Sunday, March 21, 2010
'Do no harm' should be Darling's watchword
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


Doctors have the Hippocratic oath and a version would be useful for chancellors as they shape up for their big day. "First, do no harm" should be Alistair Darling's watchwords for the budget this week.

The chancellor is at last getting the luck his doggedness deserves. After taking over on the eve of the global financial crisis nearly three years ago, he has spent most of his time fire-fighting. Now he can enjoy some of the fruits of his efforts. How cruel it would have been for Gordon Brown to have deprived him of that by replacing him with Ed Balls, his young protege.

The economy is recovering, as Darling said it would and, while some of the January figures were unexpectedly weak, Charlie Bean, Bank of England deputy governor, said last week he expected growth in the first quarter to continue at roughly its 0.3% rate in the final three months of last year.

If he is right, this will come as a considerable relief to the government, avoiding a thousand "double-dip" headlines, when the figures are released on April 23, a couple of weeks before the election.

Unemployment is coming down, recording its biggest monthly fall in February since November 1997, and its biggest quarterly fall since July 2007. Yes, there was a drop in the employment rate, to 72.2%, but this was better than after the recessions of the 1980s and 1990s, when it dropped to 67.8% and 70.2% respectively.

Yes, too, there was a rise in economic inactivity, to 21.5% of people of working age, but this was higher in 2004 and higher still in the mid-1990s. The important number to hang on to is that the recession saw a 6.2% decline in gross domestic product but only 2.4% in employment, much better than could have been expected.

It is not due to huge increases in public-sector employment, as some coverage might have made you think. Leave out 220,000 bankers accidentally employed by the state, and public-sector employment is lower now than it was four years ago.

It is true that the decline in public-sector jobs the government was pushing through before the crisis has been halted and in some cases modestly reversed. That, however, was only sensible.

Most of all, this will be the first budget or pre-budget report when Darling has not had to announce another increase in borrowing. His annus horribilis was between the spring budgets of 2008 and 2009, during which his borrowing forecast for 2009-10 this year jumped by 137 billion.

This time, as last week's figures for the public finances confirmed, he is heading for an undershoot, which the City says should be between 5 billion and 23 billion.

The Treasury is not encouraging talk of a big undershoot, partly to massage expectations lower but also because of the obvious point that even a few billion is not that much of a dent in borrowing originally projected at 178 billion. Even so, the government's Debt Management Office may have sold too many gilts (government bonds) to cover the deficit this year.

There is no doubt these figures are a considerable relief to Downing Street and the Treasury. As recently as last month, some economists were predicting a big borrowing overshoot. Politically and in the markets, that would have been hard to sell.

So how can Darling do no harm this week? British politics is not grown up enough for him to set out in detail the public spending cuts needed in the comprehensive spending review that follows the general election. Before you could say Lord Ashcroft, the Tories would trumpet the gory details in every marginal constituency.

Labour, I hasten to add, would be no better in the way it would seize on Conservative plans, which is why the Tories' promise to release more details is not worth waiting up for. The political parameters for this were set in 1992, when Labour's detailed "shadow" budget helped lose Neil Kinnock an election he expected to win. Tell the voters too much and you tend to suffer.

There is an impression out there that when markets assess the public finances and the risk of rising bond yields and the threat to Britain's AAA status, the exercise is dispassionate and highly technical.

Few of the so-called bond vigilantes have, however, delved beyond the executive summary of a comprehensive spending review, or will do so when it eventually takes place after the election. Do not forget that even when that review occurs, it still has to be delivered, so we will not know for certain how much the government has cut in, say, 2014-15, until the end of that year.

What matters is intent and plausibility. I do not think that we are in for four or five years of uncertainty over the public finances and waiting for tablets of stone to be handed down by the rating agencies.

One way or another the issue will be resolved in the next few months. A minority Labour government embarking on a 1974, Denis Healey-style spend-your-way-through-it strategy, or a minority Tory government scared of its own shadow, would provoke a savage bond market sell-off.

On the other hand, a government of either party that carries out a tough spending review, and demonstrates borrowing is on its way down, will head off the problem. The issue of the public finances will not disappear spending cuts and tax increases will be real but in these circumstances it would slip down the agenda.

Darling cannot do all that this week but his "do no harm" watchword should be to persuade the markets he means business, in a way Labour has not managed so far. That means using words like "tough" and "realistic" and "cuts". And it means encouraging the prime minister to use them too.

Do no harm also means making sure Brown and Balls do not get their hands on his red box between now and Wednesday. Targeted measures to help young people in the job market and other useful initiatives, financed out of the bigger than expected windfall from the bankers' bonus tax, are one thing. Spending the undershoot in a more fundamental way would be another matter and convince the markets that Labour is not serious about getting the deficit down, pre- or post-election. A little gentle nurturing of the recovery is all it needs.

PS: My new book, The Age of Instability, is published and available at all good outlets. It has been described, by me, as the most comprehensive and readable account of the global crisis and its aftermath. Merely carrying a copy will enhance your reputation, particularly with the opposite sex.

Everything is in there, including the crisis's origins decades ago, how close we came to the cash machines running out and the supermarket shelves not being restocked, through to an embarrassing falling-out among economists on what to do about it. It also offers some predictions on where we go from here.

Regular readers will know that if there is a new book, there has to be a competition, and I have two signed copies to give away. There are five questions and a tie-breaker, with a closing deadline of Thursday, April 1. Here goes:
1. One described derivatives as weapons of financial mass destruction, the other as a "very useful vehicle" that increased stability. Who are they?
2. What is a "ninja" mortgage?
3. Which UK business leader said after the run on Northern Rock that Britain was acquiring the reputation of a banana republic?
4. Where was Alistair Darling when he warned that economic conditions were the worst in 60 years?
5. What was the nickname of Dick Fuld, the boss of Lehman Brothers?
The tie-breaker is which person, or group of people, you would most blame for the crisis, and why. I look forward to the responses.

From The Sunday Times, March 21 2010