Wednesday 19th November 2008
By Rachel Jones
Know Your Money Editor
The shadow chancellor George Osborne has warned that the large amount of borrowing the UK government is currently doing could lead to a "run on the pound" - in other words, a collapse of the sterling. Speaking to the Times, he questions how much more people will be willing to lend to Gordon Brown, who has been repeatedly bandying the words "fiscal stimulus" about. But what do these two words mean for the UK taxpayer? It would seem that the prime minister's first goal is to convince world leaders to coordinate a global tax cut in order to boost the fledgling economy. On the surface, this would appear beneficial to the majority of households which are struggling to keep up with rising prices and mortgage and loan repayments. But with the Conservatives saying that Britons will be faced with a hefty bill further down the line, how exactly should the credit crunch be handled by the government?
Osborne's gloomy forecast
Mr Osborne highlights in his Times interview that the public are concerned that the government is attempting to spend its way out of a recession, a notion which the chancellor of the exchequer Alistair Darling follows, based on the economist John Keynes. Indeed, while the Labour party continues to flash the "country's credit card" to provide a cash injection to the markets, Mr Osborne admits that he is concerned how recovery will be stifled for future generations bearing the weight of debt around their necks.
"We are in danger, if the government is not careful, of having a proper sterling collapse, a run on the pound. The danger of that is that it pushes up long-term interest rates. The more you borrow as a government the more you have to sell that debt and the less attractive your currency seems."
Continuing on the lines that the Conservatives would show some financial restraint, the shadow chancellor tells the Times that it was borrowing that got the economy into this mess in the first place and therefore borrowing cannot get the UK out of it.
Gordon Brown's fiscal stimulus
The prime minister is positive that the country can weather the financial storm. Commenting to the BBC about what policies to deliver, he says: "The debate is essentially the one that the US is having at the moment ... We are looking at what works best. We need to have the interest rate cuts accompanied by another stimulus. This is a big opportunity. I believe we will make progress."
Indeed, although the Bank of England recently lowered the interest rate by 1.5 percentage points, there are indications that further cuts will follow. As such, Mr Brown has acknowledged that near to zero inflation could greet the public in 2009, which the Guardian states could result in near to zero interest rates. As previously noted, while a further reduction in rates may be beneficial to people struggling to repay mortgages or loans, savers may find another cut damaging, especially since banks and building societies are withdrawing high-interest saving accounts from the market.
Attacking the Tories, Mr Brown says: "The Conservative party seems to be the only party that is now standing against what is a consensus developing across Europe and across the world: unless we take the fiscal action that is necessary now - and help businesses and families now - we will be undoing any benefit that can come from monetary policy and cuts in interest rates."
But leader of the Tories David Cameron explained to the Guardian that although people are expecting a tax cut this holiday season, the public needs "real tax cuts not tax cons".
A bitter sweet legacy?
According to Stephen King, the managing director of economics at HSBC, sterling has dropped more than 25 per cent against the dollar, 33 per cent against the yen and 15 per cent against the euro, from the end of last year. Writing in the Independent, Mr King says that the Bank of England would have felt "rather pleased with itself" as international investors poured their money into the UK with the promise of high interest rates.
"For an economy, hot money is like a dangerous narcotic: it creates a high, a moment of euphoria. Its disappearance leaves only devastation in its wake," he asserts.
But as the government continues to spend more to plug the gap of fleeing investors, no one is sure of where this will leave taxpayers, although wise advice could be for people to start saving more and look after their finances, rather than relying on the policies of one party.
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