Whatever else this week may or may not have achieved in the fury of political exchange, what it has done is to produce clear divisions between the various parties on how to deal with the recession hurtling towards us. And so it should. Lord Mandelson may malevolently accuse the shadow Chancellor of treason in discussing the state of sterling. The Prime Minister may try to paint the Opposition into a corner of seeming to deny help to the victims of the downturn. But the reality is that there are profound disagreements among economists, businessmen and financiers as to how to deal with this crisis, and those arguments should be reflected in Parliament.
Everyone agrees the situation is serious. How could they deny it? But not everyone agrees with what to do in response. Gordon Brown has clearly nailed his colours to the Keynesian mast and is prepared to introduce a major package of tax cuts and spending increases to try to slow the speed of the oncoming vehicle, whatever the cost to the Government's finances. The Tories have committed themselves to holding the line on fiscal probity – calling for limits to borrowing and urging expenditure cuts to make room for any fiscal stimulus. The Liberal Democrats, who were the earliest to recognise the danger of a full-blown recession and have been most forward in proposing measures to meet it, believe in a major package of cuts and spending but argue that there ought to be tax increases on the wealthy to help to pay for it.
For the Government, this is no time for constraint when consumers are stopping spending and investors are losing confidence. And they have the cover, as Mr Brown keeps repeating at every opportunity, of international approval for big packages. The Tories cry that it is pointless promising jam today if it is all going to have to be paid for tomorrow. And the Lib Dems say the action must be big, but it must be balanced.
The case for a major stimulus is now pretty much proven. After all his denials that the economy was headed into reverse and his insistence that Britain could cope with any downturn better than anyone else, the Prime Minister has at last come round to the view that this is the most serious economic crisis in a generation. Indeed, he has even compared it to the Wall Street crash and ensuing depression. That may be overdoing it. But it should bring home the point, so bitterly learned by our grandparents, that the great danger in a reverse of this nature is that it starts to feed on itself. Falling demand prompts consumers, investors and banks to draw in their horns, which in turn makes the collapse in sales and the squeeze on credit all the worse, prompting rising lay-offs and still further falls in sales, and so on.
The sort of fiscal stimulus now being planned can counter this by putting more money into people's pockets and providing more jobs through public investment. The problem of today – as in the great crash – is that the contraction comes hard on the heels of a banking and stock market crisis. Putting more money in the pockets of taxpayers, particularly at the lower end of the scale, can help. But it cannot work alone. For that you need credit to become more freely available at an attractive price. The Government has already bailed out the banks with extra liquidity and injections of new capital. The Bank of England has acted drastically to reduce interest rates and is poised to go further. But so far the banks have still not responded with loans, mortgage rates or credit lines to their customers. As yesterday's CBI survey of smaller businesses illustrated, most firms are experiencing a drastic reduction in bank credit and a tightening in terms. And that goes for ordinary customers as well.
From the banks' point of view, that may be understandable. They badly need to rebuild their capital base and avoid a return to excessive risk. But from the nation's viewpoint, this is only making a bad situation worse. Banks must support the reflation package by restoring lending. If they will not do it of their own accord, then the Government should use the influence of its new shares and its powers to push them into more responsibility.
Even that may not be enough. Confidence, once shaken, is not so easily restored, as every person knows in their personal life. The danger for the Government is that, if its measures do not work next week, either because they are too slight or badly pitched, it will then be left with little in its locker. You cannot go on for ever reducing interest rates without putting off investors and encouraging consumers not to spend now but to wait until prices fall even further. And you cannot go on reducing taxes without destroying confidence among the buyers of government debt here and abroad. It is a time when the country needs to pull together. But it is also a time when we need every economic measure to be subject to the full scrutiny of political debate.Reuse content