Brown's state spending spree is coming home to roost

Can’t say we weren’t warned! This has been boiling up for months. Christina Speight ============================================ TELEGRAPH 18/4/07 Business comment: Brown's state spending spree is coming home to roost By Damian Reece, City Editor British inflation is now running at 4.8pc when housing costs are included, as they ought to be. This is nearing the levels that have in the past set off an accelerating inflation spiral, but the same may not occur this time. As Governor Mervyn King explained in his letter to the Chancellor, inflation may fall sharply in coming months as utilities drop out of the picture. The Bank of England was very quick to change course last summer once the housing boom resumed, raising rates three times. It takes 18 months for the full effect to bite. The US housing slump is not over, Japan is not out of the woods, and overinvestment in China is leading to vast excess capacity. The world could tip into deflation all too quickly if central banks overreact. A rate rise to 5.5pc in May is now inevitable, but we think that two rises would be highly risky. That said, Britain now has the worst inflation in the G7, and Gordon Brown is largely responsible. His spending spree on an unreformed state sector has shoved large sums of money into the hands of people who do not - for all their other virtues - contribute to economic output, which is inflationary. He has pushed the size of the state to 45.3pc of GDP, higher than Germany. His budget deficits are running at 3pc of GDP at the top of the cycle, in the middle of a housing bubble, when Britain should be in surplus. We have the worst "fiscal profile" in the OECD, bar Japan. If the Bank of England is forced to take stringent action, we can thank the Chancellor.


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