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Why are we in such a mess, Chancellor Darling?

Today UK Chancellor of the Exchequer Alistair Darling announced a £20 Billion fiscal stimulus package and an increase in borrowing to a whopping 57% of GDP or more. Tax cuts on consumption (much of which comes from imports) are to be paid for by future tax receipts (much of which comes from earnings paid to bring those same imports in).

Well, this is what happens when you base an economy on consumer spending funded by debt underpinned by house price inflation (at the expense of manufacturing and productive industry). 

For years, some people have imagined themselves to be better off because their house “doubled in value” in a short space of time, and then spent some of the “profit” on consumer goods to re-equip or redecorate or restock their new house after a move, or their current house just because they were bored with the old look. 

Personal debt, underpinned by this artificial feel good factor soared, and when the debt bubble collapsed it showed that the housing bubble was not newly created wealth, but a thin veneer with little substance. 

Maggie Thatcher created this monster with dual attempts to kill off the power of the unions and turn Labour voters into Tories. She attacked the Unions by killing off manufacturing, she turned large numbers of non-rate paying council house owners into poll tax paying property owners who could begin the process of accumulating debt as their artificially cheap houses rapidly increased in value, giving many people the false impression that this would always be the case. 

Few people have wanted to criticise this gravy train which ran for two decades until hitting the buffers last year. 

What this government debt package is effectively doing is attempting to transfer some of the personal debt into government debt. They picked VAT rather than income tax because they thought the UK might follow the US where 80% of any tax credit is saved, not spent, meaning it has far less impact as a fiscal stimulus. Because you only save tax with VAT if you buy something, 100% of the money would be used to enhance consumption, they hope. 

This does rather seem to miss the point that if the large part of people’s previous disposable income came from increases in unsustainable and ephemeral house price increases, with no such increases today, 100% of the money that was available to spend is now missing from the economy. Therefore, no 2.5% VAT tax cut will fix it, although over the course of a year it will mean people can buy more things. 

Doing nothing as the Tories suggest isn’t an option either though. I am, of course, ignoring their stated aim of reversing the hike in income taxes from 40% to 45% for those earning over £150,000 a year. Other than lining their own pockets though, they really have no idea what to do, or perhaps the correct word should be “no inclination” to do anything other than play party politics and utter disingenuous sound bites.

Having said that, judging from George Osborne’s delivery in the House earlier today one can only assume he wishes to drink through the crisis. He slurred his words, both his boss and his colleague who were sitting next to him in the Commons looked concerned he might fall over or totally lose it, and he gave the distinct impression of someone who had clearly had too much to drink. Well, he is an ex-member of the hard-drinking Bullingdon Club. Just like his boss, Cameron then. Which is why he got the job – his degree isn’t too hot if you look him up on Wikipedia…

Getting back to finance, and Tory claims that borrowing on borrowing is not the answer, they singularly fail to provide any idea of what they would do: they have no clue really, do they? Anyway, businesses use overdrafts when things get tight, and people borrow money on mortgages when they want to build a new house. But that’s what happens when you have a Tory Party stuffed with too many lawyers and accountants and self-promoting ideologues who have never taken a risk in their lives – well, not with their own money anyway. You can’t equate government spending with household budgets, even though Maggie Thatcher made good politicial use of this over-simplification of the issue. 

If you do nothing, less money goes into the economy, the recession is far deeper, and like during the 1980s recession huge parts of the UK lose out, not for a year or so, but for decades if not forever. Last time it was heavy industry, now it’s probably going to be anything related to housing, banking, and perhaps a little on the Chinese (imports). 

The problem has now reached such proportions though that there may no longer be any quick fix. Whoever gets into power next will have to fix these huge structural problems and this will take five to ten years to sort out. 

If only people had paid more attention to what the LibDems have been saying for years, the problem may have been caught and prevented much earlier. If only they could be elected to power the problem may last less time before being fixed, too.

Maggie Thatcher’s Tory ideas sowed the seeds for this calamity, and the Labs just went along for the ride because it was so called “established wisdom” and they didn’t want to rock the boat. 

The LibDem’s Vince Cable has been warning against this and suggesting we consider rising house prices as part of the inflation index, which would certainly have alerted people to the problem before it grew too big to handle, as it now almost is. 

But for some strange reason, people will only flip between one extreme to the other, from the party who laid the foundations of the current problem to the party that didn’t do enough to stop it.

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