Autumn: a season of mellow fruitfulness, or of storms, shorter days and financially darker nights? Either way, it’s when Rachel Reeves’ next Budget is due to take place and the outlook is not very encouraging.
If you believe that the core of any successful and dynamic economy is confidence, then the UK Chancellor of the Exchequer is going to have a tiresome time convincing us all that we are on the right track. In just over a year we have seen some humiliating events for the Government with more economic U-turns than a roundabout. Whether you agree with the Treasury that we are now on the right track – or not – the key issue is confidence.
In the year since the Government’s election victory, the economy has not shown any signs of recovery, be they green shoots or advanced mould. No one should have been expecting financial miracles and economic wizardry, but what we all wanted was a clear message along the lines of the unofficial motto of the 4th Royal Tank Regiment: “From mud, through blood to the green fields beyond!” (reflecting the colours of their regimental tie in bands of brown, red and green, and in this case, economic recovery).
Add to this the almost certain tax rises in the forthcoming Budget and how the Chancellor will go about them. The easiest (although still not particularly palatable) would be a rise in Income tax which should be weighted towards those often mentioned with “the broadest shoulders.”
Yes, that would mean a change in both policy and promise, but with few other valid alternatives, now is the time to recall what the economist John Maynard Keynes said in answer to a change in policy: “When the facts change, I change my mind.”
Such a change need not be seen as a sign of weakness, but rather a sign of maturity and Treasury understanding that different approaches have to be adapted. Show us the successes to date (and yes there are some), show us that your team is trustworthy and reliable, but above all show us we should have confidence in your actions.
The problem is that governments very rarely earn any money, and if they do it is often by mistake. In fact most Governments see themselves as the national arbiter of spending money. The key issue is here is that they are not spending their own money – because they don’t actually have any. The only money they have is our funds via taxation or borrowed funds from sometime foolhardy investment houses that often seem to believe that governments and nations can’t go bust.
But they can.
A historical perspective might be useful. History shows us that most countries have defaulted (a politer word for not paying your debts) at some stage and even the great United States of America had a state go bust albeit many years ago – Mississippi in 1841.
In the UK we proudly state that we have never been in such a situation – although we are being somewhat liberal in our interpretation. The Napoleonic wars nearly bankrupted the nation but William Pitt introduced Income tax in 1799 to provide payment for the very significant expenditure. Other national calamities meant that our nation came close with the South Sea Bubble in 1711 creating a huge financial crisis. The Scottish Central American Darien colonial fiasco of the 1690’s was bailed out by the English government as part of the unification deal.
We should also mention the dire state of our finances at the end of WW2, when the U.S. stepped in to support the recovery of nearly all of the financially ravaged European economies with the Marshall Plan. However, there was one exception and that was the UK, as Roosevelt and the American leadership saw little reason in bailing out the near bankrupt British Imperial economy. Our nation came close to financial failure and was in effect bust but with suitable persuasion and obfuscations we were able to blag our way through it.
However the past few weeks has highlighted some obvious ways in which our financially strapped government could have made some significant sums to set off against our debts and wasted government expenditure. You may have noticed that in her most recent speech Rachel from Accounts managed to create such nerves in the government’s debt market that we saw a significant rise in their yields (or cost) and a fall in their value.
Such a move was not because of any major policy change but rather just a lack of confidence in the aforementioned Rachel’s abilities. However, it was likely that a few well-chosen words with some of the larger financial institutions soon reversed the process, but this allowed enough time for some of those investment houses to take the hint and buy these discounted government bonds and watch the price rise back up again, and smile at an easily gained profit. So we ended up with a red faced government minister and some investment funds further into a positive black.
Now the last thing we want is for our financially inexperienced government to start betting on the market, but maybe there are some obvious opportunities that they could be taking advantage of? For example, buying bonds in the wake of yet another disastrous speech from the Chancellor when their prices are low? Someone will eventually step in again to clean up the mess and bond prices will rise again, creating a much-needed profit for the government. Or does that sound too much like common sense?
