It never rains but it pours. Gordon Brown, the Chancellor, has kept very quiet over the Prime Minister's spot of bother with Iraq's apparently non-existent weapons of mass destruction, presumably quite deliberately so, but while he awaits his moment, another, possibly even more dangerous front is opening up on his own back lawn.
The public finances, for long the Chancellor's great pride and joy, are deteriorating with a speed which even his fiercest critics failed to anticipate. With just three months of the financial year gone, the budget deficit is already double what it was in the same period last year and a half what the Chancellor is predicting for the whole of this year.
By some accounts, the Treasury has ordered all Government spending taps to be turned off until the numbers are brought back in line with forecast, but it may already too late. Barring an economic miracle, the full-year deficit will be higher by an order of magnitude than the £27bn predicted in the Budget.
The only consolation is that although the numbers look frighteningly high, they are not nearly as bad as almost everywhere else. In the United States, where the budget surpluses of just a few years back have melted away like snow in summer, the deficit now seems to be almost wholly out of control. This week the Administration's Office of Management and Budget (OMB) raised its estimate of this year's deficit from $304bn (£191bn) to $455bn, or 4.2 per cent of GDP. Not even in Germany and France is the situation as bad as that, and in Britain it is a great deal better.
The OMB forecasts that the US deficit will decline markedly from next year onwards before returning close to balance by the end of the decade, but this depends crucially on a return to vigorous economic growth. The same goes for the Chancellor's plans for "affordable" public spending. The numbers only stack up if, as the Chancellor predicts, the economy begins to achieve above trend growth from next year onwards.
Yet while America's tax-cutting agenda gives some reason to suppose a resumption of strong growth on the other side of the pond, all the indications are that here in Britain, taxes are much more likely to rise than to fall, leaving the Bank of England in the unhappy position of having to do all the work in making people feel better off by repeatedly cutting interest rates. Mervyn King, the new Governor, has already made plain that there are limits to that process.
The UK economy has barely grown for two quarters now and if there was any growth in the latest three-month period (GDP figures for the three months to the end of June are to be published next week), it is likely all to have come from higher public spending. In the latest quarter, public sector net investment (capital spending in other words), rose an astonishing 180 per cent on the same period last year, against a budgeted growth of 67 per cent for the year as a whole. Perhaps surprisingly, tax revenues have held up relatively well.
Whether that can remain the case is an open question, but already the Chancellor is having to borrow a lot more heavily than he anticipated. One look at The Guardian's Wednesday 'Society' supplement, a doorstopper of a publication chock full of advertisements for public sector jobs, tells you all you need to know about where our taxes are being spent. No, not on subsidising The Guardian, though that too, but on a bewildering and sometimes bizarre array of public sector job creation.
These jobs come not just in health, education, transport and other priority areas for Government spending, but in posts as obviously vital to the national interest as parks entertainment co-ordination, traffic and noise abatement, adolescent residential support and traveller and gypsy management.
These are no doubt all worthy enough positions and I'm sure the people who fill them work hard at making them worthwhile, but can the country really afford them, and would you chose to spend your money on such luxuries if you had any control over it? Well, maybe you would, but can it really be appropriate that there are already more than 30 people in the newly formed media and telecoms regulator, Ofcom, on more than £100,000 a year?
While the public sector spends away as if money were no object, the productive part of the economy, the bit that makes all this public sector activity possible, seems to be going to hell in a handcart. The one is growing while the other is shrinking and the difference is meanwhile being paid for through extra Government borrowing.
For the time being the Chancellor can comfort himself with the thought that though the public finances are deteriorating, they are in even worse shape elsewhere. Yet that doesn't make the present orgy of unearned public spending any more excusable. The process seems almost certain to end badly, with tax, interest rates and inflation rising all at the same time, and if Mr Brown's turn at being prime minister is coming at all, it may be a short one.
The new chief executive at Lloyds TSB, Eric Daniels, is in the manner of all new brooms conducting a thorough review of the business with the intention of sweeping out all the redundant junk and chaff of yesteryear. Whether Scottish Widows, the Edinburgh life assurer expensively acquired for £7bn in the late 1990s, is heading for the car boot sale along with the rest remains to be seen, but there is little doubt that with the benefit of hindsight the takeover was a terrible mistake.
Most business downturns prior to this one have been accompanied by an equally gruelling banking crisis in which profits would be wiped out by a rising tide of bad corporate loans. The effect was generally greatly to exaggerate the extent of the downturn by prompting a credit crunch on top of everything else. This time around it has been different. Cost cutting, buoyant consumer and mortgage lending, and more adept risk management, including the dispersal of credit risk through the bond and derivative markets, has enabled the major British banks to emerge from the downturn stronger than when they went in.
Instead the downturn has been felt much more acutely in the insurance market, where capital reserves have been all but wiped out by the bear market in equities and which as we now know was a major buyer of the bonds and derivatives the banks used to disperse their credit risk. Many life assurers have been forced to close to new business altogether, some have had to be recapitalised, and all of them have been forced to slash bonuses, a measure that alienates savers, both existing and potential, as well as sharply reducing the profits that can be earned from the life fund by the proprietary company.
Lloyds TSB is alone among the major British retail banks in owning a substantial life assurer, which is in turn one of the reasons why its share price has sharply underperformed the rest of the banking sector this past three years. What's past is past, and the question for Mr Daniels, a quietly spoken American, is whether he should be cutting his losses and running, or pumping yet more money into the business in the hope of rebuilding it for the future.
The decision is complicated by a change in the regulatory landscape, ending the so-called polarisation rule which has forced distributors to tie themselves exclusively to one product provider or to go to the other extreme and cater to all comers. Most banks have chosen to tie themselves to one provider or another, but that may not make sense in a deregulated market and if it doesn't then there is probably no point in owning a life assurer outright.
Deregulation, financial weakness and Government price capping of key savings products, has kick started a process of rapid-fire consolidation in the industry which is expected further to decrease the number of significant players over the months and years ahead. As a consequence, Mr Daniels may find himself having to buy further into the life assurance market in order to stay in the top tier of product providers. Does he really want to do that? We'll see.Reuse content