Adrian Hamilton: Recovery cannot begin until house prices bottom out

We don't have the money to fund recovery without outside investors

How can he get away with it? While David Cameron laboriously carries out a U-turn on taxes, the Prime Minister positively somersaults over every position he has ever held and yet seems to get only stronger in the opinion polls. He has abandoned all his golden rules, embraced unfunded tax cuts as the panacea for our recessionary woes and declared the whole thing a global problem in which we are but guiltless victims. Meanwhile, poor old Cameron has to do his manoeuvres in full public glare before an audience who never saw the point of his much-vaunted commitment to keeping Labour's spending plans in the first place, and are just as unmoved by his reversal of it now.

The blunt answer to the question is political skill. True, world events have given Brown cover for his policy reversals. But his real adeptness has been the way he has been able to turn events to his own advantage, playing to his strength as a man full of measures to meet the occasion and his ability – too often underestimated – to paint his opponent into a corner. In the early stages, it was pinioning the Tories (although not the Lib Dems, it should be said) into the position of being ignorant of the world scale of the crisis. Now it is to put Cameron into the role of a man who, in assaulting reckless spending, is showing himself opposed to helping the poor and the weak. It is hard politics but it is good politics, in that it has at least thrown up a real argument about policy rather than shadow-boxing over image.

The drawback to this intense focus on tax cuts, however, is that it glosses over the full nature of the economic downturn. In broad terms, in the rhythm of boom and bust which Brown has so long denied, there is an overwhelming case for a reflationary package at this stage that injects money in to the economy through tax cuts and expenditure over and above interest rates. The worse the slide, the more that needs to be thrown into the pot. But Brown's greatest deception has been to claim this is all a world problem, not a British one – and worse, to keep claiming we are in a better position to manage it than anyone else. This is simply not true.

Britain has indeed been swept up along with everyone else in the tidal wave of contraction that started in the US. But it is peculiarly vulnerable because it has a degree of debt and a reliance on the worst-hit industry, finance, far greater than anyone else's, including America. The British consumer is in hock up to the eyeballs and the economy has become perilously dependent on international finance for its jobs as well as growth.

Whatever you do to reflate the economy, that debt is going to have to be worked out of the system along with the over-inflated prices of houses and the country's excessive dependence on them as the primary form of investment. Just as in the US, but unlike most other countries, it will not really be until the fall in house prices reaches bottom that you can hope to start proper recovery. You can try to flood the system with cash through tax cuts but, as it is the poor who have been most over-borrowed in the boom, even they may prove reluctant spenders.

You also get yourself into terrible problems – as indeed the Government is right now in its relations with the banks – as to just what you want financial institutions to do. If the present bust has been due largely to massive overborrowing and lending in the past decade, as is the received wisdom, and if – as is also the received wisdom – you want banks to return to a more traditional function of taking deposits and lending prudently against them, then you have to offer savers the incentive to invest their money and borrowers to pull back on their loans.

Driving interest rates down and instructing the banks to follow suit will serve only to do the opposite. You can huff and you can puff at the banks for not loosening their lending terms but their basic need will be to tighten them. And what goes for the ordinary consumer also goes for the nation. Shorn of manufacturing, over-dependent on services in general and the financial industry in particular, and limited in domestic savings, we don't have the money that the US or Japan have to fund recovery without outside investors. Like it not, the general state of our finances do matter, and so does sterling as an indicator of our attractiveness.

None of this obviates the need for stimulus at this time, But to pretend that the Government can wave a magic wand and magic away a serious contraction of the economy, let alone limiting its life to only a year or so, is just plain deceitful.

a.hamilton@independent.co.uk