Wokingham Times

Last week I tried again to get the message through to the government that taxpayers cannot afford their bank share buying package. If they still doubt me, they should just look at what the international financial community thinks of this government’s economic policy. Since the summer the pound has slumped from $2.05 to just $1.45 as I write this. That has slashed our living standards and the value of the pound in our pockets and purses.

If you can still afford to go the States, that $2.05 cup of coffee which cost £1 in June, now costs you £1.40. The same has happened to anything we import which is priced in dollars. It means a large amount of the fall in the oil price will not benefit us, for oil is priced in dollars. We have lost even more against the yen, so it means buying fewer Japanese cars and electrical goods and paying much more for them.

I spoke in the Economy debate on the Monday, blogged about the crisis everyday on www.johnredwood.com, was invited on Newsnight and ended the week on Any Questions. My message was simple. The banks they want to buy are too big. The costs of redundancies and write offs could be large for taxpayers to carry. The £37 billion to buy shares in RBS and Lloyds/HBOS, combined with the £18 billion being borrowed to sell the deposits of Bradford and Bingley to Santander is simply too much for the poor long suffering taxpayer to carry.

In reply, the government just says it had to rescue the banks. Yes, of course it should lend them emergency money if they need it, and guarantee transactions if that is necessary. It should always do so taking good security for the taxpayer, and should do so for as short a time as possible. No sensible person wants a major bank to go under. No, it should not and did not have to buy shares in them. So far taxpayers have lost £580 million at Northern Rock, and had to put up another £3 billion of capital for that bank. Neither Northern Rock nor Bradford and Bingley now lend new mortgage money to customers. That’s another blow to the housing market, and is helping destroy jobs in housing related work.

Do I think the government should cut income tax as well as cutting interest rates to shorten and lessen the recession? Yes, of course I do. Do I think they can afford do, given their levels of spending and their commitments to the banks? No, of course I don’t. They need to change course, and do so quickly. The recession is spreading rapidly to the rest of the economy, from property and financial services where it started. The economy needs the tonic of lower interest rates and lower taxes to stop the losses and to start a recovery. All the time we have the present government’s spending and borrowing levels we are at risk of more losses on the currency and more difficulty borrowing all the money.

A modest devaluation of the pound earlier this year could help our exporters and curb some imports. It would speed the adjustment we need. The massive fall, the currency rout we are experiencing, is damaging. It makes us all poorer, and makes the government’s task of raising all the money it wishes to spend that much more difficult. The government needs to remember that borrowing is deferred taxation. Taxpayers have to pay it all back with interest. It needs to root out waste and stop its share buying.

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2 Comments

  1. THE ESSEX BOYS
    Posted November 20, 2008 at 2:26 am | Permalink

    4 QUESTIONS PLEASE:

    1. Why haven’t the Conservatives been far more critical of the government non-job ‘industry’? We don’t recall Gordon Brown ever being directly confronted on this particular subject in the House or by the media.

    2. Is it possible to quantify:
    (a) the cost of the additional jobs artificially created given the guaranteed pension rights in addition to often-high salaries?
    (b) the advertising/recruitment costs?

    3. Do you agree that recruitment should be halted NOW and staff whittled down by natural attrition and redeployment rather than via a costly redundancy bloodbath?

    4. Given that the governor of the BoE recently stated that RPI inflation will inevitably fall following the MPC’s slashing of interest rates, why didn’t they do this earlier to meet their remit on the inflation rate? The question of that remit seems very confused as 2 years ago they were trying to deflate the rise in house prices. Was that their responsibility as housing costs don’t appear in at least one of the sets of inflation figures?

    We ask here as your grasp of these issues far outstrips those of anyone from whom we have yet to hear in government! Thank you.

    Reply: I estimate the extra 250,000 civil servants taken on by this government are more than required to run a sensible government. The excess should be reduced by natural wastage over a period of years. I do advocate a recuritment freeze troughpout the public sector save for front line jobs like teachers, nurses etc.
    The MPC was looking in the rear view mirror, as I warned constantly earlier this year when ti was obvious to anyone folllowing it that prices were going to tumble later.

  2. Jason
    Posted November 20, 2008 at 3:35 am | Permalink

    Export competitiveness is all fine and well, but the current economic malaise is being exacerbated by the lack of trade finance. Simple Letters of Credit are being denied to finance trade flows – whether this be because of volatility in commodity prices, counterparty credit concerns, rising costs of forex hedging especially in regard to emerging market currencies. A good summary of the conditions can be had from the following times article: http://business.timesonline.co.uk/tol/business/in

    Any benefit from a sterling depreciation must be countered with the reality that there may not be purchasers at all for physical goods because finance is not available. This can be graphically illustrated by the collapse in the the Baltic Dry Index and a look at the ports of Asia where vessels are idled.

    Similar stories are being told in the US congressional and senate committee hearings particularly in regard to the plight of US automakers. When asked whether they felt they had benefit from the bailout of several financial institutions – they all replied no – none at all. Surely someone needs to ask why the banks are not extending lending and credit facilities to finance trade flows firstly and secondly consumer credit (though in this case one could clearly understand why). My point is where is all this going? Unfortunately, credit is the life-blood of the global economy and unless it is extended nothing will happen. What is the role of government, if any, in encouraging this – and what measures have, if any, been discussed as an alternative. Or are we already prisoners on death row?

    Reply: You are right to b e worried. This is why the authorities are trying so many different ways to get credit flowing again, but have taken decisions like the UK one to up regulatory capital and the US to allow Lehmans to go under which have made that much more difficult

  • 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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