Friday, 8 January 2010

Social Economics

I am absolutely sure I am using the term 'Social Economics' wrongly. Then again, I am not an economist or a real socialist for that matter. However, I probably know as much about economics as those who profess to by the state in which we find ourselves.

Recently, I blogged on National Debt being the new sub-prime but in the heart of that piece was the idea that external markets are watching our economy closely with a keen view to see how we can tackle our budget deficit and therefore be able to pay our debts. Given much of our National Debt is being subsidised by Quantitative Easing (QE) money to the tune of £200bn, soon it will go back on the open market and we will see what the real world, with real money, thinks of our ability to service our debt. There are many who now believe that as we leave a cogent strategy to tackle our debt until after the election and have built our strategy to date on using new money which we don't have to support ourselves, that Britain is in a precarious state.

It was described by an editor for the FT the other night as a period where a boy scout is trying to light a fire - the QE money is the firelighter which is burning brightly but there is little evidence that it has lit the fire that will be our economic recovery. But I would argue there is far more at stake here.

In my idea of 'Social Economics' which has nothing to do with its real definition, our future relies on two aspects which are not classical economics. 1) Politics - we are in a period of hiatus, marked by our lack of enthusiasm to actually do anything about the budget deficit, not even a spending review in preparation which is due to the imminent General Election. This may be understandable as cost cutting is not popular and it seems that inaction is as voters have actually polled in favour of the Government in recent months. Perhaps it is 'Denial', my age old theme - put your head in the sand and the problem will somehow right itself. Gordon Brown may be foolish to start believing in free market economics at the wrong time, especially as he believes it's what got us into this mess. The issue here is that the longer we delay and not tackle the problem, the worse the problem gets and the cure will need to be more drastic - in both spending cuts and tax rises.

2) Hand in hand with this comes the mood of the people. We have just had a dramatic illustration of how voters can change Government policy as Iceland has refused to back its Government in paying our Government compensation for those who lost savings in Icelandic banks. I have a great deal of sympathy with the Icelandic people - while they had many good years, by the end of this year they will have lost almost a third of their take home pay due to the banking disasters, and they are not a rich people. Besides, it was our Government's decision to repay the losses to individuals, not theirs. What it means is that there is a breaking point and people will have a finite limit as to how much they believe they can pay in taxes which is fair, while the same may not apply for spending cuts as they can be far more localised or general. The clear learning point is that if there had been a referendum on the bank bailout beforehand, it is suggested we would have all voted against it.

The outside world will watch closely as to what our breaking point will be. Astutely, Lord Mandelson has understood that there is a limit that people will pay in taxes but I don't think he was referring to us but to bankers who are royally miffed about the windfall tax, on top of the announced 'super tax' on those who earn £150,000 or more plus the new curbs on City bonuses. In a microcosm what bankers do about it will illustrate a wider reaction. Let's face it, if bankers get cheesed off their employers will relocate them and they will rise again elsewhere to earn their money. For real people like you and I, we will have to pick up their share of the tax burden and the rest.

So the question arises, how much will we all tolerate in Britain? How much are we prepared to sacrifice in order to keep bankers here and London as one of the biggest and most influential of financial centres? Are we prepared, as Iceland is, to say, 'Up yours, take your Casino banking elsewhere and the fools that play it' or are we realistic enough to know that we cannot have a Britain without the support of the City, its earnings and influence?

I am sure there is a line that we all cannot cross. I am also certain that the later we leave that 'stress test' the worse it will be. I do believe that part of the attempted and almost farcical leadership coup at Labour was fuelled by the PM's inaction on the whole matter. While it is nice to talk about halving the budget deficit and talk generally about the numbers, the reality is that every voter in the country would like to know what it means before they vote. Yes, it's true we are stupid lot - we think we are still relatively prosperous and that if house prices rise again, boomtime will be back - Christmas and new year sales spending shows we are that daft. It seems we have no idea what really may happen after the election or we are just in denial that it will not deteriorate.

The reality is that after the election, when the economic mire hits the fan, there will be pressure on two sides - 1) to impress the markets that Britain is doing more than enough to reduce its budget deficit and pay its debts and 2) the people will not like the bitter medicine we will have to follow to cure us of the years of excess.

It's at that point that my 'Social Economics' will kick in. Hubris and hiatus are two funny words but we have both to contend with right now and both are all about manipulating our minds and votes. Personally, I would rather know how much all this £1.3 trillion of bailout will cost me in real terms before, not after the election, and how parties are going to give us cast iron guarantees it will not happen again.

I see nothing of it from any party right now - which means we will cast our vote once again, as at the last election over Iraq, without any of the real facts at our fingertips. Some things never change.

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