This Chancellor has never met Prudence

Yesterday I tried to make it easy for the Chancellor. I asked him a question I have asked before, thinking this time he might have thought about it and have an answer to hand. I should have known better.

I asked what limits he thought there needed to be to public borrowing in current conditions, to avoid any danger of gilt market strikes, trips to the IMF or national bankruptcy. He treated me to a lecture about how we have to borrow during difficult times, as if I disagreed with that or thought we could somehow avoid some borrowing. He failed to answer a civil question with a helpful answer. Doesn’t he realise the question I asked is the one many people need to know the answer to? Markets need to know there is a way out of excessive borrowing. They need to know there are some limits and some startegy to keep the public finances in order.

We used to have a control framework. It wasn’t a very good one, and it was subject to political change, but for several years it seemed to work and the government got away with it. There was a control on how much the running deficit could be each year, and a control on the total stock of debt as a proportion of naitonal income. In theory the government only borrowed for investment, not for day to day expenses, over a cycle as a whole.

Neither of these two controls now operate. The government is flying blind, feels free to borrow and print as much as they like, refuses to come clean about how much or when they might slow down. Meanwhile they add more and more debt onto the groaning taxpayer, as they collect bad banks and bad loan portfolios for the taxpayer to bail out or guarantee.

I urge the Chancellor to think again and to drop me a line to answer the big unanswered question. Commentators are filling in their own sums, and some of them are going to be scary, in the absence of credible official figures.

The media should start reading what the government does put out. Instead of using the £78 billion Chancellor’s figure for 2008-9 borrowing, they should use the published Treasury figure of borrowing in excess of £150 billion, well above 10% of national Income.

In the first few years of this government Prudence was at hand to offer some restraint. Mr Brown divorced her, and Mr Darling claims never to have met her. One day he will wish he had. She is a great lady who may take her revenge.

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32 Comments

  1. oldrightie
    Posted April 1, 2009 at 8:48 am | Permalink

    Puppet on a string dancing to a well rehearsed funeral tune?

    http://oldrightie.blogspot.com/2009/03/puppet-on-string.html

  2. Ian Jones
    Posted April 1, 2009 at 8:52 am | Permalink

    Is the £150bn including the rolling over expiring debt?

    Unfortunately we will only know we have exceeded the markets limit for borrowing when it actually happens. Until then its a guess with a lot of variables.

    I am keen to know if the current rises in the deficit is from the PBR plus reductions in receipts or is there significant secretive spending going on?

    I still expect a significant give away at the budget to key Labour voters with it painted as “specific measures” which Mr King said was alright……

    Anyone else see in the FT the MPC member Blanchflower calling for more spending on jobs. How do these people get on the MPC?

    Reply: No, the £150bn does not include roll over of old debt.

  3. pipesmoker
    Posted April 1, 2009 at 9:16 am | Permalink

    Related to the topic only by their ignorance.

    Today’s Telegraph reports Caroline Flint , the Minister for Europe, has not read the Lisbon Treaty and the Commons business and enterprise committee do not appear to know the true reason why Lord Mandelson is so keen to sell of parts of the Royal Mail.

  4. mikestallard
    Posted April 1, 2009 at 9:18 am | Permalink

    What interests me is the time scale.
    It is completely obvious that, unless there is a radical change very soon, we are heading for the rocks. When Teddy Roosevelt went into debt as a young man, his father told him that there were two things he could do. One was reduce his expenditure and the other was to raise more income. At the moment, our expenditure, on any reckoning, exceeds our national income quite dramatically.
    Our host didn’t even mention pensions, bank liabilities or PFIs. He himself talked of £4.5 trillion pounds’ liabilities in the House of Commons.
    The current deficit seems to be about the same as the total expenditure on education or the national health Service at the moment – unless you accept the government figure of £78 billion which seems to be twice the expenditure on the armed forces in time of war.
    How long will it be before there have to be severe cuts in Public Employment? And that, believe me, will not be very popular electorally. But such cuts are inevitable – even if they are simply caused by the State going bankrupt.
    PS Is the real purpose of this G20 to raise money for the IMF in order to pay for our bail out? Is that why the Prime Minister has been circling the globe?

  5. Vanessa
    Posted April 1, 2009 at 9:37 am | Permalink

    I give a link to an explanation of Keynes-ism which begs the question why do governments do the same thing in a crisis and expect a different outcome when they know it did not work last time, or the time before, or the time before that!
    http://blogs.telegraph.co.uk/daniel_hannan/

  6. Bernard Dugdale
    Posted April 1, 2009 at 10:06 am | Permalink

    I was taken by part of Ian Jones’ reply. He’s right, there’s no line marked out on a graph or a number written down in a secret folder. We’ll know we’ve crossed the line when we look behind us and see it.

    I feel a bit too much like a prophet of doom. When the gilt sale failed last week I thought we’d crossed the line. Then the next day a further sale of gilts succeeded. The terms, of course, were very different, but it didn’t seem enough of a difference to warrant complacency.

    I keep reading the Economist and scanning its website for a definitive article that the projected borrowing numbers are simply too big, but there is no harsh and certain line coming from the Economist.

    The numbers don’t seem ‘too big’ to me, they seem to be double ‘too big’, 200% of anything we should be prepared to contemplate or can afford. Not double what we should afford, but 200% of what we even could afford.

    If we fail to borrow as much money as we need in April, doesn’t that mean that the Government will struggle to pay the bills in May? And May’s bills include all public-sector salaries and pensions.

    I know what happens if my business doesn’t have quite enough money – somebody who is expecting to get paid gets a horrible surprise (usually me!). Is the Government different? It does seem to me we may be a few weeks away from not being able to cover public-sector salaries, and I’m not sure if I’ve missed something.

    I’d be very interested in John’s view, especially if he can put my mind at rest!

    Reply: I think we are well beyond the prudent, both in the stock of risks and loans the state has taken on, and in the rate of new borrowing to meet spending. You can never be sure when the markets will prevent more borrowing. That’s why we need now to set out how we will cut down on bank risk attached to the state, and set out a course for deficit reduction.

    • Acorn
      Posted April 1, 2009 at 4:17 pm | Permalink

      BD. The best guess I have found for UK government liabilities.

      http://www.marketoracle.co.uk/Article9737.html

      As the UK is one of the few countries that does not publish basic, (M0; M1 … M4 etc) money data for public consumption, the chances of getting transparent public debt data are slim.

  7. Neil Craig
    Posted April 1, 2009 at 10:17 am | Permalink

    I am coming round to the idea that it is not borrowing as such that is the problem but exactly what Gordon says is the good idea – borrowing while GNP drops.

    If the economy were growing at 10%, the way China’s did & will again GNP would be rising by about £140 bn a year. If half the economy is government that would, in theory, mean it could pay an extra £70 bn in interest charges which, even at normal interest rates would mean we could borrow an extra £700 bm a year.

    I am not actually advising that but I am saying that we should have no worries about borrowing to cut business taxes & anything that actually improves crumbling infrastructure, funding X-Priizes etc as they would improve growth. The problem is that Brown is not borowing to do that but just to produce more parasitic government.

    This is not exactly a new idea – Reganomics was an example of it – so was the early years of Stalinism.

  8. DBC Reed
    Posted April 1, 2009 at 10:30 am | Permalink

    The Government pretty well has to prop the banks up: they obviously can’t be left to their own devices, RBS and all.
    Private sector solutions always involve set prices for goods and services which are regressive and take no account of people’s ability to pay.
    Poor people have to pay the same as rich (except for mortgages where rich young couples get a family hand-out for a deposit and pay less interest) .
    Tax-payer financed solutions should end up with the privileged paying more than the unprivileged, though the UK upper and middle classes disgrace themselves by systemic tax avoidance.

    • Robert
      Posted April 1, 2009 at 8:02 pm | Permalink

      You are simply wrong a higher rate tax payer pays 12.5x more tax on 7.5x more income than a basic tax payer!

      • DBC Reed
        Posted April 2, 2009 at 7:57 am | Permalink

        It’s difficult to get worked up about the tax problems of people getting eight times the average income when under the schemes of privatisation and degulation,which having been given every opportunity to prove themselves, have instead wrecked the world economy,and left the British bloke on average income to pay ridiculously high rail fares,for instance, where previously, tax payers had subsidised British Rail on the basis of ability to pay. And the same for all private sector schemes.
        Of course you could subsidise the railways bya tax on the enhanced land values near the stations , but when Dave Wetzel, recently sacked from TFL by Boris Johnson, instituted the Fares Fair scheme in London on pretty much this basis,the scheme (years ahead of its time) was promptly scuppered by the Tories helped by the “vandals in ermine” as Dave called them.
        So ever onward to nowhere.

  9. PayDirt
    Posted April 1, 2009 at 11:02 am | Permalink

    The result of excessive Govt debt will be inflation. Brown claims it is a global thing so if every Govt prints money then not much problem. However France and Germany ( and Russia, China et al) blame US/UK for the financial mess, so are they going to let UK/US debase dollars and sterling relative to other currencies? International holders of UK/US money are really just waiting for the best opportunity to get out of these bankrupted currencies. It’s probably happening already where it can be done without too much notice.

    • Citizen Responsible
      Posted April 1, 2009 at 3:42 pm | Permalink

      Yes, I think it’s clear that the extreme measures being adopted by our government and the Federal Reserve are compelling other countries to consider alternatives to the dollar and sterling. The governor of the Chinese central bank, Zhou Xiaochuan, called last week for a global reserve currency under IMF management. As China holds almost 30% of the world’s entire reserves, it has some clout. Also, the chairman of the finance ministers of the euro zone, Jean-Claude Junker, proposed a euro zone bond backed by the combined euro zone economies, to provide inexpensive borrowing for the smaller euro zone nations. If these sort of proposals become a reality, large investors like China will have more choice about where to place their reserves.

      • Citizen Responsible
        Posted April 1, 2009 at 10:10 pm | Permalink

        On Channel 4 news tonight, they said 75% of USA debt is held by China in USA treasuries. America is now planning to finance the biggest spending binge in it’s history. Will China be prepared to make the loans to America to finance it? How does the Chinese man on the street feel about his “poor” country loaning vast sums of money to a “rich” country? When Secretary of State Hillary Clinton went to China recently it was said that “human rights issues” which used to seem so important to the USA were put on the back burner. No wonder.

  10. Denis Cooper
    Posted April 1, 2009 at 12:28 pm | Permalink

    Obviously there are limits to what the government can borrow, but those limits have been greatly expanded now that the Bank of England is rigging the gilts market.

    That was illustrated last week, when a Treasury auction to sell 40 year bonds – well outside the scope of the Bank’s “buy back” programme – was slightly under-subscribed, while the very next day a Treasury auction of shorter dated index-linked bonds was three times over-subscribed.

    The Bank won’t ever be buying back exactly the same gilts as those just issued by the Treasury, but provided there’s enough interchangeability between the new gilts being sold, and the existing gilts being bought back, then investors will go along with it for the sake of a quick profit – up to a point.

    However I’m no longer expecting any major handouts in the Budget, now that Mervyn King has spoken out. But nor am I expecting any significant measures to cut public expenditure.

    My analogy is with Scylla and Charybdis:

    http://en.wikipedia.org/wiki/Scylla_and_Charybdis

    Brown set a course which now forces us to pass through a perilous strait.

    On one side there is Scylla, the danger that gilts investors will demand a grievous, and possibly unaffordable, price for helping the government to fund its budget deficit, while on the other side there is Charybdis, the danger of mass unemployment sucking us all down into a deflationary whirlpool.

    “Odysseus was forced to choose which monster to confront while passing through the strait; he opted to pass by Scylla and lose only a few sailors, rather than risk the loss of his entire ship into the whirlpool. Jason and the Argonauts were able to navigate through without incident due to Hera’s assistance, while Aeneas was able to bypass the deadly strait altogether.”

    We can’t rely on Hera to help us through; but we do have Mervyn King, and the extraordinary, market-manipulating, strategy for “quantitative easing” that the Bank has agreed to follow.

  11. TrevorsDen
    Posted April 1, 2009 at 12:50 pm | Permalink

    Seems to me this shows that parliament is hopeless. why were you not offered the opportunity of a follow up?

    its a debate surely??

    • alan jutson
      Posted April 1, 2009 at 6:03 pm | Permalink

      The reason:
      The Speaker is a waste of space.
      The only thing he seems to be able to control is his own Bank Account.
      The sooner Members of Parliament get rid of him for someone who really cares about Democracy the better.
      At the moment any attempt at any sort of discussion is simply a waste of time.
      Shame on Members for putting up with this absolute farce.

  12. Rare Breed
    Posted April 1, 2009 at 12:52 pm | Permalink

    I have always been very sceptical about this whole “Borrowing to invest” thing. At best you can “invest to save”, but this never actually happens.

    If that was what the Government was doing then fine, but it wasn’t.

    If you buy 20 hospitals it is not a financial investment. In fact you are merely increasing your liabilities. It should really be termed: Borrowing to increase Government liabilities. The more “investment” the more the revenue costs increase and this is why these rules unravelled in the end – because the “investments” were liabilities not income generators. The more liabilities, the greater the revenue cost.

    Nothing the Government “invests” in generates revenue (apart from Tax collectors) and so should never be bought with borrowed money.

    In business you might borrow to invest or to build a capital structure but that would be on the basis that you would benefit from the capital appreciation or income generation of a genuine asset on completion/maturity.

    “Borrowing to invest” means the building will cost you more in the short term and the costs will increase taxes in the long term. It will always be the little guys paying PAYE tax that pay for it all.

    If a British PM declared that he/she would work towards a system where not a penny of tax payers money was spent on interest on debt then they would be shot by the bankers that rule them.

  13. HJ
    Posted April 1, 2009 at 1:10 pm | Permalink

    “I asked what limits he thoguht there needed to be to public borrowing in current conditions, to avoid any danger of gilt market strikes, trips to the IMF or national bankruptcy. ”

    John, perhaps you should have anticipated Darling’s response and phrased your question differently. Had you started by saying that you accepted that some public borrowing is unavoidable in current circumstances, but that you’d like his opinion on where the limit lies, then he would not have been in a position to lecture you on the necessity for public borrowing as you would already have accepted this in your question.

    This government doesn’t want to give straight answers to straight questions, so you’ll need to make them difficult to avoid.

    • mikestallard
      Posted April 1, 2009 at 3:50 pm | Permalink

      On Newsnight the other evening, a Hedge Fund manager saids that the G20 needed to put a wall between mortgage and household lending and “casino capitalism”.
      Ruth Kelly was asked to respond.
      I turned off when, in that strange Mummerset accent of hers, she replied to the question:
      “Personally I am against bankers’ bonuses.”

      • alan jutson
        Posted April 1, 2009 at 6:06 pm | Permalink

        Typical Government tactic.
        Our house has also become so frustrated at this absolute nonesense that as soon as GB comes on the screen, we change to another Channel, it sickening to listen to him now.

  14. Adrian Peirson
    Posted April 1, 2009 at 3:16 pm | Permalink

    It’s worthless paper, stop borrowing it and Print it.

    Stop printing Gilts, Print the Money instead,

    We can slowly put it back onto an Honest Gold, Silver, Precious Standard as things recover.

    That way, Corrupt Banks and Govts wont be able to Conjure the stuff out of thin air and enslave us to the (ficticious ) consequences.
    I’m sure the present day situation, Govt debt, etc goes against our slavery laws.

  15. brian kelly
    Posted April 1, 2009 at 3:34 pm | Permalink

    It is a very long time since I stopped believing in anything Brown, Blair or this govt say. I find it better to assume that they are wrong in virtually every word they say and that every outcome will be totally unrelated to that forecast. However, it doesn’t help a lot, just breeds more cynicism and, I have to say, something close to hatred at what they are doing to this country. My purpose here, though, is a trite point in contrast to the more learned in these articles and posts and it is to ask if anyone can enlighten me as to just where are the derived economic benefits from the investments that Brown borrowed so massively and so continuously to fund? I see literally none – just a long continuing decline

  16. Demetrius
    Posted April 1, 2009 at 4:54 pm | Permalink

    For years now I have been burbling on about Fantasy Island Economics and the ancient history of financial crashes. What we have all forgotten in our recenly comfortable world is just how bad and nasty it can be when the edge of chaos is passed. I can remember a time of cold, hunger, little or no money and food shortages, and the toll it took on too many. And I can remember being where it had been even worse, where people had lost members of their family from starvation or malnutrition. Yet the Government both at home and in its funding for the undeveloped nations does not consider that there is priority for food security. So just how far from the edge could we find ourselves?

  17. savonarola
    Posted April 1, 2009 at 5:27 pm | Permalink

    Why does Darling not answer your reasonable question?

    1 He does not want to admit that the answer is too shocking to disclose and that he is complicit in the bankrupting of Britain.

    2 He does not know the answer.

    Take your pick. The markets will punish him/us.

  18. Denis Cooper
    Posted April 1, 2009 at 7:26 pm | Permalink

    Well, the Treasury successfully sold £3.5 billion of 2015 gilts today, 2.23 times oversubscribed:

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.xrEYNN8i4U

    “Notes maturing in six years fall within the range of securities the Bank of England is buying as part of its so-called quantitative easing program. Gilts rose after the sale.

    “There is appetite for issues that fall within the Bank of England’s quantitative easing zone,” said Richard McGuire, a London-based fixed-income strategist at Royal Bank of Canada. “This shows the Bank of England needs to be there to support sufficient investor appetite, given the poor supply picture.” ”

    Although it may have more trouble with the 2039 gilts it hopes to sell tomorrow.

    Meanwhile, also today, the Bank of England successfully bought back £3.5 billion pounds of gilts, getting £4.4 billion pounds of offers to sell:

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a9EQiFzNtAYo

    It doesn’t say there which gilts were bought back, but they are listed here:

    http://www.lse.co.uk/UKMoneyNews.asp?ArticleCode=upmibvsmqrniiux&ArticleHeadline=boe_says_excludes_2019_gilt_from_reverse_auction_on_weds

    and the 2015 issue sold today by the Treasury was not among those bought back.

  19. Brian Tomkinson
    Posted April 1, 2009 at 8:14 pm | Permalink

    John,
    You have given all the reasons why we must have a general election before the damage gets any worse. Do you agree? What can be done to achieve this? Does your party want an election right now or is it as keen as Brown to wait until June 2010? When do we have our say?

    Reply: Of course we want an election as soon as possible. Becuase Labour have such a large majority we see no way of forcing one early.

    • Denis Cooper
      Posted April 2, 2009 at 9:32 am | Permalink

      It would be very easy for Parliament to introduce a mechanism so that the people could bring about a general election, rather than having to wait for the Prime Minister to use the Royal Prerogative at a time of his choosing.

      The obvious route being a “recall system”, whereby constituents could lodge a requisition – not a petition – in proper legal form, with more than the necessary minimum number of validated signatures, forcing their present representative to resign, forthwith, and ordering the electoral officials to arrange a fresh election so that they could choose some other person as their representative.

      If we had such a system in place now, the Labour majority in the Commons could be destroyed through enforced by-elections, leading to a general election.

      However I don’t expect that a Tory government would want to this legal mechanism to be made available to the people, any more than the Labour government.

  20. rik
    Posted April 2, 2009 at 4:00 am | Permalink

    I can completely understand why you would be somewhat annoyed. It appears this Government is incapable of providing a straight answer to a straight question. So I think I would have phrased the question like this. “I agree we have to borrow as the UK did not have the foresight to prepare for the bad times unlike other countries such as Chile! However do you think their is a prudent limit to the borrowing or should the borrowing be limitless?”

  21. A. Sedgwick
    Posted April 2, 2009 at 12:26 pm | Permalink

    This is a further example of the demise of the Commons accelerated under New Labour, the various question times are largely without value. It is to the shame of the Speaker that he hasn’t warned various ministers, including GB, that they are bringing parliament into disrepute. Further you are far better suited to be Chancellor than the incumbent and he clearly knows it.

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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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