Commanding depths

10 Oct 08
MIKE THATCHER | The cherished fiscal rules lie in tatters as the government embarks on a borrowing bonanza aimed at stabilising the turmoil in the UK’s banking sector.

The cherished fiscal rules lie in tatters as the government embarks on a borrowing bonanza aimed at stabilising the turmoil in the UK’s banking sector.

Alistair Darling’s announcement of a £500bn rescue plan, including £50bn to part-nationalise up to eight banks, has destroyed the fiscal framework that has been at the core of New Labour’s economic philosophy since 1997.

It could have been a humiliation for the chancellor and, more damagingly, for the prime minister. But, in the end, all the main political parties accepted that there was no alternative. It was bailout or bust.

As Darling stressed in his statement to Parliament, these are exceptional circumstances and the borrowing is a temporary expedient.

However, borrowing is not a painless panacea. And we are talking about huge sums. The money involved, including Northern Rock, Bradford & Bingley and this week’s commitments, could bust the sustainable investment rule by ten percentage points.

Eventually, the money will have to be paid back and somebody will suffer. That somebody will either be the taxpayer or the public services, or, probably, both.

Local authorities are already struggling with a tight financial settlement, rising costs and falling income as the recession looms. Moreover, at least 20 councils have investments with Iceland’s Landsbanki and, as PF went to press, had not received the protection offered to individual savers.

Meanwhile, the NHS is facing above-inflation increases in drug costs and hikes in Private Finance Initiative financing fees.

Some extra funding can be found through efficiency savings. But, as the Audit Commission pointed out this week, the existing targets for councils in particular are already hugely challenging.

There will be no escape. Cuts in the public services might be avoidable for a year or two, but after that they are inevitable and are likely to be severe. Public sector workers may be relieved that they currently have the security of employment denied to their counterparts working in banking, construction and retail.

But, one way or another, this will be a recession that leaves nobody unscathed.

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