Establishment economists back deficit cutting by cutting spending

It is a significant moment, when senior economists write to the Sunday Times warning that we need to cut the deficit to sustain the recovery. It is even more important that they think deficit cutting should mainly come from spending cuts, not from tax increases. They delphically warn that some tax increases on employment and investment could make things worse.

This government’s tax increases already threaten us with less investment, fewer companies staying here, and fewer entrepreneurs taking risks here. We need tax and regulatory cuts to favour company investment and more enterprise to have a chance of growing our way out of some of the financial trouble we are in. Our corporation tax regime is now a threat to jobs, and the new higher income tax rate will add to the grief. When I first warned of a coming financial and business crisis and the UK’s growing lack of competitiveness in 2007 it was a fairly lonely position. Today it seems at last to be mainstream. Now we need a government to do something about it.

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20 Comments

  1. Steve Cox
    Posted February 14, 2010 at 10:19 am | Permalink

    Well, I'm right behind you on this one, John, but how close to your own views would you say that Messrs. Cameron and Osborne are?

    As you say, 'Now we need a government to do something about it.' I just hope that we will not be let down by the Conservative leadership when the tough decisions and choices have to be made.

  2. Kevin Peat
    Posted February 14, 2010 at 10:21 am | Permalink

    Be in no doubt that these public spending cuts are going to impact on the private sector too. Few of the private sector workers I know (I am one of them) are involved in wealth-generating export – and those that are work for foreign owned conglomerates.

    We mainly do each other's laundry for a living here in Britain.

  3. oldrightie
    Posted February 14, 2010 at 10:40 am | Permalink

    This is counter to the Government's pre-election stratagy so it must and will be dismissed by an electorate so in thrall to Brown's word stage brilliance! Anyone else notice how similar their economic pronouncements are like their climate change pontifications? Weird, like they live in a dense cloud of thick fog.

  4. Brian Tomkinson
    Posted February 14, 2010 at 10:59 am | Permalink

    JR: "Now we need a government to do something about it."

    Do we have a political party which is determined to tackle the crisis? Who will comprise such a government? It would be reassuring if you were a senior member of that government.

  5. Simon D
    Posted February 14, 2010 at 11:23 am | Permalink

    We all know what the Government has to do and we all know that it won't do it until after the election. Even the, if it does it at all it won't do enough.

    In the meantime, the left-of-centre Governments in Club Med will provide an interesting evaluation of political limits to austerity programmes. The trade unions in those countries simply won't stand for it. They want the burden to fall substantially on the 'rich' through taxation. Already militant trade union leaders and spokesmen for the left are talking about protests and riots in the Club Med streets. Moreover, left-of-centre governments are very disinclined to visit economic disadvantage on those that voted them in. Once the state has delivered to the public sector classes a decent standard of living from taxpayer coffers it is very difficult to take it away from them.

    Meanwhile back at the ranch we have revelations about the large number of BBC employees earning more than £100,000 a year and the news that our ludicrous and expenses-corrupt House of Lords costs as much to run as the Commons. (The US Senate is a fifth of its size and serves a population five times as big). Our London Borough (Conservative) is looking for a new CEO. Any bets on whether the salary will be less than £150,000?

    At the end of the day Brussels will have to keep Club Med going somehow. If not the Euro will unravel and with it, perhaps, even the entire EU project. There is no similar safety net for the UK. We are too big to fail and in any case the IMF does not have enough money to bail us out. Perhaps we should heed Mr. Mandelson's advice on the attractions of being in the Euro.

    The UK election looks increasingly like the one that no party in its right mind should want to win.

  6. Norman Cameron
    Posted February 14, 2010 at 11:39 am | Permalink

    Perhaps now that conventional wisdom has shifted from more taxes & spending to less spending there may be some hope that it will shift further to grow private sector by competitive taxes. Of course, that would make a nonsense of the New Conservative Party which has nothing in common with the policies of the 1980's and the much maligned Mrs Thatcher.

    If only we could go back to the bad old days of low public spending and low borrowing but everyone knows we need to spend vast amounts of money to be caring, simply trusting people be to able to take of themselves won't do in modern society.

  7. Matthew Reynolds
    Posted February 14, 2010 at 12:36 pm | Permalink

    The trouble is that with the level of corporate and personal debt coupled with weak investment and poor retail sales there is not the scope to raise the taxes to fund cutting the fiscal deficit.Higher taxes mean a Lost Decade a la Japan.As public expenditure has raced out of control over the past decade to maximize the number relying on the state for their income (Welfare Dependency & QUANGOS = Labour Voters) then the Tories should end this politically inspired profligacy to avoid the UK ending up in a Greek style fiasco.The loss of the AAA rating means a collapse in Sterling and higher interest rates both to choke of inflation and to keep investors buying UK Government bonds to fund the PSBR.A interest rate surge could tip us into a double-dip recession or even a depression.Now we want investors to be investing in private sector expansion to supply jobs & prosperity not in debt that means public service cuts and higher taxes for our children and grandchildren.The 50% tax band & income tax allowance claw-back need to be culled.If all the rich have to leave the nation for tax reasons then HM Treasury loses a vast sum of revenue.That means a government has to commit political suicide by either decimating the welfare state or taxing the coping classes & working poor into extinction to fund paying down the vast public debt.

    So a cut back plan on public spending of CBI style proportions ( they suggest reforms of the state sector to save £120 billion p/a within five years) and an end to the 50% tax band would be a rational policy as would simplifying taxation by ending complex tax allowance claw-back thresholds.

    Early action to get corporate taxes down to one 20% rate might help get more jobs & prosperity into the UK by making us more competitive again.You could raise productivity and reduce avoidance – thus boosting revenues available for public debt reduction.

    So you can be pro-growth and anti- fiscal deficit -indeed to achieve either you have to do the other as well.

  8. alan jutson
    Posted February 14, 2010 at 1:20 pm | Permalink

    The fact that it is also reported that half of the top 30 FTSE's Companies are also looking to relocate abroad due to the Tax System and rates, should also be a worry.

    Will they (The Government) never learn ??????

    Fours times in Government four times a failure, and the still "We will learn lessons" mantra is trotted out all too much on a regular basis.

    The problem is, will the Voters ever learn.

    How many more lessons can we take !!!!!!

  9. Brian
    Posted February 14, 2010 at 1:24 pm | Permalink

    All good stuff….. but I seem to remember that 365(?) economists wrote to The Times when Margaret Thatcher took power, saying that her policies were wrong for the nation. I still regard economic forecasting as something akin to astrology.

    • APL
      Posted February 15, 2010 at 12:26 pm | Permalink

      Brian: "I still regard economic forecasting as something akin to astrology."

      It doesn't have the credibility of Astrology.

  10. Sally C.
    Posted February 14, 2010 at 1:41 pm | Permalink

    Going back to your approach of comparing the country’s finances with a family’s finances – something that we have not discussed in your blog is the ease with which people and companies can wipe out large amounts of debt by entering into Individual Voluntary Arrangements ( IVAs) in the case of individuals, and Company Voluntary Arrangements ( CVAs) in the case of companies. While we might have some sympathy with individuals who want to write off a few thousand pounds worth of debt ( although, even that is debatable ), what is really sick-making is the ability of companies to write off hundreds of thousands of pounds worth of debt and in many cases , millions of pounds worth of debt. There are hundreds of examples, but one that features on the front page of the Business Section of the Sunday Times today is that of Paramount, a London club backed by a host of celebrities. The club narrowly avoided collapse by wiping out 70% of its £1.4 million debt after creditors agreed to a CVA. So, the people who stumped up private funding for the club have been hung out to dry. To add insult to injury, in many cases the directors are able to walk away from huge amounts of debt, allow their company to go bankrupt, and then buy it back at a reduced price a few weeks later. This cannot be right. In the past they would have gone to a debtors prison. I am not saying that we should go back to that, but one reason that so many people and companies took on so much debt is because there were no terrible penalties to be paid if everything went belly up, so to speak. I hope that the Conservatives will consider making debt a much more serious issue going forward.

  11. Ian Pennell
    Posted February 14, 2010 at 2:17 pm | Permalink

    Dear Sir John Redwood, MP

    Excellent couple of articles on the way forward for Britain, and it is enlightening that most economists finally agree that reducing Britain’s Budget deficit combined with tax cuts is the way to ensure this country’s long-term prosperity. I would add two more vital preconditions, we need to safeguard our currency by going back onto the Gold Standard (or, at least, valuable metal standard backed by gold, silver and platinum of equal proportion of value) and we also need to secure our long-term energy security by reducing our dependence on oil and gas.

    Globally, the world passed “Peak Oil” some time ago, no massive new oil fields have been discovered for decades and it is only a matter of time before oil is in very short supply. We need to greatly speed up the planning and building of new nuclear power stations by investing about £10 billion a year in nuclear power and we need to build nuclear re-processing units (like the one in Brittany, France) so that we can re-use the spent Uranium.

    In the immediate term we need to greatly increase our oil and gas storage capacity so that when oil becomes more expensive (as it runs out) we can be protected from high price rises. Windfall taxes on oil and gas companies in Britain must be abolished in order to make it easier for the oil companies to prospect for, and mine the remaining oil that there is in Britain; at least this would delay the point oil runs out in Britain to the extent that there are massive power black-outs. We also need to invest much more in the production of electric cars, electric buses and the rail network. Cars and buses reliant on petrol will not be any good when the oil runs out!

    Securing our currency against future inflation threats with a Gold Standard and investing to ensure the long-term security of our energy supplies will both be essential to ensure our economy remains healthy well into the future.

    I would like to see the Conservatives addressing all these issues with much greater vigour than has been evident to the many. It would really make us Conservatives look more like a prospective Government. Returning to the economic narrative, I think we would be in a much better position in the polls if we showed the electorate a clear, appealing economic narrative. We should have lower taxes, less stifling regulation and a clearer framework for mapping out how we will eliminate (not just halve, as Labour have indicated) the deficit in the next few years.

    A Tobin Tax of just 0.5% on all bank to bank transactions will raise at least £100 billion (given the astronomical sums of money and volumes of shares, etc changing hands- so much more than the value of the “real economy”). As argued in the Daily Telegraph article on this subject the other day, it has the potential to raise a huge amount of money and it would not damage the City; why would hundreds of economists argue for its implementation if that were the case. There is also the £100 billion identified by the Taxpayers Alliance as waste, public money spent on quangos, bureaucracy, red tape. Cutting that out won’t reduce the quality of public services, indeed with less stifling bureaucracy they may even improve!

    That means it is possible to make £200 billion of public money available in a short time, possibly in just a few years. That is money that should go to eliminating most of the budget deficit (with about £75 billion of this eliminated by increased tax revenues caused by economic growth). That leaves £100 billion left to offer major tax cuts for businesses and millions of ordinary families. We could cut the top rate of tax to just 30%, which would benefit the City much more than the Tobin Tax would damage it. And we should still have money left over to ensure that the £34 billion “black hole” in our policies, supposedly identified by Labour can be forestalled from causing us electoral damage.

    All of this would, in short enable us to show we have a well-funded economic narrative that would both appeal to the electorate in a big way and also satisfy the major international finance houses that the Conservatives are serious about paying down large debts.

    I do not believe, for one moment a 0.5% Tobin tax would cost Britain dear. It is just a small VAT on the huge bank transactions that occur in cyberspace. Each major investment bank would simply pass on the 0.5% cost to the major banks they deal with. Since the values of currencies and shares oscillate by much more than 0.5% on a day-to-day basis this small tax is unlikely to cause serios harm to major investment banks and finance houses.

    One could argue that the £100 billion would be drained out of the investment banks into the Governments coffers, but that argument does not stand up to scrutiny. The extra money taken by the Government and spent in the economy as lower taxes or increased public spending would ultimately find its way back into the pockets of savers and investors who would put that money into hedge funds and major pension plans; in other words most of that money would find its way back with the big banks. The large amounts going to pay off the Budget Deficit would be money put straight into the same major finance houses and investment banbks, some of which have lent prodigious amounts of money to the Labour Government of late!

    The taxes which damage the City of London and other major businesses in Britain are those taken out of income. The 50% tax on high earners, high rates of corporation tax, high local business rates on small businesses. We would, I think, do the City a favour if we took a small 0.5% cut from the huge sums of money exchanged between the international finance centres doing business with London, and used some of that money to cut high rates of income tax and if we used much of the rest to repay the huge debts most of these self-same big finance houses have lent the British Government of late.

    Surely, Sir, you can see the sense in getting these major investment institutions to understand that if they subsidised Britain a very small amount (from the vast sums they deal with) they could help prevent Britain going bust and ensure a favourable income tax regime for their workers in the City? It’s not such a bad idea!

    In any case, with little over two and a half months to go until the General Election, we need to develop a compelling case and strong reasons for millions to vote “Conservative” and quickly. We might be opposed to any idea of socialism on principle, but in Autumn 2007 when our backs were to the wall (we were 13% behind Labour and Gordon Brown intended to call an election a month later) we had to come up with something pretty smartly! And so George Osborne announced at the 2007 Conservative Party Conference that Britain’s growing army of non-domicile businessmen would pay a flat £25,000 levy to fund an increase in the Inheritance Tax threshold to £ 1000000. And, as you will remember, Sir; the political situation changed overnight!

    The non dom levy is potentially more damaging than this idea of a Tobin Tax because it is money taken out of individual pockets. The announcement of the non-dom levy has not caused a mass exodus of non domiciles from the UK as we stressed that on their paying the £25000 levy, no further details of their activities will be required of a Conservative Government. A Tobin Tax of just 0.5% would cause even less damage, indeed the overall effect of the measures I have suggested (including cutting the top rate of income tax to 30%), would probably benefit both the City and the wider economy.

    Nor, do I think that we should fear making two million quangocrats hate us (in order to cut £100 bliion of government waste), if the prize is electorally-appealing tax cuts for tens of millions of ordinary families and struggling small businessmen.

    The Conservatives don’t have much time left to seal the deal. The polling trends are actually going against us. The last time we had our backs to the wall the Conservative Leadership eschewed party idealism to forestall an electoral disaster. You, Sir, must impress upon the Conservative Leadership the need to do something similar before the end of March at any rate. Labour MPs will also be looking at the merits of this Tobin Tax, we must seize the Opportunity before they do, andwe must beat them in the bid for the electoral prize!!

    Yours Sincerely

    Ian Pennell

  12. Tim
    Posted February 14, 2010 at 3:16 pm | Permalink

    I might be impressed with these economists if they volunteered to put themselves out of work, but no, they want to put other people out of work. It's easy to be brave when you do not have to take the pain for your bravery.

  13. Andy
    Posted February 14, 2010 at 5:40 pm | Permalink

    Very true John … so which party do you suggest I vote for?

    Andy

  14. mikestallard
    Posted February 14, 2010 at 6:29 pm | Permalink

    Down here in the Fens, the amount being wasted by government is truly disgusting. OK we read today of vast payments to BBC people. At the Centre where I teach part time, we have several fairly "unwell" or "tired" (European visitors-ed). The Manager buys their tickets home for them and sees that they have a passport. It costs about 30 pounds, she tells me. They go by bus. Triumphantly on TV News, I heard that in nearby Peterborough two Plastic Police Persons were going into the woods to find Eastern Europeans. They then send them home for 3,000 pounds each!
    It is things like that, or the two people who come to supervise just one Job Experience Person. Or the vast army of Caring Professionals, each with a special title like "Start Here", "Go", "Young People's Advice" and so on and lots of "materials".
    There is so much the government could so and so very easily.
    Each "contract" only lasts for a few months. Just stop dellivering them!
    Could you please tell Mr Brown this when you next see him?

  15. Steve Tierney
    Posted February 14, 2010 at 6:41 pm | Permalink

    Quite a few of us have been consistent right alongside you, John. Anybody with any understanding of markets, in fact, can explain why it is low taxation and less regulation which is the only route to a safer economy.

  16. Javelin
    Posted February 14, 2010 at 8:54 pm | Permalink

    I don't think any party will mention the size of the impending cuts. Both Cameron abd Brown know they are coming, but Gordon has created such a huge public sector that it's become mealy impossible to mention deep cuts and win an election.

    If you start with the facts – that at least 100bn needs to be cut – and that Brown is not mentioning the cuts it shows a huge implicit acceptance by Brown that the State is simply too large. The state has gotten out of control. Not only is tax too high to be competitive but too many people have been employed by the state for democracy to function properly.

  17. Johnny Williams
    Posted February 15, 2010 at 12:58 am | Permalink

    This is quickly becoming the Election no one wants to really win, as it must take more than one term to sort this mess.

    I am now convinced that Brown is playing a scorched earth policy. You see he really hates the Conservatives and hates most of the British Peole too. His ego is so large that he cannot be wrong, it must be the fault of the "People" and the "Media"

    He said to Piers Morgan that he had to return the gift of a fully roasted pig, to a Middle East Leader, Strange, as no Moslem would touch pig under any circumstances and again we have to question Brown's mendacity…. His ONLY game Plan is personal survival and then to remain as Leader of the Labour Party should he lose this Election, which all indications show that he will

    • Stuart Fairney
      Posted February 15, 2010 at 7:37 am | Permalink

      I don't really care at all, but this "Brown survives as Labour leader despite an electoral defeat" is surely nonsense. If he can cobble together some kind of coalition government okay, but of Labour go into opposition which seems likely (despite Mr Cameron's attempts to shoot himself in the foot), it is over.

    • APL
      Posted February 15, 2010 at 12:34 pm | Permalink

      "gift of a fully roasted pig, to a Middle East Leader"

      "as no Moslem would touch pig under any circumstances"

      Pork is forbidden to Jews too.

      Does that mean Gordon Brown is not only dishonest but ignorant in his fantasies as well?

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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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