Jeremy Warner: Brown promises not on his watch as jobs disaster mushrooms

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The Independent Online

Outlook: The Prime Minister, Gordon Brown, promises that failure to act to protect jobs, with whole communities written off, "will not happen under my watch". After another grim day of job losses around the country, does yesterday's package of measures to get the unemployed back on to the shop floor help to fulfil that promise? Scarcely.

At first glance, the grant of £2,500 to employers for every person they train who has been out of work for six months or more, costing the Government an estimated £500m, looks a relatively generous and worthwhile measure, but as with many of Mr Brown's initiatives, it's mainly double accounting.

It's already possible for employers to get up to £2,500 per person in government grants for training the unemployed, provided it leads to a full-time job. Whether yesterday's announcement amounts to any more than existing grants is unclear.

But even if it does, the Government loses nothing by paying employers to take people off the dole queue, where the cost to the taxpayer in terms of benefit is a good deal higher. Such spending is neither more nor less than the automatic stabiliser that comes into play whenever there is a recession. Whatever the Government does, the public finances are bound to deteriorate in a downturn as the tax take falls and spending on benefit rises.

I don't want to be churlish, but £2,500 is going to make little or no difference to the few employers that will be expanding their workforces over the year ahead. And there are a few. Both J Sainsbury and Morrisons have announced plans to take on thousands more staff. As big gainers from the demise of smaller, niche rivals, the supermarket groups would have made this investment anyway. If a business proposition is worth doing, then it will be pursued regardless of the marginal incentive of government subsidy.

Any excess money that the Treasury has got to throw around would be better applied to across-the-board tax cuts for business and to job-creative public works than to employment subsidy. What's more, the focus should be as much on saving current employment as on creating entirely new jobs.

On this former front, it is still not at all clear what the Government should be doing. I've never much gone for Land of Leather furniture myself, but if even entirely debt-free companies such as this one are finding it impossible to pay the bills because of collapsing demand, then we really are in a pretty pass.

The Government's response so far is to try to cajole the banks into lending more to the credit-starved domestic economy. Part-nationalisation of Royal Bank of Scotland and now Lloyds Banking Group has substantially increased the Government's ability to twist arms. Yet there is an obvious drawback to this approach.

The more banks are required to lend to their home economies, the more they are forced to draw in their horns elsewhere in the world. The banking crisis is thus giving rise to a new form of economic protectionism, where all available credit is required to be concentrated on domestic borrowers.

Here's an interesting example of it. Australia's third largest mining company is called, appropriately enough, Oz Minerals. It's got some great assets, but like many other mining companies it took on a lot of debt during the boom.

Around a third of Oz's loans come from the British banks Royal Bank of Scotland and HBOS, the latter of which later this week becomes part of Lloyds Banking Group. As part of the recent government recapitalisation of the UK banks, HBOS and RBS have agreed to maintain their UK mortgage and small business lending at 2007 levels. With problems aplenty in the UK market, they are struggling to achieve this policy objective while simultaneously trying to restore balance sheet health.

The upshot is that they are both trying to realise capital by shrinking their lending elsewhere and therefore want their money in Oz Minerals back at the earliest opportunity. The credit crunch means that Oz Minerals is, meanwhile, finding it impossible to refinance this debt elsewhere. Unless the Australian government steps into the breach and guarantees the lending, Oz may end up in administration with a fire sale of assets.

As ordinary commercial lending shrinks, governments around the world are being forced to act as a substitute and take over where the private sector can no longer provide. Down Under, there is said to be some A$120bn of foreign lending, much of it by British banks, to Australian companies that needs to be refinanced or rolled over this year. If they are to meet their commitments back home, then British banks have to reduce these overseas loans.

As if on cue, Royal Bank of Scotland admitted last night that it had a $3.47bn exposure to Lyondell Chemical, a US company which is now in bankruptcy proceedings. Of this exposure, nearly half is lower-ranked credit, which RBS is quite unlikely to get back.

Now why does it seem so predictable that this exposure forms part of the poisonous legacy of the ABN Amro takeover, a deal that looks ever more calamitous by the day? The more RBS has to write off overseas, the less money it has to lend back home, where it is under pressure from its majority owner, the UK Government, to lend more. And the PM says not on his watch. He used to say something similar about boom and bust.

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