An economic storm is brewing and the recession (and the public) are just the innocent bystanders.
The battle over the merits of another significant fiscal stimuls has been engaged. In the corner representing prudence is the Governor of the Bank of England, Mervyn King, and in the opposite corner is prudence's previous champion, the Prime Minister Gordon Brown.
As a small, relatively open economy, the UK is exposed to the sometimes harsh judgements of the markets. And that's what happened today: the health of the public finances has been wieghed, measured and found wanting.
The recession has taken its toll on public finances by draining revenues and ramping up public spending. Government borrowing is needed to finance this deficit. But given the current and expected levels of debt and that the BoE's quantitative easing is (as intended) driving the market for government bonds, the markets raised the alarm about growing government debt levels.
Dan Brown at the The Guardian captures the tension between monetary and fiscal policy:
"Within hours of him telling Brown not to blow the budget, the gilts market has produced a ringing endorsement. An alarming report from the Debt Management Office shows that investors are already shunning government gilt auctions - in effect questioning the creditworthiness of the nation.
There have been failed debt auctions before and the Germans struggled relatively recently, but they are pretty rare. Given that the Bank of England is meant to be supporting the gilts market by pumping in money through quantitative easing, this is doubly alarming. The sharp fall in wider bond prices caused by this auction news is exactly the reverse of what this policy was intended to achieve.
Critics of Mervyn will no doubt point out that his recent caution may have caused the auction to fail, by giving investors the impression that he was going cold on the idea of quantitative easing. I think on this occasion, it is more likely the weakness in the gilts market is a symptom of what he was talking about, not an effect. We really are dangerously close to the edge."
EEF are not in favour of another stimulus...through quantitative easing, the Bank of England has already pumped £13 bn into the economy. That's more than the VAT cut, but without the corresponding increase in business taxes.