Good news and bad news on UK borrowing

There is some good news about the massive £157 billion the UK government has decided to borrow this year. They seem determined to use the banking system to lend them some of the money, to make it a bit easier to lay their hands on it and to try to keep long term interest rates down.
They will also doubtless keep up the regulatory and actuarial pressure on pension funds, which has been a feature of recent years, to get them to lend more to the government as well. Indeed, the policy of undermining the pension funds, forcing many of them to close for new members or even for continuing member contributions, was a stroke of genius for funding the government’s excess spending. The more pension funds that are “mature” or closed, the more they have under current actuarial and regulatory practise to buy government bonds. The government created a virtuous circle for itself, creating more natural buyers of government debt at ever lower interest rates.
The bad news is that all this borrowing is not achieving the desired effect of stimulating the economy and sorting out the banks. All the time the banks are sending much of the money back to the government at a loss, the private sector will be starved of funds and the banks will remain weak owing to poor profits.
So what should the government do, I hear you ask me again? Let me briefly repeat:

1. Cancel the VAT reduction early.
2. Revisit the regulatory framework for the banks, to give them some more transitional capacity to lend by amending the Tier One Ratio and related rules
3. Revisit the £450 billion package of bank support, so the banks wish to use it more
4. Reaffirm government support for all the major UK banks
5. In private negotiate the repayment of the Preference capital to taxpayers through asset sales, item 2 above and banks generating more profit.
6. Accelerate Gershon style public spending reductions.
7. Cancel undesirable public programmes like the ID card and related computer databases.

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3 Comments

  1. Ian Jones
    Posted December 8, 2008 at 12:20 pm | Permalink

    I was always curious as to whether the current Government had an ulterior motive when they decided to tax private pension dividends.
    Subsequent action of requiring the pension schemes to hold Government debt simply reinforced my doubts.

    Is Labour just trying to get cheap debt for the Government or do they see it as a way of nationalising the private pension schemes, or as they would put it “socialising” them?

  2. Not an Economist
    Posted December 8, 2008 at 2:03 pm | Permalink

    Crikey. So now the govt is going to do a Robert Maxwell on the pension funds. All in the national interest of course and with a cast iron assurance from Brown/Mandelson that their measures will again secure record breaking levels of economic growth and so enable all debt to be repaid in full at no disadvantage to the holders of the pensions themselves.

    I can’t find the reference now sorry but the Argentinian govt was doing sthg like this a few months back although that was one step further – i.e., outright nationalisation of the pension funds. So in effect Brown and Mandy take their economic policy from such illustrious types as Mugabe’s Zimbwabe (e.g., monetary inflation to give aggregate demand a good prod)) and a former South American banana republic who just 5 years ago had its own financial financial meltdown which culminated in runs on its banks and the country defaulting on its international debt. And to think at the time people arrogantly said “It couldn’t happen here”. Well at least we can now reply that Mandleson (& Brown) are doing everything they can to prove such people wrong.

  3. Rare Breed
    Posted December 10, 2008 at 1:26 pm | Permalink

    I think Cameron has got this right (although still concerned about Europe).

    Cut public Spending and get the finances in order as soon as possible. Once the finances are sorted then you can cut taxes. It is exactly what Thatcher did, although she had the advantage of selling off the nationalised industries, with the help of Mr. Redwood. It will therefore take Dave longer to put the books in order, I fear that it will take too long for him to achieve it, before Mandy gets back in.

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    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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