The Labour government is reeling from the MP expenses scandal that looks set to see as many as half of its members of parliament disappear at the next General Election. A recent opinion poll in the Times puts Labour trailing behind the fringe Euro-skeptic UKIP party at just 16%, with the opposition Conservatives at 30% are failing to fully capitalise on Labours meltdown due to their own crooked MP's, and the Lib Dem's similarly skimming along at a low 12%. Whilst this and similar polls are dire for the Labour party which do suggest electoral wipeout in the June 4th European Elections, however they do not represent what is likely to occur at the May 2010 General Election which this article will seek to elaborate upon.
In the course of updating the UK Recession Watch published last February that forecast peak to trough GDP contraction of 6.3%, and an economic recovery by the end of the this year, with subsequent analysis suggesting both a stealth stocks bull market and a bounce in the UK housing market, the most recent analysis to be published during June is increasingly suggestive of a clear strategy by the Labour Government of delivering a scorched earth economy to the new Conservative government whilst at the same time seeking to maximise the number of opposition MP's that the Labour party will able to field post May 2010.
The key evidence of the scorched earth policy is in the record 12% budget deficit that the government will run this year and the deployment of quantitative easing for the primarily purpose of monetizing government debt so as to prevent government bond auction failures which would force interest rates higher. Both of these are aimed at generating a false bounce in the economy as the eventual consequences of both is higher inflation and interest rates.
During the fourth quarter of 2008, the Labour government's goal was still to win the next general election and therefore the government response to the economic crisis was with a view towards leaving the country with an economy that was survivable in terms of electoral prospects at subsequent elections, which is why the government had at that time tried to both mask the amount of liabilities that the bankrupt banking system had forced onto the tax payers as well as tried to boost consumer spending without too much damage to the fiscal position of the countries finances by means of the £20 billion giveaway on VAT and other minor tax amendments.
In November 2008, the government had not truly realised the magnitude of the debt crisis that faced Britain with Alistair Darlings forecasts way below reality, as the government was in denial of what was taking place and continued to clutch at straws, just as we witnessed with the Bank of England throughout most of 2008 that remained paralysed into in action by the fear of inflation all the way into October 8th 2008 when Gordon Brown seized control of monetary policy and forced the Bank of England to cut interest rates by declaring the first of a series of interest rate cuts himself at the Prime Ministers despatch box and for the BOE to abandon inflation targeting in favour of trying to win the next election at any costs resulting in zero interest rates and quantitative easing.The Debt Fueled Scorched Earth UK Economy
Inline with the new policy of a scorched earth economy, the Chancellor Alistair Darling in his recent budget statement started to come clean on the huge amount of debt that the country will need to borrow on just its visible official balance sheet as illustrated by the below graph.
Alistair Darling's forecast for government net borrowing for 2009 and 2010 in November 2008 totaled just £70 billion. However now the amount of borrowing has mushroomed to £350 billion, which is set against my November forecast of £405 billion for 2009 and 2010 alone, with continuing large budget deficits thereafter.
Alistair Darling also surprised many analysts by forecasting that the UK Economy would grow by 1.25% in 2010 and 3.5% in 2011. However we need to consider the following in that 1.25% growth on the annual GDP of £1.2 trillion equates to growth of just £15 billion and for 2011; 3.5% growth equates to just £42 billion. Therefore the government is borrowing a net £175 billion for 2009 and £175 billion for 2010 to generate £15 billion of growth, and then a further £140 billion for 2011 for £42 billion of growth. Thus total net borrowing of £490 billion to grow the economy by just £67 billion, (£595 billion my forecast) which shows the magnitude of the scorched earth economic policy now implemented that literally aims to hand the next Conservative government a bankrupted economy that will be lumbered with the consequences of continuing huge budget deficits throughout the life time of the next parliament and therefore sow the seeds for a strong Labour victory at the 2014-2015 General Election.
Bankrupt Banks Bankrupting Britain
Whilst some £500 - £600 billion of net borrowing over the next 3 years might sound alarming, however it literally marks the tip of the debt iceberg when it comes to Britians total liabilities that are set to grow from £1.75 billion at the end of 2007 to £3.9 trillion by the end of 2010 as a consequence of the £2 trillion of liabilities of the bankrupt banking sector being ceremoniously dumped onto the tax payers in addition to the deficit spending of £600 billion.
The consequences of all this deficit spending and growth in liabilities is highly inflationary as printing money eventually leads to hyperinflation as 1920's Weimar Germany found out, so Britain IS sowing the seeds of much higher inflation, maybe not this year and for the first half of 2010 as recent inflation analysis illustrated, but there will be a deficit spending and quantitative easing day of reckoning in terms of economic stagnation coupled with high inflation that will land on David Cameron's lap.
In conclusion, the Labour government's primary objective now is to deliver David Cameron's Conservative government a scorched earth economy whilst at the same time engineering a debt fueled economic bounce to maximise the number of seats the party will be able to muster in opposition, therefore current opinion polls and projections of seats at the next election grossly under-estimate the actual number of seats Labour will win.
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By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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