The Problems

Public Finance and the Economy In December 2005 the International Monetary Fund called upon the Chancellor to rein in public spending which had been rising much too rapidly.

Clearly, this recommendation has not been heeded as currently public expenditure has increased to 46% of the economy, way above optimum levels. This is due to an explosion in public sector waste, typified by a bloated bureaucracy and unnecessarily high taxes, which have drained the vitality out of our enterprise economy.

A further contributory factor has been the huge transfers of public resources from the South to the North, Wales and Northern Ireland, which distorts local economies and entrenches welfare dependency. Indeed, in some areas of the north more than 50% of all expenditure is state funded, paying salaries that are over-inflated, making it very difficult for private industry to compete in the labour market.

Other core factors, which threaten the economy, are inflation and debt.

1. Inflation

The UK's "benign" inflation data is not so "benign" as at first appears

(i) Money Supply

There are various reasons why governments allow central banks and others to increase the money supply, but the outcome is always the same - inflation. This causes price rises in real assets and raw materials, which in turn affects the whole economy.

The Bank of England, whilst warning about property prices and the dangers of too much personal debt, has nevertheless allowed the money supply to increase by 10% per annum since Spring 2005. This is faster than any major economy except China.

Most central banks are flooding the global economy with too much liquidity and the threat of inflation posed by the over supply of money has to be faced. These banks would like to raise interest rates in order to slow the growth in lending and debt, which has fuelled current inflation, but are afraid of the consequences.

Western economies have created a bubble which they cannot risk bursting and the problem is likely to get worse before it gets better.

A recent report indicates that, over the past 5 years, the average family has seen mortgage costs increase by 66%, motoring costs by 33% and household utility costs by 50%. Despite this, government data in the form of the Consumer Price Index (CPI) puts inflation at only 2.5% per annum! The more accurate Retail Price Index (RPI) has recently hit an 8-year high of 3.6% and is set to hit 4% this winter.

(ii) External Causes

Manufacturing input costs are rising worldwide and it is obvious that UK businesses cannot absorb these for much longer. Indeed, evidence points towards businesses already having to push through price increases. Manufacturing costs are also soaring in China and the UK cannot for much longer count on cheap Chinese imports to offset our own inflation. Further, there is a very real risk of food price increases due to rising prices in the agricultural commodities market.

Inflation arising from increases in commodity prices are difficult to control because, initially, such price rises are the result of international demand and supply considerations. However, much of the recent rise in prices of both soft and hard commodities has been brought about by excessive Chinese demand, but China is now beginning to experience internal problems which are giving rise to inflationary pressures which will reduce some of this demand.

In the UK and Europe deteriorating economic conditions could well result in the rate of inflation easing in the first half of 2007.

The above inflationary pressures could well lead to higher wage demands, in turn causing higher prices. This, coupled with any further interest rate rises, could slow the economy and accelerate unemployment, which has already hit 5.5%, the highest level since Spring 2000.

(iii) Government related factors

The sobering report issued recently by the Institute of Economic Affairs highlighted the extent to which the economy had degenerated since 1997. It concluded that had Government expenditure been kept down to 1960's levels as a proportion of the National Income, the annual economic output could now be around £1000 billion higher today. This would have provided more resources for schools, hospitals, pensions and the essential expenditure without the need to continually raise taxes.

However. the government has permitted bureaucracy to expand massively. For example, 111 new quangos have been created, at a cost of £5.6 billion per year, £1.3 billion per year has been spent on outside consultants, and 1 in 4 workers are employed in the Public Sector. These are all inflationary factors, which increase the tax burden to individuals.

2. Debt

The availability of easy credit, and low interest rates over the past few years have contributed to the fact that the UK has the highest level of debt in Europe. Consumer credit now stands at just over £210 billion.

In addition, mortgage debt now stands at £1 trillion. 280,000 mortgages are one month or more in arrears, and repossessions are increasing rapidly. Despite the above concerns, the housing market remains buoyant. Some mortgages are on offer at seven times annual salaries which is driving prices to speculative peaks and indicates a rapidly over-heating market, due to suffer a real downturn in the near future.

However, there is no room for complacency, Bankruptcies are at record levels and still climbing (estimated as likely to exceed 100,000 this year). For the year 2006 it is estimated that the High Street Banks will be forced to provide £12 billion to cover Bad Debts, and it is against this background that the F.S.A. warned the British Bankers' Association that banks should now factor into their strategy the possibility of a 40% fall in property prices and the prospect of a 35% increase in the rate of home repossessions.

The excessive levels of debt in the UK are to an extent a UK phenomenon. For various political and economic reasons, credit has always been easier to obtain here than in other parts of Europe. All authorities, including the Bank of England agree that the housing market is highly over-priced and it is inevitable that a sharp correction will follow - it has already started in the US.

It would not be difficult to appreciate the effect a downturn would have on the wider economy if accompanied by rising interest rates, unemployment, Council Taxes and energy costs, together with stagnant real incomes.

Our Solutions

1. Popular Alliance would carry out an in-depth review into all areas of public expenditure, with particular emphasis on the identification and elimination of massive public waste. The savings from such a review would be used to reduce the tax on industry. In addition, a reduction in the tax bill for individuals would mean that they had more disposable income to spend. This would increase demand for goods, provide further employment, and increase the Treasury's tax receipts.

2. Popular Alliance, whilst recognising that there would be some initial employment loss in the Public Sector, would use the increased tax relief to industry and industrial incentives, (particularly to smaller businesses) to bring about a transfer of employment from the Public Sector to the Private Sector.

3. The Bank of England has the means to vary the money supply by way of applying certain technical measures and these would be used, where appropriate, in conjunction with interest rates. However, the raising of interest rates can amount to a double-edged sword, which could result in the strengthening of sterling in relation to other currencies, which would cause difficulties for our hard-pressed exporters. Also remittances of funds from foreign centres would be adversely affected.

Popular Alliance would be "nimble on its feet" and react quickly to such a downturn and as indicated in 3. above, be ready to use all the economic measures it has available to offset as far as possible any distress caused in markets generally and in unemployment in particular.

Popular Alliance will not hesitate to implement its stated policies but there is no doubt that as a result of the present government's policies, the UK would not be well placed to withstand a harsh global economic downturn which some economists are forecasting for the end of the decade.

Popular Alliance - A Fresh Light on Politics