Christmas? What Christmas?

19 Dec 08
COLIN TALBOT | I was in Croatia a couple of weeks ago advising their government on how (not) to do public management reform and discovered that they had cancelled Christmas!

I was in Croatia a couple of weeks ago advising their government on how (not) to do public management reform and discovered that they had cancelled Christmas!

Had this post-communist, very Christian, country done a ‘Dawkins’ and decided to revert to atheism and outlaw the religious festivities?

Well, not quite. Its government had decided that, in the current global gloom and doom. No public organisations should have staff Christmas parties, or send presents (both at the public expense) which apparently was the custom. It would send out the wrong message, they said.

Now I hesitated before mentioning this. In their current slash-and-burn phase shadow chancellor George Osborne and Tory leader David Cameron might think this is a good idea. Maybe extend it to the private sector as well? In fact why not just cancel Christmas altogether? That would surely help the recession to, er, ‘take its course?’

Prime Minister Gordon Brown, on the other hand, can barely conceal his glee – he still thinks Christmas has come early. He’s hoping his political ‘bounce’ is as big as the one the Treasury predicts for the economy – a ‘live cat bounce’, if you like.

Meanwhile Chancellor Alistair Darling has a cunning plan. He’s decided that shoppers deserve a really good Christmas — in 2009. His VAT cut is set to end just as ‘shopping days to Christmas’ do — but not this year.

This ensures that anyone with any sense nips out and buys a really big present for their beloved — you know, a Range Rover for Jeremy Clarkson or Mini for Richard Hammond — in 2009.

Of course, anyone with any sense will wait until then to take full advantage of both the VAT cut and falling prices, so the next 12 months of selling might not be quite so good.

Although when I mentioned this at a recent Treasury committee the chairman, John McFall, told us that someone on the committee — who shall remain nameless for obvious reasons – had bought a new car just last week. They hadn’t even waited for the VAT cut to kick in. There’s always one.

So, what does the future hold? According to the government we are going to have a short and not really very sharp recession followed by a bounce. This assumes that the world economy doesn’t go into recession at all. It assumes the biggest economies dip into recession, but slightly less than we do.

Not only that, but the government’s astronomic projection for the rise in public debt are based on the optimistic estimate that tax receipts quickly return to roughly what they were before the recession. This is a big list of ‘ifs’ which hardly anyone has any confidence in – except for the government.

This puts both the main parties in a hard place. New Labour relies on ‘something turning up’ to avoid the choice between immediate tax increases and spending cuts.

At best it expects to defer tax rises; and even those that it has ‘promised’ — returning VAT to 17.5% and raising National Insurance — are unlikely to prove enough. And the government can’t cut spending plans much further than 1.1%.

This will amount to real-terms cuts in some public services —especially if it tries to protect health and education – because some other items such as EU contributions, benefits, pensions and debt charges are relatively immovable.

The only alternative is to raise taxes — hence the substance behind the Tories’ ‘Labour tax bombshell’ slogan.

But the Tories are in, if anything, an even tougher spot. They have promised to abandon Labour’s spending plans from 2010 onwards. They are pledging to reverse the rise in public debt but have not yet said by how much.

This is hardly surprising. If they are not to increase taxes but still reduce borrowing substantially — to, say, halt the increase in public debt from 2010 onwards — they would have to cut as much as 5% in real terms from public spending.

This is equivalent to abolishing public spending in Wales and Scotland. Expect Labour to counterattack with a ‘Tory cuts bombshell’ slogan.

The only real alternative to either tax increases or substantial spending cuts (or both) would be to allow public debt to remain high for the medium to long term. The close to expected 60% of GDP is not especially high by big, advanced country standards.

The economic and financial impact is less certain than most economists would have us believe. The markets haven’t taken fright — if anything government bonds are in greater demand despite the increasing public debt. Unfortunately I don’t believe in Santa any more so this scenario is extremely unlikely. So happy Christmas — you’ll need it. It will be a scary new year.

Mince pie anyone?

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