The Red Budget of 2009

Whilst I don't regard the borrowing figures as too outlandish compared to what commentators like John Redwood have been warning, it's apparently spooked the markets - who've been especially troubled by the government's apparent need to try and sell £220bn of gilts. It's gotten so bad that the Debt Management Office has, according to Robert Peston, syndicated out selling £20-£30bn of it to the banks.

I'm quite worried that having ignored the systemic risks around CDOs, credit default swaps, hedge funds etc. we're going to ignore the systemic risks around such colossal borrowing. Firstly, this borrowing is going on globally (after all, we are in a global downturn) - both governments and firms are needing access to credit on a big scale. It therefore looks extremely dangerous to assume that this is a 'normal' borrowing environment, that there are no limits, that there are no risks of failure to raise cash. We face a twin peril that we may start to run up against the buffers of what the markets are prepared to bear for us at 'reasonable' rates, and that we are competing for the money with the other governments and firms of the world. Are we as attractive a proposition as the USA or Germany? More importantly, are we prepared to adjust to a world where the global credit markets simply aren't as awash with cash now that the banks are in retreat, the sheikhs have seen oil lose two-thirds of it's value, and the Chinese discover their own need for cash?

I don't think I can state how dangerous I think this level of borrowing in this economic environment is.


It's to be expected that the budget would contain some attempt at help for job creation, training, housing etc.. In general they look like small two-bit schemes so nothing to really frighten the horses. However, it's very disappointing not to see any proper attempts at spending cuts. If the list given above is accurate then it's really disappointing, as that appears to be a list of the usual suspects for quick 'efficiency' gains - ie those bits of spending that don't have powerful/effective defenders within Whitehall such as flood defence and university research grants. Flood defence last saw savage cuts 3 years ago when Defra was fined by the EU (and had to pay out of it's own budget). Research was 'reorganised' 4 years ago when Uni departments with an RAE rating of 5 was targetted as where the lion's share of the research cash would go. How much there is really to cut there remains to be seen. Personally I think the answer will be sod all, so we'll run them down a la 'death of a thousand cuts' to avoid the 'pain' of actually scrapping a big ticket item.

Darling has at least had the courage to announce some proper tax increases though. Raising fuel duty shouldn't be horrendously painful seeing as oil prices have plummeted. The problem with trying to soak the rich as he has done is that whilst it does raise some revenue (and we're sailing so close to the wind financially every penny counts) the real point of doing something like that (at least from Cameron and Osborne's perspective apparently) is that it provides the necessary political cover for really going after big spending cuts. A 50% income tax rate is a big step in political psychology. Accompany that with taking a big bite out of government expenditure and you demonstrate how serious the situation is, and show that the idea that there is a choice between cutting spending and taxing the rich is false - the circumstances are so dire we have to do both. Darling and Brown may have attempted to shoot that fox by bigging up the tax rises, and downplaying the spending 'cuts'. If they have succeeded that have bequeathed their successors a poisoned legacy of political scorched earth.