THE P.A. FINANCE GROUP.

Until the economy settles back into some form of normality, Popular Alliance will take note of daily events however, it is of little use producing a decisive policy, as the goalposts are moved daily. We shall in time, react to any particluar aspects as and when we believe we can offer sound sound input.   

 

THE ECONOMY AND PUBLIC FINANCE

 

The Current position

 

The previous Economic and Public Finance Policy was presented against a background of relative calm, although the Popular Alliance recognised that storm clouds were gathering on the economic horizon. It is disturbing that at that time, neither the Government, the Bank of England nor the FSA appears to have discerned the signs of trouble ahead.

 

What could not have been foreseen was the breathtaking speed at which total devastation was about to overtake the global banking system. The financial landscape is littered with either failed banks or banks which have needed to be rescued by others.

 

This has been brought about by a chronic shortage of liquidity following the realisation that bank balance sheets contained huge amounts of toxic debt resulting from gambling on U.S. sub-prime mortgages. It is estimated that to date in excess of £300 billion has been lost with much more to come. There is now a total lack of confidence in the financial markets and banks are hoarding cash and not lending even to each other for fear of toxic debt.

 

The consequent withholding of credit from business and individuals has driven the economy into recession and will result in bad loan charges rising out of control (more bad debt write-offs).

 

The current recession will be deeper and longer than any previous recession and whereas in the recession of the early Thatcher years and the recession of 1991/92, the remedies were clear, that cannot be said of today's crisis. There appears to be no convincing answer to the banking crisis and what action has been taken amount to little more than "papering over the cracks".

 

When unemployment reaches 3 million and above, the social implications could be appalling. The current crisis is an example of what can go wrong when the greed of bankers is combined with the total incompetence of Politicians and Regulators.

 

The Government's intention of spending our way out of a recession with money it hasn't got is a seriously flawed policy which could well result in national bankruptcy. This must be reversed.

 

What can be done?

 

1.       All unnecessary public expenditure must be cut back. This will cause a contraction in public sector employment which in any event, needs to happen as soon as possible. 

 

2.       The net savings from 1 above, i.e., salaries less increasing welfare payments, would be used to reduce taxation both to individuals and businesses, thereby increasing the demand for goods, stimulating manufacturing, increasing employment and in the medium term, increasing the Treasury's tax receipts.

 

Further, such tax relief to industry (especially to small businesses) would result in a transfer of employment from the public sector to the private sector.

 

Whatever the causes of unemployment, e.g., the massive economic downturn or the deliberate contraction in government spending (1 above), it must be appreciated that to resolve this crises, the nation will need to pass through and endure the pain of austerity at least in the short to medium term.

 

3.       The Popular Alliance would impose strict controls over the Banks' lending policies, thereby preventing any future gambling on toxic and exotic securities (the cause of much of the present global crisis) and making house repossessions only the very last resort.

 

4.       The Bank of England would be made responsible for ensuring that the Banks were tightly supervised (3 above) in particular the Banks would be forced to pass on in full any reductions in base rates.

 

5.       The housing market is at a total standstill, it being estimated that for every buyer there are 15 properties for sale, and a recent survey estimated that when a property is sold, 6 months (on average) elapses between offer and completion.

 

The above, coupled with rising interest rates charged by lenders (to be stopped as in 4 above), rising levels of mortgage arrears, repossessions and negative equity, make for housing to be made a special case, both on social and economic grounds, and leniency towards home-owners would be enforced by the regulatory authorities (3 above).

 

Until order is restored to the world markets and it is known what adjustments (if any) change the way markets operate in the future, it is suggested that it would be pointless and futile to formulate a Finance Policy at the present time. Such a policy could well be out of date within a short space of time and therefore it is proposed to review the economic situation and present updates at regular intervals.

 

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