The need to curb the deficit

Today economists have written to the Sunday Telegraph warning against an over borrowed government trying to spend our way out of recession. They are right to be concerned about the rapid build up of debt in the public sector, and the careless attitude towards more debt by the authorities.

I have called both for lower interest rates and proper controls on the increase in public debt. The two go together. Just cutting the interest rates without taking action on public borrowing is likely to weaken the pound yet more. Doing nothing on interest rates and allowing the debts to mount up has triggered a very large devaluation in the last few weeks. The pound has fallen by almost a fifth against the yen in a few days.

These sharp falls in the currency will add to shop prices again, and mean we can afford even fewer imported goods. Just cutting rates and going on a rake’s progress will intensify the downward pressures on the pound, and cut living standards more quickly. It will also mean the Bank of England has to go easy on the interest rate cuts.

That is why we need urgent action to stop the build up of debt, beginning with a renegotiation of the banking support package in the light of recent falls in bank share prices. After all, Lloyds renegotiated its terms of take over of HBOS following an HBOS share price fall, so why can’t the government to protect the taxpayers interests?

We also need more progress in repaying debts incurred by the government to take over Northern Rock and the assets of Bradford and Bingley, and progress in returning those to the private sector, whilst there is still something worthwhile to return. So far all the government has been able to do is to run the Northern Rock business down thanks to competition law, at a time when we need more mortgage lenders to ply their trade, not less.

The longer the government delays in taking sensible advice, the more difficult it will prove to sort things out. The recent performance of sterling shows us that current high interest rates are not sufficient to protect the pound. It tells us something else is wrong. Markets are saying the government deficit is too large and the downturn will do too much further damage to the public accounts. That is why we need a lower deficit and lower interest rates, to help reduce the severity of the downturn.

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11 Comments

  1. figurewizard
    Posted October 26, 2008 at 5:03 pm | Permalink

    Desirable as lower interest rates are at present the fact is that even if Gordon Brown were to abandon his fixation on public expenditure; something I believe to be highly unlikely, it would take time for the effects to be felt on our colossal deficit. An added problem is that like many of us the international markets no longer trust his assurances on anything. The only way we can buy that time is by having interest rates high enough to attract overseas cash into our economy. Then, and only then could we sensibly reduce rates as and when it becomes clear that the deficit really is shrinking. Last week, which rounded off a depreciation of the pound of 22% against the US$ over the last twelve months is a warning that if action is not taken soon to remedy this we could add a full blown currency crisis to all of our other problems.

  2. Matthew Reynolds
    Posted October 26, 2008 at 5:22 pm | Permalink

    Just modify the David Davis proposal for a 'Growth Rule' ! Grow public spending by 1.5% less than average GDP expansion every year for six years with a view to getting the budget deficit down ASAP as opposed to what the ex-shadow home secretary urged which was public spending growth of 1% less than average GDP expansion to finance £40 billion in tax cuts over six years. Hazel Blears is right in a sense that a different set of economic circumstances necessitate a new set of economic policies.

    With a PSBR liable to be £60 billion plus in 2008-09 & then £100 billion plus in 2009-10 and government spending very high as a share of GDP

  3. Matthew Reynolds
    Posted October 26, 2008 at 5:34 pm | Permalink

    We need a smaller state sector to make public borrowing come down as taxpayers are shouldering too much of the burden already . Taxes are higher than in 1997 no question while wastage in the public sector is obvious and the economic damage is there for all to see . A big budget deficit means more tax for future generations and so to boost confidence in the money markets public spending ought to be slashed so that debt can be cut . If we taxpayers have to tighten our belts then so should government – tax credits that trap people in poverty , civil servants with no work to do , £100 billion a year for QUANGO's , loads of cash for the EU which has not had its accounts signed off for over ten years , farming subsidies that hurt the Third World , overseas aid for China , the ever pointless New Deal , high government procurement costs due to market forces not being used enough to get value for money and Incapacity Benefit that is early retirement for those disinclined to work are examples of why we need smaller government . Big Government & a soaring budget deficit are bad for our economy and have not improved society . Bill O Reilly said on Fox News that in the USA that Federal Government Spending needed to be 100% frozen for a year as the deficit was dangerously out of hand . Can we please have that common sense from the Conservatives ?

  4. Lola
    Posted October 26, 2008 at 6:55 pm | Permalink

    They won't listen. They can't they're socialists (alledgedly). Socialists cannot think beyond 'we're socialists and only we know how the economy should be run and that's with masses of employees and lots of taxes.' Cutting debt equates to cutting spending or raising taxes. Guess which will happen?

    • mikestallard
      Posted October 27, 2008 at 9:41 pm | Permalink

      You needn't even bother to guess.
      Today, in his keynote speech, the Prime Minister said that the crisis was nothing to do with him because, you see, it is GLOBAL. Secondly, the crisis presents a huge opportunity to us all to invest in our magnificent public services so that we can profit from the GLOBAL DOWNTURN.
      What we need is to invest in schools and hospitals and in putting warmth into old people's houses because they simply cannot do it themselves.
      Everything in the garden is lovely. We just need a little bit more manure…..

  5. Blank Xavier
    Posted October 26, 2008 at 10:23 pm | Permalink

    The idea that the Government can spend the country out of recession is pure insanity. Russell (I think) said – there are good reasons and there are real reasons. The Government may be *saying* this is why it wishes to spend. *But it makes NO sense*. So either they are dangerously stupid or their real reasons lie elsewhere. I can't help but feel Labour have lost the ability *not* to spend. There seems to be some sort of reflex -> problem? spend!

    Or rather – tax, borrow and spend!

    As the open letter stated; if you want to stave off recession *CUT TAXES*. The more capital you have available, the more economic activity you get. This is fundamental economics. It's been known since 1776! The idea that you tax everyone and *then* spend that on their behalf is god-awful. Firstly, it's a violation of private property rights – that money is MINE, thankyou very much. Keep your damn hands OFF. Secondly, the State is hugely inefficient and will spend that money FAR less effectively than individuals will, so we'll get far less economic gain for that money.

    OTOH, I left the country about six months ago, partially because I'd had enough. So I don't pay any tax at all towards this travesty, which is what I wanted, because it was intolerable. If you don't like something, and you're paying taxes towards it, then actually you have given up your will and become an instrument of someone elses will – in fact, the will which directs that which you so dislike.

  6. DennisA
    Posted October 27, 2008 at 12:23 am | Permalink

    "So far all the government has been able to do is to run the Northern Rock business down thanks to competition law"

    The letters EU appear to be missing from competition law….

  7. Johnny Norfolk
    Posted October 27, 2008 at 8:56 am | Permalink

    You would have thought labour would have learned the lesson last time they were in power.
    They would not cut back and ended up begging for an IMF loan, and ended up out of power for 18 years. The best bit was the last bit.

  8. mikestallard
    Posted October 27, 2008 at 9:53 pm | Permalink

    There are tons and tons of questions which need an answer here:
    1. How much, exactly, counting PFI, pensions, bank needs and all the rest does the government owe at the moment?
    2. Where does it hope (exactly) to get the money from to pay the debt?
    3. What (exactly) does the government hope to "invest" in? Why?
    4. Why cannot it trust us to get out of the recession? Why does it have to be in control? (See Blank Xavier above).
    5. What about interest rates?
    6. How can the government set a good example by cutting back its own expenditure in a time of GLOBAL CRISIS?

    Isn't the right place to discuss this, actually, parliament? At the moment, both sides seem to be preaching in various newspapers, to various select groups and, no doubt, taking advice from a lot of supporters, wives, families and focus groups, ably assisted by a lot of lobbyists who want to save the whale, stop global warming, prevent hunting, send all smokers to Siberia etc etc.
    Debate in parliament, if done properly, opens up these questions and forces the perpetrators to come clean.
    At the moment these questions are certainly not being asked, let alone answered truthfully.
    Please may we have our parliament back?
    And that, includes the Tories too!

  9. Lola
    Posted October 28, 2008 at 9:19 am | Permalink

    Something else I would like explained to me is the 'Newspeak' phrase 'unfunded tax cuts'. How can this be? Tax is spending. Tax is funded from wealth creation. You can have 'unfunded spending', but how can you have 'unfunded funding'? This is another thought management phrase along with other wonders like 'key workers'.

    It may be explained by the attitude of lefties. That is that 'your money is my money, but my money is my money'. In other words socialists view all the money (wealth) as belonging to the state and available for distribution and spending as the state thinks fit. Whereas in truth the wealth belongs to us and the state is our servant. We permit the state to take some money off us and spend it collectively. It is our money. Hence tax cuts cannot be 'unfunded'. Only spending by the state can be 'unfunded'.

  10. Phil Kean
    Posted January 4, 2009 at 10:53 am | Permalink

    Happy new year John.
    —————————————–

    John, I'm not convinced about the need for even lower interest rates.

    What are we wanting to achieve by lowering rates to such low levels, bearing in mind that interest rates are already at historical lows?
    My first worry is Gordon's desire to re-start consumer spending & the housing market.
    Funded by record levels of debt, we surely must accept that high street/consumer spending can NOT return to such unsustainable levels, and instead, consumers need to repay debt & return to responsilbility & good house keeping.

    This will cause high street casualties, as we've already seen, with high profile names entering receivership. There will be more in 2009.
    Also, financial reality is forcing a house price correction, something that the lowering interest rates can not reverse.

    I realise that Labour have made the UK over-reliant on these sectors, but, I don't think we should be prescribing alcohol to cure a patient with a drink problem.

    If we're looking to lower the operating costs for businesses, always a desireable aim, we must surely want to achieve the desired affect.
    Again, we must accept that businesses will fail in this slump. Sustaining unsustainable businesses only delays the inevitable failure, and allows the failing businesses to build up even more debt, as they struggle against the odds to supply a non existent market, or try to compete against other, more efficient and cheaper producers.

    Like you, I am concerned about the plummeting pound, and the reality that it 's almost a futile exercise to encourage a savings culture with such low rates of return.
    We must also worry about the plight of those who rely on income from savings, as their situation's must surely be dire.

    The fundamentals are wrong, and we must accept that things need to be done in order to create the conditions where future jobs (organic) can emerge and flourish.
    Healthy and strong businesses will survive. Well, long enough for the voters to give them hope by removing Labour and electing a hopefully competent Conservative government.

    I'm against the current pressure on people and political parties to arrive at so called solutions to Labour's economic crisis.
    The Conservatives did NOT get us into this mess, and the shadow cabinet fall into left-wing traps by proposing, sometimes, knee-jerk and ill-thought-out solutions to this crisis.

    Gordon carries on with his folly, regardless. Today we hear he's to 'create' 100,000 'new' jobs. I expect these are more of the taxpayer and consumer funded 'bogus' jobs, like HIPs, 24 hour drinking, gambling, house price inflation, politics, PCSOs etc, the jobs which Labour have imposed on us to compensate for all the real and wealth creating jobs which Labour's policies have forced to Asia.
    And on that subject, Labour are still pushing through with further job destroying measures, and more intrusive legislation to force householders and consumers to pay for these additional bogus jobs.

    One things you can rely on with Gordon, his incompetence is certainly consistent.
    .

  • 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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