In his delivery of the Budget Alistair Darling probably made the best fist of it he could in the circumstances. But it is the wrong Budget. The reason the national debt has ballooned out of all historic proportion and the cost of servicing it this year (£175bn) is therefore so huge is that the Government’s response to the credit crunch meltdown has been badly misconceived. The Government has been right to pursue the Keynesian strategy of increasing State expenditures to generate demand to head off a slump, and the Tories have been wrong to advocate letting the brutal self-corrective devices of capitalism play themselves out, while keeping a tight lid on any increase in national debt incurred by remedial Government action. But the manner in which the Government has chosen to develop their strategy has been wholly ill-advised. It has been geared to splurging eye-watering sums on bailing out the banks (a staggering £1.2 trillion, 80% of UK GDP) in the hope that the banks would correspondingly expand their lending to businesses and home-owners, when in fact the banks have done the opposite and continue to contract their lending. M4, the relevant measure of this lending (3 month, seasonally adjusted) actually fell from 17% in September 2007, when the crisis began, to 7% in February this year. The Government chose this route to stimulate the economy because the whole power structure of neo-liberal finance capitalism is built on the nexus between the banks and the State. But by concentrating on preserving their own power structure as the first priority, the whole of the rest of the economy and society has been exposed to the failure of this policy. What the Government should have done, and could still do now, is focus its economic stimulus directly on businesses and homeowners, not through the intermediation of the banks. Then a much more stable, less costly and more rewarding Budget becomes possible.

As Paul Krugman, winner of the Nobel Economics prize last October, has advocated, the credit crunch is so drastic and the consequences so cataclysmic that it can only be rapidly overcome by temporary nationalisation of the banks. With the strength of the State behind them, there would then be no need for the banks to put their own interests first by consolidating their balance sheets as their first priority. The Government as temporary owner would then be in a position rapidly to restore lending to its pre-September 2007 levels, which was always the Government’s intention. The effect of this on the public finances would then be dramatic.
Instead of expending £1.2 trillion on propping up the banks, the Government could take them over at a fraction of the cost. It spent £45bn supporting RBS (Royal Bank of Scotland), yet could have purchased the whole bank for £4bn – its stockmarket value in January this year. Lloyds, which was valued at £35bn a year ago, could have been bought in the stock market for just £6bn last October. All of the major banks could have been brought into temporary public ownership at very little cost. And iInstead of the Government now offering almost unlimited sums of taxpayers’ money to underwrite the banks’ toxic assets under the asset protection scheme (£325bn in the case of RBS, £250bn in the case of Lloyds, and Barclays waiting in the margins with a few hundred billion), the Government as owner could either sell off or junk those assets that are next-to-worthless and re-direct the rest into lending within the wider economy that is now so desperately needed.
This would transform the Budget prospects. The deficit a year ago was just £38bn. By the time of the PBR in November it had soared to £118bn. It is now £175bn, and unlikely to fall before reaching £200bn. The interest charge on this debt was given in the Budget as currently £28bn a year and expected to rise to £43bn a year. If the banks had not been bailed out so profligately and instead lending on a far greater scale had been pumped directly into the economy, thus sharply reducting the costs of business rundowns and rapidly rising unemployment, the rise in the national debt would have far more modest and the rise in debt interest correspondingly far less.
It is reasonable to estimate that on this basis the national debt this year might have been reduced by up to £70- £100bn and the interest on that debt might have come down to below £15bn a year. That would dramatically change the Budget’s projections that investment spending must halve in the three years from 2011-12 and that total spending would be frozen over that period, with actual falls in real terms of over 2% a year once fast-rising debt interest charges and sharply increasing unemployment costs are also taken into account. It would make the hole in the pub;ic accounts much more manageable.
That much smaller hole could then be dealt with in three main ways without at all paring back front-line public services, especially health, education and housing (the last of which should rather be steadily increased). First, some major spending projects which have never been justified (e.g. ID cards £5bn, Trident £70bn over 25 years, and Government IT follies like the Home Office communications super database £6bn) could be much reduced or entirely shelved. Secondly, a real crackdown on tax havens, which are estimated to cost this country up to £25bn a year, could certainly generate at least £5-10bn a year in extra revenue. And thirdly, the most popular part of the Budget which clawed back a tiny part of the gains made by the rich in the last three decades could certainly be extended. Tax could be increased for the 1% earning over £150,000 to a rate of 60%, and for the 2% over £100,000 to 50%. Higher rate tax reliefs could be removed in other sectors as well as pensions. Capital gains tax could be modestly restored to parity with income tax, which is where Nigel Lawson left it. Non-domicile tax exiles could be brought within the tax net which they should never have been able to evade. And the case for a land value tax could be reviewed, concentrated on the largest estates.
But the bottom line remains for social democracy that no cuts can be contemplated in basic public services , least of all to take the rap for bailing out the banks after the most reckless and irresponsible blowout in modern financial history.
Nor is this a scenario of what might have been, but cannot be now. Though it would have been far better if the Government had followed this strategy from the outset, it could still do so now to its very real advantage. Lending to businesses and homeowners is still stuck at very low levels and even quantitative easing, which is really the Government’s last shot in the locker, does not seem on early evidence to be working. It’s temporary bank nationalisation, or bust.

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