Halve interest rates and cut wasteful spending

Halve interest rates. Cut out waste and undesirable public spending. Sell some public sector assets to raise cash.

The government should do all three if it is serious about preventing recession or recovering from the downturn.

Money is too tight and interest rates too high, just as money was far too loose and interest rates too low for too long in the period 2001-6. The current inflation comes from past mistakes, and will subside as soon as world commodity and energy prices subside, which they may well do.

Even today, if the government imposed a staff freeze (excluding essential front line service employees like teachers, nurses, police, doctors and service personnel) the costs would run off quite quickly given the huge size of administrative payrolls. It should also place a ban on most new consultancy contracts, cut down numbers of political and press advisers, and slow down or cancel expensive computer schemes, especially the ID one. It would not be difficult to save billions over the next year or so.

Asset sales would also help the public accounts at a time when they are strapped for cash. Let’s see the sale of the Student Loan book accelerated. Bring on the sale of Northern Rock. Insist on more private capital for the railways.

There are many things the government could do to get a grip on its finances. Being a government of spinners, all it will do is change the basis for setting out the borrowing figures and the fiscal rules, and carry on borrowing as if there were not repayment day. That will prevent the Bank cutting interest rates as much as possible, and will intensify the squeeze on the rest of us. The UK is the worst placed of the major economies to ride out the Credit Crunch, because its own economic policy is so appallingly badly run.

Of only we could have some action to fight recession, instead of wonky words and fiddled figures.

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14 Comments

  1. Letters From A Tory
    Posted July 18, 2008 at 9:42 am | Permalink

    Then again, if interest rates are cut and inflation starts to pick up pace, we really are doomed.

    http://lettersfromatory.wordpress.com

  2. David Belchamber
    Posted July 18, 2008 at 11:13 am | Permalink

    "Of only we could have some action to fight recession, instead of wonky words and fiddled figures".

    I agree with you 100%. Could you please show up once and for all what The Spectator referred to as Brown's "fake facts"? Inflation for ordinary people is not running at 3.5% or thereabouts, unemployment figures should include NEETs, violent crime is NOT declining etc.

    However, Brown and his ministers still get away with these deceptions; the tories will have to use the correct stats when they get back in and Labour will then attack them for being so bad.

    Brown misled the House at PMQs some time back by claiming that inflation was only 2.5% but under the Tories it was 15%, thus confusing the CPI and RPI. But it went unchallenged.

  3. Neil Craig
    Posted July 18, 2008 at 12:27 pm | Permalink

    Not sure about cutting interest rates. I suspect that would let inflation rip & the £ drop (though the latter may be a good thing).

    I would suggest cutting the regulatory squeeze on construction. Not merely on housebuilding but on public buildings too. Richard Rogers recently said that of the Dome cost of £670 million only £46 million was the actual building cost. Equally the new Forth Bridge is going to be £4.2 billion when the inflation adjusted cost of the old one is £314 million. If all our construction could be cut by 75% to 93% it would feed through to a massive boom.

    This came from somebody else in a newspaper comment but seems apt:

    "There are a few reasons why UK construction projects cost such a ridiculously high amount.

    First of all, there is the universally charged Day-Works scam, charged by every single major construction firm in the UK, which essentially doubles costs. Don't like it? Try finding a contractor who will work without it…Interestingly, it is unheard of in Japan, where I once witnessed an entire motorway built in a week.

    Second of all, there is the ridiculous Health and Safety industry. Initially a decent idea as the UK had the highest rate of deaths in construction of any developed nation – now simply an industry in itself. It leads to horrendously over-engineered solutions, overspending on materials and design and huge delays in completion times. Complain about it and you're seen as someone who wants construction workers to be mangled by any piece of passing machinery. Health and Safety employs 200,000+ people in the UK. In France, it employs no-one, and they're not slow to adopt restrictive working practices.

    Third of all, there is our horrifically labyrinthine planning process, brought about by there being simply too many politicians. In terms of population Greater Glasgow and Manhattan are pretty similar. Manhattan has 10 councillors; Glasgow has 328.

    Fourthly, there is the cost of land in the UK. Progressive land release policies, such as the Greens' Land Tax, designed to prevent speculative land banking by housebuilders, supermarkets etc are actually a good idea, which would prevent property prices from artificially inflating – I don't generally have a lot of time for the Greens, but this is a good policy, and one that works well elsewhere.

    Fifthly – there are very few skilled construction professionals in the UK, and those that are employed in the industry generally suffer from low wages, poor working conditions and often poor training. I do laugh when I hear of contractors trying to tempt school leavers to take on a career with them – abusive, one-sided contracts, no rights and short-termism are rife. Consequently, sub-contracting is everywhere.

    So the next time you wonder why our major projects cost so much – simply think of the five reasons given above."

  4. newmania
    Posted July 18, 2008 at 1:15 pm | Permalink

    Wouyld you agree with Clegg and disagree with Osbourne who are advocating tax cuts and rises respectively then ?

    Reply: N o – Clegg is not offering tax cuts – remember the Local Income Tax they want to clobber you with

  5. Charlie Bardswell
    Posted July 18, 2008 at 1:50 pm | Permalink

    John,

    I've been reading your column for some time with great interest. I broadly speaking agree with you. However your policy prescription slightly concerns me. Whilst I agree on the need to cut waste (who wouldn't) the other suggestions, I struggle with –

    Asset sales in the current economic climate would surely lead to sale of assets at a discount to their true realisable value, not least because it would be known that the government were desperate to raise cash and therefore bidders would push down the prices further.

    As for cutting interest rates, currently it is banks, not the bank of England who have high interest rates as spreads have widened. My concern is that my cutting rates now we would end up in a liquidity trap – i.e. the cuts would make little or no difference to the forthcoming recession, but limit the possibility for cuts when recovery becomes an option. I believe that this mistake has been made in America already. The side effect being to lower the currency (an effective loosening) and stimulating inflation as well as capital withdrawals. It is also worth noting that with the CPI expected to rise to 4-5% real interest rates will be velow 1% shortly. On an RPI basis, they will presumably turn negative.

    I could not agree more that we are in the current situation because of past policy mistakes, however the situation is what the situation is and I feel it is now inevitable that we accept that there will be a recession and focus our efforts on mitigating the consequences, rather than cling to a belief that we can prevent it.

    Al the best and keep up the good work and the good blogging!

    Charlie

    Reply: thanks for the kind words. If we cut rates it will price mroe people into being able to borrow or to maintain their borrowings – what you need to do to stave off recession. Selling assets at current levels is not as good as selling them last year, but the government has no easy choices. I would rather they sold assets than cut out necessary spending. They need to cut waste and sell assets as the deficit is so large.

  6. bill Quango mp
    Posted July 18, 2008 at 2:43 pm | Permalink

    Not even proposals from this failing administration.
    Mr R.. what are they afraid of that they don't even try to have some ideas on what to do? Just fingers crossed and hope the iceberg isn't going to do too much damage.

  7. Richard
    Posted July 18, 2008 at 2:51 pm | Permalink

    Another hearty meal of government fudge for lunch. Of course the golden rule was breached years ago by keeping PFI off the books.

  8. Mark Wadsworth
    Posted July 18, 2008 at 6:12 pm | Permalink

    What should be emphasised again and again is that "teachers, nurses, police, doctors and service personnel" make up less than a quarter of the people in taxpayer funded jobs. What on earth do the others get up to? What do they do?

  9. mikestallard
    Posted July 18, 2008 at 6:39 pm | Permalink

    Did you read Charles Moore in the Spectator this week? He said that, if he has any sense, David Cameron's first budget will along the lines of Mr Howard's in Australia – harsh. There are so many things to do, as you rightly point out.
    The Chancellor today peddled the usual lie about being handed a weak heavily indebted economy in 1997. I was as shocked as ever.
    And, according to Global Europe the Northern Rock fiasco was not all the Chancellor's fault:
    "Worries about breaking the Takeover Code – which became statutory in 2006 as a by-product of EU legislation – caused the Bank of England’s reluctance to act as an ‘honest broker’ to Northern Rock.
    · The imprecise wording of allegedly relevant directives, especially on insider trading, delayed and hampered decision-taking in the critical weeks in August and September 2007 when Northern Rock sought help from it’s regulator, the FSA, and the Bank of England.
    · The EU’s rules on state aid caused concern in the Treasury, which led to the inappropriate imposition of a deadline for a private sector rescue and the repayment of the Bank of England’s loan.
    · The heavy redundancies at Northern Rock were justified in terms of compliance with the EU’s state aid rules, not in terms of their costs and benefits to the British nation."
    This is released today by Global Vision (Tim Congdon).

  10. Matthew Reynolds
    Posted July 18, 2008 at 7:26 pm | Permalink

    We need a pepetual two year inflation target of 2% on the RPI-x measure with greater independence for the Bank of England to fight rising prices . We need drastic cuts in QUANGO’s to ensure that public spending growth is below 1% in real terms p/a for five years to make sure that the PSBR is cut year on year – so that big government and excess public borrowing do not impede hopes of an economic upswing . Basic rate payers aged under 65 need £240 p/a tax refund while all pensioner households need a £600 winter fuel payment while fuel duty goes down 15p a litre . BBC privatisation , the QUANGO cuts and extra tax revenue due to high oil prices could fund each measure to get more money to those suffering from Labour’s high inflation economy . The UK should opt out of as many EU regulations as possible to stimulate small business growth while replacing IB & JSA with a payment designed to slash economic inactivity would stop QUANGO cuts adding to the dole queues by getting many of the economically inactive into work . Short term measures to help those in need and longer term policies to balance the budget , fight inflation and boost employment levels will I think be a sound response to the present mess . Boosting capacity in transport , energy and water would boost employment levels now while giving us an infrastructure designed to support the return of economic prosperity .

  11. Matthew Reynolds
    Posted July 18, 2008 at 8:26 pm | Permalink

    We need a pepetual two year inflation target of 2% on the RPI-x measure with greater independence for the Bank of England to fight rising prices . We need drastic cuts in QUANGO's to ensure that public spending growth is below 1% in real terms p/a for five years to make sure that the PSBR is cut year on year – so that big government and excess public borrowing do not impede hopes of an economic upswing . Basic rate payers aged under 65 need £240 p/a tax refund while all pensioner households need a £600 winter fuel payment while fuel duty goes down 15p a litre . BBC privatisation , the QUANGO cuts and extra tax revenue due to high oil prices could fund each measure to get more money to those suffering from Labour's high inflation economy . The UK should opt out of as many EU regulations as possible to stimulate small business growth while replacing IB & JSA with a payment designed to slash economic inactivity would stop QUANGO cuts adding to the dole queues by getting many of the economically inactive into work . Short term measures to help those in need and longer term policies to balance the budget , fight inflation and boost employment levels will I think be a sound response to the present mess . Boosting capacity in transport , energy and water would boost employment levels now while giving us an infrastructure designed to support the return of economic prosperity .

  12. Mark Wadsworth
    Posted July 18, 2008 at 10:16 pm | Permalink

    John, I'm glad you mentioned the LibDem's proposals for Local Income Tax (in reply to Newmania above).

    But let's face it, local councils have to pay for police, street-lighting and refuse collection etc somehow. Which would you prefer – a Land Value Tax (to replace Council Tax and Business rates and all other property- or wealth-related taxes) or local income tax?

    The former would be simple, keep property prices low and stable and wouldn't discourage economic activity; the latter would be heinously complicated, it would do nothing to dampen booms and bust in the housing market and would act as a brake on growth?

    Reply : I want lower spending and to keep the Council Tax. We could start by getting rid of all those so called Chief Executives and their large offices which Councils never needed before the Bains Report.

  13. Neil Craig
    Posted July 19, 2008 at 12:19 pm | Permalink

    80% of council spending is covered by the rate support grant. That means if councils could cut their overall spending by 20% there would be no need for arguments on what sort of local tax is needed. To do this would require central government to cancel a lot of local government's statutory duties & need to fill forms for central government to collate etc but is clearly possible.

    I would like to see the RSG funded on a set figure per constituent rather than, as seems at present, being proportional to spending & the council's political clout. This would mean that councils spending above the average would have steeply higher council tax & competent ones zero (or even negative) which would concentrate minds wonderfully.

  14. David Belchamber
    Posted July 19, 2008 at 12:43 pm | Permalink

    I don't know whether you have read Barack Obama's book "The Audacity of Hope" or can get hold of a copy. At the bottom of page 153 (in my paperback) there is a quick summary of the situation that the USA faced after the Depression with a description of what the New Deal subsequently did to repair the damage.
    It seems exactly the recipe that is required for Britain today.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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