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Will markets put the Vulcan Nerve Pinch on Darling?

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Paul Mason | 15:15 UK time, Thursday, 23 April 2009

Some thoughts on the UK budget...

1. This is a multi-layered story where the econo-wonk press gets the biggest issue - which is fiscal credibility - and the politico-press is going, quite understandably, for the more easily "relevant" story of labour's U-turn on the higher 50% tax rate. (We'll be doing both tonight on Newsnight).

2. There is a slight but serious chance that the bond markets will go on strike and not buy the UK's £220bn debt. A lot of bond traders are going on the airwaves to say they probably will buy it, albeit at a higher interest rate. But bond traders are Spock-like beings who play 3D chess at one-move-a-day-pace. The ones not talking to the press are the ones thinking about putting the Vulcan Nerve Pinch on Darling.

3. A quick explanation of gilts: gilts are IOUs issued by the government over periods of 5, 10, 30, and 50 years and bring a guaranteed interest payment for the buyer, paid every six months. Two thirds are held by pension funds, as they supply a ready and predictable source of income. Once issued gilts can be traded, so their price can go up or down compared to the interest rate guaranteed. Out of this relationship you get a yield - which is a bit like a "real" interest rate. If the price of gilts goes down, because there's not enough demand, the yield goes up - and the government effectively ends up paying a higher interest rate on its debt. (Pile in ye pedants and diss me on the detail, but I think this is the best simple explanation I can give).(Guido also onto this story gives a useful graph of the forward price of gilts).

4. OK so if the markets don't believe the government's 3.5% growth prediction for 2011 they will start pushing the yield upwards (and the price downwards). The yield on a 10 year Treasury Gilt (here) is currently 3.45% (you can see it each day at the bottom of the front page of the FT's companies and markets page).

5. The aim of the government's quantitative easing strategy is to get the yield down. The Bank of England is buying up gilts to push yields down. But the fears over the UK budget deficit will push yields up. They have already started to creep up in response to the credibility fears we covered on Newsnight last night. Gillian Tett interesting on default risk in general.

6. So, yes, you have worked it out right: the lack of credibility on economic forecasting and debt is working directly opposite to the £150bn being printed by the Bank of England to do quantitative easing.

7. How will it end? Well what the bond markets typically fear is two things a) a default, where Britain refuses to pay its debt. This right now is a theoretical impossibility. And b) inflation - where the government allows inflation to inflate away all that interest over the 10,20 or 50 year life of the bond, leaving the bondholder as sad as a 1923 German with his wheelbarrow full of worthless notes.

8. This article explains more about the fears in the bond market right now. But the canny traders are looking ahead to the November PBR. If there is no election before then, and he does not get reshuffled, Alistair Darling will have to stand up and say whether the 3.5% prediction is right. Indeed since he predicted growth to begin in Q3 2009 he will have a good idea whether he's going to be proved right or wrong. If we are then faced with a further upward revision of debt, a further downward revision of growth, then he hole in the finances will look bigger and the tax take will have to increase even further. Senior Tories believe this will have to be done by raising VAT, as the government was caught discussing in a recent leak.

9. We will know by November whether yesterday's figures were over-optimistic. Sometime between now and then the debt rating agencies will have a look at the UK's public finances and decide whether it keeps its AAA (zero chance of default) rating. See here for why they are already considering a downgrade.

10. Finally the Institute for Fiscal Studies has just said that total government spending will be cut by 0.1% a year in real terms, between 2011-2014, the lowest three-year spending growth for any government since 1996-1999.


  • Comment number 1.

    It's blatatantly obvious that we will not have the growth predicted by Darling.

    As a consequence we will not be able to service the interest payments on the gilts.

    Brown/Darling will try to hide this as long as possible by buying up the gilts via QE, ie printing money.

    This will not work and we will see the death spiral of sterling and start of hyperinflation.

    I see no way out of this, and nor does Darling. If he were to present numbers based on a 0% growth for the next 2 years there would simply never be a point at which the debt would fall to zero, even after 100 years.

    He would have looking kinda stoopid standing up and presenting numbers which showed the future complete collapse of the UK economy. Therefore he had no option but to present figures showing a notional pay-back date, however unrealistic.

    Put quite simply, we are stuffed. Why will not anyone in the BBC openly present this likely eventuality?

  • Comment number 2.

    I am glad you have mentioned the politco-journos talking about the 50% tax rate.

    Both Sky News and the BBC News today has been obsessed with talking about what is, after all, only going to affect just 1% of the UK population.

    Perhaps this tells us something about the salaries enjoyed by journalists at the BBC and Sky News?

    Perhaps it just demonstrates just how out of touch such journalists are with the 'ordinary' people in the streets - you know, the other 99% who make up the majority of us who do the working and living and dying around here!

    I have been amazed at the anger I have been listening to on the streets today - people who normally have nothing to say about politics have been openly talking of their anger and disgust with the Budget, Brown and Darling. As for the bankers, you don't want to hear what little old ladies in the Mumbles wish to be done to the bankers!

  • Comment number 3.

    Have you found out why the IMF got their figure so 'wrong'?
    Have all toxic debts now been accounted for or are there more surprises in store?

  • Comment number 4.

    Agree tawse57 post 2

    How shabbily the media lets us down.

    The small tax hike will not only affect very few, it will also not affect the income of that small percentage much, and neither will it bring in much money (about half of what we are spending on terrorism security actually).

    I am particularly disappointed at the media's lack of questioning of the socially embedded proposals, even while the contradictions scream out:

    - the Govt's supposed jobs creation, when this is an impossibilty under current EU rules - any jobs created here are open, and have been usually taken by, overseas workers - either from within the EU, or 'skilled ' but cheap from outside of the EU.

    Yet the govt keeps getting away with this tripe, and the media keeps allowing it to.

    - public works building projects. It seems to me that Darling is saying there will be more, and the same, and less. But whatever, there is no questioning of whether projects will continue to be under the extremely bad value PFI schemes that will cost us heaps even without the recession factor, with profits going into transnational investors pockets with low risk, for 30 years. And with the credit squeeze we have even been ensuring that we lend them the money to continue earning from the public purse, if they run short.

    But nothing in the budget, about bringing these back to direct works, to cut costs overall, as indeed we are talking long term debt now and not this year's phoney budget figures as per usual; and no imagination or critique in that regard in media questioning.

  • Comment number 5.

    I have tried, throughout this crisis, not to blame Governments (of either stamp) since all of us were caught up in the hubris of the NICE decade: and most people actually bought into the idea that you could live forever on the 'never-never'. It was stupid, but there you are.

    This budget is something else. The bare-faced effrontery of the growth projections - which no-one (not even the Treasury) can seriously believe - leaves the Government without honour or credibility.

    Will the markets buy the 'gilts'? How should I know - but as Paul says in point 7, they will fear inflation. The less they buy the more will be bought by the Bank of England (a good point by #1): giving a short term illusion of sustainability but stoking inflation and the fear of inflation.

    There is a negative spiral here that has no apparent bottom

  • Comment number 6.


    I notice the extraordinary growth forecasts for GDP in the Budget have some very serious qualifications : " B.45 The forecast assumes that the Government's interventions to improve flow of credit in the economy ensure that a sufficient volume of credit will be available to support economic recovery." Then, it goes on to say " The Budget 2009 forecast adopts the forecasting assumption that the MPC's decision to purchase 75 billion of assets, just over 5% of money GDP in 2008, is successful in raising nominal GDP by approximately that amount over the normal horizon over which monetary policy affects inflation and GDP groth." Box B5. Is that 2 years?

    Can you offer your considered view on how these assumptions, if wrong, could affect the growth forecast here.

  • Comment number 7.

    Cheers for trying to explain gilts, as soon as stuff like that gets mentioned I feel like I'm listening to someone that's been playing everquest for 10 days talking about elf magic. Spock-like, do they also possess a kind of natural innocence?

    I'd like to hear you or any of the other people's on this blog give an idea at the big picture. Seems like the budget detonated and every one is off madly chasing the flying shrapnel. Econo-wonks seem to have all got their heads buried in the minutiae and the rest as you say are distracted by the p**s on the rich side show. Nobody has really given people of limited attention spans like me a wider perspective.

    Would also like to know how the government comes up with its growth predictions? Cable says they just reverse engineer it. Can't someone freedom of information request it?

  • Comment number 8.

    The BoE will have a mound of gilts on its balance sheet, which it purchased through QE. Presumably, the government just cancels these and never has to repay them and never has to pay the coupon interest on them.

    The enemy of fixed price gilts is inflation. Consumer Price Inflation is already running at 3% against a 3.45% yield on 10 year gilts. The government also issues index-linked gilts, whose interest is tied to the rate of Retail Price Inflation. However, if RPI goes negative, so does the interest paid on index-linked gilts.

    With so many governments around the world having to increase their spending to combat the affects of the global recession, there is a lot of government debt being issued all over the world. This means that supply of government bonds will outstrip demand on a global basis. To attract buyers for gilts, the British government will have no option but to increase the interest rate payable on gilts, which will then push up the cost of the government's interest payments.

    The British government is highly indebted.
    British companies are highly indebted.
    British households are highly indebted.
    All at a time when tax revenues, company revenues and household incomes are all falling.

    The end conclusion will be much higher taxes for the British general public. It will be those on average wages who will end up paying the brunt of the government's borrowing. There is no way round this. Mass market taxation, together with public sector spending cuts, will be needed to service and repay our government debt.
    This will strangle any chance of growth, as the British public struggle with over-indebtedness and higher taxation and imported price inflation caused by a weak sterling.

    The British economy is facing many years of difficulty ahead....

  • Comment number 9.

    This may be beyond the intellectual and ethical ambit of NEWSNIGHT:

    Afghanistan and Pakistan are now a single problem. There are two contending ideas of a solution: that suggested by the Saudi Ambassador to Pakistan and that implied by Hillary Clinton.

    Strangely enough, that suggested by the Saudi Ambassador is less fundamentalist than that implied by Hillary Clinton.

    It would be good for the thinking pundits within the BBC to have a go at this!

  • Comment number 10.

    Paul - interesting blog. I now know how to spot a bond trader - just look out for a man with pointy ears reciting "that is illogical" whilst he reads the Tresaury growth forecasts. And if bond traders are vulcans then perhaps Darling and Brown should get help from their fellow Scot in the engine room of the Enterprise. Maybe they will be issuing so many bonds so quickly that there is a risk that UK government "cannae take it". We need to find some Dilythium crystals pronto.

  • Comment number 11.

    Paul, you did say eco-wonk didn't you only after the budget and the Tory reaction it could have been eco something else. As an unreformed leftie I thought Alistair did quite well although we got to squeeze the rich thirty years too late but he has landed Dave with the dilemma of dare I help out the Faunteleroys or stick with the plebs for electoral aspirations either way we are all in it for thirty stretch or until the banks tell us where it is hidden...doodle pip

  • Comment number 12.

    ......we always called it "the Vulcan Death Grip"

    (Sounds much more dramatic than a mere "nerve pinch").

  • Comment number 13.

    12. At 5:43pm on 23 Apr 2009, MrTweedy
    ......we always called it "the Vulcan Death Grip"

    I thought that, like so much, it was just another event that required a bit of narrative enhancing for us poor plebs to 'interpret' things properly.

    But, fair do's... both are used:

  • Comment number 14.

    Dear Gavin the wrong bird the wrong Death Scream, I do not Hear A thing, push the Volume in an upward direction 2 Full Blast.

    Happy Days


  • Comment number 15.

    al the tooos n twelvetee pounds and a bit

    it works 4 me

  • Comment number 16.

    Would someone like to tell us how much it is going to cost us to service this debt mountain , this year and in the following years ?

    The Government seem to be quiet about those projections !

    Isn't it time we the people had a say on this path the current government is insisting they drag us down ?

    ITN is saying that it will take until 2032 before debts are back to a manageable level again. They are quoting the IFS figures.

  • Comment number 17.

    Great stuff, cadet Mason...

    One is aware of the Peter Principle, where staff are promoted to the level of their incompetence...

    Maybe you should postulate the 'Paul Principle' [because it's your name, and you have to rob Peter...] about the idea that the chance of a default cannot be zero with this Government, because they will just keep upping the ante to the point just before the 'gilt strike' kicks in...

    And since you don't know when the 'gilt strike' kicks in until you hit it ! Of course, we've been here before and there was a mini-panic..

    Was that 'siren song' taken as a real note of caution to stop hiking up the debt even further ? Nope, like a gambler on a losing streak, they are upping the bets yet again.

    Para.7 is bang on the button - having now abandoned one election promise, the New Labour mantra of sound money will next to be thrown under the train, and I can see Boney M being recruited for the Labour Party Conference to give it that full-on seventies theme again !!

    post.3 - TheBlameGame - Sarcasm is so unbecoming !!

  • Comment number 18.

    Sorry, but after the last post some light relief is surely called for.

    The funniest thing about all this is that we know that David Cameron and George Osborne have to hold back and put a lid on their level of righteous outrage / synthetic indignation [delete as appropriate..] because they know that if they REALLY go 110% all guns blazing to tell the truth, the whole truth and nothing but the truth about these public finances....

    Well, the 'flying by the seat of his pants' Chancellor could be defenestrated by a good old fashioned 'Sterling crisis', that 'gilt strike', then the debt downgrade you mentioned, and the domino effect of higher interest payments AND more debt due to lower growth leading to a catastrophe which THEY will have to pick up !!

    So it is a bit like that Quentin Tarantino style stand-off...

    If I were David Cameron, I'd be tempted to focus on the 50% tax rate thingy, because if too many people started reading Paul's Idle Scrawl and watching Newsnight, the whole bally edifice could come crashing down like a post-pub game of strip Jenga..

    What was it they used to say about the Northern Ireland situation ? If you think you can solve it, then you haven't understood it ?

  • Comment number 19.


    There is another factor to consider and that is the General Election. This must give rise to uncertainty. Uncertainty equates to risk and risk to a risk premium - that is the yield of gilts will rise because of the general election!

    I think that it is highly improbable that the Government will be able to get satisfactory (i.e. investors willing to pay the price it wants to sell at) prices for its gilt sales in the quite near future and this too will push up the price (i.e yield).

    The only choice is to quite dramatically cut expenditure and the other choice of raising taxes cannot produce enough money. What to cut? Defence (Afghanistan), Unnecessary administrative projects (ID Cards), all pay to civil servants, by 20 percent (and for equity everybody else!), and The Olympics! What this would do is reduce yields and the cost of the borrowing by reducing the government's need for funding.

  • Comment number 20.

    To quote Blackadder:

    This is a crisis. A large crisis.

    In fact, if you got a moment, it's a twelve-story crisis with a magnificent entrance hall, carpeting throughout, 24-hour portage, and an enormous sign on the roof, saying 'This Is a Large Crisis'.

    A large crisis requires a large plan. Get me two pencils and a pair of underpants.

    Millions who have never known unemployment, parts of the country where people have gone from school into a job and never been out of work their entire lives.

    Oh well, the people of Wales, the North of England and Scotland finally have something over the Home Counties lot - at least we all know how to sign! You lot in Surrey, Berks and London get on your bikes!

  • Comment number 21.


    Was Leon Brittan wearing a comb-over toupee? These are, indeed digfficult times! Sort of credibility crunch.

  • Comment number 22.

    As you say the enemy of gilts is inflation and through quantitative easing the government will increase nominal (not real) GDP by the amount of that quantitative easing.
    Or in other words reduce the real value of their debt by that amount.
    So how about a bit more quantitative easing?
    Much less painful that all them cuts.

  • Comment number 23.


    Apparently the definition of an alcoholic is 'one who drinks more than the examining doctor'.

    If loss of job and home leads to heavy drinking, there will be more jobs in brewing, health and drink sales, with revenue (increasing) in the government coffers. many will die young (except perhaps the Muslims).

    Job's a good'n.

  • Comment number 24.

    The government are reaching the point where they have to make things up in order to make the numbers stack up.

    A slippery game in which they will inevitably trip themselves up and contradict themsleves numerically. The bow wave of such evebntualities has already started to be felt as picked up by #8 which was obviously read by PM and formed part of his Newsnight article today.

    If the consensus of non-aligned bloggers here is right on the scale of Mr Darlings unjustified optimism, then come the pre-budget report in November he will not be able to make anything stack up numerically anymore and may as well show up wearing a comedy frizzy red wig and a big red nose to make his speech.

    Do people realise what that will mean..that is only 7 months from now.

    As others pointed out here the Conservatives dare not even call it because of what it may facilitate in so doing and therefore be accused of being complicit in an economic catastrophe which only China would have the funds to bail us out of.

    The bloggers here can make a difference.

    Well done#8 and well done PM...keep at it the Newsnight anchormen may keep accusing you of being depressing in your articles but the people deserve the truth and they will handle it...welcome it in fact after being spoonfed manipulation for so long.

    What the politicians never understand is that people can instinctively smell a rat even if they do not understand the economics behind it..

    Ignore Paxo and Gavin and keep digging no matter how depressing, trust the people of this nation to handle it, we collectively do not deserve our chancellor and his boss deliberatley producing a budget to save their party, not the nation.

    I am so glad I found this blog I think I would have gone insane otherwise.


  • Comment number 25.


    Wake up Jericoa! It is Kansas - and there really IS nothing you (or we) can do!

    UNLESS the iniquity of our being refused that extra box on the voting slip is taken up as an embarrassing cause celebre by media. Ideally, it would be labelled 'NO CONFIDENCE' - a damning indictment on governance AS A WHOLE. But 'abstain' will probably have to do; and oh what tricks they will try to play on us before it is allowed. They will set up an enquiry to decide how to label the extra box, and try to arrive at a vacuous or pejorative result.
    OR they will say: "no extra box is needed, leave the slip unmarked and that will be counted as A NULL VOTE, with spoilt slips counted, separately, as such." power tends to corrupt; political power starts by choosing corrupt lackeys, and hones their aptitude.

    We need an ABSTAIN box.

  • Comment number 26.

    If we introduced just 25 to 50 Independents at the upcoming Election, then the main Parties would never know the Outcome of a Debate until the Votes were cast.

    That just might achieve some level of democracy to Britain.. We are all riding the Titanic and I can already see the "Iceberg" it is still recession in 2010 and flatlining in 2011.

    That would bring UK PLC to its knees as "Stony Broke" Boy, would we have austery then, its only two years away.

  • Comment number 27.

    The government are knowingly lying. They know there is no chance of reaching predicted growth levels.

    Being treated with such arrogance and taken for fools will make the public extremely angry.

    At the moment the weather is fine, summer's coming, holidays to look forward to, lots of us still have money to spend.

    But when the penny drops the Manse in bonny Scotland will not be far away enough Mr Brown.

  • Comment number 28.

    # 22 - the point your missing is that as 2/3rds of bonds are bought by pension schemes, it will be the pensioners who suffer the pain as the real value of the government debt they hold decreases. There is no magic way out of this; it is all about how the pain is going to be shared. There is only so much QE the Treasury can do without spooking the bond markets and pushing up the interest rate on bonds.

    I think that the commentators (including PM) are grossly understating the risk that we will have to go to the IMF later this year. Do you not wonder why the G20 agreed to the IMF's facilities being increased to $750bn? They must be contemplating one or more of the larger economies (such as the UK) needing help. It can't all be required for Eastern Europe and South America surely.

    On the bright side, I now have my chickens and my tatties will be planted this weekend.

  • Comment number 29.

    The last thing this country needs is to lose market confidence, as it looks like the majority of the spending over the next parliament will have to be financed by borrowing rather than raising taxes. Well, Alistair Darling has done exactly the opposite in this weeks budget. Just when you think this lot couldnt have made things worse, they surprise you beyond your imagination.

    It is interesting that the policies put forward by Michael Howard during the 2005 General Election are now turning popular for the voters: caps on immigration, restrained growth in government spending, lower taxes (although it may not be possible in todays circumstances). If that election were held 18 months later, he probably would have won and that will be the end of Labour. I wonder if Mr Howard is banging his head against the wall now, seeing how things have turned out for his successor. Which brings me to my point - timing is everything. God has a wicked sense of humor, and we are all bathing in his universe of cosmic joke.

    Paul, very insightful thoughts on the budget, well done! Your Newsnight report was excellent too.

  • Comment number 30.

    Why don't we just scrap Trident? Cut public spending at a stroke.

    Review all the other defence spending while we're at it.

    What's the point in having weapons no-one is ever going to use?

    There are a few other items of spending which could also be on the list eg ID cards; expensive government databases; unnecessary quangos etc etc......also sell off a few things like the Tote

    I'd have it all under control in a couple of weeks!!!

  • Comment number 31.

    ...Without regulation of these over-the-counter markets, excess was inevitable, ....

    ....“If you take the cop off the beat in a neighborhood, all kinds of malpractices will be committed,....

    inevitable? what do the light touch regulation missionaries say about that?

  • Comment number 32.

    anyone else else thinking where are the reported usa banking 'profits' in the coming from? or is it a setup?

    given the tv punters on the finance channels are talking bull market that would be a good sign for it to go down now all the retail punters have gone in long?

  • Comment number 33.

    Paul wrote...

    '9. We will know by November whether yesterday's figures were over-optimistic. Sometime between now and then the debt rating agencies will have a look at the UK's public finances and decide whether it keeps its AAA (zero chance of default) rating. See here for why they are already considering a downgrade.'

    ...wasn't all that toxic debt from the USA triple A rated?

    The ratings agencies lost their credibility a long time ago and anyone trusting their existing UK sovereign debt rating is an April fool. The IMF will be called in irrespective of these clowns' ratings.


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