Brown must focus on the banks

26.03.09 Publication:

Given their lack of fiscal room to manoeuvre, Brown and Darling should take RBS and Lloyds/HBOS into full public ownership

Can this truly be called a “retreat”? Only last November, when Alistair Darling was unveiling his package of VAT cuts and extra public spending in his pre-budget report, the spin from the Treasury and

10 Downing Street

was that this fiscal stimulus would be quite enough, thank you, to support the economy. So if Gordon Brown is now “retreating” from a further stimulus package, he must be retreating from a position he had said he wasn´t going to take anyway.

Well, yes, times do change, the economic situation has got steadily worse, and a new stimulus would indeed be a good idea if there were any money available to pay for it. Politically, the prime minister has caught himself in a trap in which he at one point thought he had caught the Tories: the trap of having to oppose a fiscal stimulus just when the need for one is growing, a stance that underlines his own responsibility for the parlous state of the public finances.

Almost certainly, it would have been better to have announced a bigger stimulus package last November, in the heart of the worst period of panic, so that he could get the worst news on the public finances out of the way, and so that he could not in future be accused of doing too little to avert a slump. But it is too late for that now, with a budget deficit of an extraordinary 11-12% of GDP popping up in many forecasts for next year.

Thanks to those dreadful public finances, Britain is now dependent on the global economy – and especially the economies of our main trading partners in Europe – for our hopes of recovery. Sterling´s fall has averted deflation for now, and has opened up the possibility of an export-led recovery, but only if demand abroad can revive. That is why Brown is not in fact inconsistent in ruling out further fiscal stimulus at home while calling for a concerted global stimulus at the G20 meeting next week: Britain needs other countries to boost demand, so that our exports can grow. The trouble is that they are not exactly keen to oblige.

What he and Darling really ought to focus on, given their lack of fiscal room for manoeuvre, is the banking system. Their policy of taking big stakes in RBS and Lloyds/HBOS, while offering government insurance for banks´ dodgy assets, puts the government in the worst position of all. Huge amounts of taxpayers´ money have been put at risk, but it is under the control of private bankers, whose pay, bonuses and conduct are going to cause continual controversy.

It would be far better for the prime minister to clamp his wobbly jaws on the bullet and to take RBS and Lloyds/HBOS into full public ownership. Public money needs to be under public control. Having cleaned out their balance sheets, the government could then put them up for sale, or even distribute shares to all taxpayers. At least there would then be a chance for a profit – whether financial or just political.