Another £100 billion of public spending from the CBI?

When I heard the BBC tell me this morning that the CBI had called for £100 billion extra public spending in order to prevent a deeper recession I was ready to blog about the CBI’s economic illiteracy. When I read their Press Release I was interested to see the CBI said no such thing. They merely reported the obvious, that as the economy falls so public spending and borrowing will increase automatically, to pay more benefits to the unemployed against a background of declining tax revenues.

The CBI’s latest press release makes sense. It is a distinct improvement on their dangerous advocacy of the Exchange Rate Mechanism in the late 1980s, when I took a large Stock Exchange quoted company out of membership of the CBI in protest at their wrong headed stance. I remember their incomprehension that I felt so strongly about it as to cancel membership. I subsequently had to face taunts in government when I opposed our membership of the ERM that I should be supporting it as a DTI Minister faced with the strong representations of the CBI in favour.

Instead I can blog about the BBC’s sloppiness and their misunderstanding of how an economy works. Let’s try again. If you order another £100 billion of public spending on top of what is already happening, you need to increase taxes by £100 billion to pay for it. If the taxes fall directly on companies they will be worse off by at least the costs of collecting and spending the money. If the taxes fall on individuals, the companies will lose that part of their demand as people’s incomes are cut by higher taxes.

If the BBC’s idea of the CBI idea is that the £100 billion should be borrowed, then the taxpayer in the longer term will be even worse off, as the government will need to increase taxes some time to pay not just the £100 billion but also the interest on it. In the short term if the money lent to the government would otherwise have been lent to the private sector we are not better off. Indeed, borrowing from individuals and companies is a bit like increasing their taxes in its economic impact, as money they might other wise spend is taken by the government as a loan instead.

President Obama’s naïve “Keynsianism” is being well and truly
criticised in the USA. The BBC does not seem to understand why.

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10 Comments

  1. Mike Spilligan
    Posted February 16, 2009 at 7:55 am | Permalink

    Thank you for that. I “heard” the same, and being engaged in too many things early in the day, thought, “What on earth is the CBI up to, proposing this?” The BBC really needs to sharpen up on its economics headlines.

  2. APL
    Posted February 16, 2009 at 8:38 am | Permalink

    JR: “If you order another £100 billion of public spending on top of what is already happening, you need to increase taxes by £100 billion to pay for it.”

    let’s not forget too, a hundred billion here, a hundred billion there, pretty soon you’re talking serious money.

    And eventually, soon I think, it will impact the governments ability to borrow money.

    Then, well, I’ve always wanted to travel to Argentina but I never envisaged Argentina coming to me!!

  3. chris southern
    Posted February 16, 2009 at 9:29 am | Permalink

    You will never change the views of the BBC as long as their goverment backed manopoly is allowed to continue.
    Especialy if their plans to force internet users to pay as well.

    This country has supported state spongers for too long, it’s about time some bussiness learned what generating income from their own work is realy like, then maybe we will start to get a stronger economy.

    and after thinking about what lola told me about the faults with certain nationiled companies that i thought in the past should become nationalized, i have to admit, lola was right, they are better off in the private sector (so long as they are run efficiently)

    as for the CBI, isn’t it better to invest in better/cleaner technology that force tarrifs/fines and fines on companies, actualy causing the slow down in what they “intend” due to companies and individuals having less money due to said tarrifs/taxes and fines.

    bring back the part time politicians with real world business experience.

  4. Freddy
    Posted February 16, 2009 at 9:35 am | Permalink

    Fancy that – the BBC telling a bare-faced lie in support of their illiterate overgrown student view of the world.

    John, honest and competent journalism is a vital part of a democracy. What are you going to do about the BBC when you return to government ?

  5. Stuart Fairney
    Posted February 16, 2009 at 9:39 am | Permalink

    Why does Mr Obama (with no experience of the car industry for example) believe his task force of civil servants will be better at running Ford than say, Ford?

    Why does anyone think a near trillion dollar spending package (which no-one has actually read!!) is just the thing when the problem is a $3.1 trillion dollar deficit?

    The various ‘Cuffy Meigs’ types must be laughing out loud

  6. alan jutson
    Posted February 16, 2009 at 10:11 am | Permalink

    All seems rather obvious.

    You borrow £100, you have to pay back £100 plus interest.
    You tax someone £100 more, they have £100 less to spend.
    Customers who have less to spend means Companies have £100 less income .
    Companies have less income they make less profit.
    Companies have less profit they pay less tax.

    Do none of these high flying Consultants who advise the Government seem to be able to work it out, or do they think the answer is to simply print another £100 to replace the £100 lost, then its alright.

  7. Robert
    Posted February 16, 2009 at 10:25 am | Permalink

    I am grateful for your blog and it’s my first required reading.
    I listen to the BBC by way of the Today programme and the evening news when I get back in.

    This CBI incident aside – I must be in a minority in finding the BBC informative and without bias, unless I’m being naive here in taking their coverage at face value and not trying to read between the lines.
    Robert Peston provides an informative blog.

    (I’m not that Robert!)

  8. Robert
    Posted February 16, 2009 at 10:36 am | Permalink

    PS
    The Daily Telegraph” page 4 placed the same slant on the CBI report as the BBC
    The cartoon is brilliant

  9. oldtimer
    Posted February 16, 2009 at 1:07 pm | Permalink

    These days I expect nothing less from the BBC. This is a self perpetuating oligarchy that behaves like a quasi-Stasi organisation. Examples include its demands, with menaces and detector vans, of the licence fee; its own imposed definition of what is and is not politically correct to say in public; its editorial control of what is and is not reported – and of how it is reported; the obvious exercise of double standards in its treatment of people it approves of compared with those it does not.

    The BBC is in need of serious reform. The redistribution of the licence fee would be a good place to start coupled with a new definition of what is, and is not, covered by that infinitely elastic phrase “public service broadcasting”.

  10. matt
    Posted February 16, 2009 at 10:58 pm | Permalink

    Hmmm you don’t seem to want the government to use money to support ailing businesses and you criticize it for spending on unemployment!

    You are right about the BBC. They set extremely high standards across a bewildering array of media and occassionally they fail to live up to them.

    Reply: I don’t criticise government for spending on people who are unemployed, but criticise them for following policies which create so many unemployed

  • 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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