The economy is still in freefall

The latest figures show the UK economy has been in worse decline than at any time since the 1930s. As expected, the Chancellor’s forecasts have turned out to be too optimistic.

Worse still, the biggest decline by far has been in manufacturing. The government sector has continued to grow – on borrowed money – and private sector services have been patchy. The biggest hit has been taken once again by those who make things. This is the very opposite of what the PM always said he wanted.

Two of the weakest sectors have been new housebuilding and car manufacture. The government has sought to encourage the former throughout its life, but has been most unsuccessful. It has sought to tax the car into oblivion for much of its period in office, only to offer some offsetting cash breaks once the crisis in motor manufacturing was painfully clear.

The irony of the government’s strategy of subsidising banks, spending more in the public sector, whilst regulating and taxing private industry more has been to lead to relatively much more unemployment in the industrial sector than elsewhere. The legacy of the distorted economic policy will be more closed factories and more retreats from making things in the UK.

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21 Comments

  1. Mick Anderson
    Posted July 1, 2009 at 7:17 am | Permalink

    We know all about the problems with the economy – we live in it every day. We also know that many of the “jobs” created in the last decade have been government non-jobs for interfering box-tickers, and that the unemployment figures (when corrected for those living off benefits as unfit to work) are staggering.

    However, we need the discussion to move forwards.

    This is made much more difficult if the existing incumbents refuse to release information to the opposition parties to allow them to plan properly. There should be a legal obligation for this information to be made available at all times to everyone in Parliament, allowing proper scrutiny of the Executive.

    The electorate are genuinely worried about many things relating to the current recession, and we need a plan. More than that – with an election due in relatively short order, we need to know what the opposition parties plans are.

    Mr Osborne can complain about the books not being opened for (legitimate) scrutiny, or he can take another approach. I’m sure that he has a fairly good idea what the current level of spending and income is. The vague nature of the current economic situation means that any future estimate is subject to rather a lot of error anyway, which is the Governments own excuse for not having a spending review.

    So, don’t play Labour at their own game, but write a set of budget proposals with a reasonably large range of error. If you publish the assumptions that the calculations are made on, at least we can see the flavour of any potential new Government. If the error turns out to be worse than expected (higher OR lower deficit) then you have the implied caveat that allows you to change your plans. It’s no more than any member of the public has to do when planning a mortgage, new car, pension, or any other commitment.

    Perhaps the work will be wasted because the raw information is too far out. Consider that the work is also wasted if you fail to win power, which is always possible. But if nothing else, it will mean that you are doing a better job in Opposition than the executive are doing in Government.

    I’m aware that any good plans that you publish are likely to be “adopted” by the Labour party. I don’t care – if it’s a genuinely good idea, let’s have it implemented as soon as possible. We know when not to believe Mr Brown if he claims that it’s the result of his original thought.

    All of these playground politics are rather tiresome, and all opposition parties would be well served by learning how to rise above it.

    • Waramess
      Posted July 1, 2009 at 7:58 am | Permalink

      Couldn’t agree more.

      Every government worker is an economic equal to an unemployed person. We are willing to have such people in society to do those things we thiink are proper and necessary in order to organise a well run society.

      We need to be very clear with the electorate on such issues so that it can be seen for example, that making a public servant redundant from an already redundant position is to save money for the public purse and not to increase unemployment.

      We need good right wing economic policies put forward to the electorate in a simple to understand manner and not for the Tories to always follow the governments lead.

      The Labour party have over many years refined the use of meaningless rhetoric, now let the Tories refine the way in which they put forward their own ideas.

      • Denis Cooper
        Posted July 1, 2009 at 10:51 am | Permalink

        Except my two daughters, who are paid by taxpayers to educate their children so that they can grow up to be useful and, yes, economically productive citizens. I would never accept that either of my daughters is “an economic equal to an unemployed person”. Their contribution to the future productive capacity of our society is indirect, but real – just as real as the contribution made by somebody who’s building a road, rather than using the road, or building a factory rather than working in the factory. As would become apparent over a number of years, if every teacher was in fact turned into an unemployed person.

        • Waramess
          Posted July 2, 2009 at 8:17 am | Permalink

          Emotionally I can understand what you say but economically there is no difference.

          The unemployed are paid for by the taxpayer and teachers are also paid for by the taxpayer. This is not to say that teachers are not valuable to society, it is to make an irrefutable statement that we as taxpayers do pay some in society to perform useful tasks but we also pay others who are far less useful and in some cases arguably do nothing useful at all.

          The point I make is rather more fundamental: when we make those who are already paid for by the state redundant from their jobs we do not increase the burden on the state, we actually reduce the burden on the state and on society.

          There is little point in keeping notional unemployment levels down by employing unnecessary numbers in government; the effect is in fact the same as paying one group of unemployed a higher benefit than another for no good reason.

          Far better that we grasp the nettle and reconfigure the economy by shrinking the size of government, and return the cost benefit to its rightful owners.

      • Mick Anderson
        Posted July 1, 2009 at 11:07 am | Permalink

        Sorry to be cynical, but many government workers are far worse than the equivalent to one of the unemployed.

        The unemployed can claim some living costs, and there is the cost of running the Job Centres and administering it all. Perhaps this amounts to £25k per unemployed person per year. Those unemployed signed off on long-term sick pay are obviously more expensive, but maybe not massively more. If it costs more than this, then that’s just another example of the inefficiency of the Public Sector.

        That is the bare minimum salary for many of the non-jobs, and that’s before you count the cost of the impact they have on the real world. Think of all the “elfin sayftee” people hampering manufacturing, adding extra red tape. How many stories have we heard of unnecessary outreach workers, or roadsigns being written in Polish for the sake of political correctness?

        OK, perhaps some of these are at the extremes, or even urban myths. But it’s rather troubling how believable it all is.

        I’d far rather shrink the bloated Public Sector, and use some of the money saved to fund decent Private Sector job-finding for the people sacked as a result. Perhaps use the model of the Princes Trust to encourage people to start new companies.

        Governments don’t create jobs. They just use up money inventing things for people to do, to keep down the (fiddled) unemployment figures, and for “social engineering”.

    • Posted July 1, 2009 at 9:36 am | Permalink

      David Cameron has already made the point this week that there is a thread of deceit running through this government. The issue of ‘redacted’ MPs’ expenses is a good example of this, something which is only too well recognised by a despairing electorate. Even if the Treasury came up with the information George Osborne seeks it is more than likely that it would not be entirely reliable.

      This however does present the party with an opportunity. A pledge to begin a detailed audit of the true state of the public finances to be published in full (with no redaction) on completion together with the plan to resolve the no doubt many serious and currently unacknowledged problems this would uncover. This would be hugely welcomed by the people of this country.

      The promise of such a report would also be a huge incentive to voters to make a choice to be told the truth, the whole truth and nothing but the truth. It would most certainly be a lot bigger story than duck islands, dry rot and the like.

      • alan jutson
        Posted July 2, 2009 at 11:05 pm | Permalink

        Agreed.

  2. Richard
    Posted July 1, 2009 at 8:01 am | Permalink

    It is interesting that the EU competition authorities will now seek to reverse the market concentration caused by Brown’s forced merger of LLoyds and HBOS. It is becoming increasingly clear that the banks – in the UK as in the rest of Europe – are using every accounting device to postpone the recognition of losses they have on their books. Whilst this continues there can be no real recovery as there will be no liquid credit market. The government are a party to this 1) as they are in control, at least of the zombie banks and 2) because they don’t want their original bank rescues to be shown up for the wasteful shambles they were. What do you think about the idea of forcing the banks into a full balance sheet purge, providing whatever liquidity is needed from the BoE to support short term funding + to guarantee deposits but NOT providing any more taxpayer equity. Any new equity needs to come from balance sheet restructurings of the banks in negotiation with their creditors as would happen with any other company? Next time the banks need ‘saving’ lets do it properly.

  3. David Eyles
    Posted July 1, 2009 at 8:06 am | Permalink

    This and other sources are saying that it’s the worst since the 1930s, or the early ’50s. The BBC last night were busy saying that it’s the worst since 1979. So which is the truth and have the BBC been leant upon again to massage the numbers?

  4. Brian Tomkinson
    Posted July 1, 2009 at 8:12 am | Permalink

    Will this not encourage Brown to want to spend (waste) even more money we haven’t got? This will mean even more borrowing as he insists that he is not cutting spending. I am not sure for how much longer we can bear to contemplate the developing catastrophe that is besetting us due to his manic behaviour.

  5. NickW
    Posted July 1, 2009 at 8:43 am | Permalink

    The measures which the Conservatives are going to have to take are horrendous.

  6. Robert K, Oxford
    Posted July 1, 2009 at 8:48 am | Permalink

    One of the depressing aspects of the current political “debate” is its lack of ideological drive and intellectual energy. There are few places, this blog being one of them, where one feels that anyone close to the levers of power is thinking beyond managerialism and base political positioning.
    Simon Heffer in the Telegraph made the point well, a couple of days ago. See his article: “If David Cameron wants to govern, he should stop being afraid of ideas” http://www.telegraph.co.uk/comment/columnists/simonheffer/5700830/If-David-Cameron-wants-to-govern-he-should-stop-being-afraid-of-ideas.html)

  7. NickW
    Posted July 1, 2009 at 8:56 am | Permalink

    The measures which the Conservatives are going to have to take to balance the economy are horrendous.

    What Brown is doing is running the economy into a cliff at full speed so as to ensure that the crash is as bad as possible, and all the opprobrium for clearing up the mess is heaped on the Conservative party.

    The only solution is to ensure that Tax rises are not a penny here or there, but a single discrete tax which is labeled Labour failure tax.

    When I had my own business and VAT was introduced and raised to 17.5% we started giving everybody clearly itemised receipts to show VAT as a separate amount.

    The Conservatives need to ensure that the “Labour failure tax” is kept separate, clearly labeled, and in everybody’s face.
    Income tax, (or more properly a tax on income) is the preferred option because the lower paid can be kept out of it, and will not be disproportionately affected by it, as they would be with consumption taxation.

    One last point.
    Hold a public inquiry into the running of the economy under Brown, and keep it in everybody’s faces.

    Malfeasance in public office is very clearly what this Government is now doing. Brown should walk the perpetrator’s walk, just like Madoff.

    • THE ESSEX BOYS
      Posted July 2, 2009 at 12:21 am | Permalink

      LABOUR FAILURE TAX – what a good presentational idea.

      Similarly we have advocated a method of creating and illustrating a ‘kitty’ into which all the savings on government waste – (Yes Mr Brown, that’s how we choose to more accurately define ‘Tory cuts’) – can be aggregated to show how our combined efforts are helping pay off Labour’s debt.

      Perhaps we can dub it THE PUBLIC PIGGY BANK which, eventually, will provide our children, or theirs’, with a bonus to help safeguard their futures.

  8. Posted July 1, 2009 at 10:02 am | Permalink

    Mr Cameron impresses me. He can change to fit the current mood (at the moment anyway). We are a long way, now from “hug a hoodie” or Zac Goldsmith.
    If he announces huge cuts in, say, the civil service, then he will, surely, lose that many votes? Or the bureaucrats? Same deal?
    If he announces sensible cuts in detail, that will, surely, play into the hands of Gordon Brown who will attack each detail in that niggardly and self righteous way of his that is so annoying.?
    He, and the shadow treasurer are,however, making all the right noises.
    Out here in Conservative Country, it is very obvious that, were I a cynic, I should say that the government is cutting education (College money), roads (lots of holes), and handouts. I shall be travelling to Harrogate, by the way, today on a motorway that has no traffic on it.
    Between Mr Prescott’s constituency and the A1M, that is.
    I look forward to some sensible, detailed Conservative plans when Mr Brown finally decides to call the election that will destroy not only him but the whole rotten Labour Party which always ruins our economy for us – and all, comrades, in the best possible taste.

    • THE ESSEX BOYS
      Posted July 2, 2009 at 12:29 am | Permalink

      Mike – as an aside we thought Cmaeron’s spontaneous asides at today’s PMQs were masterly and he played Brown like a fiddle!

      His grip, tone and authority get better and better.

  9. Denis Cooper
    Posted July 1, 2009 at 11:05 am | Permalink

    It astonishes me that there’s now so little mainstream media commentary about “quantitative easing”.

    I watched a TV report about the GDP contraction during the first quarter being some tenths of a per cent sharper than previously thought, but now there are signs that the worst may be over; and the supposedly knowledgeable “economics editor” didn’t even think it worth recalling that on March 11th Mervyn King threw the switch and set the printing presses rolling.

    Since when they’ve been running day and night, with short breaks for essential maintenance, and have now churned out £100 billion – roughly equivalent to 7 per cent of GDP.

    Of which newly created money, 97 per cent has found its way into the government’s coffers, by the Bank buying up previously issued gilts from the market, while in parallel the Treasury’s Debt Management Office has been selling new gilts into the market.

    Taking into account the 3 per cent which has actually been used for the originally stated purpose of buying commercial assets “to inject liquidity into the financial system”, the Bank will complete its first £100 billion of purchases of existing gilts today – details here:

    http://www.bankofengland.co.uk/markets/apf/index .htm#giltresults

    The link to “Balance Sheet impact” leads to a bar chart, in which the ever rising bars are almost entirely turquoise – purchases of previously issued gilts, another £3.0 billion scheduled for this afternoon.

    Without the Bank mopping up surplus gilts from the market, it’s unlikely that the Treasury would have been able to borrow anything like enough by selling more gilts; so the government would have been forced to make severe cuts in its expenditure – in the worst case by a quarter, as that’s how much of its present spending is now being funded by borrowing – and that would have sent the economy into meltdown.

    The problem now is that while the condition of the economy may have stabilised, it’s (figuratively but effectively) on life support provided by the printing presses, and those presses must be kept running until the economy has recovered sufficiently to keep itself alive unaided.

    Which may mean that so-called “quantitative easing” will have to continue for a couple of years, and then it will be a few more years before the government’s finances return to balance, and then it’ll be decades before we finally clear the accumulated hundreds of billions of debt that have been racked up.

    Thanks, Gordon.

  10. APL
    Posted July 1, 2009 at 12:35 pm | Permalink

    NickW: “What Brown is doing is running the economy into a cliff at full speed .. ”

    I am afraid it is past that stage. Do you recall those cartoons where the character would run over a cliff and for a couple of seconds float in the air with its legs thrashing but getting no purchase. That’s where the economy is just now. The drop is yet to come. Hat tip to the title of this artical.

    NickW: “and all the opprobrium for clearing up the mess is heaped on the Conservative party.”

    Yes, I agree that is the tactic.

    Now a little off topic but revelant to government spending. We can see what a unified and targeted opposition can do against something like ID cards, the government has practically scrapped the scheme, do you recall when an Id card was going to cost £60 the government for some reason thought there would be queues around the block at that price.

    Now they are going to be voluntary and I assume free, which means we have paid for them and waisted millions on what is a completely unnecessary project (given that we are an Island) we just need a fraction of the cost spent on immigration and customs officers.

    But the point I really wanted to make, it wasn’t long ago that Michael Howard came out in support of ID cards. The problem is for the Labour party as well as the Tory party, they have still isolated themselves from their supporters.

    Thus they both come up with insane and expensive schemes which have not a shred of support in the country, thrash the policy in an attempt to make it popular.

    Political parties need to understand that we don’t want to be told what to do by a bunch of shysters. If a man has integrity and hasn’t been dipping his hands in the till for the last ten years then he’ll get a good hearing. But don’t make the mistake of putting the political cart before the horse.

    And by the way? We cannot afford to spend £10 billion a year on the European Union!

  11. alan jutson
    Posted July 1, 2009 at 6:14 pm | Permalink

    You are correct John that Manufacturing and Construction appear to have suffered in a big way.

    Certainly the Labour plan of taxing the motorist, both on new car purchase, and more and more fuel duty increases over the years, has now backfired in a big way.

    In the housbuilding industry the elevation of stamp duty rates and banding has caused start and stop points in the market.
    Any property valued at 10% above a stamp duty rate tends to stick, as purchasers are often unwilling to pay a higher level of stamp duty tax on a house only margially into the higher rate.

    Construction has suffered for years from the full VAT rate being applied to repairs and improvement.

    The Federation of Master Builders along with many other Trade organisations have campaigned for a 5% rate of Vat on repairs maintainace and improvement works for years.
    The Government excuse given for not being able to do anything about it, has in the past been EU legislation which would not agree to it.

    The EU has now seen sense, and from October last year it is now possible to have a 5% rate if any Country wants to take advantage.

    Too many construction workers are now idle, too many cowboys who charge no VAT (and thus pay little tax as well) win works against Contractors, who play by the rules, and who are including for the full rate of tax (VAT etc) within their quotations.

    We now have Visting labour from other Countries also competing with our own workforce.

    Do the sensible thing, reduce VAT, make it a slightly more level playing field for those who play by the rules and let us stimulate this area.

    Tax take may increase as a result.

  12. Posted July 1, 2009 at 10:03 pm | Permalink

    Mr Redwood,

    You make a very valid points here about trying to undo the harm of high taxes on the car with a subsidy for new car purchases. However, I would take issue with you on the government having encouraged new housebuilding. You have said before that house buying was encouraged house buying in the past with low interest rates from 2000 to 2005 (only then to raise them too high). However, tough planning laws have meant that during the boom the numbers of new homes being built were at record lows, with much of the new build being in apartments and not the more desirable houses. This shortage of new build when demand was (artificially) strong, further exacerbated the house price inflation.

    However, you do point to a general principle for a quick, sustainable and affordable recovery – Undo the harm done by higher taxes and more regulation.
    In the boom, these extra costs were largely absorbed. They have encouraged a steeper downturn and the increased costs will slow down and diminish the recovery.

    • alan jutson
      Posted July 2, 2009 at 5:39 pm | Permalink

      Manicbeancounter

      Yes you are correct that fewer properties are being built, and that a huge number of properties that have been built are apartments.

      I guess from your comments that you have experience and had the the misfortune to try and negotiate with a Planning Department, with regard to Construction projects ?

      Fewer properties (houses) are being built because planners and Government want to protect greenfield sites from development and houses take up more land than apartments.

      More dense housing (future slums some would call them) are being constructed because Local Authorities have to meet National Government targets on new build, or be financially penalised.

      Buy to let investor also semmed to prefer these type of properties.

      The result, the easiest way to meet new build targets and use less land, is to build apartments which are now in oversupply.

      In addition many Local Authorites want to encourage public transport use (even if no public transport is available) so car park spaces are deliberately limited, causing congestion as people park on paths etc.

      In addition we now have the wonderful 106 rule which is being applied by some Local Authorities, when Planning is granted, it means you have to make a financial contribution to the Council for them to spend as they like on a local project. like traffic management (traffic obstruction by any other name) or a new roundabout etc, this therefore increases the cost of your development, but has no real benefit to you.

      We then have Gordons increased rate of Stamp duty, which confuses the market, and divides it into price sections.

      The fact that you will now pay over £20,000 tax when purchasing a property worth £500,000 means margins are suffering when undertaking refurbishment work, to resell on at a later date.
      The fact that you also pay 15% VAT tax on all materials used is another limiting factor.

      Thank goodness at the moment VAT is Zero for New Build.

      So there you are, the Government has increased taxes on cars and housing, and both have gone down the drain, ANOTHER LESSON TO BE LEARNT.

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    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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