Today, of all days, David Cameron has the chance to massacre Gordon Brown at PMQ’s. 

Its is clear there is a division at the heart of Government.

Alastair Darling, Chancellor claims that inside Number 10 ‘the forces of hell’were unleashed on him when he predicted a deep and severe recession and that Damien McBride & Charlie Whelan actively briefed the media against him.

Gordon Brown, of course, denies this,  ”I was never part of anything to do with this.  I would never instruct anybody to do anything other than support my Chancellor.”

So the question is, either Gordon Brown was in control and authorising his inner circle to brief and smear his Chancellor, (in itself the very worst of playground bullying), or, if Brown is right, he would never instruct his advisers to do anything but support his Chancellor, then the accusation must be that he had lost control of the heart of Downing Street and ‘advisers’ were going off doing their own thing.  What else were advisers doing?  Again a very damning position. 

This feels like the court room scene in ‘A Few Good Men’, when Jack Nicholson, (Playing Nathan Jessop), was goaded by Tom Cruise to admit that he had ordered a Code Red.  Nicholson denied ordering his Commanders to enact a Code Red attack on a Private marine, (like Gordon Brown today!).  Nicholson’s Commanders protected him and denied everything.  But Nicholson had to be seen as in total control.  When this assertion was undermined, ie he lacked control or knowledge of what was going on, he cracked.  Lack of control was weakness.  Gordon Brown likes to revel in power, he loves to be seen in control, he is itching to say he ordered a Code Red on Alastair Darling, he just needs David Cameron to rattle his cage hard enough and fire him up to crack. 

So which is it Gordon?

I look forward to DC having some mileage on this in PMQ’s.  DC has his moment as Tom Cruise in that famous scene.  I hope his opening gambit goes something a little like this:  ‘Would the Prime Minister confirm whether he authorised the ‘forces of hell’ on his Chancellor, whether his Chancellor is lying, or whether he was unaware of the briefings taking place by his senior advisers to the media, in which case has he lost complete and utter control of the Downing Street Machine’?

I would also love to see DC draw the comparison with bullying.  ‘Would the Prime Minister agree that one definition of bullying is using advisers to brief against your Chancellor behind their back’?

Should be a fun PMQ’s. 

We all want this dreadful recession to end.  Many of us have friends who have been affected by this harsh recession be it, losing their job, falling into debt, having their house re-possessed, destroying their marriage/family life, through the stress of potential redundancy / working longer hours to hold their jobs.  The sooner we see ‘green shoots’ the better.  Alastair Darling has been more encouraging lately as he sees those green shoots emerging and that the UK is back into recovery mode.  He has to be positive to talk up the markets but economic data paints a darker picture and one which shows that whilst the economy is fighting to get out of recession, the dangers of a double dip recession are serious and real.  For that we must all be worried.

Politics is currently in suspended animation.  Everything on hold until the next election.  The Government are deferring key decisions until after that election.  Tough medicine the economy needs NOW is being held until post election….why?….because tough decisions are unpopular and this Government wants to win the next election.  The lack of decision making, total procrastination at the heart of Government is damaging the economy still further.  Let’s have that election today and get on with the job of getting people back to work and this great economy on its path to recovery and prosperity.

Key economic data yesterday painted a worrying position.  Government debt is far worse than expected and spiralling.  Government revenue received through tax receipts is dropping like a stone whilst benefit payments are shooting skywards.  Bank lending, seen as key to small businesses rejuvenation, is again falling.  Banks, several of which this Government now own, (ie we do as British tax payers), are failing in their duty and stated promises to push bank lending again and get the economy moving.  These stated goals are not being implemented and not evident.  Many small businesses are delaying on investment decisions because they cannot get bank funding, (we heard that story from a recent post by Russ Rec).  In the meantime, whilst banks don’t lend, they are grabbing with the other hand.  Credit card rates are rising.  Bank charges reappearing for minuscule errors.  Private household debt the highest of European nations.

Despite the abuse Gordon Brown threw at David Cameron over the Conservatives Spending plans ie branding DC Mr 10%, we now see from leaked Treasury papers that the Government are planning 10% across the board cuts.  Hypocritical is one word Mr Brown!  The politics of dishonesty is never attractive and this electorate have long memories.

Lets make no bones about it, tough spending cuts HAVE to follow.  For the sake of the economy.  Whoever wins power.  Cuts will involved public sector job losses, hence adding to the unemployment queues.  But if we don’t, we are in danger of having to go cap in hand to the IMF for a bail out by them….again!.  They will impose tough conditions to the bail out and cuts could be even more savage.  We all know that UK PLC is in danger of losing its ‘AAA’ credit rating on the world stage. 

Any public sector losses, especially job losses/pay freezes, WILL see the Unions swing into action.  A winter of discontent beckons.  The Post Office have balloted members for strike action.  The Tube Drivers have been striking this year already.  We can expect the nation grinding to a halt at various stages this winter due to Union protests, hence damaging the recovery.  Power workers have threatened walkouts, hence the return of black outs is a real possibility.

So a lot can undermine our economy.  Double dip recession is a real possibility.  But lets take a closer look at the stats……

Our debt situation is horrific.  No over word describes the cancerous, spiralling debt this country is storing up for our children.  Yesterday we learn that bankrupt Britain borrowed £6,000 every second last month.  The Government amassed a humongous £16.1 billion debt in one month…the largest on record.  This was a 63% increase borrowed in the same month last year.  The Government has borrowed £63.5bn since the beginning of the financial year in April.  Britain’s overall debt now stands at £800bn—heading for the £1 trillion mark. That is frightening.

Our nation’s finances are out of control.  This is shameful mismanagement of the economy on a criminal scale.  Quantative easing draws mixed responses from the world’s best economists and whether it is having any effect on the UK economy.  The IMF even stated that they could not assess whether any impact had been made by pumping a huge amount into the economy.  Bank of England data shows that broad money supply grew by just 0.1% in August, after a 1.3% increase in July.  This dragged the annual growth rate down to 12.6% from 14.4% a month earlier, hence demonstrating quantative easing’s limited/zero effect.

It now looks like we are on track to amass a debt of over £200bn by the end of the fiscal year, some predicting an overshoot of Govt Spending targets by £50bn.

With the economy still seeing dire unemployment figures, predictably total tax take over the first five months of the year to the end of August was 11.4% lower compared to the first 5 months of last year, while benefits spending was 9.5% higher.

Net lending to British businesses also fell in July, (by the largest amount since records began).  it fell by £15.5bn, even more sharply than the £3.6bn drop in June.  Why?  Companies paid back more than banks lent.  The figures for August are projected to worsen.

We cannot gamble our nation”s future any more….for the sake of our children let’s have that election now and let the people decide.

Worrying quote of the day…given we are heading for a debt of £1.2 trillion. 

Chancellor Alistair Darling has said the Government will spend “whatever we can” to keep people in work – as he predicts an end to the recession in the next few months.

Carrying on spending Alastair…grind this country further into the ground!

But…..Let us know how you intend to pay this money which you are merrily spending….but please tell us before the election.  The people deserve some Labour honesty.  Tax rises?  Labour’s tax bombshell returns?

It is no secret that every Conservative loves Gordon Brown.  We all want him to lead the Labour Party into the next election.  He is the Conservatives biggest electoral asset.   Hence, our nightmare scenario would be for Brown to be removed…either voluntarily or deposed!  Are we seeing the start of our worst nightmare?

Why a nightmare?  Well, any new Labour Leader will enjoy a honeymoon period.  That time when the media will focus on their every move.  They will ‘whore’ media attention.  Enjoy copious media coverage when they can distance themselves from the past and paint a vision of the future.  That time…when they can start to make an inroad into the Conservatives poll leads.  Honeymoon periods are as natural as when night follows day…what is unpredictable is their scale.  Whether Labour’s new leader is Alan Johnson, Harriet Harman, David Miliband or James Purnell, matters not….anybody but Gordon will lead to Labour gains in the polls…for a short time.  Enough for an election win?…unlikely, enough for a Hung Parliament?…maybe….limiting damage & preventing Labour meltdown?…most definitely.  Hence, why Conservatives hope their Nightmare on Downing Street never happens.

If Labour enjoy a honeymoon period when their poll ratings turn, this will put the spotlight firmly on the Tories.  This spotlight will be an intolerable strain and will lead some Tories to crack.  Dissenting voices will be heard.  Cries of…the Tories should have revealed more policies…been more aggressive….been tougher on Europe, Immigration, Law & Order, public spending…will start to be heard.  Labour will exploit these cracks for all they are worth.

Yes, we are in the silly season, when the media print and make up stories.  BUT The Mail on Sunday is running a fascinating story today that states that Alastair Darling is getting mightily pissed off with Gordon Brown’s inability to make ground on the Conservatives over the public spending.  Take a read here.  http://tiny.cc/ZMGp8  Following Brown’s botched attempt to sack Darling in the last reshuffle, it appears that Darling has grown some balls…and not Ed Balls! 

The Mail reports that according to sources present, the Chancellor has stated: ‘I am trying to talk sense into that man. He just doesn’t get it –going on about “Tory cuts” is not going to make an impact on the electorate.  ‘We have to frame the debate in terms of our cuts being better than their cuts. The voters aren’t stupid – they know how bad the economic situation is.’  The scathing comments were made in a private conversation with a veteran Labour MP and critic of Mr Brown just before the Commons rose for the summer recess.

The Mail also states that there were claims that backers of Home Secretary Alan Johnson were secretly canvassing ‘non-aligned’ Labour MPs not closely linked to any potential successor.   Sports Minister Gerry Sutcliffe, who ran Mr Johnson’s unsuccessful Labour deputy leadership bid in 2007, was accused of quietly taking names.” 

Whether true or part of silly season…matters not.  It is a well known truth that Labour MP’s are again openly discussing whether Gordon should lead the Party.  Labour MP’s look at their Majorities and work out if they are safe.  They are listening to their constituents as they spend time meeting the people over this long recess.  Their chances for turning their Party’s fortunes are slimming.

Let’s add our own analysis to this.  The big question is how can Gordon Brown and the Labour Party turn round the current colossal opinion poll gap?  What can be done?  Well, the war in Afghanistan will continue to see losses of soldiers and will rise in unpopularity as the year moves on.  Unemployment and the economy is not out of the woods by a long way.  While some commentators say we are through the worst of the recession, what is also true is unemployment will continue to rise and the UK has a cancerous, spiralling burden of debt, which will require either huge tax rises on middle England and / or swathing cuts in public spending.  Both tough messages to sell.  Swine flu looks like coming back with a vengeance over the winter period, so any election strategist will tell you that Labour need a miracle to come their way.  So Brown has absolutely NO TRUMP cards to pay….none at all.

Labour’s biggest chance lies without Brown at the helm.

So let’s look at the coming months.  If TBB was Lord Mandolsen…the Kingmaker…, we would not want to leave the election until the last possible moment in June next year.  I would also advise against April & May next year.  In April next year, payslips being opened will see workers getting furious about their lower take home pay due to tax rises.  Hence, not the best time to hold an election campaign.   Let’s look at this year.  Bad news stories will continue to build over the coming months.  The Labour Party Conference will not be a happy affair.  It will be rife with leadership plots and bitterness at the prospect of a hammering at the next election.  After that we have the Pre-Budget Report which will no doubt reduce into stories about the tension between Numbers 10 and 11. 

So from a timetable point of view, the Labour Leadership election will need 2 months to run.  Then the new leader will need 3 months approx to enjoy the Honeymoon period.

So, if I was Peter Mandolsen I would recognise that I would want an election in March next year.  The economy should have more positive news stories in place by then.  (don’t forget we have to avoid April & May, due to the new taxes hitting payslips).  So, I would want a new Leader in place to enjoy January, February and March. 

I would want the Leadership process done by Christmas.  So I could wheel out the new Prime Minister over all the happy Xmas telly.  The new Leader can appear ‘nice and jolly’ on Xmas GMTV, Noel’s Christmas Presents, Christmas Top of the Pops, X Factor final etc.  So if we say the leadership election needs 2 months, it really has to start in October……hence expect the chattering to increase. 

Gordon will know this…..his Party know this……anyone attending this years Labour Conference…you will be witnessing Gordon Brown’s farewell Conference Speech…enjoy it…..but will it be the speech where he announces he is resigning, hence triggering a Leadership race.  If he were loyal to the Labour Party, he would do this…but we all know that Gordon has only 1 loyalty and that is to himself.  Or will he hold on and be advised in October that he has to go?  Let’s watch with interest but hope that Gordon can survive… for the sake of the Conservative Party!

Sam the Eagle and his Lookalike Brother Alastair!

Guess what. Doesn’t take an economic guru to predict that tax receipts will fall in a recession does it? 

That is what has happened.   Tax receipts have fallen by £32 billion the National Audit Office revealed.  This includes a £6.4 billion drop in VAT income following Alastair Darling’s decision to cut the rate to 15% last November.  (That has to go down as a howler of a policy.  A VAT cut that failed to stimulate demand, was lost mongst huge high street discounts on price….and now has lost the Government precious revenue.  That must be a definition of economic incompetence!).

This is the steepest decrease in tax receipts since the 1920′s and the Great Depression!

These figures show the Treasury overspent by £24 billion because of its rescue of the Banks.

The cupboards bare Alastair!

‘Raising Tax is great incentivisation to entrepreneurs in a recession’ says Darling!

Much was made when Alastair Darling and Labour did a complete u-turn on it’s manifesto commitment not to raise the upper rate of tax, but this they did and introduced the 50p rate for those earning £150,000 pa.  This was a real sop to Socialist Labour and hitting the rich….or ‘squeezing the pips until they squeaked’!  Darling & Brown claimed that the extra revenue yielded would help to repay debt and thus help the recession effort…..but will they be proved right?

They are right that we need to repay debt, as we have argued many times before.  But spending levels continue to rise, like a cancer spreading through the veins of a defenceless old ravaged body.  The level of unemployment is soaring towards 3 million and attaining heights higher than what a junkie reaches on a heroin fuelled binge!  Unemployment is on the same trajectory as the space shuttle taking off from Cape Canaveral, the number of jobs available dives faster than a trident armed submarine….whilst benefit claimants drain the state further of key resources, (many through no fault of their own, victims of criminal economic mismanagement).

Sites like TrueBlueBlood have been highly outspoken about cutting tax on the entrepreneurial in society, not raising tax, (as Government Red Book figures show tax receipts rise on cutting tax).   Who is most likely to be the engine driving us out of recession?  The entrepreneurial in society or an unemployment benefits claimant?  This is by no means demeaning to the unemployed.  But a reality that those who have the money to take risks, take on more credit, invest in their businesses, will be the ones that create new jobs and help start bringing confidence back into the economy.  With confidence comes spending, hence off we go into a strong and healthy recovery. 

As predicted, those on high salaries are now actively looking at how to avoid paying this tax….such to the point that the Government may earn LESS revenue due to the higher paid seeking ways to minimise and avoid tax.

Today it was reported that leading firms are working with London’s finest accountancy firms on tax avoidance.  How? 

Strategies to avoid the tax include bringing forward payment dates for bonuses or dividends to pre-empt the introduction of the tax in April next year or deferring payments until after the general election.

Ingeniously some companies are planning to bypass the top rate tax by paying 3 years’ worth of salaries and bonuses to top employees this year.  Employees would then loan the salaries and bonuses  back for a pre-arranged rate of interest over 3 years.

The brain drain of talent abroad has even commenced….Guy Hands, the entrepreneur and city financier who runs Terra Firma Capital Partners, has already quit Britain.

The Iron Chancellor benefited from the previous Conservative Government’s economic management and boom conditions.  Over the past 12 years New Labour have frittered away a golden inheritance….and Brown & Darling have been found out and seen to be the economic criminals they surely will be seen in history as. 

‘Committing Economic Suicide’

If you read nothing else on this blog, read the following KEY IMF REPORT FINDINGS bullet points for the truth into this recession.  It blows the lid on Brown and Darling’s falsehoods.

The IMF has just published its latest report into the health of the UK economy.  It tells a lot more than what Chancellor Darling & PM Brown would want to.  For those that are happy to read the whole massive report, take a look here.  http://tiny.cc/O5fsu

In a nutshell, I have pulled out some of the key paragraphs for your review.  Before we come to them, for the quicker blog readers, this is what we learn…in a few bullets:

IMF KEY FINDINGS

-           A key phrase in this document for me is this:  ‘Imbalances and balance sheet strains had emerged even before the recent global shocks triggered a sharp decline in economic activity’.  ie we were heading into recession BEFORE the Global shocks took place.

-           Household indebtedness will constrain the pace of recovery.  In the run-up to the crisis household debt increased to 175 percent of disposable income—one of the highest levels among advanced countries

-           GDP will fall by around 4.5% this year

-           Public debt projected to double in 5 years

-           Our Financial system may not yet be repaired so that banks are ready to lend again!

-           WE HAVE TO CUT SPENDING.  ‘Implementing an ambitious fiscal consolidation plan will be essential. The focus should be on putting public debt on a firmly downward path faster than envisaged in the 2009 Budget’

-           House prices have dropped by more than 20 percent from their peak and commercial real estate prices are down by 40 percent.

-           Little consumer confidence due to constrained credit and unemployment.  This limiting recovery           

-           The monthly growth of both secured and unsecured household credit has fallen almost to zero.

-           The cut in VAT rate has failed in its aim, (coupled with the larger personal allowances). ‘Nonetheless, the size of the discretionary stimulus and its impact on debt levels is small’

-           Government debt was already too high pre the recession.  ‘The structural fiscal position was already weak at the onset of the crisis—government expenditure as a share of GDP has increased substantially in the last decade, while some of the revenue strength financing the increase has proved to be unsustainable’

-           The IMF cannot make any judgement on the effects of Quantative easing.  Is it working?  Has it had any effect?  Who knows?  The IMF don’t!

-           Sure you would love to know the cost of the bailouts - broken down. Total: £904bn or 63% of GDP. A few highlights:

Northern Rock — £14.6bn.
Bradford & Bingley — £24bn
Kaupthing Singer & Friedlaender — £3.3bn
Landsbanki — £4.5bn
Heritable — £500m
Dunfermline — £1.6bn
All bank recapitalisation — £78.1bn
Credit Guarantee Scheme — £250bn
Working Capital Scheme — £11.5bn
Asset-Backed Securities Guarantee Scheme — £50bn
Asset Protection Scheme — £466bn

TOTAL TAXPAYER EXPOSURE: £904bn or 63% of GDP.

IMF Key Paragraphs in more depth

Looking ahead, the economic recovery is expected to be subdued and gradual as banks and households go through a difficult balance sheet adjustment. With the economic downturn heightening the risk of further large credit losses, banks have tightened the supply of credit. The high level of household indebtedness is also likely to constrain the pace of economic recovery. GDP is projected to fall by about 4¼ percent this year, with quarterly growth picking up gradually through 2010. The speed and strength of the recovery, however, remain highly uncertain, given the unprecedented nature of the crisis and the importance of confidence effects.

Notwithstanding recent signs of stabilization, underlying vulnerabilities in the UK are sizeable.The financial crisis has brought about a dramatic deterioration in public finances. Public debt, although starting from a relatively low level, is projected to double in five years. The sharp increase in government borrowing and contingent liabilities, together with continued financial sector fragility, are significant vulnerabilities. In these circumstances, a severe shock has the potential to disrupt domestic and external stability. This highlights the importance of credible and consistent policies to truncate downside risks and strengthen market confidence. The main policy priorities remain, first, resolving the problems in the financial sector to buttress stability and promote normalization of credit supply, and second, setting monetary and fiscal policies consistent with a firm commitment to the existing policy anchors of price stability and fiscal sustainability.

 Repairing the financial system is essential for achieving a sustained recovery. The authorities’ policy interventions have averted a systemic breakdown in the financial sector. But the financial system may not yet be repaired to level where banks are ready to increase lending sufficiently to underpin a strong recovery. Although major banks are expected to remain above minimum regulatory capital requirements, recession-related credit losses will lead to an erosion of capital buffers. At the same time, it is doubtful that increased capital market funding can compensate for shortfalls in bank lending. It will therefore be important for the authorities to continue to:

• • Seek further strengthening of banks’ capital positions by encouraging banks to take advantage of improving market conditions to augment their capital base and, if necessary, providing further public capital support.
• • Promote options to preserve capital cushions and improve capital structures, for example by restraining dividend payouts not supported by profits and converting preference shares to common shares.
• • Develop contingency plans in the event that further shocks threaten the stability of financial institutions.
• • Support credit supply through targeted and appropriately designed intervention in dysfunctional credit markets.

More fundamentally, the success of the current policy package hinges on continued trust in the sustainability of the fiscal position. A strong commitment to reverse the sharp deterioration of public finances within a reasonable timeframe is crucial. Therefore, once the economic recovery is established, implementing an ambitious fiscal consolidation plan will be essential. The focus should be on putting public debt on a firmly downward path faster than envisaged in the 2009 Budget. The credibility of such plans would be enhanced by clarifying early the specific measures needed to achieve the adjustment, including in the context of the next Comprehensive Spending Review. The emphasis in current plans to weigh the adjustment toward expenditure reduction is appropriate in light of international experience that expenditure-based consolidations are more durable. Long-term sustainability would also be helped by implementing structural reforms to address the rising costs associated with demographic change. Building a broad public consensus on the need for sizeable fiscal adjustment will be essential in meeting fiscal challenges.

Imbalances and balance sheet strains had emerged even before the recent global shocks triggered a sharp decline in economic activity. These included overheating in property markets, low domestic saving rates, high current account deficits, large external liabilities, rising (albeit still low) public debt, and significant increases in the leverage of financial sector and household balance sheets.

Household balance sheets are also highly leveraged.  In the run-up to the crisis household debt increased to 175 percent of disposable income—one of the highest levels among advanced countries . The rise in debt was matched by an increase in the value of housing, pension funds, and other financial assets held by households. However, the sharp fall of asset prices since the beginning of the crisis has eroded the value of household portfolios. Net household wealth in the UK is estimated to have declined by about 15 percent in 2008, and may fall further in 2009.

House prices have dropped by more than 20 percent from their peak and commercial real estate prices are down by 40 percent.  So far, prices have been falling much faster than in the previous major real estate price correction during the early 1990s.  Mortgage arrears and bank repossessions of properties have increased, although they are still relatively low as a share of existing mortgages. The foreclosure rate in 2008 was only 0.35 percent, compared to 4¼ percent in the United States. Delinquency rates on non-conforming mortgage-backed securities of the newer vintages are going up, but are still not far above the rates on older vintages (and are much lower than the delinquency rates on US subprime mortgages). Despite some recent positive news, forward-looking indicators such as mortgage approvals and the sales-to-stock ratio suggest that the housing price adjustment is yet to be completed.

Consumer spending has weakened on falling wealth, rising unemployment, and tighter credit constraints.   Employment is declining, and the unemployment rate reached 7.2 percent in the three months to April 2009. The rise in uncertainty about future income and employment prospects and the fall in household wealth are weighing on consumer confidence. Simultaneously, credit constraints have become more binding: recent credit conditions surveys show significant tightening of credit standards for both secured and unsecured household lending. As a result, the household saving rate has been rising—from very low levels— since early 2008.

Firms entered the crisis with relatively strong balance sheets, but vulnerabilities are increasing.  The rise in non-financial corporate debt over the last decade has been moderate, and firms have held substantial liquid financial assets. However, the profit outlook has deteriorated as demand continues to contract and credit conditions remain tight. Business investment has declined steadily over the last year, and surveys suggest that both demand for and supply of credit to corporations have contracted. Default rates have started to rise, although from a low base. The steep fall in commercial property prices has reduced further the net worth of corporations.  

Over the past year, adverse feedback loops developed between deteriorating financial conditions and a weakening economy.  Banks, constrained by tight capital positions and a difficult funding environment, reduced lending to the private sector. As house prices kept falling, the value of pensions and other financial assets declined, and job security became elusive, consumers retrenched their spending. The decline in consumption, in turn, reduced business profits and depressed investment, leading to further falls in employment and income. Demand for credit also weakened as households and businesses tried to repair their balance sheets. The actual and prospective rise in defaults and bankruptcies has weakened further the balance sheets of banks and their ability and willingness to restart lending.  

As a result, credit flows have stagnated and lending rate spreads remain high.  The monthly growth of both secured and unsecured household credit has fallen almost to zero. A pick up in the issuance of bonds by the corporate sector in recent months has not been sufficient to offset the net decline in business credit from banks. Indeed, the reduction in credit growth is steeper than in previous recessions. At the same time, lending spreads remain wide, reflecting a perception of high credit risks and increased capital costs. Corporate bond spreads over government bonds also remain elevated.   

The financial crisis and the recession have led to a sharp deterioration of public finances.  Revenue in the UK is sensitive not only to the economic cycle, but also to asset prices and the level of financial sector activity. The synchronized downturn of the economic and asset price cycles led to a rapid decline in income and corporation taxes, VAT, and asset price-related revenues. The headline deficit in 2008/09 was 6½ percent of GDP and deficits of about 13 percent of GDP are projected for 2009 and 2010. Discretionary fiscal stimulus of 2 percent of GDP is being implemented. The main components of the stimulus package are a temporary reduction of the VAT rate, larger personal income tax allowances and pension transfers, and advancing of planned capital expenditure. Nonetheless, the size of the discretionary stimulus and its impact on debt levels is small compared with the effect of automatic stabilizers and the loss of asset pricerelated revenue.  

Public debt is rising fast.   The structural fiscal position was already weak at the onset of the crisis—government expenditure as a share of GDP has increased substantially in the last decade, while some of the revenue strength financing the increase has proved to be unsustainable. Sizable fiscal deficits were recorded even as the cycle reached its peak. The post-crisis increase in net borrowing is projected to result in a doubling of gross general government debt over the next 5 years to about 99 percent of GDP. At the same time, contingent liabilities of the government from financial sector interventions have increased sharply. Gross resources committed to financial sector support measures so far have exceeded 60 percent of GDP, although the net cost to taxpayers is likely to be much smaller.

However, it is yet too early to judge the effectiveness of QE.  In principle, the significant liquidity injection should induce investors to rebalance their portfolios, thus lifting asset valuations, generating positive wealth effects, and facilitating new issuance. Targeted purchases of private assets can complement these effects by directly reducing excessive risk premia and reviving market activity. The initial evidence has been moderately encouraging as gilt yields have remained low since the launch of QE, despite the countervailing effect of large new government debt issuance. Meanwhile, spreads on commercial paper and corporate bonds have narrowed, amid a broader recovery of asset prices. It remains to be seen, however, whether these effects will be sufficiently strong and lasting to generate the desired rise in aggregate demand. This uncertainty strengthens the case for further diversifying the BoE’s asset purchases, especially by targeting private credit markets that are currently dysfunctional but deemed to be viable in the long run. The BoE noted that efforts in this direction were underway but that setting up appropriate facilities took time. In mid-June, it announced its intention to start buying certain types of asset-backed commercial paper.

Grim Reading……