Tuesday, 25 November 2008

Is the Tide Turning Again?

I'm beginning to think that the Tories, and George Osborne in particular, have managed to get back on the front foot.

Osborne has, by all accounts, won fulsome praise from the right for his Post-Pre-Budget-Report Performance (PPBRP). Just as the current crisis gave the rudderless Brown a target to aim at, so Darling's PBR has given the under pressure Osborne something to get his teeth into - and he has taken some almighty bites so far.

There is no easy answer to this mess. But it is hard to disagree with the view that the answer to a crisis caused by huge and irresponsible corporate and personal borrowing is not to borrow even more in the hope that it reignites the economy.

I believe that, fundamentally, recessions are a correction for unfunded growth and spending. This recession should be deep because of the huge amount of growth that has been induced through the illusion of increased wealth rather than through real, earned wealth.

My worry, therefore, is that if we somehow manage to stave off a recession or ease the depth of it then the underlying problems won't be fully corrected. The result will be that future growth will be built on an unstable foundation, which will result in further, and possibly more severe, pain later. Like it or not, this sick patient has to take its medicine and that medicine is, unfortunately, unemployment, business closures and the misery that goes along with them.

The problem with that strategy is that it means the economic cycle and political cycle will not be aligned as the Government would like. So, make no mistake, everything Darling is doing is designed to realign these cycles for the benefit of his party. To suggest anything else would be ridiculous just as it would be ridiculous to suggest that any other party wouldn't be motivated in exactly the same way.

My own reading of the PBR is that Darling would have been better doing nothing. The content of the PBR has given the Tories plenty of ammunition to back up what was beginning to look like a faintly ridiculous oppositionist stance. This stance now looks as though it was a gamble that has paid off and they now look very secure in questioning the wisdom of the Government's actions.

However, the biggest problem has been the presentation of the PBR and, specifically, the lack of clarity about possible increases in VAT after it has been restored back to 17.5%. This is like the 10p tax rate all over again and will confirm to many that had started to give them the benefit of the doubt again that Labour is just not capable of telling the whole truth.

It can take years to build up credibility in the eyes of the electors and only a moment to lose it. Brown had been doing a reasonable job of restoring his hard won credibility recently. I fear the PBR may have undone all that good work at a stroke.

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