Government in crisis - there is no more money

In December 07 I put the hypothesis forward that by early in the New Year we would see signs of economic distress a lot more clearly and that pundits predicting that the UK would sail through 2008 were mistaken. I also put forward the proposition that the Labour Government would begin to take the political flak and that their budgetary response would be seen to be hugely constrained by the failure to manage spending.

Then in April 08 I put forward the prediction that the downward trend in house prices, looming inflation and recession signs were all dreadfully under-estimated by the economic pundits and that we were moving into a true housing crash and the recurrence of mainstream inflation.

In case the latest indicators have been missed…..

http://news.bbc.co.uk/1/hi/business/7443501.stm
http://news.bbc.co.uk/1/hi/business/7442650.stm
http://news.bbc.co.uk/1/hi/business/7437132.stm

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Now, continuing the theme it is time for the next piece.

I don’t see any evidence that the dreadful state of the public finances has really settled into the media or publics consciousness. Here are some pointers….
In 1989 going into the last slowdown, we were running a budget surplus of 2.1% of GDP. By 1992 we were running a deficit of 5.9% of GDP leading to massive tax rises (remember the increase of VAT on energy etc), a fiscal collapse to the tune of 8% of GDP.

Now we are in a position of 3%+ deficit – which to be honest is a lot more if you were to properly account for (a) PFI finance (b) Public Sector Pensions (c) Northern Rock and the various other minor financial slights of hand beloved of this government. Given a deficit of much more than 4-5% takes us into “banana republic” land of the Italy’s and Greece’s of this world, and given that a fiscal collapse is now upon us, what does the Government do given its already up against its own “golden rule” limits?

The painful symptoms of fiscal challenge (Nurses discontent, Police work to rule, Post Office closure programme, Teachers strikes etc) are but the first waves of a fiscal tsunami bearing down on the Brown Government and the hapless Labour MPs that make up the governing party. The FX markets are showing the early signs of nerves, marking down Sterling – as so often before the early warning indicator of Labour Government mortality.

This is like a slow motion disaster movie. The end of the great public sector “experiment” by New Labour is nearing its conclusion – and will end in a run on the pound / crisis management of the public finances and huge recriminations in the Labour movement reminiscent of the 1970’s.

By the onset of winter it will be possible to see most or all of the above more clearly.