The National Building Museum in Washington does not figure highly on
the itinerary of most visitors to the capital. Designed by a US Army
quartermaster-general, it was intended as the headquarters of the US Pension
Bureau and its ugliness led one architectural critic to regret that it was
fireproof.
Yesterday, however, its vast interior, with its Italianate columns, was the
venue for a meeting of the leaders and finance ministers of the world’s 20
largest economies. The task before them: to put together a route map out of
the recession and ensure the firestorm that has engulfed the global economy
does not happen again.
Even before they sat down, in the notable absence of Barack Obama, America’s
president-elect, the broad thrust of their objective was clear.
Every country would do its bit to revive or maintain growth, either through
monetary policy and more cuts in interest rates or, where appropriate,
fiscal policy. The stalled Doha round of world trade talks will be urgently
reopened.
Though some way short of a global action plan, it did give the green light for
countries keen to shield their economies from the worst of the down-turn.
Last week China showed the way by unveiling a £380 billion fiscal stimulus
built around infrastructure spending and Vat reform.
The G20 also gave a further nudge towards interest-rate cuts – a signal to the
European Central Bank, which has been slowest to respond to the global
crisis, and even raised interest rates in the summer.
The leaders also pledged to have firm proposals ready for improving global
financial regulation by the end of March. These are set to include greater
harmonisation of accounting standards and much-improved cross-border
regulation, including the possibility of a “college” of supervisors to
monitor the worldwide activities of the biggest banks.
Action to clamp down on the bonus culture within banks is also likely, as is
better control of securitised-mortgage markets. “We want to change the rules
of the game in the financial world,” said Nicolas Sarkozy, the French
president.
At a White House dinner that marked the start of the gathering on Friday
evening, outgoing American president George Bush was flanked, appropriately,
by Hu Jintao, the Chinese president, and Brazil’s president Luiz Inacio Lula
da Silva, the leaders of two of the world’s most powerful emerging nations.
“This problem did not develop overnight and it will not be solved overnight,
but with continued cooperation and determination it will be solved,” Bush
said, warning against expectations of a quick fix.
But others warned that time was of the essence. “If we don’t take quick action
we run the risk of falling into a depression,” said Brazil’s finance
minister, Guido Mantega.
Alistair Darling, who joined Gordon Brown for the meeting, highlighted that
next year Britain would chair the G20, taking over from Brazil. Normally,
few notice who is at the helm of this grouping. Now, however, it is at the
centre of efforts to save the global economy and its next meeting has been
pencilled in for April – though it could be brought forward if the crisis
deepens.
FOR Brown and Darling the significance back home of their transatlantic trip
will come a week tomorrow, with the chancellor’s prebudget report.
Even a few weeks ago the idea of a big fiscal stimulus for the economy – tax
cuts and higher public spending – seemed fanciful.
The question for the Treasury was how it would deal with the budgetary red ink
resulting from the economy’s slowdown and the loss of its revenue cash cows,
particularly in the City.
Part of the prime minister’s mission to America, however, was to seek global
approval for, in effect, forgetting the government’s fiscal rules as long as
the economy needs a boost.
Such approval was not hard to find. Around the table in Brown’s suite at the
Waldorf Astoria hotel in New York on Thursday night was a rare assembly of
top American economists. The guest of honour was Paul Krugman, this year’s
Nobel laureate.
Also there were professors Alan Blinder of Princeton University, Mark Gertler
of New York University, Joseph Stiglitz of Columbia University, David Backus
of New York University’s Stern School of Business, and Adam Posen, deputy
director of the Peterson Institute for International Economics in Washington.
Economists can be expected to disagree about most things but there was a high
degree of unanimity in the room. As they discussed the global economic
crisis, all agreed on the need for a dramatic “fiscal stimulus” in America,
Britain and most other countries.
“The view was that the minimum fiscal package America should introduce should
be worth 2% of gross domestic product, or $300 billion (£200 billion),” said
one source. “Some in the room were arguing for a stimulus as high as 4% of
GDP or $600 billion.
In Britain, the consensus has been that to make any difference, this month’s
fiscal package will have to be worth at least £15 billion, or 1% of GDP, a
figure the Treasury has neither confirmed nor denied. For Brown, listening
to the assembled brainpower in Washington, the thought must have been that
he could justify doing even more.
The economists also discussed monetary policy and agreed with the assessments
made by both Brown and Mervyn King, the Bank of England governor, that there
was room for Britain to make further interest-rate cuts.
On their trip to America both Brown and Darling have been keen to stress that
any boost to the economy should be temporary and they have not abandoned the
government’s fiscal framework.
Brown told a public meeting that the budget would be brought back under
control once the immediate economic emergency was over. Tax cuts would be
targeted at the less well-off because they are likely to spend a higher
proportion of any extra cash put back into their pockets.
He confirmed there would be additional spending on transport infrastructure,
and hinted at more “green” tax breaks.
There is also an expectation that the government will announce something more
“eyecatching” in its pre-budget report on November 24.
Brown was at pains to stress that the government’s recent bailout of the banks
did not presage a return to the state rescues of the 1970s. No 10 sources
confirmed the prime minister is concerned at the prospect that the White
House will bail out Detroit’s big-three car makers, General Motors, Ford and
Chrysler. He also fired a shot across the bows of incoming president Obama,
warning that any retreat to protectionism would be a “road to ruin”.
AT home, the government’s planned fiscal stimulus has split economists and
politicians alike.
Robert Chote, director of the Institute for Fiscal Studies (IFS), first mooted
the idea that a package worth £15 billion would be necessary to make a
difference.
The IFS has warned for some time that the public finances were in a poor state
and that taxes would eventually need to rise. But Chote said yesterday these
were exceptional cirumstances, with the proviso that any giveaway would need
to be accompanied by a credible plan to mend the public finances over the
medium term.
“There is clearly uncertainty about how effective monetary policy is going to
be,” he said. “You probably need to spread your risks and not put your eggs
in one basket. The risks of not doing something are higher than the risks of
acting.”
However, Peter Spencer, economic adviser to the Ernst & Young Item Club,
which uses the Treasury’s model of the economy, disagreed.
“Brown spent his tax proceeds when times were good and can’t afford to give
away more,” he said. “Not only that, but it really is very difficult to
bring forward these capital programmes and it would also be hard to get any
tax cuts through before April, by which time the recession will be baked in
the cake.”
The political battle over the pre-budget report promises to be a bitter one.
Yesterday George Osborne, the shadow chancellor, accused Brown of
deliberately pursuing a “scorched-earth policy” – leaving
the next government to pick up the pieces.
He also warned reckless government borrowing would cause a run on the pound.
“We are in danger, if the government is not careful, of having a proper
sterling collapse,” he said.
Downing Street hit back at Osborne’s “desperate” comments, saying: “This is
totally irresponsible from Osborne, and just shows that this is no time for
a novice.”
It is a long way from the lofty heights of the Washington summit to the fight
over the government’s fiscal plans. But whether those plans are successful
or another damp squib will have big economic and political implications.
How low will the pound go?
IN 1944, when negotiators gathered at Bretton Woods for the international
monetary conference, the pound was worth $4.04. Last week it touched $1.45,
a long way down for a currency that stood at more than $2 in the summer.
Against the euro, sterling fell to 1.15, its lowest since the single currency
was created in 1999.
Analysts said the pound was undermined by a gloomy forecast from the Bank of
England and a perception that both the Bank and the government are relaxed
about sterling’s slide, seeing it as a way to both boost and rebalance the
economy.
Economists warn, however, that if sterling falls too much it could cause
problems.
The government’s prebudget report, due on November 24, is set to unveil much
higher levels of borrowing. Analysts fear that the annual total could rise
above £100 billion over the next two years.
The government has funded its deficits in part by selling UK government bonds
– gilts – to foreign investors. Doing this against the backdrop of a sliding
pound could prove difficult.
Barclays Capital predicts that the pound will recover because the Bank’s cut
in interest rates earlier this month will eventually boost the economy.
Other forecasters predict more falls, however.
