Policymakers in Britain and the eurozone should take note of an interesting event due to take place on Monday. The British government will finally redeem the war loan taken out in 1917 under the premiership of Lloyd George. That is to say, the last traces of that first world war debt will be repaid almost 100 years later.
With debt, and deficits, one has to take the long-term view. This applied to the situation facing the coalition in 2010, and to the policymakers of the eurozone, who were also faced with the financial consequences of the 2007-09 banking crisis. The impact of the crisis was the peacetime equivalent of the devastation wreaked on public sector finances by war itself. Unfortunately, both in this country and the eurozone, an absurdly short-term view was taken of the situation, not least with regard to Greece and other peripheral eurozone economies.
It is now well established that Chancellor Osborne has had to accommodate reality and “roll forward” his targets for debt and deficit reduction. Even so, what he is proposing to do to public services if the Conservatives are re-elected is sending shivers down many a spine, as the consequences of a “long-term plan” that favours tax cuts at the expense of public services and national defence become more and more manifest.
When issued in February 1917, the 5% war loan of 1929-47 accounted for just over 50% of the national debt. By March 1933, when appeals to patriotism by Chancellor Neville Chamberlain persuaded people to lose money by taking up a 3.5% coupon for the original 5% – times were hard! – the war loan accounted for just under 25% of the national debt.
The actual amount to be redeemed on Monday is, at just over £1.9bn, trifling by today’s standards, but tomorrow is nevertheless a historic day. Appeals to patriotism were efficacious both with regard to the original issue in 1917 and to the conversion in 1932. But one wonders, for all his persuasive powers, what reaction Osborne would face if he were to appeal to today’s electorate to accept a lower coupon. On the contrary, in a blatant pre-election bribe, our shameless chancellor has been offering the so-called “grey vote” something for nothing with a new 4% bond issue at a time when most interest rates for savers are close to zero.
As for the plight of the poor, Osborne glibly told the Today programme that the poor have been paying the price for the mistakes that led to the Great Recession. We know what is implied there: it was all Gordon Brown’s fault, although, in fact, Brown made a major contribution to the fiscal and monetary stimulus that “saved the world”.
At which point, a word of praise is due to that inveterate campaigner and Father of the House, Sir Peter Tapsell, who is one of the few Tory MPs to proclaim publicly that the recession was not caused by “Labour’s mess”. Many years ago Tapsell entertained hopes – nurtured, I think, by Mrs Thatcher – that he would one day be chancellor himself. It was not to be. He became a national treasure instead.
At all events, Harold Macmillan once said: “Here we are, and the question is: where do we go from here?” From the chancellor’s point of view it is to next week’s budget, and to an election victory, after which he would remain as chancellor and be the key negotiator, from the powerhouse of the Treasury, over the terms for “reform” of the EU to Britain’s satisfaction.
I wonder. And notwithstanding the emphasis on more austerity to come, next week’s budget is widely expected to contain more pre-election bribes.
However, the record of pre-election budgets is mixed. Way back in 1964, Reginald Maudling produced a budget that was based on the assumption of a spring election, but prime minister Sir Alec Douglas Home decided to delay until autumn, and Maudling’s “short-term plan” went awry.
In 1970, Roy Jenkins got caught out when he ignored an adviser’s warning that an initially well-received budget could fall victim in the public prints to a rogue set of bad trade figures, and that is exactly what happened. He was subsequently blamed for supposedly contributing to the loss of the election.
As befits my maverick old friend Nigel Lawson, his most memorable budget was not the one that preceded the 1987 election, which the Tories won in a canter, but his 1988 budget, in which he changed not just the British but the western world’s attitude to acceptable levels of taxation by lowering the top rate from 60% to 40%.
The Lawson boom ended in tears, but there is a sobering lesson for all in that, during Lawson’s heyday, the public finances were in such good shape that senior officials even speculated privately about the chances of paying off the entire national debt.
One thing we can be quite sure about next week: the budget will bear no resemblance to Denis Healey’s last budget in 1979, when the Callaghan government lost a vote of confidence (on devolution). In the Commons, an election was called in a hurry, and the April budget was abandoned in favour of a “ways and means” budget, agreed by both parties, that merely allowed the government to continue to collect taxes until the formation of the next government – which was where Thatcher came in.
Oh, and by the way: the principal pre-election bribe comes not from the chancellor but from the market forces that have halved the price of oil.
