Economic recovery plan?

Forget it, Gordon

The Prime Minister’s survival is pinned on a September ‘relaunch’ to ease the voters’ economic woes. But, says Martin Vander Weyer, each door through which Brown tries to escape his predicament slams in his face. His room for manoeuvre is negligible All this talk of Gordon Brown’s ‘economic recovery plan’ calls to mind the unhappy day, many years ago on a junior bankers’ training course, when I took part in a competitive team game which involved managing a computer model of the British economy.

We were told it was a version of the Treasury’s own model. In successive rounds, each team would have the opportunity to alter tax rates, interest rates and public spending levels, the objective being to maintain strong growth, low inflation and low unemployment. But also in each round, the game’s moderator would introduce random events with economic consequences: a sudden rise in oil prices, say, or a wave of public-sector strikes, or the outbreak of a small war.

Before the game began, my teammates went into a huddle. ‘You’re a clever bugger, Martin,’ one of them said. ‘We think you’d better be captain.’ So off we went, with me calling most of the shots. Two rounds in, we were looking pretty good: prudent and stable, you might say. But five or six rounds in, what with oil prices soaring and one thing and another, we were in deep trouble. Stagflation loomed. Public borrowing seemed to be irretrievably out of control. Our dole queue was lengthening. Attempts to correct past mistakes only made matters worse. The team began to mutter and squabble. We lost the game and for the rest of the month-long course my cleverbugger status never recovered.

I haven’t made that up: it took place in 1982 at a training centre in Sussex which is now a luxury hotel, and I can still recall the burning resentment of one colleague who felt, probably correctly, that he would have done a far better job than me as captain. So I really do know how Gordon Brown feels. In his high-stakes version of exactly the same game, there are only a couple of Pre-Budget and Budget rounds left to play before the runup to the 2010 election. Even the new rule he introduced to deal with the 10p tax uprising, that really howling cock-ups can be reversed at will between rounds regardless of cost to the public finances, offers him little comfort. No one now thinks he can win: it’s only a matter of how badly he loses, and whether he is sacked as captain before the bitter end.

Some of his former teammates have quietly started forming new teams of their own. All he can do is summon his last trusted collaborators together to devise a list of desperate measures for an early-autumn ‘relaunch’. Perhaps some of these discussions took place in the Suffolk mansion to which he retreated for his summer break; all we can firmly guess is that none of them have happened in their rightful place, inside Her Majesty’s Treasury. ‘Is there an economic plan?’ one Whitehall official moaned to the Evening Standard recently. ‘If there is one, we haven’t been told about it or shown it...

Presumably the Chancellor is involved, but even that’s not absolutely clear.’ It’s not clear because the Chancellor, Alistair Darling, seems already to have been thoroughly stitched up by Brown’s people over the leaked story of a possible stampduty holiday, which clearly did not come from him and which he was unable to confirm or deny. Many observers assume Darling is being lined up for the chop, to be replaced by David Miliband — not because Brown wants the benefit of Miliband’s untested economic skills on his team, but to hobble Miliband’s leadership-bid prospects by lashing him to the mast of the stricken regime.

So who is actually drafting the ‘plan’? Standing by the whiteboard, multicoloured marker pens at the ready, must surely be Wilf Stevenson, Brown’s old university pal who has just been called in to Downing Street from the Smith Institute, the Brownite think-tank criticised by the Charity Commission for its lack of political neutrality. Wilf’s task today will be to make stale ideas look fresh by turning them into one of those wacky mind-map diagrams beloved of think-tankers and consultants. Next into the room, and in a pretty foul mood, is Ed Balls, co-author of Brown’s economic vision and currently his Schools Secretary. How very irritating, Balls must be thinking, that putting the public finances straight is not as easy as squirming out of responsibility for the Sats fiasco. What a pity we can’t treat incompetent, overspending departments of state like the exam-marking firm ETS: simply sacking them and making them pay us the money back. But even if he wanted to, Balls can’t slide out of the team now. His fingerprints are on too many of its past decisions, and after all, if the Miliband ploy doesn’t come off, Balls is very likely the one who will end up in the Josef Goebbels role — the ultraloyal propagandist who becomes top man in the bunker in the final days.

Also at the table, and no doubt in feisty form, will be Shriti Vadera, Brown’s former economic adviser turned junior minister first at DFID and now at the Department for Business, Enterprise and Regulatory Reform, where she is in charge of competitiveness. (‘How’s Shriti these days?’ I asked a mutual acquaintance recently. ‘Busier than ever,’ came the reply, ‘she’s got a big role at BERR but she’s still moonlighting on the old job.’ ‘What, the DFID one?’ ‘No, the Gordon one.’) The trouble with having Shriti there is that she tends to give snarling short shrift to anyone who displays a lack of economic rigour — but economic rigour is almost the last thing this plan is about.

Let’s try to guess which key words Wilf has scribbled on the whiteboard so far. If he started by putting ‘Economic Recovery Plan’ at the top, he may already have scrubbed out ‘Recovery’, because it is all too obvious that the conventional monetary and fiscal engines are not available to pull the British economy away from the precipice of recession. On the monetary side, the government cannot stimulate recovery by cutting interest rates because rates are the responsibility of the Bank of England, and the Bank won’t cut them until it is confident that the inflationary surge has waned. Bank rates look set to stay at 5 per cent well into next year — unless a really sharp decline in oil and food commodity prices takes the sting out of inflation quicker than the Bank currently expects.

On the fiscal side, stimulus by means of significant tax cuts is out of the question for a government that is already busting through its own debt-to-GDP rules and heading towards a deficit (according to Citigroup economist Michael Saunders) of £55 billion this year and £74 billion next. Tax revenues are falling below projections as the downturn eats into taxpayers’ incomes and profits. And welfare bills are ticking upwards as more people lose their jobs: the British Chambers of Commerce now say the number of unemployed could rise to two million. As for a Keynesian burst of debtfinanced public spending, that would be condemned as utterly irresponsible, especially as inflation is already rising dangerously. Indeed on the present trajectory, the pressure on Brown — not least from the IMF — will soon be in the opposite direction, to slash spending and raise taxes in order to come to grips with the damage he has done. The accountants Grant Thornton have estimated that tax rises equivalent to five pence on income tax would be needed to bring public borrowing back within the Treasury target of 40 per cent of national income next year.

In the plainest terms, therefore, there is nothing Brown’s team can do to make the economy ‘recover’, any more than they could deliver on their previous promise to buck the global cycle by doing away with boom and bust altogether. The credit crunch and the inflationary commodity boom have set the entire industrialised world on a downward path, which more and more economists now think will end in the official definition of recession, which is at least two consecutive quarters of negative growth. That’s where we’re heading, folks, and all Brown can do is tinker at the edges — of the moribund housing market, and in relation to soaring domestic energy prices — in the hope of easing the pain and resentment of loosely targeted groups of voters.

So the next big words on Wilf’s whiteboard are almost certainly ‘Kickstart house sales’. The number of property transactions is down by as much as half in some parts of Britain, for two reasons. On one side, the mortgage lenders have become much more restrictive, partly due to belated reassessment of risk and partly due to a shortage of the market funding they need in order to be able to lend. On the other side, buyers are sitting out, waiting for prices to fall further. The government cannot kickstart house sales: the only thing that will bring the market back to something like normality is a further fall in house prices to a level at which both buyers and lenders feel safe to go back into the water, coupled with an easing of the mortgage lenders’ funding crisis.

The mere suggestion that there might be an across-the-board stamp duty holiday (costing the Treasury several billion it cannot afford) has set the market back even further, as more buyers wait and see. A raising of the stamp duty threshhold would ease the way for firsttime buyers — but only by encouraging them to buy into a falling market; and stamp duty changes tend to be quickly reflected in house prices anyway, so that any giveaway would be largely cosmetic. On the other hand, a government guarantee of certain categories of mortgage, or some more firepower for the Bank of England’s special liquidity scheme, would certainly stimulate the lending side, but only at the expense of a further increase in the Treasury’s mounting pile of contingent liabilities. In reality, perhaps the most that can be done is to plead with lenders to go easy on repossessions.

Then there’s the matter of household fuel bills. One proposal — leaked not by a Downing Street spinmeister but by a Whitehall mandarin talking too loudly on a train — is to spend £1 billion on extending the winter fuel payment scheme, currently only for pensioners, to all seven million families that receive child benefit. Rather than just targeting those who are categorised as suffering from ‘fuel poverty’ (that is, spending more than 10 per cent of household income just to keep warm), that would include all the middle-class, floatingvoter families who happen to collect child benefit: a simple electoral bribe. It could be paid for in part by the ‘green tax’ on power generators discussed in these pages by Irwin Stelzer last week — and in part by a windfall tax on the ‘profiteering’ utility companies that have raised electricity and gas prices so steeply this year.

There’s a soft target, surely? But one of the most articulate opponents of the idea is the Cabinet minister responsible for energy policy, John Hutton, who is trying to drive a longterm strategy which depends on attracting foreign firms to invest in new British nuclear generating capacity. ‘We’ve estimated that over the next ten to 12 years the UK will need up to £100 billion of new investment in our energy infrastructure,’ he told me the other day. ‘That investment is mobile –— it can go anywhere it will get a decent rate of return. You’ve always got to structure your tax policy against that background. That’s the new reality. We’ve got to show that the tax framework is as competitive as it possibly can be and I know the Chancellor wants to make sure that it is.’ But down in the bunker they are not listening to the Chancellor, or Hutton, or any other voices of reason. By now, surrounded by angrily scrunched-up sheets of figures and empty coffee cups, Wilf has crossed out ‘Economic’ and ‘Plan’ as well as ‘Recovery’. Perhaps, having read the health minister Ivan Lewis sounding off in the Sunday Times this weekend, he has scribbled ‘Tax the superrich’ — then crossed that out too, and written ‘Business exodus’ beside it. Perhaps he has written ‘Codename: Blackadder’ in reference to that famous line: ‘What we need at this stage of the war is a futile gesture.’ Or perhaps he has just wiped the board clean and written ‘National Olympic Celebration’ instead.