competence.

It is clear that over the past year the damage done to Gordon Brown's reputation for economic management has been irreparable. The dithering over Northern Rock; the bungled changes to capital gains tax; and, most damaging of all, the forced reversal over the 10p tax rate, have topped the list of blunders and U-turns.

The hubris that led Brown to proclaim the end of 'boom and bust1 has been blown away as the economy, and particularly the housing market, progresses once more on that wearily familiar path. Food and energy have soared, pushing inflation well above the Bank of England's 2% target. Debt and mortgage repayments have become unaffordable for growing numbers and we are threatened with a wave of repossessions.

The global financial turmoil of recent weeks, with the second nationalisation of a British bank (Bradford Sc Bingley) in just over a year and the semi-nationalisation of many more, has put the focus on the banking system, overshadowing more traditional aspects of the financial calendar such as the upcoming Pre-Budget Beport The Banking Reform Bill, with its long overdue improvements to the protection of savers' deposits and to the finance and banking system, was introduced to the House of Commons this week.

This week marked a historic period for the British economy. The government's £50bn rescue plan for the banks means that it is no longer justifiable to impose aggressive repossession policies on homeowners and insolvency policies on businesses. The short-term bonus-driven ethos must end, starting with bonuses for bank board members, who should be ensuring the stability of banks over the next decade, rather than maximising profit over the next few months. The obligations banks have to the public must change for good.

What makes the government position so awkward, however, is that when Chancellor Alistair Darling stands up in the Commons to announce the PBB, his fiscal options will be entirely hamstrung by the yawning black hole in the public finances. He has no real scope for manoeuvre. Freefalling house prices will be reflected in stamp duty tax receipts, while rising unemployment and poor business growth will depress income and corporation tax receipts - all exacerbating an already tight fiscal position. Many people will be studying Darling's growth forecasts for statistical confirmation of a recession. After two quarters of stagnation, it is inevitable that we will see a serious downgrading of the forecasts in April.

The government's fiscal rules themselves have already lost credibility and, at the time of writing, rumour is rife that they will be revised. After being repeatedly fiddled with, they will not be trusted as long as ministers set their own tests and mark them. The rules need to be reinforced by ensuring that the definitions of the economic cycle and performance are assessed independently of government, by the National Audit Office or a body of comparable authority.

So what can and should Darling do from within his fiscal straitjacket? High on the list will be the next step in the government's humiliating U-turn on the 1Op tax rate. More than a million people are still losing out from Browns decision to put short-lived political interests above the needs of low- and middle-income earners by abolishing the 1Op rate in his final Budget as chancellor. We have still had no reassurance as to whether the increase in personal allowances will continue in the next financial year or what other assistance will be given to families struggling with higher tax bills in the face of rising food, energy and mortgage costs. Furthermore, the reversal of this policy disaster has itself placed further pressure on the public finances, costing the government £2.7bn in borrowing. …

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