Lord Forsyth of Drumlean: How Gordon Brown turned a global financial crisis into a British financial catastrophe - and what we must do to get the economy growing again
Lord Forsyth of Drumlean was Secretary of State of Scotland between 1995 and 1997. He is speaking alongside Philip Hammond MP and Irwin Stelzer at a Politeia fringe meeting - Banks, Booms and Busts - tonight at the Hilton Hotel, Deansgate, Manchester, between 6pm and 7.30pm.
The American commentator Willam Safire, who died last month, described Britain under the Labour Government before Margaret Thatcher became Prime Minister as a first class example of how to ruin a first class country. All Labour Governments leave office with unemployment and debt higher than when they took over. This Government has excelled itself.
Public spending has doubled and the national debt is projected to double to £1.4 trillion, but who believes education or health care is twice as good? It is true there are more new schools and hospitals but many of them have been bought on tick through PFI. The Government may claim the credit but they have not settled the bill. Our GPs may be better paid but it is harder to get a family doctor at night or at the weekend. There are more than 5 million people on out of work benefits and both the number and proportion of our youngsters not in education, employment or training is higher than when Labour took office.
People on the lowest incomes are paying effective marginal rates of tax of 90%. If you earn a £100 a week and double your income you will be allowed to keep just £5 or £6 of that extra £100 after tax and benefits withdrawal. If you were a private equity millionaire buying and selling companies and gearing them up to the gills over two years your marginal rate of tax was 10% thanks to a Gordon Brown initiative. The Government wasted £12 billion cutting VAT by 2.5%, but are imposing new taxes on jobs and savings with higher National Insurance contributions and by making some employers pension contributions a benefit in kind. This latter measure will see some people facing tax rates of more than 100%.
The economy Gordon Brown inherited was the strongest it had been for a century. Unemployment was falling by 50,000 a month and borrowing was £35 billion. Now borrowing, which is just taxation deferred, is out of control and treasury forecasts have the credibility of Billy Bunter’s postal order. The Prime Minister has turned a golden legacy to base metal. His golden rule turned out to be an elaborate con to justify borrowing at the height of a boom when revenues were pouring in from City bonuses and stamp duty.
The tax revenues Gordon thought were permanent and based his spending plans on were temporary revenues that came from the bubble. These have now evaporated leaving a black hole in the budget which he is filling with borrowed money. The Government will need to sell an astonishing £900 billion of Gilts over the course of the next Parliament to meet their spending plans. Who will buy them? Interest rates will certainly have to go up to get them away. That means higher mortgage and credit card payments after the election which will further depress house prices, increase unemployment and add to the pressure on Bank’s balance sheets as loan default rates escalate.
It will be a slow and painful climb back to real prosperity. Banks are struggling to lend despite huge injections of capital and liquidity because they are trying to shrink themselves and existing borrowers are drawing down facilities. We have seen recessions before caused by inflation and followed by monetary tightening but this one is different. This is driven by plummeting asset values which have damaged the balance sheets of the financial sector, households and governments. We are all poorer than we thought we were and have to cut back.
The Government may boast about recovery but the truth is we are still in the eye of the storm. We need a clear plan that shows how debt will be paid back in the medium term and where the reductions in public expenditure will fall. Of course we will not get it this side of an election. The country is in the grip of a megalomaniac and a Prime Minister whom it seems is incontinent when it comes to public spending and has a capacity for self delusion which leaves Walter Mitty in the shade. Of course there is a world crisis, but Gordon Brown has turned a global financial crisis into a British financial catastrophe.
The first thing we need to get straight is that the financial crisis was not caused by sub prime lending in the United States or bankers' obscene bonuses. There have been some spectacular examples of greedy and irresponsible bankers but it is fatuous to put the systemic collapse of our financial systems down to just bankers and their greed. These are symptoms and not a cause. Global imbalances and the lethal combination of very low interest rates and exceptional amounts of liquidity are the root cause. It is important to remember that these imbalances have not gone away and just as banks like Northern Rock can collapse when the supply of credit vanishes, so too can countries.
This is a crisis whose origins lie in regulatory failure and misguided monetary policy. The Chinese have been saving vast amounts accumulating more than £2 trillion of monetary reserves. Other countries like Singapore, Korea, Taiwan and the oil producing states have done the same. Here in the UK and in the United States we went on a spending binge financed by cheap borrowed money, cheered on by a chancellor boasting of having abolished boom and bust. The fact is the prosperity of the last 15 years was founded on cheap credit from Asia, cheap labour from Eastern Europe and cheap manufactured goods from the Far East.
We have been living beyond our means by borrowing money from the countries supplying us with cheap goods and services. In rough terms we have been spending about 10% more than we earn and saving nothing. We need to save around 10% to fund future investment so there is a gap of 20% which can only be filled by falling living standards or growth.
One thing Alistair Darling got right last week was the importance of concentrating policy on getting growth back. That means lower taxes not higher taxes, Alistair, effective regulation not suffocating bureaucracy. It means nurturing and supporting our small and medium sized businesses who are the engines of future prosperity.
Last week I spent a bit of time with the senior managers of a diverse range of businesses. It’s tough out there and they were doing a great job. Their world is one of pay freezes and reductions, improving productivity, enhancing customer satisfaction, recruitment moritoriums, careful management of cash, innovation to cut costs, reduced pension provision and closed final salary schemes.
The contrast to the public sector where employment is rising, expenditure growing and unaffordable index linked pensions offering retirement at 60 are considered a right is stark and unsustainable. Of course we must protect public services, but a bloated public sector cannot be allowed to become the cuckoo in the nation's nest.