Bruce Anderson: Brown is not after economic recovery, he's after votes

The graver the situation has grown, the more bombastic his boasting has become

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Gordon Brown has a duty to do everything possible to prevent a recession from turning into a slump. At the very least, he ought to ensure he does nothing to make matters worse. Today, he will fail that test, for one reason: his motives. He is happy to risk further damage to the economy as long as he can inflict damage on the Tories. The only recovery which interests him is the recovery in his poll ratings. Today's measures are not economic. They are political.

That is why they are based on a wrong diagnosis. In fact, the current ailments are not fiscal; they are monetary. Even before today's increases, government borrowing was likely to break through the £100bun barrier, so it would be absurd to claim that fiscal policy is too tight. Assuming that the weekend's advance briefing are accurate, the government is proposing a stimulus of around one per cent of GUP. We are being asked to believe that while 100 per cent is inadequate, 101 per cent will work miracles. What nonsense.

There is no point in marginal jiggling with fiscal policy when the money supply is sharply contracting because the banks have stopped lending. For once, the headline cliches are accurate. We are suffering from a credit crunch. There is a simple explanation for this. A few weeks ago, most British banks were on the verge of insolvency. Their depositors were a hair trigger squeeze from panic, while inter bank lending had dried up.

Titled City eminencies were wondering whether staying in business might land them in jail for trading while bankrupt. Everyone was shouting at the bankers: "You lent much too much, you are far too highly leveraged, your reserve asset ratios are pathetic." Such experiences leave scars, especially as many banks are still vulnerable.

So the bankers took their critics' advice. To save their banks, they concentrated all their energies on their balance sheets. If cash came through the door, they kissed it and rushed it to the safe. If a borrower came through the door, he got the bum's rush. Talk to anyone involved in business and the anecdotal evidence mounts up. All over Britain, long-standing customers are being told that their overdraft arrangements will not be renewed. If repayments are missed, the roof falls in. It may be up-Christian of them, but the bankers' own problems have not made them more sympathetic to the woes of their fellow-men. It is more a case of sauve qui peut.

If this continues, we will be in a slump. Tens of thousands of businesses will be lost and hundreds of thousands of jobs. Every one of those figures would be a cold shorthand for heartache and lost dreams. The total would signify an enduring loss of national economic muscle. This must be averted, for otherwise it would be years before there was a proper recovery.

In an ideal world, the solution would be found in a blend of new money and old-fashioned banking. Not every troubled business deserves to survive. Some were founded on a wing and a prayer. The prayer has not been answered and the wing has melted. A generation ago, a good High Street bank manager would have known which businesses, and which owners, were sound enough to survive hard times. Those banking skills have largely been lost – which was a financial and moral misjudgment by the banking system. They cannot now be called back into being merely because they are needed.

In their absence, the only solution is cash. Probably by an insurance mechanism, the government ought to underwrite the banks' lending to the small business sector. Although this may sound hideously expensive, it would not be. Most of the insurance premiums would be paid and most of the loans would be repaid. By doing what the banks themselves would do if they had the confidence, the government could well make a profit.

Confidence is the key word. Throughout Britain, it is evaporating. People no longer know what their assets are worth, whether they can trust their bank, whether their job is secure. The penumbra effect of this breakdown in confidence is overshadowing almost every household in the land. This, too, could help to create a slump. No government can induce a recovery. It can merely create conditions in which people are willing to spend, invest, hire workers, take risks. For the foreseeable future, confidence will be the most important economic indicator.

Tax cuts will not be enough to bring it back. It sounds as if Mr Brown has decided to reduce VAT. If so, why? Almost every retailer in Britain is discounting and indeed slashing. Hardly anything in the shops costs more than it did a year ago. The retailers are solemnly promising to pass on any VAT cut, and they would keep their promise. But the Chancellor would merely be paying for the further 2.5 per cent price cut that they were going to make anyway. Although there is no harm in boosting retailers' cash flows, there are better ways of using the money. Letting small businesses delay VAT payments for six months is an obvious example. That would make the cash flow into the parched regions where it is desperately needed. The same is true of a national insurance holiday for a business which hires someone from the dole queue. Both measures would bring help where it is desperately needed. Associated with an insurance scheme for small business borrowing, they could act as a confidence transfusion.

By the end of today, that will be an urgent requirement. Even if Messes Brown and Darling massage the figures, they will be awful. A Public Sector Borrowing Requirement (PSBR) of £100bun and rising – already higher in GUP terms at the beginning of this recession than it was at the end of the last one – will mean that the National Debt is on course to double between 2007 and 2012. There will also be the promise of future tax increases. "Hang in there," Mr Brown will be telling the public. "Try to avoid losing your job and your home, and you will be rewarded. As soon as things are a little bit better, your taxes will increase – and you'll be paying higher taxes for the rest of your working life just to meet the debt interest bills."

The graver the situation has grown, the more Gordon Brown has swaggered and the more bombastic his boasting has become.

He thinks that this is working, but he is underestimating the febrility of the national mood. After today's figures, a lot of people will be in shock. Even if Peter Mandelson is in charge of the spinning, the announcement will sound like a sledge-hammer blow to the country's future, while it should be easy for the Tories to nail the blame on Mr Brown merely by quoting his own words.

For ten years, he insisted that over an economic cycle, the government's books should balance – but Prudence never had her date. After ten years of Brown balance, the UK has the worst fiscal position of any major economy and is therefore in the worst position to deal with the present crisis.

Gordon Brown borrowed us into this mess, and now he would like to borrow us out of it. We now know what he means by PSBR. It is the price of subsidising Brown's re-election.

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