5 reasons to borrow more?

The government wants to increase spending, and therefore borrowing, to help us out of recession.

We need to distinguish between the several different ways in which borrowing will rise in the next few months. Some are inevitable and some are avoidable.

Borrowing will rise because:

1. The government is buying controlling interests and shareholdings in banks, and may do this in other types of company in due course.(it has already bought a railway company)
2. Revenues will fall as the private sector makes less profit, carries out fewer transactions and earns less money.
3. Expenditures will increase as more people need unemployment and related benefits.
4. The government may increase spending on projects to create jobs.
5. The government is increasing spending anyway, assuming the economy would grow.

Only items 2 and 3 are unavoidable.

Item One is so far the most expensive, boosting borrowing by more than £40 billion ( cost of shares so far in Rock and the latest 3 bank package), and the most contentious.

Item 4 could make sense if overall borrowing was under sensible control. It is more dangerous as a policy where borrowing is thought to be high, as total high borrowing may reduce market confidence causing problems with raising borrowing at sensible interest rates and adding to inflationary pressure through lower sterling.

Item 5 includes a big build up in administrative central government and quango staff entailing large increases in the public sector pension and pay bills. The increase in this should be stopped as the rate of growth in the economy has slumped.

The most worrying one is Item 2. The government needs to think hard about how much revenue it can collect in the next couple of years, and about the sustainable revenue for the future.

Taxes on property will be sharply down this year. There will be far fewer transactions, and prices are falling, slashing Stamp Duty and other transactions taxes.(CGT, VAT, Income Tax on these). The government should not assume a sudden bounce back in values and volumes in a year or so.

Taxes on corporate profits will fall sharply, reflecting lower profits, especially in the financial sector which has played such a large role in recent UK growth. Again, the government should not assume a sudden bounce back in banking and related profits in a year or so, especially if several banks are still nationalised.

Profits on oil and gas will fall from recent peak levels as energy prices have fallen so far. There is more possibility of a bounce back when the global economy recovers.

Taxes on high incomes will fall, as we have to assume that the high bonus culture of recent years will be adjusted downwards for the lean times ahead. Taxes on other incomes may not fall in cash terms, as there is still some pay growth, but the rate of increase will be much reduced by unemployment and slower pay increases.

VAT receipts will be damaged by fewer and cheaper transactions. This will recover when the economy picks up.

A prudent government would only borrow that portion of lost revenue which will pick up again when the economy moves back to some growth. There will be substantial permanently lost revenue. It would not be prudent to plan to spend that in future years.

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21 Comments

  1. RobertD
    Posted October 27, 2008 at 9:34 am | Permalink

    To judge from the current Sky News poll which has overwhelming support for cutting government spending and reducing taxes over extra government spending the man in the street understands this far better than the Westminster bubble.

    Its time for Dave, George and Co to take off the gloves and present both the facts as you have outlined, and offer a real alternative choice.

  2. andrew hammerschmied
    Posted October 27, 2008 at 11:14 am | Permalink

    I was not aware the socialist government bought a railway company. I was under the impression they simply confiscated it.

  3. Henry Crun
    Posted October 27, 2008 at 12:23 pm | Permalink

    Mr. Redwood,

    I have to confess that I am confused. From whom will the government borrow the money?

    It can't be the banks, as the govt have been pumping money into the money market because the banks are unable/unwilling to lend to each other.

    Now the government is having to borrow to cover their bank share purchases. I don't know much, but I do know that it is imprudent to borrow money to buy shares. Unless of course, like the abolition of boom and bust, in Gordon's world the value of shares can only go up.

    reply: We the taxpayers are sitting on a loss of around £5 billion on the bank shares if Gordon goes ahead at the prices he proposed with the purchases.
    The money will be borrowed from a wide range of sources. Paradoxically the banks will lend to the government as this scores well for them with the Regulators, so some of it is a mad circle of government buys banks shasres to bolster bank capital so banks can lend back to government to buy bank shares. The government also aims to borrow from individuals with cash to spare, and from foreigners.

    • mikestallard
      Posted October 27, 2008 at 7:56 pm | Permalink

      You can't get the wood, you know.
      Those were the days! Good old Neddy Seagoon!

    • Henry Crun
      Posted October 28, 2008 at 10:28 am | Permalink

      Words left out

      We have been scammed, plain and simple. And the socialists have fallen for it hook, line and sinker, thinking that the bail-out somehow gives the people "power" over the banks, bankers and bankers' bonuses.

      Mr Redwood, you have to get the front bench to up the ante now at PMQs and in the press in taking this mendacious bunch of charlatans running our country to task, expose their hypocrisy and lies. You also need to start taking the BBC to task, their pro-Labour bias is now so blatant that the only solution is privatisation and withdrawal of the licence fee.

      I, for one, have had enough. I don't think that you and your colleagues have a real sense of the anger that Mr Brown and his cronies have instigated in the British people. They have pulled over our eyes for the past eleven years and the mainstream press are complicit in the New Labour fraud.

      A general election can't come soon enough.

      Apologies for digressing slightly off-topic.

  4. Acorn
    Posted October 27, 2008 at 12:39 pm | Permalink

    Well said JR. We really have to start worrying about our corporate sector. Like it or not, we are all totally dependant on it.

    Our socio-economic model has three sectors; the government sector; the household sector and the corporate – private that is – sector. Regardless of where your thinking is on the political spectrum, the corporate sector supplies the interest; the wages and dividend payments that keep the other two sectors afloat; all the way to that last pension payment before you fall off your perch in the national birdcage.

    Being dependant on outsiders to regularly inject sustenance – capital – into our birdcage, eventually leads to our nation falling off its collective perch when they stop. Particularly when the outsiders think your birdcage is starting to stink a bit and they find a nicer birdcage somewhere else to feed.

    If your perch is in the US birdcage you currently have an advantage; the world has decided to use your bird food – the US Dollar. As the US also makes – prints – the bird food you are perching pretty, even though it may not feel like it at the moment. All the non US birdcages are the ones with the food shortage problem.

    Unfortunately there is a cuckoo in our birdcage that steals a lot of the food and throws it out of the cage – government sector cuckoo bird. The trouble is we can't see how much the cuckoo has thrown out and who is going to clean up the good bits and put them back in the cage. We also don't know who is going to clean up the bad bits or how they will recycle them back into the cage and when. What we do know is, the more food we keep in the cage the better off the little worker birds will be. We have to pluck some flight feathers from the cuckoo.

    Now, the banker bird is a useful guy to have in the cage but he is insisting on being fed first, so ………………………. .

    OK, ITS SILLY; BUT, YOU TRY EXPLAINING TO THREE SIX-FORMERS – not mine – WHAT THE HELL IS GOING ON. If they don't get A* next year, I will want to know why!

  5. Johnny Norfolk
    Posted October 27, 2008 at 1:04 pm | Permalink

    All this Labour government can do is spend. When things are tight the first thing you do is cut back. This lot are just spending more and more. it wont work, it will just make matters worse.

    God help us all.

    • Donitz
      Posted October 27, 2008 at 8:54 pm | Permalink

      Welcome to the world of the Socialist. Old Labour, New Labour it all comes back to tax, borrow and spend until bankrupt.

  6. mr ecks
    Posted October 27, 2008 at 1:54 pm | Permalink

    I am afraid you didn't really answer Henry Cruns point above–what you seem to be saying is that the banks who have received taxpayers money will lend it back to the political dross who pay back the banks with still more of our money plus substantial interest charges. I might suggest to you that if the Tories were worth their salt (which sadly you are not) that fact alone, widely noised abroad, should be enough to bring Bottler Brown to his knees. Also, what other "wide range of sources" will Brown be able to call on?. Arab money? Chinese?–cant see them rushing to get hold of a bankrupt state's debt–Government bonds?–perhaps millions of little old ladies,. despite being terrified of General Winter, still have billions stashed away in their matresses ready for a flutter on the Bottlerbonds–guaranteed by the state–can't fail. Perhaps Brown intends to copy his illustrious socialist forbears and go to the IMF?. He will have to join an ever growing queue only to discover that by the time he gets to the top of that queue the cupboard will be empty. Plus it is hard to see him swallowing the humiliation of the Labour/IMF connection let alone the conditions that would be attached to such a handout. No— there is only one way Brown can get the cash he intends to throw at the problems and that is, like the U S and the Eu —-to PRINT it.

  7. Paul Danon
    Posted October 27, 2008 at 3:17 pm | Permalink

    Borrowing has got us into this mess. The answer surely is to live within our means. We must cut all un-necessary jobs, such as those in government, quangos and frivolous services. We must accept a lower standard of living and seek national self-sufficiency in food-production. If we are also to export, we must produce goods that people overseas really want, and these should be of high quality yet cheap. The small pound will help with this. Our over-governed, debt-ridden service-economy makes us vulnerable in times like these.

  8. Keith
    Posted October 27, 2008 at 4:17 pm | Permalink

    Perhaps I'm being simplistic here but in relation to my household budget, if I haven't got any money then I'd be pretty damned silly to borrow it.
    Surely, the same applies, or should do, to a national budget.
    Would someone explain the difference?

    • Paul Danon
      Posted October 27, 2008 at 5:39 pm | Permalink

      With you there, Keith. These Keynesian capital projects are madness and politicians' vanity. The latter hope to engineer a boom to win votes but, of course, it must all be paid for, so spending on these white elephants will slow genuine recovery. If they're paid for by printing money, that will scupper growth. Countries in recession need to close airports and cancel international sports events, not throw dodgy money at them.

  9. mikestallard
    Posted October 27, 2008 at 8:00 pm | Permalink

    Keith – it is worse than that.
    Did you hear the Prime Minister speaking today? I was in the gym listening intently.
    First of all, it is not his fault. It is the global economy which is throwing up a lot of challenges which he is determined to meet.
    Then there are vast opportunities which he also is excited by for the 21st century.
    In other words, he made it totally obvious that he has absolutely no grasp of your simple point above. None at all.
    Secondly, of course, the obvious answer is to invest. Hence the borrowing (uttered sotto voce).
    He made it absolutely clear that he has no intention of cutting back at all.

    • Phillip Downs
      Posted October 28, 2008 at 9:52 am | Permalink

      Mike – In essence, the borrowing issue is simple. What I find so deeply disappointing at the moment is the lack of a coherent and effective Conservative response to Brown's proposals. This is a point for you John and it has been voiced so many times on this blog. I hope you are aware of the intensity of how utterly fed we are of the Government's proposals appearing unchallenged. The Conservatives need to oppose properly.

  10. anoneumouse
    Posted October 27, 2008 at 8:51 pm | Permalink

    What happens when the IMF runs out of money?

    With most governments in the world strapped for cash due to bailing out the banks. What will happen when the IMF runs out of money?

    The IMF total quotas at end-August 2008 was SDR (funny money) 217.4 billion (about $341 billion).

    That will only bail out 21 countries = to that required by Ukrain

    • DavidH
      Posted October 28, 2008 at 12:21 pm | Permalink

      They'll print it.

  11. Adrian Peirson
    Posted October 28, 2008 at 6:50 am | Permalink

    The Bailout, enslaves us all to this communist Regime, his BIG spend on Public sector will have us all working for the State.
    Welcome to Gulag Britain.
    Oh and the Border patrols they are setting up isn't to keep people out.
    So Gordon Prints gilts valued at £40 billion per year and the Banks lend him unbacked Paper Currency at interest.

    Why not Print £40 billion and issue that into the Economy, it's the same thing, except there would be no £40 billion to pay back, and no Interest.

    Hey Presto, I've just saved us £40 billion.

    The Quangos cost us £100 billion per annum, the EU Costs us £20 billion NET.
    Two Illegal wars.

    If Brown is a socialist like he says, he wouldn't have bailed out the Banks, he would have declared all Bank loans and Mortgages Null and void, Giving people their Cars, their homes and their Businesses free of charge.
    ( But he didn't, so who does Brown really work for, you and I, or the Global Bankers. )

    doing this would have freed up around £500 Per month for most families.
    They would have spent, so stimulating the economy that way.
    New banks would have sprung up.
    If Brown wants to help pensioners, it's easy, simply don't Tax Pensioners, Better yet, let them keep the whole of their annuity, not just the Interest. it belongs to them and their family, not the Pension company.
    But no, he has done it the other way, Enslaving us by Taxes and now creating massive state workforce for his public sector build.
    If Brown wants to save Sterling, all he has to do is Back it with Gold and silver, after all it's just lying around in the BoE Vault somewhere.
    People will drop the dollar and the Euro for a currenct that has real intrinsic value, just like money should have.
    Socialism was never about the People, it is about Absolute Power and Control over the Masses.

    We are no longer free, we are enslaved to the state.

  12. Letters From A Tory
    Posted October 28, 2008 at 11:47 am | Permalink

    I was pretty astonished to hear about projects such as CrossRail, the Olympics construction and the Thames waterway being brought forward, seeing as it will take years to plan and sort out the contracts.

    The effects won't be felt for years and the effects won't be felt anywhere outside London.
    http://lettersfromatory.wordpress.com

  13. Keith
    Posted October 28, 2008 at 3:35 pm | Permalink

    I'm with Phillip Downs here. What the hell is wrong with the Tory front bench people? They're letting Brown get away with the most outrageous lies and not challenging one of them.
    Have they had their spines removed?

  14. Paul Danon
    Posted October 31, 2008 at 1:59 pm | Permalink

    Lord Lamont writes in yesterday's Telegraph: "Between 1991 and 1998, Japan spent 100 trillion yen on new railway lines and other public works. Little good did it do. Its economy stagnated. Since 1991, Japan’s government debt as a proportion of GDP rose from 64 per cent of GDP in 1991 to 171 per cent this year. Japan is in a debt trap it can’t escape. Gordon Brown’s policies would take Britain down the Japanese route — with one important difference. Japan runs large trade surpluses and can fund its borrowing from domestic savers."

  15. Jon Grainge
    Posted November 1, 2008 at 5:43 pm | Permalink

    I am somewhat confused!!!!!!! The banks appear to be fully responsible for the present financial situation and now Mr Brown borrows £37 Billion (some of which would appear to come from the banks themselves) to give back to the banks to buy shares and then to redistribute the money to business loans. So why do they not do that? As for bankers bonus's, they should be now made illegal. How dare they act so dispassionately. As for Barclays refusing to take advantage of the Governments plan and go the to middle east instead, total bloody shame on them. I say let every Barclays investor now withdrawn their funds from Barclays and put it elsewhere in UK.
    If the banks where a proper business they would be insolvant: so why not let them go bust???????????

  • 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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