Time called on extravagant decade of debt and the tab must now be paid
When Alistair Darling stands up this afternoon to present his first Pre-Budget Report he will be grateful for one thing at least. Having lost his nerve at the 11th hour, his predecessor has relieved him of the immediate need to pull unaffordable electoral rabbits out of his red box.
To counter the Tories' election-spiking inheritance tax master-stroke would require something more dramatic than this cash-strapped government can stretch to. The new Chancellor knows that his room for headline-grabbing manoeuvres is limited.
He might, but obviously won't, remind the prime minister of Mr Micawber's advice on living within your means. For a look behind the spin of this afternoon's statistical barrage will merely confirm that for most of the 10 years in which Gordon Brown held the purse-strings we have been spending "20 pounds ought and six" out of an income of just 20 pounds. The likely result next year, as Dickens predicted, is economic "misery".
There are two aspects to Britain's walk down Queer Street. First the Government has failed to heed Joseph's advice to the Pharaoh. It should, but hasn't, shored up its finances in the years of plenty to enable it to survive the famine that inevitably follows.
Britain now has the worst Budget deficit among the core EU members for the first time in nearly 40 years. After years of above-trend growth, a persistent deficit of more than £30bn is a sign of shocking profligacy.
With the Treasury's growth forecasts looking too optimistic, that problem is unlikely to go away. Back in March the Government expected economic growth next year of between 2.5pc and 3pc. Independent predictions are now as low as 1.7pc. But it's not just the Government which has been happy to mortgage our future. We've all been at it, to the extent that household saving is down to only 3pc of income, while household debts have doubled over the past 10 years when measured against our earnings. The cost of servicing debts is close to the level that burst the 1980s Lawson boom.
What Mr Micawber didn't say, but no doubt understood well, was that the link between spending more than you earn and misery is not immediate. Abuse of your credit card creates, in the short term, the same feeling of wellbeing that prudent financial management offers in the long haul. But it is an illusion. The tab has to be paid. And the longer it is left the more painful the adjustment.
Just as the Government's chickens are coming home to roost in the form of lower than expected growth, the consumer is also realising that time has been called on the decade of debt.
The signs are everywhere that the economy is hitting the buffers. Last week, housing market numbers from the Halifax showed the first fall in prices this year. Yesterday, uSwitch added to the gloom with a survey showing that disposable income is the lowest for 10 years. Both point one way – to belt-tightening next year.
One possible road map for 2008 looks something like this. The credit crunch continues to bite, keeping the cost of borrowing for businesses and consumers high. The financial sector, on which Britain is dangerously dependent, contracts. This pushes unemployment higher and reduces government revenues further. Meanwhile, inflation refuses to lie down (yesterday's producer prices data are the latest indication) so the Bank of England can't cut rates as fast as it might wish. The housing market falls over and a mid-cycle pause becomes a full-blown recession.
Such a scenario is the Government's worst nightmare.
For investors, the lessons are already clear. A portfolio which is dependent on continued growth in the UK economy looks vulnerable to a slowdown.
Sectors such as retail and leisure which have enjoyed rising earnings and expanding price-earnings multiples are dangerously exposed. More attractive are businesses with an exposure to parts of the world still firing on all cylinders or those operating in recession-proof areas like pharmaceuticals.
Big is better than mid-cap and small because the largest companies are less dependent on their home market. Transnational oil and gas and mining stocks, the values of which are determined by the global price for their product, are barely affected by it at all.
One word of caution before you abandon the UK to its hangover. I am not the first person to have noticed that the prospects for the rest of the world are better than for extravagant Anglo-Saxon economies. It's increasingly in the price. The Hang Seng index in Hong Kong, perhaps the most obvious play on white-hot growth in China, has risen by a staggering 37pc since its recent low on August 17. There have been similar stunning runs in markets from Bombay to Brazil.
If you think the developing world has decoupled from the US locomotive of the world economy then that process has further to run. But the risks of an emerging market bubble are mounting.
As Alistair Darling drinks from the poisoned chalice he inherited, the Chancellor could be forgiven an envious glance at the rest of the world's booms. He faces a far different challenge and can't even blame the last man in the job.
Source: telegraph.co.uk
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