March 12, 2008 | posted by Michael Baxter in UK economy |

And while markets were busy saying Phew yesterday, one man was quietly beavering away in his study, preparing for his budget to rescue the UK. 

Yes, our silver chancellor is beginning the biggest day of his career to date. Poor old Al.   it’s not been a good time at number 11.  Gordon Brown was often called the lucky chancellor, his successor seems to have the opposite characteristic. What would Napoleon have made of all this?  He once famously said after being presented with candidates to replace one of his generals, “I want none of those. Go back and find me a lucky general.”

Mind you some of the problems were of Al’s own making.    The changes to capital gains tax, and his plans for nondoms, do smack a little of an idea suggested by his daughter after a day at school.  But this afternoon, the real attention should focus on what he can’t do – and this time, it’s not his fault. If you believe the UK is set to follow the US, and we are running around 12 months behind, then we really need to look at the mistakes made by the Fed and US government a year ago, and make sure we don’t repeat those mistakes.

Right now the Fed is doing a passable impression of someone in panic mode – maybe if it had taken some of the action it is taking now a few months earlier, all this mess could have been avoided.     Then again, with inflation building, it had little choice but to keep rates at 5.25 per cent for as long as it did.  The Bank of England is similarly hamstrung – a big cut in rates now may avoid recession in 2009 – but the underlying inflationary pressures could lead to  a much worse crisis in the years that follow.    Besides lower interest rates encourage more borrowing.  It’s what Keynes called pushing on string.    If there is too much debt, the last thing you want to do is encourage more borrowing.   Instead Keynes argued that a crisis of this type required tax cuts for the poor.

 Why the poor?  The reason why the poor got the benefits of Keynes’ ideas was not so much down to some ideal, rather it was down to pure economics.  The poor have a lower savings rate, therefore if they get a tax rebate they will spend the proceeds, and their money will then spread across the economy.    The rich are more likely to save the proceeds – or in  modern speak, invest it into property.  Well that’s the theory anyway.

Now interestingly, that’s what the US did.  Arguably they were a little late – but earlier this year George Dubya announced a $150bn tax give away – the equivalent of $800 for every US taxpayer – even more for households with two income earners. Now imagine the impact such a move would have upon the UK if Al announced a similar move today.  Fears of a recession would disappear,  and Al’s silver crown would sit beneath a halo. But he can’t do that.    His lucky predecessor, or is he Alistair’s unlucky boss, spent all the money.  When times were good. Gordon spent. The UK probably faces the most serious threat to its run of positive economic growth since the run began in the early ‘90s, yet government finances are in crisis.  Whether there is a halo above Darling’s crown or not, it’s a right royal mess.