The latest figures show that consumer spending has held up reasonably well. As forecast here the savings rate is also on the rise, mainly owing to people borrowing less or repaying some debt. The public is learning to handle the new situation, by getting out of debt and by shopping around for the bargains and discounts.
Those with floating rate mortgages and other loans have the pleasure of deciding how to spend the extra money they can keep as interest rates disappear, as long as they keep their jobs. Those on savings income have to tighten their belts, as their needs are ignored.
The two parts of the economy we need to do better, business and exports, remain weak. The government sector continues to pre-empt resources, increasing the squeeze on companies through its taxes and regulations. We need a recovery based around increased business investment and a higher level of exports. So far we just have the favourable consumer impact from lower interest rates and the extra incomes of the growing army of public sector employees.
We learn today that Mr Darling may admit he needs to borrow a collosal £175 billion this year to pay for all the excess in his public spending figures and to feed the ever hungry nationalised banks. It would be good if he would start by admitting he borrowed more than £150 billion in the year to March 2009, and not the £78 billion he told us about in the Pre Budget Statement. We need an honest presentation of how bad the public finances are before we can start to clean them up.
We also learn he will be setting out some combination of higher taxes and lower spending to start to plug the gap in the Budget. The probem with higher tax rates is they can send business abroad and jobs overseas. In a highly competitive world you need to keep tax rates at a competitive level in order to maximise tax revenue. The UK is no longer very tax competitive and needs to be careful about any proposal for higher tax rates on individual and company income or gains.
What we need are some cuts in pbulic spending. Not from the 25% of public spending that goes on the salaries of nurses, teachers, doctors and other front line service providers, but cuts from the rest. What we need is a government that understands spending too much will cause problems raising the money, will crowd out the private sector, and will make bringing the balance of payments back into order more difficult.
You can’t solve a crisis brought on by borrowing too much by borrowing more. Government spending is not necessarily reflationary, as you need to take the money from the private sector to be able to spend it in the public sector.