Recovery – cut spending, encourage enterprise and saving

New battle lines have been drawn. Mr Brown says the difference between the two main parties is between Labour’s Age of Opportunity and the Conservatives’ Age of Austerity. The true battle lines are between a Conservative party which grasps that there can be no sustained recovery without controlling the deficit, and a Labour party which believes it can go on printing,borrowing and spending without limit as if this would produce a recovery.

One of Labour’s biggest problems with this spin line even to get through to the election is they cannot explain why the UK economy did not recover when others did, despite all the borrowing and printing. If we look at past sustained recoveries – after 1981, after 1992 – they both followed tough action to control the deficit. If we look at past Labour mismanagement, in 1964-6 and in 1974-5 spending and borrowing too much then led to a worse crisis, followed by the need for cuts and austerity imposed by overseas money lenders and by the financial markets.

If we do not control the deficit, the deficit will control us. Already, despite the excessive money printing, the cost of government borrowing has risen. If we allow the cost of government borrowing to surge by being careless about the additional amounts we need to borrow, the country could become locked in a debt trap. The deficit would keep on rising and the accumulated debt would soar, simply because the interest burden kept on increasing. When you have borrowed this much already, you need to be careful about future borrowing, to try to keep the interest bill down. On present policy the public sector hoovers up all the available extra cash, starving the productive sectors, especially small business, of the money they need to expand and to create jobs.

The deficit has to be cut by cutting spending. We have often looked at how to do this on this site, and found that technically it is easy to do. The politicians just need to learn how to do it by following what many businesses do automatically -not cutting front line or valued services, but cutting the rest strongly. We should rule out all tax rises on earning and saving. We need to do more of both. We may need to cut rates on earning and enterprise, to encourage more of it. We need to work our way out of this debt mess. That willl require an Age of Opportunity for the wealth makers, the job creators, the savers, the hard workers and the doers. It will also require an Age of Austerity for the bureraucracy, after its excesses of the last few years.

All governments rely on more income tax receipts. The best way to speed those up would be to cut the higher rate of tax Labour proposes from next year. Whenever the UK has cut income tax rates in ther past the rich have paid more tax and paid a higher portion of total income tax. The Conservatives have promised to cut the Corporation Tax rate. This is the way to generate more tax revenue, by getting more successful people and companies to come here,. to stay here, and to create jobs here.

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32 Comments

  1. Johnny Norfolk
    Posted January 3, 2010 at 10:24 am | Permalink

    The problem for the Conservatives is that labour have left it so long and done nothing that the Tories will now have to do more to sort it out.
    Most of us understand that, but so many labour supporting people in this country are just so shallow they do not have a tiny understanding of basic economics just like their leaders.

    So you must explain very fully not to us but to them, as the labour supporting BBC will try and use it against you saying that given more time Labour would have sorted it all our without any pain.

    It will be interesting to compare for example a current Marr interview with labour against a future interview with a conservative government.
    Just watch the difference.

  2. Mike Stallard
    Posted January 3, 2010 at 10:36 am | Permalink

    I am just ploughing through Lee Kwan Yew's biography. When he took control over Singapore (1950s), it was bankrupt (pretty well) with a huge deficit stretching into millions of dollars. There was little industry and a very well organised Left (the Communist Party).
    The first thing he did?
    Reduce his own and his ministers' salaries quite dramatically in public.
    He, with his chief ministers, then went out, most Sundays, and cleared the rubbish out of the streets with his own hands (good photo op).
    He also told everyone, in his first speech that it would take time to build Singapore into a viable economy. He also made sure that every government office was fitted with air conditioning so that the government efficiency increased even though there was no increase in the bureaucracy.
    If only……

    • Mike Stallard
      Posted January 3, 2010 at 10:37 am | Permalink

      PS: The deficit was paid off in just one year…..

      • Chuck Unsworth
        Posted January 3, 2010 at 7:38 pm | Permalink

        @ Mike Stallard

        Alex Josey's biography of him? Much of my time in Singapore was spent with his publisher, Donald Moore. A multicultural society with strong colonial overtones, it was characterised by the huge industriousness of its Chinese population which Lee carefully harnessed, and the devotion of all cultures to classic western education.

        I doubt that Britain has the drive and energy of these people, but we'll be obliged to find out pretty shortly. As to education – well….

        Air-conditioning enabled the Civil Servants to work through, during the heat of the day, whereas before they had previously tended to take a break of several hours. I think it was thus not entirely popular, but Lee was pretty autocratic.

  3. A.Sedgwick
    Posted January 3, 2010 at 10:47 am | Permalink

    Good stuff as usual but if the first few days of electioneering are anything to go by Cameron is going to lose the election. His speech in Oxford was pointless and Ken Clarke is now laying the ground for tax increases, when it is patently obvious that we are taxed enough. The core message has to be spend less not tax more.

    • Brian Tomkinson
      Posted January 3, 2010 at 12:28 pm | Permalink

      I quite agree, but I fear the Tory high command isn’t interested in our views. They expect to get our votes by default. However, if they have no credible strategy for reducing government debt by public spending cuts then they have lost their raison d'etre for me.

      • APL
        Posted January 4, 2010 at 4:36 pm | Permalink

        Brian Tomkinson: "They expect to get our votes by default."

        They seem more interested in Labour and Liberal voters. Its called being taken (i) for granted. (ii) for a ride.

        The Blu Labour party expects thinking Tories to stay on board.

  4. Alfred T Mahan
    Posted January 3, 2010 at 11:17 am | Permalink

    John, surely a cut in NICs, especially Employers' NICs, is more of a priority than a cut in Corporation Tax?

    NICs are paid regardless of whether or not a company is profitable, and so cutting them helps companies stay in the black and thus survive in tough times.

    They are a direct tax on jobs, and with unemployment likely to be a persistent problem for years they are counter-productive in the extreme.

    Employees' NICs are merely a hidden income tax, and any seriously reforming government committed to reducing the size of the tax take should be making it as transparent as possible.

  5. APL
    Posted January 3, 2010 at 11:40 am | Permalink

    GB: "Labour’s Age of Opportunity and the Conservatives’ Age of Austerity. "

    Can not some intelligent fellow on the Tory benches just nail this mans compulsive lying? Just demolish him!

    It's long past the time when he should be accorded polite political etiquette.

    He really does live in a sort of deluded Alice in Wonderland mirror world.

    —————–
    By the way on another topic, related to government waste. Have you been reading the extraordinary revelations in the press but with major credit to Richard North's blog about the graft and corruption endemic in the 'global warming' racket?

    There seem to be indications that DEFRA and a number of other UK government agencies are subsidizing this (operation-ed) with UK tax payers money which then seems to be being channeled directly into private hands.

    What justification can there be for such wanton dissipation of public funds?

    Does no one in Parliament scrutinize the accounts of these public bodies?

    • APL
      Posted January 4, 2010 at 9:31 am | Permalink

      I missed this one.
      http://www.telegraph.co.uk/finance/newsbysector/e

      But this if I am not mistaken is the same system used for VAT fraud applied to the Carbon trading scam.

      A fraud (the carousel fraud) operating on a scam ( the carbon trading scam).

      Only in the European Union!!

  6. alan jutson
    Posted January 3, 2010 at 12:02 pm | Permalink

    John

    Anyone who runs a normal household budget within their means is applying the same logic that you outline here, so I do not understand why so many MPs do not get it !!!

    Perhaps the reason is that for many, they have not operated a simple family budget system for years unlike the majority of the population.

    For many in the past, it would seem that they lived in a dreamworld of forever claiming almost everything they needed from expenses, (just like printing money) It would seem to many of us that they did not need to touch their salaries at all, not even for buying a second home (mortgage paid) so no need to budget at all. Everything, but almost everything, it would seem was met from expenses.

    Now I know this is perhaps a dead subject given that it is supposed to have been sorted out, but it must have had the effect of numbing the brain to the normal sort of problems most of us, who do not such means of support, have to deal with day in day out. Good heavens they are even guaranteed a job for a fixed period at a time so no worries about redundany like millions of others.

    So if you have no work or industrial experience (excluding JR here), you have no personal financial worries, you have no loss of home worries, you have no job loss worries, is it any wonder you MP's cannot run the finances of UK PLC.

    Just look at the existing Cabinet and passed Members of it.

    I wouldn't let them run me a bath.

  7. no one
    Posted January 3, 2010 at 12:50 pm | Permalink

    can i work for you john?

  8. David B
    Posted January 3, 2010 at 1:49 pm | Permalink

    I think the choice at the next election is one of realism ie spending in the public sector must be cut or one of make believe using the same planning that was used for the post Iraq invation. Government cannot have an age of opportunity by act of parliament it can only set the foundations and let the people do the rest

  9. Donna W
    Posted January 3, 2010 at 2:33 pm | Permalink

    According to the financial genius living in No.10, Labour will be able to halve the deficit in 4 years, by increasing spending. So he told Andrew Marr this morning.

    The Tories are obviously up against a magician whose skills exceed those of David Copperfield. Gordon Brown can magic billions out of thin air …. every time he spends a billion, two are returned to him!

  10. JohnRS
    Posted January 3, 2010 at 3:02 pm | Permalink

    As usual your analysis is spot on. However I'm not sure your views about the required action are shared by the leadership of the Conservative party. To most people it still looks very much like a choice between NuLabour and BluLabour.

    Unless there are some clearly stated, truly conservative policies announced over the coming weeks the best Cameron can hope for is a hung Parliament.

  11. Colin R
    Posted January 3, 2010 at 5:39 pm | Permalink

    Excellent article. Unfortunately, the Conservaive Party is not making a good case for less taxation and reuduced spending. Although, cutting spending and tax is economically rational and necessary,the Conservative leadership do not want to fall into the trap of being accused of being a friend of the rich.

    In my opinion the next election will be a very dirty affair. Gordon Brown will do almost anything to try and stay in power. He cannot fight the election on his record, so he will resort to smear, he will resort to appealing to the less attractive characteristics in people. (envy, class war etc) He will try to make out that things are not that bad and we can reduce the deficit in a benign way.

    In an perverse way I almost want Brown to win the election. If he does he will have to take the hard decisions and deal with the reality of his own economic incompetence. It almost makes me sick to think of the Labour Party, post election, sitting on the sidelines pretending that if they were in power things would be different.

  12. Ex Liverpool rioter
    Posted January 3, 2010 at 6:32 pm | Permalink

    John
    I read a good deal from One Peter Schiff & its clear to me that me must start Saving. One thing which i think would go down very well low be 0% tax on savings for basic tax payers?

    Say i ceiling of £45,000 ?

    I no idea what this would cost, after all we are now fighting in Iraq/Afgan…soon Paklistan (Gosh that be "fun") Sudan & Iran………..Shortly to followed by Russia & China……….& am sure with Gordon leading us VICTORY will be ours.

    Mike

    • A.Sedgwick
      Posted January 4, 2010 at 3:58 pm | Permalink

      I think Cameron/Osborne promised this awhile back but like a few of their good pronouncements they seem to lose heart rather than sell the honesty and benefits e.g. inheritance tax.

  13. Lola
    Posted January 3, 2010 at 7:29 pm | Permalink

    My business operates as a partnership. Cutting corporation tax will not help me one jot. There is huge opportunity for what we do, but we are so highly taxed and expensively and uselessly 'regulated' that we are struggling to find the cash to expand. So not only do you have to cut taxes on limited companies but you must also cut taxes on partnerships.

    BTW, I would seek to incorporate, but the regulatory costs of doing so are eye watering. I reckon about £30,000 to £50,000 for us. This serves absolutely no uselful pupose but merely puts sand in the gears of efficient business. Let me point out that in the period since our regulator came into being the fees that I pay it have risen by well over 1000%, yet my PI policy costs have fallen.

    • Mick Anderson
      Posted January 4, 2010 at 8:26 am | Permalink

      Lola – perhaps all the regulation is what has caused your PI policy costs to have fallen. If the regulator limits what you do, surely you are less likely to make a claim.

      You'd inevitably prefer both less regulation and lower insurance costs, but basic realism suggests that this won't happen.

      I do know what you mean about Corporation Tax, though. I seem to have been taxed on the money owing to my company because I chose to help somebody out by letting them pay a large invoice by installments. I'm used to cash accounting, so this was rather a rude shock.

      If the whole tax system was simplified, we'd all be paying far less for the administration, and there would be a (slim) chance of the system being more fair.

      • Lola
        Posted January 4, 2010 at 12:12 pm | Permalink

        I need to get particular to disabuse of any idea you may have that regulation has improved the situation for me and consequentally caused my pI costs to fall.

        1. We are regulated by the FSA.
        2. The FSA has failed, spectacularly. The evidence of the banking failures confirms this.
        3. We are a fee based business and have been so since inception in 1995. The FSA has struggled to understand how we work, but our PI insurers got it straight away.
        4. Other businesses not working to our model have seen a rise in their PI costs.
        5. We are not at all limited by the regulations. We have a view that we do what is right for the client and then sort out any compliance matters later on. In other words I generally ignore the FSA.
        6. If you try and read the FS regulations you will realise that the FSMA2000 was an Act designed to divide and conquer the three legs of sensible supervision, that is the Band of England, the Treasury and the FS Regulator, and put all the power in one man's hands – Gordon Brown.

        • Mick Anderson
          Posted January 4, 2010 at 3:47 pm | Permalink

          Hi Lola,

          Sorry, I didn't mean to imply that the regulation you suffer (or work around) is a good thing. Merely that there might be a small glimmer of benefit, even though it wouldn't compensate for all the grief caused by poor regulation. Miniscule plus, large minus.

          I don't work within the financial services industry, and your original comment didn't make reference to this either. There's pervasive regulation everywhere, so I wouldn't make that assumption.

          Within the electronic engineering sector that I work, your approach is recognisable. There are all sorts of rules that we are expected to comply with, but careful choice as to how and where a small organisation operates often means that you can avoid the worst excesses of red tape.

  14. Martin
    Posted January 3, 2010 at 7:59 pm | Permalink

    John – Can you explain the obsession in some quarters with raising taxes to cut the deficit. Why not cut expenditure.

    What is wrong with Ireland's approach of cutting public sector wages? if today's Sunday Times coverage is anything like correct 90% plus of public sector wages are way too high.

    What is surely wrong is the targeting that the government is so fond of. By the time various public sector sob groups are protected what is is left of the public sector is too small to make enough difference.

    Similarly the welfare system also suffers from targeting. Today's Daily Mail had the classic story of ridiculous sums being paid out, while the Sunday Times has a story about a man who is homeless thanks to the useless benefits system. Another example of the targeted system.

    Apartheid perhaps?

    • Lola
      Posted January 4, 2010 at 5:27 pm | Permalink

      Being married to an entirely exploited and underpaid teacher, I do not go along with cutting the pay of state employees. A better bet would be to sack all the bureaucrats and, in education as an example, let the money follow the child so that parents could spend it on the education they judged best for their child. All the education aparatus would be privatised. A result of tjhis would be higher pay for teachers, but they would lose their profligately run and over-generous pension scheme.

      Putting the bureacracy on the dole, or more accurately releasing them to pursue a more fulfilling and wealth creating career in private business, would be a net saving to the taxpayer as the dole they would receive would be less than the equally tax funded pay and pensions they were previously enjoying. They are doing nothing of value either as state employees or on the dole, but at least in the latter case they are available for work somewhere else.

      That would cut the spending at a stroke.

  15. Steve Whitfield
    Posted January 3, 2010 at 8:40 pm | Permalink

    Very Wise words from you Mr Redwood. Sadly i believe that you (and us) have been very badly let down by the left leaning clique running the Conservative party.
    Fundamentally I suspect, Cameron & Osbourne have no real disagrement with New Labour on anything. They just doesn't understand that it, the Labour party, despises this country, it's history, freedoms and people.

    Cameron proved it in his recent speech.

    "Let’s at least recognise the good intentions of our opponents"

    Good intentions. Don't make me laugh Dave old son!! . So you really believe what Labour has done was the result of incompetence alone?

    'Let’s be honest that whether you’re Labour, Conservative or Liberal Democrat, you’re motivated by pretty much the same progressive aims: a country that is safer, fairer, greener and where opportunity is more equal. It’s how to achieve these aims that we disagree about – and indeed between the Conservatives and the Liberal Democrats there is a lot less disagreement than there used to be.’

    So there it is, Dave is a progressive liberal that believes in giving more to the 'poor' in the form of a ever more bloated welfare state.
    He believes that the way to make the country safer is to allow unlimited immigation,a feral underclass to take root, to build no new prisons introduce the ridiculous human rights act. He's also jumping on the green bandwagon despite the scientific evidence on green warming now looking very flaky.

    Any truly Conservative voter has No party that represents they're views.

  16. Kevin Peat
    Posted January 3, 2010 at 10:06 pm | Permalink

    Your economic plan makes perfect sense but let's remember that the worst damage inflicted on Britain is not economic. I'd rather live in a poor Britain with high cultural standards than the whore she has become, pimped by the political class. David Cameron appears to be happy with the broad political consensus in Westminster which indicates to me that not much is going to change.

    Like millions I feel abandoned, betrayed, unrepresented, vulnerable, unwanted, persecuted – prey for criminals. A stranger in my own country.

    How can you possibly change the way I and millions of others feel ?

    So that's why I'd rather pull the plug on it all by not voting for the party which should naturally represent me:

    – Let Labour back in. They'll sup their own poison and never be forgiven – obliterated.

    – The Tory party will fragment – and then we might finally get our representation.

    But in truth I think Britain has had it. I see no hope. Against our express wishes things were done which have delivered the adverse outcomes that we were afraid of.

    This is what Mr Cameron is up against if he wants to recover the votes of those saying "They're all as bad as each other." This is why honour should have been enforced in Parliament instead of allowing miscreants to stay in office.

    We now have total loss of faith and belief in anyone in high office. And that's the fault of good men standing idly by.

  17. Andrew Gately
    Posted January 4, 2010 at 11:10 am | Permalink

    What is the point of saving when the government believes in a policy of moral hazard which rather than charging a higher rate of interest on monies borrowed from the Bank of England thinks that savers should be wiped out. This was the case with shareholders in Northern rock and too a lesser extent RBS and Lloyds.

    It strikes me that there policy of moral hazard involves stealing property. I would hardly describe stealing as morally correct.

  18. Richard
    Posted January 4, 2010 at 12:56 pm | Permalink

    Time for a flat tax. Adopt the Liberal Democrats' proposal to make the first £10,000 tax free, then set all tax – income tax, corporation tax, capital gains tax, inheritance tax at a flat rate of 25%. Abolish all allowances, tax-shielded investment schemes etc. It should be possible to make an 80% reduction int the cost of running HMRC into the bargain. Then we'll get a real recovery.

    • A.Sedgwick
      Posted January 4, 2010 at 4:13 pm | Permalink

      Amen

      • Mike Stallard
        Posted January 4, 2010 at 8:47 pm | Permalink

        I would like this looked into as well.

  19. Lola
    Posted January 4, 2010 at 4:23 pm | Permalink

    Just been talking to someone who had a bank 'review' with their 'personal manager' this morning with one of 'our' banks – LloydsTSB

    When reviewing their modest overdraft facility they were told that if they reduced their borrowings over time not to reduce the facility with the bank as once decreased it would not be increased again. This did not just apply to this one customer but to all customers.

    So the banks, having been given pretty well all of our money, which we couldn't afford, and therefore being in hock to us, they are now making things worse by cutting off lending our money back to us.

    The whole thing is utterly bonkers.

  20. Steve Whitfield
    Posted January 4, 2010 at 9:29 pm | Permalink

    Mr Redwood talks about 'Battle lines being drawn' but the more I hear from Cameron, the more similar the main parties seem to be.
    In the election campaign I expect any truly conservatice values to be either suppressed or non existant. Either Cameron isn't a true conservative or he is trying to be all things to all men (and women) which is a very foolish strategy. He needs to start listening to natural conservative supporters (still the majority,for now, despite years of labour social engineering) quickly before he hands GB the next election.

    The trouble with the Conservative party is that it has bought into the whole rotten politically correct agenda.

    Take for example woman's pay and the campaign for equal pay on the conservative party official website. The Guardian would have been proud of this . Instead of supporting the factually correct truth (women earn less because of different work/life choices and because they take childcare breaks) ,they take the lazy PC line that this is because of discrimination.

    I won't be voting Conservative until there is change at the top.

  • 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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