UK Debt Downgrade "80% Certain"

Tomorrow's DT will make further horrible reading for Brown and Darling (I dearly hope). According to one of their economics journos, Ed Conway, the head of one of Britain's leading fund managers, Neil Woodford, Darling's and Brown's inability to face up to the unsustainable scale of their spending and consequently gigantic debt levels - at least in peacetime - is now virtually certain to lead to a credit rating downgrade and, far worse, a subsequent debt spiral. Woodford is quoted as saying:

I would argue that there is a high probability... a decent chance that we will be downgraded, and it is a near certainty if we do not, in the wake of the next election, properly deal with the deficit. There are some major challenges here. If we do not take the medicine, there will inevitably be a downgrade. If we do, we have a chance of escaping a downgrade.

After the PIMCO shock, where their experts determined that there was an 80% probability of a downgrade from AAA and acted accordingly by dumping UK gilts, it seems this gathering economic storm is going to make the current arctic weather and subsequent national chaos look like a soft, Barbados beach on a warm day.

And the only party with a plan for getting us out of it with a coherent fiscal policy, designed to allow monetary policy to remain loose by avoiding the downgrade and subsequent, devastating interest rate rises and inflation, thus enabling a strengthening in any recovery, is the Conservative party. Philip Hammond proved that yesterday.

No wonder the Tories want an election right away. They're not bluffing - it's vital that we have a change of government because it really is the 11th hour for Britain's finances and economy.

Action must be taken - now!

By the way, well done Gordon. Well done Darling. Britain really is nearly bankrupt, thanks to you. Marvellous.

Darling Flexes Muscles He Never Knew He Had

Darling: just window dressing?

Though flabby and out of condition, Alistair Darling is flexing his newly-found political muscle, it seems. I wondered whether he would actually try to run his own department at some stage, especially now that his position is basically unassailable after he gave his former friend and boss, Brown, an ultimatum about Balls' attempts to steal his job.

However, due to the fact that this Labour government is so extraordinarily directionless, talentless and rotten to the core, the instant consequence of Darling's inevitable move to reverse the ridiculous VAT cut - the most ineffective and expensive tax break in history - is to split the cabinet, or so the ST has just said. It would be hilarious if it wasn't so tragic. Here are the key bits:

His comments [about reversing the VAT cut] come just two days after Harriet Harman said the planned rise from 15 per cent to 17.5 per cent on January 1 was "under review".

Ms Harman, speaking in the wake of the Daily Telegraph's campaign to postpone the increase, said the Government would be flexible about VAT – a move that was welcomed by business groups.

Leading figures in the retail and hospitality industry, including Sir Philip Green and Sir Stuart Rose, have argued it will be an "administrative nightmare" to implement the change not only on a Bank Holiday, but also at the busiest time of the year for restaurants, hotels and shops.

However, Mr Darling publicly "slapped her down", according to a Treasury source, after he made clear the reverse in the temporary cut was still set for the New Year.

Talking on the BBC's Andrew Marr Show, he said it would "definitely" return to its original higher level of 17.5 per cent in January

"...when you consider that it costs almost about a billion pounds a month, I was quite clear at the budget and clear when I announced this last November that the VAT rate would return to the 17.5 per cent at the end of this year. Now that remains the case," the Chancellor said.

It is understood that he was upset that Ms Harman, deputising for the Prime Minister, who in on holiday, spoke on tax matters.

In the Marr interview this morning, Darling also tried to shift the blame for the government's mishandling of the economy back onto banks that are still not lending to businesses, despite Labour assurances last year that this would not happen. Given that the Treasury's own new rules for the banks, which demand that they have double the capitalisation that they could work with previously, and mean they have no option but to hoard QE and bailout cash, it seems rather dishonest of Darling, muscular or otherwise, to try to offload responsibility for his and his governments' hopeless incompetence over loan guarantees onto bank boards hand-picked by him! No more than we've come to expect, though, I suppose. Meanwhile, through all the lies and bluster, thousands of businesses and hundreds of thousands of jobs are being lost in what is a truly horrific downturn - and which could be rapidly turning into a full-blown depression.

While that might be another story, it's all part of the same problem: bad government. The fresh split and the "bad" bank behaviour provides further evidence, as if more were needed, that this government, with its constant infighting and loser leader is completely paralysed. The country needs a united government with a proper mandate to act. It needs a general election far more now than at any time in the post-war era.

You see, Darling might have muscle now, but he has no authority. No-one in this government has - and none moreso than G. Brown, who, laughably, remains our Prime Minister. This really is a crisis, even if it might not feel like one. Remember, though: it never does until it's too late. The clock is ticking on the timebomb that is a sudden and huge acceleration in unemployment, which is where all this is heading.

It's 1978 all over again, folks (or worse). Gawd 'elp us all.

US Economists: UK Budget Wrong

US financial newsblog, Intermex Power, has published a powerful article this evening by Brian S. Wesbury, chief economist, and Robert Stein senior economist at First Trust Advisors in Wheaton, Ill, who write a weekly column for Forbes. They have described the tax hikes combined with the huge levels of borrowing in the UK budget as a perilous error on the part of the government which will certainly not head off the potential credit downgrade.

...we need only look at the U.K., where the threat of a downgrade comes despite the large tax increases already built into their budget. It offers an example we shouldn't follow.

They warn the US government that to follow Brown's plans to borrow and print more money to finance ballooning levels of public debt would cripple the US economy by hammering the value of the dollar. The Standard and Poor's recent decision to 'review' the UK's AAA credit rating was not only intended to force the government to wake-up to the risks they're taking with unsustainable debt but to warn the US and the world that debt was a major danger. As the authors put it, the review of the UK's AAA status was...

...a shot heard 'round the world [and] happening despite [Gordon Brown's] planned tax hikes, because [the UK's] debt burden was to rise to 100% of gross domestic product.

So much for Brown's great lie, then: his la-la land 'global consensus'. The warning is clear: the government's policies are not only wrong, they are dangerously wrong. As Peter Hoskin of the Spectator noted earlier today

... Professor John Taylor's article for the FT today extrapolates from Standard and Poor's recent assessment of the UK's creditworthiness [and] delivers a warning about the rising national debt in America. This passage jumped out at me: that we are now in totally uncharted territory thanks to the government's mishandling of the economy year after year.

"While there is debate about whether a large deficit today provides economic stimulus, there is no economic theory or evidence that shows that deficits in five or 10 years will help to get us out of this recession. Such thinking is irresponsible. If you believe deficits are good in bad times, then the responsible policy is to try to balance the budget in good times. The CBO projects that the economy will be back to delivering on its potential growth by 2014. A responsible budget would lay out proposals for balancing the budget by then rather than aim for trillion-dollar deficits."

Taylor's point also applies over here. By the Treasury's own (optimistic?) forecasts, we'll still be running a budget deficit of 5.5 percent of GDP in 2014. Going off their current plans, that deficit would be similiar under the Tories. So unless the next government undertakes bolder fiscal consolidation than is currently being mooted, we may again be lamenting a failure to "fix the roof while the sun was shining.

The message for Brown and Darling, coming now from experts all over the world, can't be any more clear: you must cut spending or cause an even deeper crisis for the UK economy. Of course, they will not - but not for economic reasons, for political ones. Launching the essential raft of cuts in public spending would mean they would be unable to attack supposed 'Tory cuts' and thus in their uncomplicated minds lose their 'unique selling point'. As this appears to be the main (only?) plank of their political strategy it would also mean their having to work-out (very quickly) exactly what, if anything, this government is now for. I can provide the answer for them right now: this government is [good] for precisely nothing.

What voters simply must finally realise from all this is that the cynical - and severely flawed - political calculation behind the tax-borrow-and-spend 'policy', and behind triggering an insane debt explosion, is the only motive for Brown's reckless actions. It's the sheer desperation of a man (deservedly) threatened with the end of his political career and willing to devastate the UK economy in a last-ditched and deluded attempt somehow to 'save' himself. He's attempting to trick the electorate into backing him by generating a fake recovery for early 2010 which itself will result in the dreaded 'double dip' recession and then years of stagflation.

This country is currently at the mercy of a very dangerous man. The press better wake up to this fact and help people with a campaign to have him removed - immediately. It's the only option left.