From European boom and bust to Labour boom and bust – the cycles get wilder

In April 1989 I published a pamphlet which set out why joining the European Monetary System and its Exchange Rate Mechanism would be destabilising and bad for the British economy. I showed how shadowing the DM in preparation for membership forced the UK authorities to borrow too much money and to buy too many different currencies at poor rates in a way which could create boom or bust. As it turned out the system created both, first boom, then bust.

It was easy to predict. It was painful to advance the argument, as the whole British establishment, the Labour, Liberal Democrat and Conservative parties and the CBI were all united behind this monster. Consensus politics ruled, and the consensus was determined to take our economy up the mountain and then throw us off the cliff. They did so spectacularly.

I was chairman of a major industrial company at the time. I asked the CBI to attack the foolish policy. They refused, so I pulled the company out of CBI membership. They just could not understand why! Maybe three years later they worked it out.

In December 2003 the Labour government decided to switch inflation targets for their so called independent Bank of England. They set the Bank an easier target to hit. They claimed they were bringing us into line with the rest of the EU, though I suspect they wanted to send a signal that interest rates were to be kept too low. Again, I objected, and pointed out it was further proof that we did not have an independent Bank. Once again the consensus knew best, and the British establishment gently dosed through the most massive build up of debt and credit we have ever seen.

This time round, I am pleased to say, the political consensus broke earlier. Opposition parties did draw attention to how too much debt was being built up. More recently George Osborne has been attacking the government’s failure of economic management, so he has had to be the target of especially brutal Labour briefing. It never does to be right!

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6 Comments

  1. Matthew Reynolds
    Posted November 16, 2008 at 12:41 pm | Permalink

    Why not wait for the Labor Pre-Budget Report and then pledge say an emergency 15% cut in the budgets of all QUNAGO's to pay for reducing the PSBR ? The deficit & size of government is getting dangerously out of hand – all the said public bodies should be told that unless they cost the taxpayer 15% less in FY 2009-10 then they will be left to sink or swim on their own merits (i.e. be funded by fees that they levy to fund their budgets as they would get no public funding unless their budgets where 85% of what they are now by March 2010).

    Job Seekers Allowance & Incapacity Benefit could be replaced by one sort of payment designed to slash economic inactivity , the New Deal ended , tax credits ended for those who are wealthy enough not to need them , civil service recruitment frozen 100% for five years , government procurement costs cut thanks to greater usage of market forces to produce greater value for money , no overseas aid for places like China & India who obviously do not need it , more private cash for transport so public funding can be cut and Regional Development Agencies axed along with costly IT schemes that do not work ( as in the NHS ) and no ID Cards either.

    Those reductions in public expenditure need to be phased in over five years with the aim to turn a budget deficit of possibly £100 billion into say a £5 billion surplus. The more Hawkish that George Osborne & Philip Hammond can be on cutting Big Government down to size the better for future generations who face high taxes & poor services owing to higher debt interest charges. A smaller state would get the economy moving as it has in Eire & Reagan's America and big cuts in the PSBR would improve confidence on the part of The Square Mile that the economy was heading towards greater stability. The sheer wastefulness under Labor gives the Tories the scope to go for good old slash & burn by ending the client state designed to keep a failed Labor regime in power.

    A big £15 billion cut in spending & borrowing would stop the £ collapsing and could see a return of business confidence on the back of lower long term interest rates. That would be good in 2009-10 – by getting government out of the way business investment is not crowded out and so could start to improve meaning good news for future job creation & productivity etc….

  2. John
    Posted November 16, 2008 at 1:01 pm | Permalink

    The idiot Brown, having caused, by his inept Chancellorship, Britain to have a much worse financial outlook than many other countries, accuses Osborne of making his mess worse by mentioning the truth. This appears to me to be the ultimate in hypocrisy. Very similar to the head of child services at Haringey quoting statistics when her department failed in it's duty to "baby P". This, I think, shows how the government's slimy tactics are filtering down to local level. If the Tories get in next time they will need to clear out much of local government, and not before time.

  3. THE ESSEX BOYS
    Posted November 16, 2008 at 1:24 pm | Permalink

    Having just watched George Osborne on the Andrew Marr show we felt he put up a spirited performance.
    However for the second time in recent weeks he has been tactically naive when stepping into the spotlight. Last time, of course, it was in even mentioning his association with Mandelson in Corfu and this time in raising the currency issue in the way he did.

    Again we add that we're no economists but one doesn't need hindsight to see that something along the lines of this would have made the point so much better:

    "The £ has fallen 25% against the $US in recent weeks and, whilst I very much hope the PM's plans do so, I do not believe they will stop the unfortunate run on our currency which is due to the market being apprehensive about the state of the UK economy."

    George has many goood qualiities but these miscalculations are not what we expect from either a key party strategist or a Chancellor in waiting.

  4. anoneumouse
    Posted November 16, 2008 at 2:19 pm | Permalink

    The last thing we need is a 'fisting stimulus'

  5. Hoolio
    Posted November 16, 2008 at 6:42 pm | Permalink

    I can't believe the Telegraph this afternoon ("The British Government is under international pressure to cut taxes by £30 billion to help pull the country out of recession." http://tinyurl.com/5du8b8).

    The Telegraph story is a huge distortion of what the IMF actually said about the G20 communique. In fact, Mr. Strauss-Kahn noted (quote) that the Summit Declaration recognizes that some countries have more room for maneuver than others. "We believe that those countries – advanced and emerging economies – with the strongest fiscal policy frameworks, the best ability to finance fiscal expansion, and the most clearly sustainable debt should take the lead," he said. (unquote). I wouldn't have thought he had the UK economy in mnd.

    Moreover, if you compare early drafts of the G20 communique with the final version (see Dani Rodrik's weblog at http://rodrik.typepad.com — Dani is a Harvard professor of political economy), most of the draft guff about fiscal stimulus was removed from the final communique, one imagines by the other 19 leaders at the G20 summit. In other words, what really seems to have happened at the summit is that the Great Helmsman was comprehensively snubbed.

    Mr Osborne was right to warn about the run on the pound.

  6. mikestallard
    Posted November 16, 2008 at 10:58 pm | Permalink

    Now that the cat is out of the bag and everyone is beginning to see that we really do face oblivion, allow me to ask: what's next?
    I think we can all agree:
    1. Mr Brown and his government have absolutely no intention of cutting back on anything at all.
    2. Mr Osborne and his supporters are full of excellent ideas (see above: Hoolio). We haven't heard them yet loud enough.
    3. Taxes were already ridiculously high (42%) when the crisis broke.
    4. The Public Sector needs cutting back and the GDP needs a huge boost.
    So fix bagginets and fall on! (Charles Dickens, but I forget where).

  • 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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