Jesse Norman MP: Why Balls's calculations don't add up

Jesse Norman is the MP for Hereford and South Herefordshire

As someone once said, opinion on Ed Balls is divided.  There are those who dislike him, and those who can't stand him.

But where you fall in that spectrum needn't be the result of prejudice.  It can be a purely rational reaction to what he says.  Take his performance on the Today Programme this morning, for example.

According to the Balls view, this country needs a VAT cut and "growth policies", i.e. more spending.  But now he's added a new theme: only the UK among the world's major economies possesses the political power and the financial leeway to address its economic issues.  The rest of the world needs leadership.  Therefore it is not merely wise, but the duty of this country, to cut VAT and spend more.

Back in the "reality-based community", however, things look rather different.

The Office of Budget Responsibility has estimated that a 2.5% cut in VAT will cost £12 billion, stimulate the economy by £4 billion and generate an additional £1.5 billion in new taxes.  That's £10.5 billion in lost net revenue.  To recover the full £12 billion in cost, the VAT cut alone would have to grow the economy by £30 billion.  No proper explanation or justification has been offered by Ed Balls as to how this could happen; his VAT cut is just political hot air.

But the key point is this.  Mr Balls has obviously got no idea what's actually happening at the moment.  We are very close to a renewal of the secondary banking crisis.  This is not just a matter of increasing sovereign yields, or of widening credit default swap spreads on major institutions like RBS.  The money markets are seizing up again.

The number of banks now 100% funded directly by the European Central Bank is far larger than anyone originally contemplated.  The US dollar-denominated debt market is all but closed to banks.  In August the euro-denominated eurobond market saw no issuance at all for a whole month, for the first time ever. Spreads on the Financials CDS Index are at all time highs.

The conventional wisdom is that the next major obstacle is the Greek sovereign debt repayment in March. But events will move far faster than this.  What we need is urgent, vigorous and imaginative political leadership in Europe, not voodoo economics from Mr Balls.