[A-List] UK legitimation crisis: pensions & property boom

["Michael Keaney" <michael.keaney@xxxxxx>]

MacWhirter is good as mainstream political analysts go but his economic
analysis is dodgy, even by conventional standards. For a start, while Brown
gave the Bank of England formal responsibility for setting interest rates
independent of himself, he could as easily have smothered the credit boom by
raising, or indeed just holding, the level of direct taxation, instead of
doing a Lawson and further reducing it. But there is an even more
fundamental reason why the British property market is once again running out
of control. The pensions crisis is becoming so pronounced, with stories
appearing almost daily of people who thought they had saved prudently only
to find that the fund bears no liability for them; or that their employer is
shifting them from defined benefit to defined contribution; or that the
stock market collapse has simply wiped out the promised goodies of the
"personal equity plan". What is left to invest in, therefore, other than
property? At the moment it is possibly the "one sure thing" that most with a
view to securing their future would bet on, rationally or otherwise. After
all, there are plenty of mugs who not so long ago thought of the stock
market in such terms.

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Gordon's Tales of Boom And Gloom

Iain MacWhirter wishes the Iron chancellor would take responsibility for his
actions when the going isn t so good
The Sunday Herald, 24 November 2002

This government isn t one that likes to eat its own words. But Gordon Brown
has performed an extraordinary rhetorical U-turn on the eve of this week s
pre-Budget report. The Chancellor shocked his own MPs last week by
announcing that Britain faces the worst economic outlook in 30 years. The
combination of risks and uncertainties is more numerous than probably at any
time in recent world history, he gloomed to the Financial Times. Yet, only
seven months ago, at the last Budget, he was confidently forecasting strong
economic recovery.

The stock market may have risen by 10% in a month, but the Chancellor isn t
buying. All bets are off. Black holes are appearing across the national
accounts. He didn t spell it out, but we all know what he means. Taxes will
rise, pensions will continue to fall, people will hurt. We re all doomed

Whatever happened to bullish Brown, master of the capricious economic tides?
Gordon Brown s mood swing has been so striking you wonder if he should
consider a course in psychotherapy. After years of telling us how he had
abolished boom and bust, he now seems to be preparing the nation for
precisely that.

What has gone wrong? In his Budget speech in April, the Chancellor
congratulated himself for insulating Britain from financial misfortune
caused by the world stock market crash. Prudence had prevailed. As a result
he felt able to throw open the stopcocks of public sector spending on health
and education. On Wednesday he will have to slash his growth forecasts in an
unprecedented exercise in humble pie consumption. Gordon got the numbers
wrong, and the Tories won t let him forget it.

Well, perhaps a dose of Calvinist humility will do him no harm. This
Chancellor has never been shy about celebrating his own achievements. In
recent years, the mood of self-congratulation in the Treasury has been
little short of sick-making. We ve been told repeatedly that government
policy had brought unprecedented stability to the British economy.
Unemployment is down to pre-Thatcher levels; average earnings have risen at
their fastest rate for a decade; interest rates are running at their lowest
levels since the 1960s; and inflation has been conquered all thanks to Mr
Brown s fiscal disciplines. The fundamentals are all in place. The rest of
the world may be going off the rails, we were told, but not us.

Now, suddenly, we are told the British economy is behaving like an Intercity
train that s just jumped the points. Brown blames this on the worst downturn
in world trade in 20 years. A rolling recession across the industrialised
world that has brought global growth to zero. But those of us with long
memories might hear echoes here of chancellors past. When the economy last
got into serious trouble, in the 1990-91 recession, the then Tory
Chancellors John Major and Norman Lamont also blamed world market con-
ditions. Indeed, every economic downturn since 1974 has been caused by world
market conditions at least in the minds of the chancellors of the day. All
we need now is the green shoots of economic recovery.

Funny that when the economy is doing well, you never hear about world market
conditions. You don t hear chancellors saying that a fall in unemployment or
inflation is the result of the international trading environment. When
things go up, it is down to the brilliance of the government; when they go
down, someone else is always to blame.

The difference this time, perhaps, is that Gordon Brown is getting his
excuses in first. He doesn t want to be seen as a victim of events but as a
master of them, or at least a wise interpreter of them. Like a long-range
weather forecaster he is advising us to look beyond the current consumer
spending boom expected to reach further record-breaking heights this
Christmas and see turbulence ahead, even though it is as yet invis-ible to
the naked eye.

It s a classic spin-doctor technique to get bad news into the public domain
first, before your enemies catch on. Brown hasn t been the longest serving
chancellor since Lloyd George for nothing. He doesn t swallow his own
propaganda and knows perfectly well that no polit-ician can defy the
economic cycle indefinitely. Indeed, one of the reasons for the current
spending splurge on public services is that the Chancellor foresaw the
deflationary impact of the stock-market crash and decided to spend his way
out of it. We aren t seeing a rise in unemployment because the public sector
is on a recruiting drive.

But not even Keynes believed you could spend your way out of crisis
indefinitely. The imbalances in the domestic British economy are too severe.
There will have to be a correction. Britain is in the middle of an
unprecedented and unsustainable consumer boom financed by cheap credit.
Household debt in Britain is at an unprecedented 800 billion. This spending
spree has sucked in imports, leaving a trade deficit of up to 7bn a month.
Meanwhile British industry is flat on its back, inward investment is in
steep decline and the financial services industry is in intensive care
following the stock market crash.

The bust will come when the housing bubble finally collapses, as the
Organisation for Economic Cooper-ation and Development warned last week that
it must. House prices are continuing to rise by 25% year on year without any
visible means of support. It is grimly fascinating to watch this new
speculative bubble growing so soon after the equities balloon burst. You
would have thought people had learned their lesson. You might have thought
house buyers and mortgage lenders would recall the terrible con-sequences of
the last house price bubble in 1989. Negative equity, ruined lives. But no.
According to the Financial Times, house prices are now 6.19 times average
earnings; in 1989, at the peak of the last housing boom, they were only 3.9
times average earnings. This cannot go on.

The Chancellor will, of course, deny any responsibility for the bust. The
cheap money that has fueled house prices is not his responsibility but the
Bank of England s. For understandable reasons, the Monetary Policy Committee
of the Bank has been reducing interest rates to mit-igate the effects of the
stock market collapse. But this debt overhang couldn t come at a worse time.
Already, the stock-market decline is hammering the public finances. Tax
receipts are down, as assets have been written off, so less money is coming
into the Treasury coffers. This is wreaking havoc with the public spending
numbers. The Chancellor has had to borrow 13bn this year to make up the
difference.

So, while the Chancellor bemoans world market conditions, we should remember
that this is a bust that started at home, not abroad. The Tories will point
out on Wednesday that the Chancellor s increased public spending on
hospitals and schools can no longer be justified. They will say that there
is a shortfall of at least 25bn in the current spending cycle and that Brown
will have to raise taxes to fill the gap.

But the one thing they can t blame him for is the credit boom. In 1997 he
handed responsibility for interest rates to Sir Eddie George. I trust Mr
George is looking forward to a long, well-earned retirement.