Following the longest recession in history Britain posted its first-ever budget deficit for the month of January.  Usually January is a bumper month for tax receipts.  Unfunded government over-spending was £4.3 billion, when consensus economists were forecasting a £2.6 billion surplus, according to the median of 16 forecasts in a Bloomberg News survey.

Don’t rule out a double-dip recession.  With neither the Conservatives or Labour offering policies to kick-start consumer spending and GDP growth, we could be in a lot of trouble…

So have you stocked up on beans or gold yet?  Have you taken Guido’s advice?

The Governor of the Bank of England now has to write an open letter to the Chancellor. This is Mervyn King’s sixth such letter in seven years.  Perhaps he will recommend stocking up on commodities.  Don’t forget we have a serious chance of a double-dip recession on the horizon.  And still we have no pro-growth policies from the government, only over-spending and over-borrowing…

The news agenda yesterday oscillated between Phil Hammond saying that the Tories had only identified £1.5 billion of cuts and Labour seizing on Cameron’s shift of emphasis saying that there would be no swingeing spending cuts, just a start on cuts in 2010.  Mandelson claimed that the Tories would pull the rug out from under the recovery by cutting £11 billion this year when he himself said only last month that we need to cut £80 billion-a-year within 4 years.  The government is even legislating to that effect.  It is like the Mad Hatter’s Tea Party:

`Have some wine,’ the March Hare said in an encouraging tone.  Alice looked all round the table, but there was nothing on it but tea. `I don’t see any wine,’ she remarked. `There isn’t any,’ said the March Hare.  `Then it wasn’t very civil of you to offer it,’ said Alice angrily.

Meanwhile, back in fiscal reality, Britain is the most indebted nation in the industrialised world.  McKinsey released research yesterday which puts the “billion here, a billion there” political squabbling in perspective.

Have the politicians grasped the magnitude of the deep hole Britain is in? The Tories have publicly identified spending cuts equivalent to less than ¼ of a percent of GDP.  The government is overspending by some hundred times that amount.  This is “through the looking glass” economics.

Alice laughed. “There’s no use trying,” she said: “one can’t believe impossible things.” “I daresay you haven’t had much practice,” said the Queen. “When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”

We can’t go on like this…

Yesterday’s GDP disappointment makes the case for a tax cutting Emergency Growth Budget even stronger.  Policy Makers have got to go for growth, you can’t tax your way to prosperity.  Or else the cat gets it…

Graphic : Taxloss via Alphaville

A rounding error rather than an end to recession…

UPDATE : Reflect that we have had £200 billion of quantitative easing and all we get is this – most of that went on giving foreign gilt investors an exit rather than bank loans to enterprises.  Subtract the mirage of the Keynesian car scrappage scheme from the figures and we are really still in recession.

It didn’t take long for Will “we don’t do attack dog” Straw of Left Foot Forward to, errm, go on the attack.  The editor of the well funded “evidence based” blog dismissed Guido’s story (“Economics for 7 Year Olds“) about the UK being the only G20 country left in recession by quoting the figures from the back pages of an out of date copy of the Economist.

He even made a little dunce’s hat and wittily headlined his piece “Economics for Gui-d’oh  Fawkes”.

Will might have checked a back-copy of the Economist, but it seems he missed the news yesterday that Canada grew 0.1% in Q3, Mexico grew 2.93% in Q3, South Africa grew 0.9% annualised in Q3, and so did Russia. The story was driven by the new data released.  Guido isn’t sure what Will is smoking, but the icing on the cake was the citing of Spain as an example of a G20 country still in recession.  Spain isn’t even in the G20 Will.

Will’s blog is usually pretty good, provocative and produces original content, he really should stick to evidence based positive stuff, the last mysteriously funded high profile left-wing blogger who tried to take Guido on head-to-head made a huge fool of himself.  Will should also know (from his years of spinning for HM Treasury) that you need evidence that is up-to-date. Guido’s story was based on news, not old data or wishful thinking…

Guido was more than sceptical when politicians and Labour luvvie economists like Gavyn Davis started talking up the bogeyman of deflation at the same time as the government was running up massive fiscal deficits.  It seemed too handy a coincidence that they would print money on a scale never seen before at the same time as issuing debt on a scale never seen before.  They subsequently, coincidentally, bought the debt using the money they had just printed.

This we were told was to stave off deflation which it was emphasised was very bad.  Goods becoming less expensive was somehow worse than goods becoming more expensive.  If we got deflation it would be the end of the good times for ever according to even monetarist economists.  Guido was sceptical that deflation was necessarily bad, history shows that there have been times of increasing prosperity that coincided with deflation.  Deflation happened several times in the nineteenth century.  During that era of rapid economic development there were no central banks and money was calculated as a certain quantity of gold or silver.

Deflation was not necessarily a threat to our prosperity, in a situation where the money supply is stable it is the manifestation of prosperity and pensioners know that their standard of living would have improved.  With inflation now upticking this experiment in Mugabenomics* has to be reversed without setting off hyper-inflation or collapsing the government debt market.  The policy authorities have figured out how to prop up the gilt market – they are changing the regulations to force banks to buy government debt to the tune of hundreds of billions. It remains to be seen if they can avoid an inflationary catastrophe, surging record gold prices suggest the markets suspect not…

*©Vince Cable, who was against QE before he was in favour of it.  God knows what he thinks now.

Below is Guido’s easy to understand summary of the third quarter GDP growth figures globally:

As well as being the lamest economy in the G7, we share recessionary woes with economic powerhouses like Romania.  Gordon Brown’s epitaph will be that he didn’t abolish boom and bust, he didn’t save the world and he “led the way” only in his imagination.  The British economy has paid the price for his delusions.

Sources : Eurostat and OECD

ONS numbers reveal that youth unemployment continues to rise, with the number of 16 to 24-year-olds up by 15,000 to 943,000, giving a rate of 19.8%, a record high. 

Gordon says youth unemployment is his priority…