Margareta Pagano: More balls, please, at the Treasury

With the economy in such a shocking state, Labour's only hope is a sharp U-turn on public spending – but does it dare?

Alistair Darling must be feeling brave. I don't mean because he stopped Gordon Brown from replacing him as Chancellor with Ed Balls but because of the shocking state of the economy.

Two sets of figures show why the UK's fiscal position is so catastrophic, and why Brown's position as Prime Minister is on such a knife-edge. This latest crisis may have been triggered by the scandal over MPs finances but the real cause is this country's perilous finances.

First, since Labour came to power in 1997, the number of jobs in the private sector has risen by 4.6 per cent while, staggeringly, the number in the public sector has risen by 20.9per cent – by 1.4 million jobs – to 8.1 million. Secondly, in this financial year, the Government is forecast to spend £4 for every £3 it raises from tax, giving us the biggest fiscal deficit recorded in peacetime. Recent figures from the European Commission add to the agony.

By next year, the UK is forecast to have the fourth biggest fiscal deficit in the EU. More telling, it estimates that three quarters of the jump in the deficit is due to the leap in spending as a proportion of GDP, a share of spending to GDP which will rise to an extraordinary 48 per cent. This would be the highest level recorded for more than 200 years – except during wars.

But then this is war – fiscal war. There are only two ways to win: inflate our way out of trouble or slash public spending. Endless government spending is no longer the sacred cow it once was – the public knows it is a debate that needs to be had and one which may even lead to efficiencies. I'm told that advisers are telling the Shadow Cabinet to look at where cuts can be made in each department, while the Lib Dems talk openly of trimming.

Secretly, the Labour Party knows that slaying the many-headed monster that it has fed for the past decade is the only way to stop the UK facing sky-high taxes and runaway inflation. But it still refuses to acknowledge this publicly, particularly with a general election looming any day now.

One intriguing theory floated last week by those backing Brown's attempt to make Balls the Chancellor was that his young acolyte, the architect of much of his economic policy, could be the man who would dare to kill this Hydra. The theory was that Balls could go were others fear to tread – that only an old-fashioned socialist would be able to take the knife to the spending programme while keeping old Labour on side.

However, I am not sure I buy all this. It would have required Balls to take on Gordon Brown, given that the Prime Minister consistently attacks the Tories over their alleged plans to close schools and sack nurses.

It would be nice to think that Darling fought so hard against Brown because he wants another chance to repair the damage done by the spending splurge of the past decade. He's also got a White Paper on financial regulation to bring out, a chance to reform the tripartite agreement between the Bank of England, the Financial Services Authority and the Treasury.

Is it too much to hope that Darling's victory will give him the confidence to look for ways to balance the books? He could start by looking at Canada where, after nine years of aggressive spending cuts under prime minister Jean Chretien, they finally got the debt under control, leaving the country better placed than others to face the global recession. At the very least, Darling should be brave enough to start the spending debate.

Oh, the power of investor fury as Rio Tinto buckles – and its shares jump

Jan du Plessis, the new chairman of Rio Tinto, must be feeling rather pleased with himself this weekend. Shares in Rio rose more than £2 at Friday's close to £30 after news that the world's biggest mining group had finally caved in to investor fury, dropped the Chinalco deal, launching instead its deeply discounted rights issue. Having been chairman of BAT Industries, Du Plessis is well-versed in controversy. But even he will have baulked at the storm provoked by Rio's decision to invite China's Chinalco to take a near 20 per cent stake in the group.

Rarely have investors been so angry with a corporation. They were spitting blood at Rio's chief executive, Tom Albanese, who bypassed them with his deal to take $19bn from the Chinese in return for a fifth of the company.

But investors have been rewarded for their anger and for their persistence. They are being given 21 new shares for every 40 they own, representing a discount of 48 per cent at the closing price. This is a steal and they know it.

However, the bankers involved in the transaction are not so happy – Blackstone will be one of the biggest losers, not just dropping down the league tables but also losing up to £30m in fees.

Du Plessis hasn't wasted time either in getting the long-awaited rationalisation of the industry on track. Along with the $15bn rights issue came news of a sensible tie-up with arch-rival BHP Billiton to merge some of their iron-ore interests. Du Plessis was careful to protect Albanese on Friday, explaining that Rio went with the Chinalco deal mainly because the financial markets were in such a terrible mess back in February when the deal was first hatched. He's right to say there might have been little appetite for new paper then but the point is that investors should have been asked.

Rio is now in much better shape but it is difficult to see whether Albanese can survive.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
News
Jerry Seinfeld Comedians in Cars Getting Coffee
peopleSitcom star urges men to be more supportive of women than ever
Life and Style
Living for the moment: Julianne Moore playing Alzheimer’s sufferer Alice
health
News
Jay Z
businessJay-Z's bid for Spotify rival could be blocked
Sport
footballLouis van Gaal is watching a different Manchester United and Wenger can still spring a surprise
News
The spider makes its break for freedom
VIDEO
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Evening Administrator

£8 per hour: Recruitment Genius: This Pension Specialist was established early...

Guru Careers: Executive Assistant / PA

£30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

What is it like to live with Alzheimer's?

Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
The Internet of Things: Meet the British salesman who gave real-world items a virtual life

Setting in motion the Internet of Things

British salesman Kevin Ashton gave real-world items a virtual life
Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

Election 2015: A dead heat between Mr Bean and Dick Dastardly!

Lord Ashcroft reveals latest polling – and which character voters associate with each leader
Audiences queue up for 'true stories told live' as cult competition The Moth goes global

Cult competition The Moth goes global

The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

Pakistani women come out fighting

Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
Leonora Carrington transcended her stolid background to become an avant garde star

Surreal deal: Leonora Carrington

The artist transcended her stolid background to become an avant garde star
LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

Education: LGBT History Month

Pupils have been discussing topics from Sappho to same-sex marriage
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

Cricket World Cup runs riot to make the event more hit than miss...

The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot