Spending Money We Don't Have

Just wait until we see the card statement

The man who refused to buy more military helicopters back in the good times is now committing "to billions of pounds of extra defence spending". He's apparently going ahead with the Navy's new £5bn carriers, keeping Army strength above 100,000, and completing the Eurofighter and Joint Strike Fighter programmes.

And where, pray, is the money for all this extra spending coming from?

"A government source said there would have to be “tough decisions elsewhere”.

Ah. Of course. Tough decisions elsewhere.

But not apparently in the area of free personal care for needy adults at home. In a cynical attempt to buy votes among the elderly and their families, Brown announced at the last Labour Party Conference that he was ordering a huge expansion of the personal care programme. Yet according to the Directors of Adult Social Services it will cost around £1bn pa, whereas Brown has only come up with £420m. The rest? That will be down to those tough decisions elsewhere.

Not that Brown is alone. This morning we heard that nice but vacuous Mr Clegg promising to spend another £2.5bn pa on schooling for the underprivileged. £1.5bn will come from scrapping tax credits for all families on above average incomes - clear enough. But the rest will come from er... tough decisions elsewhere on er, quangos and inspection regimes... and stuff.

And then there are the Tories. According to the ever-helpful Mr Darling, they have made around £8bn of new spending pledges, including more single rooms in NHS hospitals and more maternity nurses (see this blog). But once again, the funding seems to be down to tough decisions elsewhere.

All of which raises the fundamental worry we've mentioned before: despite the direst warnings about the size of our national credit card bill, we don't yet seem to be ready for public spending cuts. Right across the board, our politicos have examined the entrails of their focus groups and private polls, and concluded there's simply no electoral upside in promising cuts. Which is why Brown is still dishing out new spending pledges, and why Cam is back-peddling furiously on his earlier promise of immediate cuts.

So how's it going to play out?

Well, if the politicos don't get a grip, sooner or later we will hit that sterling/gilts crisis we've blogged so often. At which point, we will end up being forced into an emergency package of cuts and tax increases just like back in the jolly old 70s. We'll have no choice.

Indeed, there is now a school of thought that Cam is back-peddling on his cuts promises precisely because of that. He knows the only reason there hasn't so far been a crisis of market confidence is that investors believe he will cut. But in political terms that means voters haven't yet been exposed to the real risks, so he gets no political credit for being tough.

Far better to back off now, ahead of the election, jangle the market's nerves while Labour are still at the controls, let the voters understand the real risks, and let them see Labour totally incapable of handling them.

You know, we hope that is the correct interpretation. Because it implies that Cam and George do understand the real problem.

But if we hit a pre-election market wobble, they'd better be ready with some convincing statements on their true fiscal intentions. The last thing we need is for them to get elected having already lost the confidence of the markets.

A very delicate flower, confidence.

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A Perspective From History

No time for a proper blog today, but Tyler is a sucker for long-term charts. So we must just pass on a chart from the IMF's latest World Economic Outlook. It shows the growth of world GDP since 1870, plotted against the ten major financial crises that cropped up over the period.

Some obvious points jump out:

• Despite serious setbacks that seemed terminal at the time, we have always pulled through in the end: against the long-term upward trend - largely driven by technological advance - even the biggest crises now look like mere ripples.
• The Great Depression was very painful, but the world economy actually recovered long before WW2 and all that enforced government spending
• The three decades following WW2 really were a golden age
• The crises seem to be getting more frequent, yet their impact on world GDP seems to be less

So what should we conclude?

First, we will come through our current difficulties. Inventiveness and enterprise will ultimately drive us forward once again.

Second, financial crises are part and parcel of the way we progress. They don't mean the market system is bust, and they don't mean the end of capitalism.

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Cereal Bunglers

Nostalgiafests don't butter any parsnips - let alone feed 7 billion people

The top three stories on last night's C4 News formed an instructive conjunction:

Story 1

The government's panic programme to dish out Tamiflu like Smarties (see this blog) has backfired badly. It seems that for children at least, the side effects are worse than the swine flu Tamiflu was meant to be treating.

Now who could possibly have foreseen that?

Well, the Doc for one. When the Smarties programme was launched last month, he delivered his definitive verdict:

"I can prescribe Tamiflu, though as yet I have not. I would not take it, and I would not give it to my family, so why would I prescribe it for patients? What this means is that anyone with any vaguely viral symptom is going to get "treatment" for a condtion they probably do not have with a drug that is next to useless and may have hitherto unexpected side effects. Great!"

Story 2

The government's panic programme - expensively fronted by My Lord Sugar - to provide thousands of new apprenticeships has flopped:

"Earlier this year the government announced it would fund an extra 35,000 apprenticeships as part of efforts to tackle the recession, costing £140m. But its figures show there has been a decline in the numbers of 16 to 18-year-olds in England starting them - in the first nine months of 2008-09 the number dropped by 8.3% on the same period the previous year."

Now who could possibly have foreseen that?

Well, Tyler for one. Back in January when the programme was launched he wrote:

"It's all part of Labour's current headline management/money burning exercise known as Doing Something Not Nothing.

Apprenticeships only work if employers actually take on apprentices, and with the virtual demise of British manufacturing, they largely stopped doing so.

What's more, the government's grandiose programme to have all 16 year olds stay on at school means that the minority who do leave are rather unlikely to be the ones employers might want to take on as apprentices."

Story 3

The government is now planning to inflict a new programme on us "to change the way food is produced and processed so that we continue to enjoy healthy affordable food in the decades ahead". The Rev Benn climbed into the pulpit and pleaded with us to mend our ways - before it's too late.

To which we say que?

Are we not supplied with cheap food beyond the wildest imaginings of our great grandparents? Is not the variety and the quality (if not the taste) fantastic? Is not food production getting more efficient with every passing year (watch the latest episode of the excellent Mud Sweat and Tractors here - especially you, Tyler Senior)? What's to change?

True, food prices did increase quite sharply last year. But they've now turned down again, and the longer term downward trend is unmistakable - even in this chart taken from Defra's own paper (food prices vs the RPI):

Indeed, despite the occasional hiccough, relative to general prices - and certainly relative to incomes - UK food prices have been on a long-term downward trend since the abolition of the Corn Laws in 1846. Which is why food now comprises only around 12% of the RPI shopping basket.

So what about the soaring population - all those extra mouths to feed?

Well, yes, from the perspective of food prices, that is somewhat less than ideal. But the vicar does not suggest we impose a Chinese style one child policy, or even that we should cap immigration. So he clearly doesn't think that's a pressing issue (Tyler has just been sent a paper by a BOM correspondent that puts an alternative view - we'll read and blog it in due course).

And let's not forget that technology is moving on apace, so that yields are still increasing. Here's Defra's chart for cereal yields since 1970:

And you know the really good bit? The recent increase in prices will surely serve to spur on the producers to invest in yet more technology to produce yet more food from the same amount of land.

It's called the market, you see. Higher prices = higher profits = more investment = higher production = more for everyone.

And if you're a believer in markets like Tyler, you say the markets will take care of it. The markets will spot the need for more food and will drive the technology to deliver it. Simples.

Or rather, simples as long as our bungling politicos and commissars don't decide they can do better than the market. As long as they don't step in to forbid the necessary technological innovation, say, or to subsidise farmers to take yet more of our fields out of production. Say.

Remind me - why does anyone ever believe these arrogant clowns know what they're doing?

PS Actually, the report Defra have published to support the Rev Benn's sermon is packed with fascinating charts. Here are one or two of them.

First, the real price of various agricultural commodities since 1970:

Not much of an upward trend there.

Second, the origins of the food we eat here:

Thank God for international trade, otherwise we'd still be living on turnips.

Third, the breakdown of where we buy our food:

Looks like we still disagree with the BBC and the Grun about Tesco - we clearly see it as a great grocer rather than the embodiment of capitalist evil.

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