Let’s borrow more to cut borrowing!

We learn that the government is planning to borrow more money to cut taxes. Apparently it now wishes to limit the depth and length of the downturn.

Yet it was the authorities who brought about this downturn. The MPC late in the day called time on too much borrowing in the private sector by hoisting interest rates to make borrowing dearer. The Bank of England starved the money markets of funds to prevent banks lending more, forcing Northern Rock and a couple of other banks into trouble. In 2007 we had lectures from the Chancellor and the Governor that people had borrowed too much and banks had lent too much. They were told they wrong to have lent so much , and they had to sort it out as best they could without public subsidy or intervention. The authorities followed up the sharp slowdown by demanding each bank held more capital, and leaked the story in a way which damaged bank share prices and their capital raising ability.

Now the Authorities have what they said they wanted – a collapse of private sector lending and borrowing – they are in a panic. They turned banks from profitable lending machines into unprofitable damaged institutions. They now realise they have overdone applying the brakes, just as surely as they overdid encouraging the fast build up of credit through the accelerators of easy regulation of capital and low interest rates before. So now they decide to borrow more in the public sector, to offset the lack of borrowing in the private sector. If an economy borrows too little, too many people are out of work and too many businesses go under. If it borrows too much there will be inflation, and too many strains on the people, governments and companies that overborrow and on the banks that lend them the money.

The good news is they have realised that borrowing to cut taxes is more likely to yield the results they want more quickly than a programme of public works. Big public capital projects take time to get off the drawing board. When people are starved of income and paying too much of it to the government, quite a lot of the tax relief is more likely to find its way into spending. However, with individuals and small businesses under the cosh of needing to repay loans, and worried about their own economic prospects, the government should expect some of the tax cuts to be saved. The government wanted the private sector to cut its borrowings rapidly, in a damaging way. Some of any tax cut will go towards this , but will at least speed the process up and bring forward the day when more can be spent.

The bad news for the UK is the government is already borrowing too much. The taxpayer is now being asked to be the banker of first resort and the consumer of first resort. The strains on the UK public sector will be huge. This week-end in the press there were alarming figures about how much tax revenue the government is losing from the big fall in activity in the property market (Stamp duty and CGT), from the sharp fall in financial sector profits (Corporation tax), from the big decline in high income jobs in the City (Income Tax) and from the halving of the oil price (Duty, VAT, Corporation Tax). Now the government is going to add more cuts in revenue from tax cutting proposals.

Time after time this government sets up the next leg of the crisis by the way it tackles the last one. Easy money created an inflation problem. Tight money to control the inflation created a banking crisis. Bank nationalisation to solve the banking crisis is setting up a government borrowing and debt problem. Tax cuts on borrowed money to solve the deflation will add to the questions over state credit.

We need authorities who can manage things with reasonable stability. Stability requires sensible amounts of credit and borrowing in both public and private sectors. Lurching from too much to too little borrowing in the private sector was crazy. Compounding the error by now lurching to much borrowing in the public sector is not a good idea. The government’s approach is “Let’s halve interest rates and double the amount of debt we have to sell at those interest rates”. They still do not seem to understand money markets, and the price of money.

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17 Comments

  1. patently
    Posted November 10, 2008 at 9:55 am | Permalink

    Why do I have the feeling that we have just swallowed a spider?

  2. Stuart Fairney
    Posted November 10, 2008 at 10:58 am | Permalink

    Government MP's rather remind me of terminal patients at the moment. They are living with wild abandon and satisfying every secret fantasy, such as bank nationalisation, that has been a private wish since 1983. But they know the end is coming and the closer it gets the more wild the behaviour.

    This is honestly, the only explanation I can find for some of the ludicrous decisions of late.

  3. mikestallard
    Posted November 10, 2008 at 11:34 am | Permalink

    The government is big, clumsy and ignorant. This, really applies to most governments. Government should not, therefore, put their huge clunking fists into the delicate machinery of finance, the economy or indeed anything else much.
    Your blog, John, demonstrates this perfectly. Too much, too late.
    Look at the Labour Front bench. What do any of them know about anything much except for "people". Can you name just one person who has been in banking? Or just one who has actually run a small business?
    It is like asking a dinosaur to mend my Seiko Automatic 21 jewels wristwatch.
    I don't think the government ought to be allowed to fly Jumbo jets or design ladies' clothes either, actually.
    But I do think perhaps that a tad more humility might be in order.

  4. Acorn
    Posted November 10, 2008 at 11:45 am | Permalink

    I have made myself the chairman of the fan club for the preservation of the Credit Default Swap (CDS). Why you may ask. Because it tells you a lot about what the financial markets think of you as a credit risk. There is probably a case for globally outlawing the use of these instrument for pure gambling; that is, where you do not hold the actual debt that is being insured, but that is another story.

    Just how much debt can our government take on before the bond markets and those that insure holders of those bonds start to think things are starting to get; err; just a little bit tricky over in dear old UK.

    We have a lot of domestic and external debt. the UK is second only to the US in external debt owed in foreign currencies and we do not have the advantage of being the printer of worlds reserve currency; and, our economy is only about the sixth of the size of the US. Should we worry; who knows.

    We do know that at times like these, the markets tend to punish countries that have large balance of payment deficits. The countries with the spare cash are going to want sweeteners to keep buying our treasury IOUs; higher interest. The people who insure those IOUs against default will want higher premiums; higher risk of failure. Can we go broke, "Yes We Can". (apologies to Bob the Builder and Obama).

    Please have a look at the following on Money Week. If you have the time read the link from Reinhart and Rogoff, most educational.
    http://www.moneyweek.com/investments/how-safe-are

  5. Amanda
    Posted November 10, 2008 at 11:52 am | Permalink

    What came next, I've forgotten? What do we need to swallow to catch the spider?

    Would anyone care to unravel this beyond, we borrow to fund tax cuts, that people use to pay back debt and store under the bed – as putting it in the bank has no reward. What next? Not forgetting of course, that the government and banks have to get their funds from somewhere and need a reasonable margin.

  6. Johnny Norfolk
    Posted November 10, 2008 at 1:01 pm | Permalink

    I just wish the Tory party was on the attack about all this. Can you imagine what Mrs Thatcher would have been like with this lot.
    I think Cameron needs to come oput fighting for all of us.

    He just comes over as just far to reasonable and is letting Labour set the agenda again.

    If the only way the Tories can be heard is by being tough thats how it has to be. Take a look at how the conservatives are fighting the election in New Zealand.

    Our Tory party is far to timid.

  7. Gareth Portal
    Posted November 10, 2008 at 2:23 pm | Permalink

    Mrs Thatcher's Reaganiszation (sic) of the UK is essentially what's at the heart of this mess, creating the environment for living beyond our means. Stretch a spring, and it will eventually snap back. Even 25 years later!

    • Francis Purdue-Horan
      Posted November 10, 2008 at 10:03 pm | Permalink

      Gareth @ 1.23pm

      That's right, lets have a go at Mrs Thatchers Gov't and forget Gordon Brown has been running the economy since 1997 (and still is as PM.)

      Lets go back to the days of waiting for up to six months for a basic landline telephone and all the other disasterous policies of "old" Labour.

      And another thing, why should I be responsible for the credit agreement contract that I signed for (as an adult with human rights,) when I took the cash for an extension to the house, but instead, blew it on a new car and a holiday.

  8. R.Rowan
    Posted November 10, 2008 at 2:48 pm | Permalink

    Well said John but when is Osbourne going into attack dog mode instead of his cuddly little speeches that lack bite,the best thing I have seen is the Conservative home video on Brown enjoying his recession. We need more of these type of attacks to regain the momentum along with sound policies on how we intend to solve the problem.

  9. APL
    Posted November 10, 2008 at 3:46 pm | Permalink

    Mikestallard: "I don’t think the government ought to be allowed to fly Jumbo jets or design ladies’ clothes either, actually."

    Really, I thought fatty P from Hull would be a shoe in for that one.
    By the way, if he really was suffering from bulemia, wasn't he just a tad oversized?

    Acorn: "Just how much debt can our government take on before the bond markets and those that insure holders of those bonds start to think things are starting to get; err; just a little bit tricky over in dear old UK."

    This is called Stress testing, Gordon has so much confidence in the strength of the british economy after ten years as chancellor and who knows how long as PM but it seems like ten years already. He is sure he can test it to destruction !* :-0

    Amanda: "What came next, I’ve forgotten? What do we need to swallow to catch the spider?"

    In that case we have already swollowed a fly, next, I think a bird. But it is probably long past that stage, the old lady didn't ever get past a horse did she? I wonder if she lived in Threadneedle street?

    Johnny Norfolk: "I just wish the Tory party was on the attack about all this. "

    If they are not Mr Norfolk, what is the Tory party for?

    Johnny Norfolk: "Our Tory party is far to timid."

    Yes they are. So they are not on the attack!

  10. jean baker
    Posted November 10, 2008 at 3:55 pm | Permalink

    Johnny Norfolk,

    David Cameron showed his mettle throughout Channel 4's overtly aggressive interview after the Tory Conference. He's done likewise in Parliamentary debates. Brown's ignored his 1p tax cut and VAT freeze proposals to assist small businesses. Brown hitched a ride on Cameron's NICE proposals.

    Brown's focus is appeasing voters as opposed to long term proposals to rectify the historic, financial disasters he created.
    He's grown used to raiding pension funds and leeching off taxpayers to fund lucrative 'closed shop privatization of Britain'.

    Nulabor in truth loathes democracy; the first government to waste billions of taxpayers hard earned money on manipulative/brainwashing TV mockumentaries and 24/7 IT monitoring spyware. British citizens are the most 'spied upon' in the EU.

    • Johnny Norfolk
      Posted November 12, 2008 at 1:16 am | Permalink

      He appears to be more interested in not upsetting the leftie media. He needs to come out fighting for the future of our country. They are to timid. We are back to labour over spending. The basic tactics Mrs T used then need to be used again. they worked then and will work now.
      There are to many front bench wets.

  11. StevenL
    Posted November 10, 2008 at 8:56 pm | Permalink

    As a single young bloke with no kids I'll eat my hat if GB gives me a tax cut.

    He'll say 'tax cuts for hardworking families' but I bet he means higher tax-credit benefit payments, paid for by a few pence on my Christmas whisky and my 0% threshold rising a lot slower than the 5% CPI figure.

  12. Bazman
    Posted November 10, 2008 at 10:47 pm | Permalink

    I'm quite impressed with John Redwoods predictions on the economy.

  13. Matthew Reynolds
    Posted November 11, 2008 at 1:06 am | Permalink

    As Labor are talking about £15 billion in tax cuts might I suggest going slightly further & going for £16 billion ? This could mean raising the basic personal allowance by £2,000 plus inflation thus giving most taxpayers a reduction worth up to £400 p/a ?

    The coping classes & low earners would find their cash flow helped thus boosting demand and helping those who need it meaning that one gets economic and social liberalism at the same time.

    Interest rates are now 3% and it might not be prudent to lower them much more meaning that fiscal policy might have to be active as part of a recession beating policy. They have fallen by 2% very quickly and another 2% off is surely the most that can be cut from the price of money. 1% has not worked in Japan as monetary policy while important is not the only solution – rather a partial remedy.

    The effect of a bigger personal allowance could be a holding operation thus shoring up GDP until the effects of lower base rates fully filter through into the economy.

    Mortgage regulation , the red tape driving up building industry costs and our planning laws all need streamlining to get the property market going again.

    Surely it is commonsense to give people some of their cash back in tax relief so that they can service debt better or save money in the banks ? If the banks need more capital then rather than buy bank shares lower taxes will possibly aid the bankers by getting them some more funds . It strikes me that more economic liberalism and not less (i.e. tax cuts not banks being state run )could help solve this ?

    Pledging to slash the cost of QUANGO's by 60% over six years with a view to balancing the budget might be an idea as by hiving them off , axing them or merging them to that extent you could save £60 billion eventually . By replacing Job Seekers Allowance & Incapacity Benefit with one payment designed to curtail economic inactivity the public sector job shedding that my plan involves need not add to unemployment overall if others where got back to work & if smaller government was boosting GDP and thus employment levels ( as in Eire ).

    A big tax cut now partially funded by less bank subsidy and a hatchet to Brown's client state would minimize the recession in the short term while in the long run a recovery would not be threatened by economic instability ( caused by vast public borrowing driving up interest rates as investors demanded a better return before lending to the Treasury ).

  14. Johnny Norfolk
    Posted November 11, 2008 at 1:08 am | Permalink

    Good to see you on Newsnight John. It was good you were not letting that Labour man get away with his stupid remarks.

    The whole programme should have been taken up with this, so we could get to the truth of the matter.
    But that would never do for Labour/BBC

  15. Freeborn John
    Posted November 11, 2008 at 1:43 am | Permalink

    Good to see you on 'Newsnight'. With the polls tightening the Conservatives really needed to bring in the fast bowlers on economic policy, and it certainly looked like you scuttled out the Labour tail-ender tonight.

  • 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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