Sixteen years ago an economic gale blew away a vital part of my
economic strategy; now, a more comprehensive storm has undone the
entire economic strategy of the Labour Government.
In the days of the late-lamented Prudence, the Chancellor of the
Exchequer at the time, promised an end to "boom and bust". As Prime
Minister that promise must haunt Gordon Brown, for he knows that - as
Chancellor - he was culpable for the domestic circumstances that
contribute to our dire economic plight.
Who ignored the debt spiral as it built up? Who weakened regulation
and allowed Northern Rock to offer 125 per cent mortgages? Who
diminished Bank of England control over our banking system? Who
wrecked final-salary pensions with a £5 billion-a-year tax levy? Who
ignored the risks of the house price and equity boom? A glance in the
mirror shows him the culprit.
The Prime Minister admits to none of this but asserts that our present
woes are due entirely to "an international crisis begun in America".
He repeats this mantra so often that he may have come to believe it.
But no one else should. A large part of the crisis now engulfing us is
home-grown in the Treasury and No10. The UK would be facing recession
and a house price collapse without any international dimension. New
Labour has as much financial blood on its hands as any erring banker
on either side of the Atlantic.
Last year, at the Mansion House, the Prime Minister spoke of "an era
that history will record as the beginning of a new golden age for the
City of London". Nemesis must have smirked. Within months there was
the first run on a UK bank for 100 years, and the collapse of Northern
Rock. Since then, the taxpayer has been called upon repeatedly to
rescue our once-secure banking system.
Yet ministers foresaw nothing of what was building up and, to judge by
their inaction, understood even less. Their failure to do so is one
reason the future is bleak for so many who did not profit from the
boom, but will surely suffer from the bust.
House prices are falling at the fastest rate since records began.
Every home is losing value, but the plight of the elderly is
especially heart-rending. Many who planned to boost their retirement
income by trading down to release a cash nest egg have had their hopes
dashed. The soon-to-retire face a double whammy: not only has the
value of property fallen, but their pension funds - already weakened
by tax levies - have also been cut in value by 30 per cent or more.
Hundreds of thousands of elderly people did everything possible -
without state benefits - to secure their future. Now, the crisis cut
in interest rates is likely to reduce their income even further.
At the heart of the troubles is debt. Debt has been this Government's
biggest growth industry. Annual borrowing - even at the beginning of
the recession - is at record levels: no comparable country is in a
When Mr Brown claims that national debt is lower than many such
countries, he is being less than candid. He knows he is excluding
long-term liabilities such as £100 billion of private finance debt,
our unfunded public sector pensions and the debts of Network Rail and
Bradford & Bingley. Once these are taken into account, our true debt
is nearly three times higher - at a shocking £76,000 for every
household. The figures the Government uses to reject the charge of
financial incontinence are as bogus as a fourpenny bit.
Personal debt, too, has risen to levels never before seen - up by 70
per cent in a single decade. It is now the highest of any leading
economy: higher as a proportion of income than any G7 country has
seen. The Labour Government wallowed in the feel-good factor of this
easy money: it made it popular, won elections, so Labour let it rip.
The IMF tried - repeatedly - to warn Tony Blair and Mr Brown of the
dangers ahead, only to be told it was "mistaken" and "wrong". It was
Mr Brown glosses over these errors. The UK, he claims, is better
placed than most to deal with the crisis. But, if the IMF is correct,
that is yet another juicy piece of fiction: it believes the UK will
suffer the deepest recession of any leading nation. The collapsing
value of sterling suggests it is not alone in that view.
Faced with a blizzard of debt and a recession, the Government summons
the ghost of J.M. Keynes and hints at further mega-borrowing, although
whether this is for spending or tax cuts is not yet clear.
This would be folly. Some distress borrowing is inevitable - recession
will cut tax revenue and increase social expenditure - but if the
Government appropriates Keynes to justify further massive public
spending, it will be making a fatal error.
What, then, to do? Most importantly, monetary policy has been eased.
Beyond that, experience of the last recession makes me cautious. There
is no pain-free way forward from the mess we are in. My heart says
"yes" to tax cuts; yet my head tells me that, if we pile debt upon
debt, there will be a painful day of reckoning. Today's unfunded tax
cut is tomorrow's tax increase. We are not in a 1930s-style slump, nor
do I believe we will be. It may be unpopular to say so, but we should
be wary of mortgaging the future with even more debt.
For 11 years Mr Brown has claimed personal credit for the economy that
Labour inherited but the Conservatives created: "We have had the
longest period of growth in the history of this country," he says,
conveniently forgetting that the first five years of this growth came
under the last Conservative Government.
As Mr Brown heads towards Washington, in his self-appointed role as
economic czar to the wider world, there will no doubt be a spring in
his step. But come the next general election the public will not be so
easily fooled, or forgiving.
As with every Labour Government we have known, its legacy will be a
wrecked economy that - yet again - will take years to mend.