Darling arrives at the table with no cards left to play

Published on Friday 6 November 2009 21:46

"NO MORE fiscal stimulus" is the firm message in Chancellor Alistair Darling's interview in The Scotsman today. It follows a year of unprecedented interventions to save the economy from a severe depression. VAT was cut, a car-scrappage scheme introduced, capital spending plans accelerated and special measures announced to stimulate house purchase for first-time buyers.

These, together with record low interest rates and extraordinary resort to 200 billion of "quantitative easing" to boost bank lending to business, have helped staunch the rate of decline, but have not pulled the UK out of its longest recession since records began in the 1950s.

Mr Darling speaks with the authority of a gambler who has played his last card. A year ago, his Prime Minister was posing as the man who saved the world from collapse. Today, Mr Darling takes the chair of a Group of 20 meeting in St Andrews with the UK the last major economy still to emerge from recession. His plea is for other countries to keep their emergency stimulus measures in force, bearing in mind that in the United States unemployment has climbed over 10 per cent. But they will wish to spend much of the meeting discussing co-ordinated exit strategies, amid concern that tardy action would allow asset prices to inflate further and risk a rerun of the post 2007 crisis.

Mr Darling is also boxed in at home. Ahead of a pre-budget report due early next month has come an IMF cross-country assessment of fiscal conditions – the second of this G20 series launched in July. It is a timely reminder of the very weak state of the UK's fiscal position. The IMF estimates that the UK's underlying structural fiscal deficit will amount to 7.8 per cent of GDP next year, the second highest among G20 countries and exceeded only by Ireland, with a deficit equivalent to 8.2 per cent of GDP.

The IMF notes that the UK faces "a significant deterioration that may prove to be structural in nature" and estimates that the UK's fiscal balance will need to improve substantially over the next ten years in order to get the government debt/GDP ratio down to "moderate levels and keep them there on a sustainable basis".

So, to all extents and purposes, the UK lacks the capability for continued fiscal stimulus and will need to move firmly and soon to get the public finances back on to a sustainable path.

In this, there will be very little likelihood indeed of any "fiscal stimulus" or "QE" for UK households in the years ahead. This would be a sensible time for tax cuts to stimulate economic activity. But, instead, tax increases are looming, with an increase in National Insurance, the introduction of a new 50 per cent top rate of tax starting at 150,000 and a clawing back of allowances for those earning 100,000 or more. Fiscal stimulus it most certainly is not, with the worst of the pain delayed until after a general election.

He may wish to present higher public spending as a virtue. The reality is a debt legacy from Hell.