The Chancellor in the Times – still more silly spin

There was one really encouraging thing in the Chancellor’s remarks to the Times. He thinks oil prices will remain high. As he’s been wrong on practically everything else, that is very encouraging! It is possible the big falls in the oil price this week will trigger further declines and some unwinding of the substantial “investment” positions that many funds have taken in oil. That would help relieve the immediate inflationary pressures, and might persuade eventually even the slow moving Monetary Policy Committee that it should fight recession rather than inflation. The long term trend in oil and other commodity prices is up, but that does not mean it will happen in straight line with no periods of weakness and decline. World demand growth is reducing, and even China and India are having to cool their economies to combat inflation.

It is also good news that at last the Chancellor recognises that he has been too optimistic about the state of the economy, about the likely pace of economic growth and the state of the public finances. Unfortunately he still seems to think in Labour soundbites and seems incapable of proper analysis of the situation.

He tells his colleagues through the pages of the Times that there will be no more money for “schools, hospitals, defence”. What does that mean, and why put it like that? The budget figures for 2009-10 and 2010-11 show more money for all three, especially the first two. Defence is in great need of additional money for equipment. There is plenty of extra money washing around in the budget estimates for the next two years in programmes without the same priority, which should be switched to the important and sensitive areas. There are huge amounts of over administration, over regulation, over computerisation, and over provision of consultancies which should be flushed out. That would free money for priorities, and allow cuts in overall spending. Non front line staff costs should be brought down through a strict policy of no recruitment.

The Chancellor needs to wake up to the bleak reality of a large budget deficit and borrowing overshoot which will prove difficult to finance and will be damaging to the rest of the economy. If he persists in continuing with so much wasteful spending in the public sector it will squeeze the private sector even more. That will produce more political misery for him amongst the voters he is squeezing, and will induce more job losses in private sector companies who will have to cut costs the painful way because the public sector is unable or unwilling to cut its costs in less painful ways.

The huge surge in borrowing in the last quarter took most commentators by surprise. My forecast of a £10 billion overshoot this year now looks quite low. The public finances are deteriorating more rapidly than I have ever seen, and still the government carries on spending as if there were no problem. The Chancellor talks tough – and foolishly – in the Times interview. Who believes him? The best thing is to watch what he does, not what he says. In the last few weeks he has spent an additional £2.7 billion on the 10 p tax rise compensation, (and promised more to come), £1.5 billion on North West transport, an unspecified amount on Northern Ireland for the 42 day vote, £4 billion over several years for two new aircraft carriers (work for Scotland) and hinted that he will raise less in revenue for fuel duty and car tax than planned. That is hardly evidence of a man with an iron grip on spending, or with a clear sense of direction on taxation. This budget deficit problem is going to get a lot worse and will need additional measures to control it. Borrowing is just deferred tax with interest! The public doesn’t want a bigger collective mortgage.

Meanwhile the commentators write about the breaking of the fiscal rules as if it were sudden and new. Any sensible commentator can tell you the rules were broken years ago by fiddling the figures.

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5 Comments

  1. David Eyles
    Posted July 19, 2008 at 11:18 am | Permalink

    Whilst I agree with your general point about GB's financial proflicacy, I feel that the expenditure of £4 billion on a couple of aircraft carriers is a snip compared with the waste elsewhere (£101 billion according to the Taxpayers' Alliance for last year alone). Bear in mind that the Royal Navy has been halved in size since Labour took power.

    Nevertheless, as you say, the confirmation which was widely expected to be turned into a postponement, being announced when it was, does look very much like buying votes in Glasgow East.

  2. Kit
    Posted July 19, 2008 at 11:21 am | Permalink

    "£4 billion over several years for two new aircraft carriers"

    The figure is closer to £20billion if look at the "on the road price."

  3. david
    Posted July 19, 2008 at 11:27 am | Permalink

    Will you be supporting David Cameron's intention of raising taxes when the Conservatives regain power?

    Perhaps cancelling the aircraft carriers should also be considered?

    Reply: He has no such wish

  4. Neil Craig
    Posted July 19, 2008 at 12:02 pm | Permalink

    "The long term trend in oil and other commodity prices is up,"

    Not so. The long term trend in commodity prices vis a vis income has been downwards since at least the begining of the Iron Age. The Simon-Ehrlich bet was made some years ago on precisely this question. Simon won & "environmentalists" have refused to put their money where their mouths are ever since. www3.interscience.wiley.com:8100/legacy/college/botkin/0471389145/ed/pa03.html Unlike Cassandra Mr Ehrlich has prophesied many different sorts of doom for decades, been continuously wrong & profited mightily thereby which says something about our society.

    Commodities other than oil are rarely destroyed & can be recycled. Oil is an energy storage medium & we have cheaper sources of energy (ie nuclear) & are on the cusp of having a viable biofuels industry usng GM plants & algae.

    John you may think I am nit picking over 1 line but this question goes to the heart of whether humanity has an unlimited future or can only slow down our return to the caves, which in turn affects all our economic (& indeed other) policies.

    While it is possible to destroy our future & most western political action seems to be predicated on the assumption that we should, neither commodity limitations nor anything else provide a technical, as opposed to political, barrier to infinite success.

    I reccomend http://www-formal.stanford.edu/jmc/progress/

  5. mikestallard
    Posted July 19, 2008 at 9:07 pm | Permalink

    I couldn't see why the government was being so silly until Newsnight last night.
    Two men were discussing the economic plight. One was quiet, sensible and I think he came from the Confederation of British Industry or somesuch. He spoke when spoken to and had obviously thought the matter through – saying the sort of things that everyone on this blog is saying – reduce spending first and try and get government expenditure down to avoid inflation and recession.
    The other bloke – I am not sure who he was – had grey hair and an open necked shirt under his grey suit. He constantly interrupted, spoke when told not to, and continued speaking even when his slot ended. He didn't listen at all. He knew.
    His message was this: we are short of infrastructure and it is urgent that we spend more and more on this vital need. To him all this quango business and over-centralisation was simply common sense. To question it was just as stupid as, say, questioning whether or not smoking causes cancer, or whether global warming is going to destroy the planet.
    Scary!

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    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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