Cameron gets the message on the Legacy of Labour

David Cameron yesterday started blaming the current deficit problems on the last Labour Government.  Benedict Brogan on his Telegraph Blog quotes Cameron

 “I think people understand by now that the debt crisis is the legacy of the last government. But exactly the same applies to the action we will need to take to deal with it. If there are cuts – they are part of that legacy.”

I have been thinking along the same lines for a while now. See for instance.

I believe it is as important for the future to understand the political element of how Labour went so wrong. The Golden Rule and the denial of the problem until it was too late have made a serious recession into a painful period of painful cuts in expenditure and large tax rises. This nation will be poorer for a generation as a result.

Please Pray for Gordon Brown

After the events of last week (see here, here and here), I feel quite sorry for there appears to be a divergence between the public and private face of Gordon Brown. Christians attempt to reconcile these differences in their own lives through prayer, studying the bible, public worship and seeking God’s unconditional forgiveness for when they have made mistakes, or erred in the smallest way. The Labour doctrine of spin, I would suggest, tries to fudge, evade and deliberately obscure anything that contradicts their message. When there are is strong underlying growth and charismatic leaders to promote populist policies, then this spin doctrine can carry people along. But when the main thrust of future policy is recognized to be inflicting hardship then it becomes quite difficult to constantly put out positive messages. Instead Labour have chosen to maintain the upper ground by a constant barrage of negative, exaggerated or misleading statements about their major rivals.

            Whilst many would recognise the impact the slogan of “Labour Investment verses Tory Cuts” has had on delaying recognition of the crisis in the public finances many months, what is not recognised is the impact on those in the party. If they put a slant on policy that is fundamentally at odds with what they believe – genuine public service – it will eventually be personally damaging. Maybe some, like Ed Balls and Peter Mandleson, who are more thick-skinned and less ideologically-motivated, the conflict between the good of the party and the greater good of the nation does not seriously trouble them. But Gordon Brown is committed to serving the country and has always believed he is the most able to lead it. Until the downturn this justified his ruthlessness in the pursuit of the top job. He is also astute enough to realise that not only did he get bank regulation wrong, but that his justification of structural deficits (see here) has left the government finances in their most wretched state for over 30 years. In so doing he knows that public services will have to be cut and then constrained for a generation.

            So when you hear of Gordon Brown’s throwing Nokias, or calling a straight-talking pensioner a bigot under his breath, please pray for him. Pray that he may know Christ’s love and forgiveness, and turn away from the lust for power and the love of spin. Most of all pray that he may have time for rest and reflection.

The Golden Rule has lead to Economic Ruin

The current financial debt crisis can be laid at the door of the Golden Rule and its interpretations. It states

“The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending.

Therefore, over the economic cycle the current budget (ie, net of investment) must balance or be brought into surplus.”

This gave two consequences for the UK.

1. For a number of years there was a deficit to finance the creation of assets which would give non-monetary returns.

2. This deficit increased the nominal National Debt faster than the nominal growth in GDP.

That is the new assets were either in the category of having no significant financial returns (such as schools or hospitals) or had financial returns that would never cover the capital cost.

In terms of level of public services, the country is probably benefitting. But we entered the severest downturn in 60 years with a structural deficit. Yet these assets created liabilities as well. There are the running costs of the new assets and there is the interest on the debt. Furthermore, there are a huge number projects financed by Public Finance Initiatives (PFI). That is the Private Sector meeting the initial capital cost and charging for the flow of services.

The consequence is the UK entered the severest downturn in 60 years with a structural deficit. This was for the financing of “investment”. Further, each addition to the capital stock added to the Nation’s liabilities. For a new school or hospital to deliver its’ stream of benefits requires staff and maintenance.

The Golden Rule turns out to be far from Prudent, because it was not for investment in the accounting sense. That is assets acquired with expectation of a future stream of revenue generation or cost savings. Rather, the acquisitions were liabilities. Under Labour, we have acquired extra debt to pay out extra money year after year. Gordon Brown took a gamble with the Nation’s finances, by failing to understand the term “investment”. It should not come as a shock that in the long term it would unravel.

For clarity, here is a simple analogy.

1. Someone sets up as a plumber. They acquire a van to transport themselves, tools and equipment to places of work. The van has running costs, and also there is a loan to repay. But it enables chargeable work to be undertaken. It therefore enables or augments an income stream by an amount that is expected to exceed the cost.

2. Someone owns a basic low-cost reliable car, acquires a new 4×4, partly financed by a loan. The fuel, servicing and insurance all go up, along with the finance cost. It may increase their standard of living, but substantially increases that person’s outgoings.

Most Government “investment” is in the second category. It may provide services that people individually could not afford, but increases the sense of well-being. However, if debt financed, will just result in extra costs.