Stephen King: Darling's poison pill for his political foes

Related Topics

David Cameron may be licking his lips at the thought of a return to Conservative rule but, after yesterday's Budget bombshells, he'd be wise to heed some lessons from history. For the Tories, a poisoned chalice awaits.

Some governments are lucky. They're elected after all the hard fiscal consolidation work has been done by others. The Conservatives won the 1951 election following years of fiscal austerity delivered by Clement Attlee's post-war Labour administration. TheTories then stayed in power for the next 13 years. In 1997, Labour inherited a remarkably healthy fiscal position from the outgoing Conservatives. Twelve years later, Labour are still in power.

Other governments are not so lucky. Labour was re-elected in 1974 following the Conservative "Barber boom" of the early-1970s and the 1973 oil price shock. Harold Wilson's government inherited a particularly poor fiscal position and, in the process of trying to bring it under control, lost all semblance of economic credibility. The UK economy had to be bailed out by the IMF in 1976. The Winter of Discontent struck at the end of 1978 and Labour was booted out of office in 1979. Although, by then, Dennis Healey had already adopted many of the policies which later became associated with Thatcherism – rejection of simple Keynesian demand management, and the acceptance of monetary targeting – Labour were going nowhere.

The fiscal numbers outlined yesterday by the Chancellor make for hideous reading. Borrowing in the coming financial year of £175bn is almost unimaginably large. Expressed as a share of national income, though, the numbers are even worse. On the Treasury's projections, borrowing will rise to 12.4 per cent of GDP.

The numbers remain as bad in the following fiscal year and, thereafter, only begin to improve as a result of an assumed (and remarkable) 3.25 per cent growth rate in every fiscal year from 2011 through to 2013.

The rise in the top rate of tax may grab all the political headlines but, in the context of Mr Darling's fiscal projections, its impact is no more than a rounding error. To bring the finances back under control, a lot more heavy lifting will be required.

Under current plans, the level of government debt continues to rise in the outer years of the Treasury's projections notwithstanding the reduction in government borrowing.

The austerity of the late-1940s started when borrowing was a little over 6 per cent of GDP, a legacy of the War. The Labour administration of the mid-1970s also had to deal with a deficit of above 6 per cent of GDP. After reaching 8 per cent of GDP in the early-1990s, the Tories were left to clear up their own mess having unexpectedly won the 1992 election.

With the exception of the Thatcher administration in the early-1980s, governments which have had to impose fiscal discipline after years of recklessness have typically ended up paying a heavy price. So if the Tories win the next General Election (as the polls currently suggest) will they find themselves having to raise taxes or cut spending so much that any initial popularity disappears in an instant? And, if so, will they then face the ultimate curse of the fiscal disciplinarian, to be booted out of office after only a single term?

To be fair, it's easier for governments to borrow these days without having to knock on the IMF's door. Government borrowing has also been helped by the credit crunch. Investors who, once upon a time, happily purchased all manner of now-toxic assets have headed for the safety of government bonds. And in an effort to kick-start the financial system, the Bank of England is also now buying gilts via quantitative easing. The biggest budget deficit in living memory is linked with the lowest gilt yields since the 1950s.

The Government is hoping the economy is suffering primarily a cyclical malaise but, buried in the depths of the Budget papers is an assumption that, as a result of the impact of the credit crunch on the nation's capital stock, there may have been a permanent loss of output relative to trend of around 5 per cent between 2007 and 2010.

This, apparently, is a one-off loss which has no impact on the long-term growth rate of the economy, either past or future. A more likely scenario, is that the Government has persistently over-estimated the economy's sustainable speed limit: it has, therefore, been living beyond its – and our – means.If so, getting the fiscal numbers back on track will be very hard work indeed. Brace yourself for a decade of austerity.

Stephen King is managing director of economics at HSBC

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Customer Service / Sales Advisor - Print

£14000 - £16000 per annum: Recruitment Genius: Based just north of York, this ...

Recruitment Genius: SEO Account Manager

£15000 - £20000 per annum: Recruitment Genius: An SEO Account Manager is requi...

SThree: Associate Recruitment Consultant - Global Leader - FTSE 250

£18000 - £23000 per annum + competitive: SThree: As an Associate Recruitment C...

Recruitment Genius: Field Sales Representative

£22000 - £28000 per annum: Recruitment Genius: This family run school photogra...

Day In a Page

Read Next
A church in South Carolina burns after a fire breaks out on June 30, 2015  

America knows who has been burning black churches, but it refuses to say

Robert Lee Mitchell III
England's Jodie Taylor, left, and Jill Scott celebrate Taylor's goal against Canada during the first half in a quarterfinal of the Women's World Cup  

Women's World Cup: We should be able to praise England's Lionesses without shaming the men's team

Charlie Webster
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most
Katy Perry prevented from buying California convent for $14.5m after nuns sell to local businesswoman instead

No grace of God for Katy Perry as sisters act to stop her buying convent

Archdiocese sues nuns who turned down star’s $14.5m because they don’t approve of her
Ajmer: The ancient Indian metropolis chosen to be a 'smart city' where residents would just be happy to have power and running water

Residents just want water and power in a city chosen to be a ‘smart’ metropolis

The Indian Government has launched an ambitious plan to transform 100 of its crumbling cities
Michael Fassbender in 'Macbeth': The Scottish play on film, from Welles to Cheggers

Something wicked?

Films of Macbeth don’t always end well - just ask Orson Welles... and Keith Chegwin
10 best sun creams for body

10 best sun creams for body

Make sure you’re protected from head to toe in the heatwave
Wimbledon 2015: Nick Bollettieri - Milos Raonic has ability to get to the top but he must learn to handle pressure in big games

Nick Bollettieri's Wimbledon files

Milos Raonic has ability to get to the top but he must learn to handle pressure in big games
Women's World Cup 2015: How England's semi-final success could do wonders for both sexes

There is more than a shiny trophy to be won by England’s World Cup women

The success of the decidedly non-famous females wearing the Three Lions could do wonders for a ‘man’s game’ riddled with cynicism and greed
How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map