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HERE is my festive advice to anybody who wants to understand how the credit crunch will affect Gordon Brown next year: as soon as you can catch a break from playing secret santa, run out to the video store and grab a DVD of Terminator III.
Besides the thoroughly enjoyable pyrotechnics and action scenes, the film, the last starring Arnold Schwarzenegger before he became governor of California, has a simple, typically religious message: judgment day is inevitable.
For years, Brown piled on higher taxes and red tape, gradually eroded Britain’s competitiveness and presided over an increasingly unhealthy and unbalanced economy. For almost as long, few noticed and even fewer cared. But 2008 will be the year in which Brown is finally faced with the consequences of his actions: the public, long anaesthetised by the house price and credit boom, is finally coming to its senses now that the good days are ending.
Brown’s record has long had much to be desired. All the main English-speaking economies have grown faster than Britain since 1997, including America, Ireland, New Zealand, Australia and Canada. Others that have expanded at a better rate than Britain include Luxembourg, Greece, Iceland, Spain and Finland – as well, of course, as all the emerging economic giants, led by China and India.
Britain’s productivity growth has slowed; the trade deficit has exploded, with the current account only kept afloat by dividend and interest payments from overseas; the Exchequer has accumulated vast debts, mostly off balance sheet, at a time when it should have been enjoying a surplus, and faces an explosion in the budget deficit to up to £50bn ($102bn, E69bn) in 2008-09; entrepreneurship and business creation rates lag those of many other countries; savings have collapsed; the markets expect inflation to be a percentage point higher than any other G7 country; and Britain is facing a long-term pensions crisis.
The list of woes goes on and on. Even Britain’s supposedly robust job-creation record is misleading: of the 2.7m or so jobs created over the past decade, up to 1.5m have gone to immigrants and between 700,000 and 1m are public sector jobs, depending on definitions (though the two categories overlap). Few new jobs have been created in the private sector for British-born workers, which helps to explain why the number of adults on out-of-work benefits – the most accurate measure of unemployment – has only fallen from 5.7m to 5.2m.
So why did so few people understand how unimpressive Britain’s economic performance has been, at least until the past few weeks, when his ratings started to plunge in opinion polls?
Surging house prices, cheap and easy mortgages and the credit-based retail boom served as a powerful opiate; as long as their wealth and spending keep on rising, voters can be remarkably forgiving.
At the same time, an inflow of foreign money and unprecedented levels of immigration helped to camouflage the long-term wounds inflicted by Brown’s misguided policies. Without these factors, the economy would have performed appallingly; but most important of all, they made an average economic performance feel like a great one.
There is another reason why so many failed to see just how poor Brown’s stewardship of the economy has really been. The establishment – in business, the media, culture and politics – is almost entirely based in London and its surroundings. Our great city’s astonishing prosperity, its emergence as a preeminent global centre for finance, sky-high wages, cultural vibrancy and cosmopolitanism all combined to convince the commentariat that Britain must be doing better than anyone else.
The reality is that London’s performance has indeed been outstanding: had its rate of growth been that of the UK as a whole, Britain could fairly have been deemed to have undergone an economic miracle. But for the most part, London’s success had nothing to do with Brown; in fact, on balance, he has hindered rather than helped its performance. The use of the City as a milch cow to fund a massive UK-wide increase in state spending – on top of appalling schools, massive crime and welfare problems, and crumbling infrastructure – have all meant that London has performed well below its potential.
While the economy could just about cope with Brown’s tax and spend policies and obsession with regulating all that moves when it was being lifted by a global financial tide, the damage caused will become unbearable next year. April’s hike in capital gains tax and corporation tax for small companies, as well as the crackdown on non-domiciled wealthy foreigners, come at the worst possible time.
Like in Schwarzenegger’s film, it will prove impossible for Brown to put off judgment day forever. The credit crunch, the crisis in the City and the ending of the house price boom mean that the public is now starting to look at Brown’s record in a very different way. Citi estimates 1.7m households will face large increases (worth more than one percentage point) in their mortgage rates in 2008, as previous fixed rate mortgages expire and discount periods on variable rate loans end. With a reduced supply of mortgage credit, spreads between fixed mortgage rates and swap rates have spiked in recent months and are likely to stay wide. As a result, lower Bank rates are unlikely to produce much, if any, near term drop in fixed mortgage rates.
Brown is not to blame for the credit crunch or the cyclical element of the current slowdown; but the hit to their finances and declining house prices mean voters will look at his overall performance in a far more dispassionate light in 2008. Unfortunately for the Prime Minister, there will be no Arnold Schwarzenegger to rescue him from their wrath.