Economy Support To Continue

(Reuters) – THE GOVERNMENT MUST KEEP BORROWING until recovery is entrenched, and one set of good economic data will not be enough to show this, Chancellor Alistair Darling told Reuters on Wednesday.

Darling said it was better to continue tax and spending measures to boost the economy for too long, than cut them off prematurely and risk plunging Britain back into recession.

His comments come ahead of the publication of preliminary third quarter gross domestic product figures on Friday, which economists expect to show 0.2% growth on the quarter following five consecutive quarters of contraction.

‘We must support the economy until we’re sure the recession is over,’ Darling said at a Reuters Newsmaker event.

‘Some are tempted to think the crisis is over. It’s not… and one set of data showing positive growth will not be enough. We need to ensure that the recovery is embedded.’

Britain faces an election by June next year, and the Conservatives, who lead opinion polls, accuse the Labour government of letting the public finances get out of control when tackling the recession.

Darling said financial markets were already more confident about the fiscal outlook than earlier this year, and that he would soon unveil further measures to tackle the budget deficit.

‘They’ll see evidence of our intentions to get the deficit down in the pre-Budget report,’ he told Reuters in an interview.

‘Maintaining confidence in our ability to manage and deal with the situation is important and I do think confidence is better than it was a few months ago.’

But the bigger danger was jeopardising economic recovery by stopping fiscal support too early, Darling said.

‘It’s better to take back that support too late rather than too soon.’

‘Borrowing to support people now and to invest in the future may feel counter-intuitive… but in the longer run, it will mean the bills we face as a country are lower, and that we are better placed to pay them off.’

The government borrowing is forecast to hit £175 billion pounds this year, more than 12% of gross domestic product.

Darling also rejected the idea that banks should be split into those that handled retail business and those that were investment banks, along the lines of the United States’ 1933 Glass-Steagall Act.

In a speech on Tuesday, Bank of England Governor Mervyn King suggested banks could be split up into safer utility-type operations and sections that operated in riskier markets, with tougher regulation and public backing for only the former.

But Darling said the credit crunch had shown both retail banks such as Northern Rock and investment banks like Lehman Brothers could fail, and neither be left safely to collapse.

‘I don’t think you can decide that in one type of banking you’ll intervene and in one type you can’t,’ he told Reuters. ‘I don’t think a Glass-Steagall approach, which might have been right for the 1930s, is right for the 21st century.’

Instead, he defended his proposal for ‘living wills’ setting out how banks could be wound down in the event of bankruptcy, saying they would also aid regulators in identifying the riskiest parts of a bank’s business.

Darling also reiterated earlier calls for more competition in the British retail banking market, and said that the government would try to ensure this when it sold its large stakes in Royal Bank of Scotland and Lloyds.

He also singled out U.S. investment bank Goldman Sachs for criticism about the scale of bonuses paid, which look on track to be back to 2007 levels.

‘Some do, some manifestly don’t [get it]. What happened with Goldman Sachs last week sends the wrong signals.’

UK Cannot Afford Another Fiscal Rescue

(Telegraph) – IN CALCULATIONS THAT WILL SPARK FURTHER CRITICISM over the state of the public finances, an IMF paper presented to world’s leaders has laid bare how the UK’s indebtedness has left it unable to provide the vital stimulus the economy could need over the next 18 months.

Every other G20 country, apart from the UK and Argentina, has been able to budget for temporary spending increases or tax cuts next year to help drag their economies out of recession, according to the paper presented to a recent G20 meeting in Basel. Even Germany, whose finance minister, Peer Steinbruck, has accused the UK of ‘crass Keynesianism,’ plans to spend a full 2% of its economic output on such measures next year.

The news underlines the fact that, with Standard & Poor’s having warned recently about the perilous state of the UK accounts, Britain has very little leeway to afford new emergency measures. However, sceptics will warn that it also makes it doubly likely that, in the pre-Budget report this autumn, the Chancellor will announce extra measures to keep Britain in line with its G20 counterparts.

The UK entered the recession with the worst structural budget deficit in the Western world, leaving it with little room to borrow in order to lessen the impact on profits and unemployment. Although the IMF last week said it now expects the British economy to return to growth next year, its calculations over the implications of the deficit underline the fact that any recovery will be tepid.

The Organisation for Economic Cooperation and Development has also made grim predictions about the state of Britain’s public finances. It is forecasting the fiscal deficit next year will climb to 14% of GDP — higher than Ireland or Iceland, and the worst in the industrialised world.

… (13/07/2009) – Tories ‘Will Take Years To Fulfill Tax Pledges’

… (14/07/2009) – UK Cost Of Living Falls Most Since 1948

UK To Fall Furthest Into Debt

(Press Association) – THE UK IS PREDICTED TO SINK FURTHER INTO THE RED than any other major developed country next year, an economic body has warned.

The fiscal deficit is expected to rise to 14% of economic output in 2010, compared to an average of 8.75% in the 30 most developed markets, according to a report by the Organisation for Economic Co-operation and Development (OECD).

The OECD warned that ‘public finances have deteriorated sharply’ since the beginning of the recession and called on the UK to continue to develop ‘a strong and credible’ framework for reducing the ratio of debt to output.

The OECD said the state of the UK’s balance sheet meant the possibility of extra stimulus to the economy was curtailed. It also said the UK economy was likely to recover ‘only mildly’ in 2010, with any return to health dependent on an upturn in the housing market and credit availability.

It predicted that UK unemployment, which currently stands at a 12-year high of more than 2.2 million, will ‘rise substantially’ and ‘labour market conditions will remain unfavourable for a long period.’

‘While labour market flexibility remains relatively high in the United Kingdom, policies to help the unemployed remain employable should remain a priority,’ it said.

Politicians ‘Need To Get A Grip’

(Press Association) – A BUSINESS LEADER has urged politicians to ‘get a grip’ on long-term problems such as rising Government debt and increased levels of youth unemployment.

Richard Lambert, director general of the CBI, said the country was at a ‘burning platform moment,’ threatened by critical issues which needed to be tackled urgently.

At a CBI dinner near Gatwick, he criticised the apparent failure of politicians across the parties to address ‘huge challenges.’

He said: ‘The United Kingdom faces some of the biggest economic, social and environmental challenges of our lifetime — challenges that go right to the very heart of what kind of country we want this to be.

‘Britain finds itself at what you might call a burning platform moment. We can either take the bold steps that will be necessary to take us forward to a prosperous but different kind of future, or we can pretend to ignore the need for change, and risk going down with the ship.

‘Instead of focusing on this big picture, politicians appear wholly preoccupied with what’s going on within the Westminster village, and in doing what they can to strengthen their own positions over the short term.’

Commenting on the MPs’ expenses scandal, Mr Lambert said: ‘In response to this public rage, politicians are airily throwing around ideas for constitutional reform — ideas which may be desirable in themselves and will need serious discussion in calmer times; but which are a massive diversion at a time when so many urgent policy decisions have to be agreed and implemented.’

The CBI leader added that the UK faced a fiscal deficit this year on a scale which had never been experienced before in peacetime.

A spokesman for the Business Department said: ‘The Government will continue to lead with bold and decisive government in order to lead the country out of recession. Many initiatives have been announced and more will follow in the coming weeks.’

… (27/06/2009) – UK To Fall Furthest Into Debt