What Happens Next?
This THFC Space blog post is written with some frustration, in terms of conflict between head and heart. We have had an apparently policy laden 24 hour deluge since the three Leaders’ debates began what seems a lifetime ago, but was only 20 days, which has shaken the nation from its political lethargy. However, the deep cuts and tax rises necessary to eliminate the c£70Bn structural deficit have been assiduously avoided by all politicians.
First of all, why are we in such a mess in the first place? John Hills described in the FT yesterday three factors that gifted New Labour: in the early years, unemployment fell to a 30 year low (meaning a low benefits bill), economic growth (particularly in financial services) allowed the Government to pay down debt (but not as fast as other developed nations, leaving the UK relatively exposed) and until Iraq and Afghanistan we were able to cut expenditure on defence. In retrospect, the Government took a big gamble on the Financial Services industry and used the tax-take to expand government expenditure. Low and stable interest rates (driven by an independent MPC) drove an investment and borrowing boom. We lapped up cheap Chinese imports while they invested surpluses buying up the parts of the world they were allowed to. However, even in the good times we weren’t adequately covering the cost of the welfare state, the recession has slashed tax the tax take and we are still heavily committed in a variety of war theatres. And then came the Credit crunch with a massive consequent implosion of the debt balloon.
The much quoted Institute for Fiscal Studies (http://www.ifs.org.uk/) has set out an excellent summary comparison of how the three principal political parties might set about eliminating the deficit (entitled: “Election Briefing 2010 Summary”). Essentially all three political parties get back to achieving the ‘golden rule’ of government debt below 40% of national income by 2031-32!! The Conservative party borrows marginally less (£604Bn) over the next seven years (£643Bn under Labour or Lib Dems), but front loads cuts in public expenditure more than the other parties. All parties weight their policies to around 66% public expenditure cuts v 33% tax increases, however the type of cuts to unprotected areas have never really been achieved before. Comparisons are made with 1976 -1980, but in reality the type of cuts needed have not been seen since the Second World War (regardless of who wins the Election).
We then get to the question of market confidence. Greece is experiencing widespread unrest and a General Strike begins today after Germany and the IMF have imposed what are probably undeliverable swinging cuts in the national deficit from something like (being Greek the numbers keep growing!): 13.6% of GDP to 3% to be delivered by 2012).
Whether you are of the view that Greece should never have become a member of the Euro in the first place (and interestingly how strong would the Euro be without the weaker members, and would the German export machine be able to function at all without the profligate Southern Europeans), market confidence in the new UK Government will be vital.
The UK electorate really need to deliver a clean mandate to one party tomorrow. A tired Labour government, riddled with political infighting understands the job that needs doing. Whether they are capable of delivering it is another matter. Given the number of jobs in the public sector, a Conservative administration would rapidly take the UK into a double dip recession (areas like Wales and Northern Ireland where the public sector makes up a proportionally larger share of the economy would suffer in particular). However, a clean Conservative majority (regardless of the experience of the new ministerial team) would most likely command the markets’ respect. Old habits die hard and, given the potential contagion in relation to Greek, Portuguese and Spanish sovereign debt, market confidence will be important in the next few months. ‘Change’ and the apparent virtues of a hung Parliament are illusory.
That brings me back to head and heart. The housing sector (and all of us!) are in for a hugely tough three years. Gordon Brown was right in the third leaders’ debate about not threatening an apparent slow recovery, but he would also have to deliver swinging cuts – just over a longer period – and the markets do not now trust his record on controlling expenditure.
To end on a positive though… from a financial perspective, Housing Associations are currently viewed as a better credit than the banks (or indeed some European nations). That is a position of real strength upon which to capitalise in the next 2 -3 years…it may not feel like it but it will be.
Photos:
double dip – thanks to colm_bracken from flickr.com (CCL)
protest in athens – thanks to endiaferon from flickr.com (CCL)