Bill Jamieson: Crisis could bring return of national government

Published on Thursday 4 December 2008 22:01

AS THE recession intensifies, here and around the world, could we be on course for a national government next year? Britain swung behind a national government in 1931, one of the darkest periods of our economic history.

As unemployment hit three million and doubts swirled about the country's solvency, buyers of government debt took fright at the figures for government spending and a Labour administration buckled under a gathering apprehension of collapse.

We are not at 1931. But there is a strong case for the view that we are not far off. Latest news on the economy is dire. House prices plunged 2.6 per cent last month, the biggest decline since September 1992. New car sales are down 37 per cent. Readings for manufacturing, construction and services published this week are the worst since records began. And now interest rates have been slashed by a further full percentage point to 2 per cent, the lowest since 1951 and the austerity era.

With every week, this recession is forcing us deeper towards a national crisis of unemployment, massive business failures, plunging government revenues – and soaring debt. What happens if the economy does not start to recover in the final quarter of next year, as the government has forecast? More immediately, how bad is it going to get in the first three months of next year?

I have not met a single businessman who has not privately warned that it is going to get considerably worse before it gets any better.

If this week's appalling Purchasing Manager surveys prove anywhere near accurate, we are heading for the worst downturn in the British economy in 70 years and with no evidence of any bottoming out in sight, still less an upturn. Concern has given way to a widespread and deepening apprehension across the economy.

There has been much talk of an election next year. The chances of a close result continue to rise as the Conservative opposition has been seen to fall short of the magnitude of the crisis we are facing. Given the possibility of a hung parliament, there is another prospect that may come increasingly to the fore as confidence continues to ebb: a national government bringing in prominent figures from across the political spectrum and from business and finance.

The recession of 1931 brought forth a national government under Labour leader Ramsay MacDonald. It was a dark time, with a deeply controversial political realignment catalysed by a severe economic and financial crisis. It was brought in as a temporary construct. Few forming it thought it would last more than a few months. The national government, with its baleful mission to cut public spending, was seen as a betrayal by many in the Labour Party. Chancellor Philip Snowden's soundbite against the programme of his Labour critics was "Bolshevism run mad". The Daily Herald spat out a contemptuous dismissal of Ramsay MacDonald: "A pinchbeck Mussolini".

But the national government brought forth much more than grudging support. It was overwhelmingly backed by the public in the election of October 1931. This returned 471 National Unionists, 34 National Liberals, 33 other Liberals and 13 National Labour. The opposition comprised just 52 Labour MPs.

And far from being a temporary quick fix, it held office, first under MacDonald, then under Stanley Baldwin, until 1940 when Churchill took over as prime minister.

The national government was formed out of the need to cut spending, cut debt and to regain international financial support for sterling and government debt. A quite different time and a quite different crisis?

Think again. The UK government has just announced the worst projections for government debt and borrowing in the country's history. The pound has fallen by some 25 per cent against the world's major currencies already this year, with a growing danger that this might develop into a freefall. There are increasing questions over the willingness of overseas investors to fund such vast amounts of UK government debt, risking an attendant collapse in the gilt-edged market.

It is barely a week since the Pre-Budget Report was published. But it is already clear that tax revenues are set to plunge further than feared, adding to the debt figures just announced. The implications for the public sector, hitherto regarded as broadly immune from the effects of the slump, are not at all good. Its complacency is about to be brutally shaken.

Little wonder, against this background, that concern is rising over the rushed, piecemeal response to the crisis that will add even further to the Treasury's liabilities. It is not only bolder measures that are required in the control of public spending and borrowing, but outstanding leadership that is up to the scale and depth of the crisis we now face.

An incoming Conservative administration could well need a coalition to build consensus for the measures it would need to introduce. This could see leading figures such as the Liberal Democrats' Vince Cable and Labour moderates brought into the Cabinet. An alternative approach could see the formation of an emergency group attached to the Cabinet Office reporting direct to the Prime Minister. This could include senior business figures such as Digby Jones and leading independent economists and advisers.

At Scottish Government level, the Council of Economic Advisers could be adapted and given a more immediate remit, meeting on a twice-monthly basis. In addition to Sir George Mathewson, it could bring in Sir Tom Farmer, Steven Purcell, the leader of Glasgow City Council, Ben Thomson and Jack Perry to push through change in the public sector.

Little change can be expected at UK and Scottish level until the crisis is more fully developed. But that, on current projections, may not take too long.