Too Little, Too Late

The UK’s pre-election debates have thrown into sharp focus the level of distrust with existing party politics. But is anyone confronting the real state of affairs?

The “Clegg surge” has flummoxed both Labour and Conservative party strategists – particularly the latter, who until recently had assumed that they would automatically assume government after the election as British voters dispatched Gordon Brown into a long-overdue retirement.

If opinion polls are to be believed, Clegg’s Liberal Democrats are scoring well with the electorate, and for a number of reasons. They opposed the Iraq war, warned of the dangers of the credit bubble, back civil liberties, and are seen as relatively less tainted than either Labour or the Conservatives by the scandals over the abuse of the parliamentary expenses system.

They are also widely viewed as having the best candidate for the post of Chancellor of the Exchequer: Vince Cable.

However, with all due respect to Mr. Cable, the Lib Dems have one thing in common with their two major competitors. Their budget figures don’t add up.

The UK is currently running a fiscal deficit of £170-180 billion a year, around 13% of GDP, the worst gap between income and expenditures of all the world’s major economies.

The Lib Dems claim that they have done better than the other parties by costing £15 billion of savings, which are to come from a mixture of taxes on banks, increased levies on the better-off, new green taxes and a crackdown on tax evasion.

Even if these figures can be realised – according to today’s press, the IMF also wants its pound of flesh from the banks in the form of new taxes, while raising real money by cracking down on evasion is notoriously difficult to achieve – they go less than one-tenth of the way towards eliminating the current fiscal gap.

Worse than that, it could be argued that there is no longer any scope to raise significant new tax revenue while allowing the productive part of the economy to grow.

In a penetrating new study of the budgetary struggles in the UK and Japan, economist Andrew Smithers points out that tax revenue in the UK is already at 40% of GDP, compared to Japan’s 28%. Japan has much more scope to tax than the UK, in other words. It’s the scale of public expenditure in the UK – now well over 50% of total GDP – which is the real problem, and which none of the major political parties has the courage to confront. If anything, the Liberal Democrats are heading in the opposite, wrong direction by suggesting that they will set new lending targets for state-owned banks, rather than allowing those behemoths to shrink.

With Greece’s problems escalating daily – the country’s five year credit default swap spread has just hit another record high, at 484 basis points, while there is now widespread speculation that the country is facing a restructuring of its debt – the UK is dicing with the same outcome by refusing to confront the scale of its fiscal problems.

I know that, when compared to Greece’s inflexibility within the Eurozone, the UK has its own currency, which it can in theory inflate away. However, it’s also true, says Edmund Conway, economics editor of the Daily Telegraph, that four-fifths of the UK government’s liabilities (counting those both on- and off-balance sheet) are inflation-linked. Printing our way out of trouble may not be an option after all, in other words.

So, for all the enthusiasm amongst the UK’s beleaguered voting public over the emergence of a real third contender to challenge the electoral duopoly that has prevailed for almost a century, all parties’ proposals to restore budgetary balance seem too little, too late.

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