This government has not seen us through the recession

Whenever anyone criticises the government for spending too much, for borrowing too much, for putting too much of our money into wayward banks, for hiring to many people into non jobs or for pledging too may spending projects for the future, they are told that every one of these decisions was crucial to see us through the recession. Without all this we are invited to believe that our worst recession since the 1930s would have been even worse.

The truth is these measures did not limit the downturn or cushion the fall. Their cack handed way of first helping pressurise the banks the banks then giving them too much support has simply allowed RBS and Lloyds to go on paying too many executives far too much money at our expense. It has not led to a good flow of much needed business finance to most of our private sector. It has not led to the timely reorganisation of those banks to make a competitive and lean banking sector. The recession which we were told was going to be a middle class recession for the south east – as if that made it alright – has turned out to be a savage industrial downturn for the midlands and north.

The reason we had such a bad dowturn is they followed a destructive monetary policy, choosing targets and interest rates that increased the damage and altering banking regulation from too loose to too tight at exactly the wrong point of the cycle. Spending so much and borrowing so much in the puboic sector has now led to even tighter money and higher interest rates for the private sector, making recovery more difficult.

Running the state sector in such an inefficient and expensive way does not boost the economy. It sandbags it. The productive sector has to pay the bills – in the short term through higher interest rates and in the longer term by higher taxes. Labour seem to think that putting so many people onto mega salaries in state subsidised banks, quangos, Councils and Whitehall will of itself create the extra demand the private sector needs. Instead that creates extra demand for imports, whilst a stressed private sector struggles for finance.

If the government’s case was right and all this public spending powered a recovery, surely £200 billion on with their money printing for public spending we should be well into recovery? If their policy was a good one, wouldn’t the UK have been first out, ahead of countries with better public spending control, instead of last out?

Today the issue is how Mr Brown behaves towards his civil servants. The bigger issue is why he has instructed them to so debauch the public accounts, that any recovery will be damaged by the need to raise too much money and the need to make very large adjustments to either spending or taxation to sort things out.

Labour’s one correct claim is that there have been fewer redundancies in the private sector than some forecast. As readers of this site will know, that is because there has been a big move from full time to part time working, especially in industry. Many workforces and managements have decided to share the pain by each taking less pay but keeping part of a job. That does not make it healthy or a happy private sector. Now the private sector want to know when the public sector is going to wake up to reality and realise the game is up for all these highly paid jobs which we cannot afford. Do they want work sharing and lower pay like the private sector, or a more conventional post cutting programme using natural wastage and voluntary redundancy to slim the numbers?

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26 Comments

  1. Chris
    Posted February 21, 2010 at 9:44 am | Permalink

    So why isn't the Conservative Party crucifying Labour with some of these facts. We were first in to recession, we're not even out yet (despite a rounding up error trying to prove otherwise).

    Someone needs to take charge of destroying Labour's record on the economy, but all we are hearing is soundbites about giving out shares!

    • emil
      Posted February 21, 2010 at 9:18 pm | Permalink

      If you see the aggressive, constantly interrupting, in your face style of questioning BBC presenters employ with Conservatives (perfectly displayed with Philip Hammond this morning on Breakfast News) and compare it with the completely non-challenging manner when Labour politicians are interviewed you can see exactly the problem the Tories are up against. The media don't want the electorate to hear about any Tory policy. Sadly Sky aren't much better.

      ps the 7:30 paper review was a case in point, a PM is accused of bullying staff and a shadow chancellor has opined about giving tax payers money back from **OUR** bailing them out, so guess which politician they criticised, and which one was supported ?

  2. Javelin
    Posted February 21, 2010 at 9:45 am | Permalink

    John there is a strong relationship between Browns temper and his tax and spend policies.

    Anger and tempers are born from weakness. In particular frustration and outbursts is the redirection of anger from the inability to achieve bigger goals. A person will be trying to achieve a larger goal and then at some point near to the deadline a small incident will coincide with the goal not getting met. Gordon then directs anger at the person who makes a small mistake or unhelpful action and effectively blaming them for his own inability to achieve his bigger goal. So the weight of effort of the larger effort is brought to bear on the small blockage.

    If you notice people say his tempers are out of the blue. Well they're not. Gordon is trying to achieve a long term goal, of fairness and equality. When some poor civil servant inadvertently types a little too slowly Gordon cannot admit to himself that his long term goal is already off the rails and needs to find somebody to blame.

    Gordons thinking is classically somebody who thinks too much about the process and details and doesn't focus on planning and goal achievement. So when he gets close to a goal he assesses his situation and realises he isn't going to meet the goal, he doesn't blame himself because he wants to believe he is part of a team where everybody is working together. He then blames the other person for not being good enough to be in his team.

    Sadly for the UK The Prime Minister thinks he is amongst equals, when he should really be more of a leader. He works too hard On the details and doesn't focus on goals. He wants to have a vision and he wants to implement it himself. Power is centralised and this creates more work for him. Instead of being a leader of people he is a master of processes.

  3. alan jutson
    Posted February 21, 2010 at 9:46 am | Permalink

    A sound summing up of the situation.

    Unfortunately those private Companies and their employees who have been trying to weather the storm with lower order books, shorter working weeks, and lower income, still have most of the same fixed overheads.

    The fat of past (if it existed) years for both Companies and employees is gradually vanishing, and so many hard decisions are now facing them.

    £200 Billion has not gone into the economy at all, it has been going to pay off Government debt, and this lie should be nailed.

    Unfortunately neither I or my Company see things improving for a long time yet. Those that have money, and there are many, are not spending because of uncertainty, those who do not have money are struggling to survive.

    A bleak future for a while to come, with lower tax revenues an added problem.

  4. Andy Hoff
    Posted February 21, 2010 at 10:50 am | Permalink

    "…using natural wastage and voluntary redundancy to slim the numbers?"

    We don't need to slim the numbers like it's a weight watchers course, we need drastic surgery on a huge scale. To cut this governments overspend we need to bring all of our armed forces home, cut quangos and bureaucracy by 90%, sack every single PR person, Community Liaison Officer and every other non jobber, totally reform the health and education sectors, simplify the tax system with far fewer types of tax (get rid of NI, road tax, green taxes for a start), pull out of the EU, repeal almost all of Nu Labour's laws passed on the last 10 years, dump every ridiculous over spending government program (All the huge IT systems, many defense projects, stupid high speed rail etc, etc), set proper budgets for every department and hold managers accountable for every penny. Cameron's idea of publishing every expense over £25k is a good one and should be carried out properly, it's the only government IT project that might work.
    Whilst we're at it all the surveillance laws that have been passed to "fight terror" but in fact are used to snoop on ordinary people should be repealed.
    Then we might just have a decent country again.
    Oh, and there's one other small change I'd like- political correctness should become a capital offense.

  5. waramess
    Posted February 21, 2010 at 10:52 am | Permalink

    Maybe sometimes I read this blog and don't fully understand to whom it is addressed.

    Your views are generally pretty spot on but they don't reflect the Conservative leadership views. Cameron and Osborne are only very recent converts on the need to reduce government spending and so far as I know Cameron is still a supporter of QE and the *rescue* of some of our banks.

    OK, we are told that Cameron is not interested in his right wing support but more interested in winning over the marginals.

    Fair enough, but we should expect to see some very robust retribution after the election if he gets it wrong, and if he gets it right a lot of his solid right wing voters will, in any event, be lost forever.

    Maybe winning is so important it is worth changing the traditionally held views of the party but many would disagree.

    Perhaps the capacity to properly argue economic principles against a wall of Keynesian rubbish might be a better idea, and that is where Cameron and Osborne lose it

    Now we have Cameron promising to sell us our own shares in the banks, cheaply, for which we have already overpaid in hard earned future income.

    We must be a pretty dire country if the only candidates we can find for Prime Minister are snake oil salesmen

  6. Mark M
    Posted February 21, 2010 at 11:01 am | Permalink

    Whenever anyone says that the spending was needed to get us through the recession, I always ask "well if more state spending gets us out of recession faster, why didn't we spend even more?".

    It's a Reductio ad absurdum argument. Government spending cannot create more growth than it costs because otherwise we might as well spend limitless amounts and enjoy the huge boost to growth that brings us.

  7. Nick
    Posted February 21, 2010 at 11:19 am | Permalink

    Halve the deficit in 4 years
    Rate 5%
    Term 20
    Year Debt Deficit Extra Debt Payments
    0 800 175 0.00
    1 975 153 14.04
    2 1128 131 26.32
    3 1259 109 36.83
    4 1368 88 45.58

    =============

    Probably hasn't formated properly. This also assumes no inflation.

    So, this is what halving the deficit means in practice. It means at the end of the 4 years, that there is 46 billion of extra debt payments that have to be made.

    So the question that Labour has to answer, what is going to be cut in order to make these payments.

    Don't forget that growth doesn't affect this. It's purely based on Labour estimation that with growth, it can halve the deficit in four years.

    If they can't get growth going, its worse quicker.

    However, before that it goes tits up. We will be faced with a collapse in the price of Gilts. Given Brown has bought 200 billion of them, you've got large losses on top there.

    You've large losses in the banks, still a state secret.

    It's certainly a poisoned chalice.

    That means you as Tories if you get power need to pin the blame.

    Doomsday book of government debt
    labour tax to appear on all payslips to show what's being paid for liabilities.
    All spending over 25K to be published.

    Then sit back, let people get up a head of steam, and you have the political motivation to cut

  8. Kevin Peat
    Posted February 21, 2010 at 11:30 am | Permalink

    As William Hague points out: to say that you're about to inherit a poisoned chalice from Labour is an understatement.

    The really are the dirtiest of fighters.

  9. Ian Jones.
    Posted February 21, 2010 at 1:08 pm | Permalink

    I do sometimes wonder if Brown has an agenda to turn the UK into a communist country.
    I see Labour is talking about setting up a Govt investment bank to invest in new industries. Where will they get the money from? How will they decide what to invest in and more importantly havent we been here before and decided it was a disaster last time?

    The UK has time warped back to the 70's and is making the same mistakes again…..

    • Eotvos
      Posted February 23, 2010 at 5:22 am | Permalink

      Ian, this is straight out of the Harold Wilson book of economic chaos. It was called the National Investment Bank (if I remember rightly) and enabled Viscount Stansgate, aka Anthony Wedgewood Benn, to throw away taxpayers money on the Merton Motorcycle Co – operative and many other uneconomic enterprises.

      The creation of this would give (Mandelson – unflattering comment on him removed) even more power.

  10. Demetrius
    Posted February 21, 2010 at 1:55 pm | Permalink

    Well yes, the difficulty is that the Government is still persuaded that slushing fiat money unsupported by real assets around the various figures and indexes constitutes "growth". This is because it does not understand money or how the private sector functions in the production of real wealth. Strangely one person with real insight seems to be Darius Guppy of all people in today's Telegraph, but he is neither a politician nor or an academic economist.

  11. Irene
    Posted February 21, 2010 at 2:22 pm | Permalink

    "Do they want work sharing and lower pay like the private sector, or a more conventional post cutting programme using natural wastage and voluntary redundancy to slim the numbers?"

    I think we all know the answer to that, judging by what the unions are saying – business as usual

  12. Richard
    Posted February 21, 2010 at 2:47 pm | Permalink

    Clearly stated as always. Today's papers are again full of letters from left-leaning ecomomists urging the government not to cut expenditure, using the 'Keynesian' argument that the state must step in to boost spending/consumption in order to compensate for the increase in private sector saving and decrease in private sector spending. Conservatives should attack this argument hard and expose it for the nonsense it is. Pursuing it's logic, any and all government expenditure is good – so lets not cut MPs' expenses, lets rather increase them. After all, production of pornographic videos and duck houses is economic activity and surely boosts nominal GNP. To see what nonsense it is consider this: if its aggregate spending that matters why does the government have to do it? Why not simply print £60bn and give £1000 to every man woman and child in the country on condition they spend it? Or better still £2,000 each? The argument can plainly be reduced to absurdity. Sustainable recovery requires a restoration of confidence. That can only come when it is clear that the state will not clobber investment returns through the threat of devaluation/inflation/interest rate increases and future tax rises.

  13. Lindsay McDougall
    Posted February 21, 2010 at 3:13 pm | Permalink

    Are we all now agreed that a full blown recession is absolutely inevitable (and I would choose to measure it in terms of the maximum number of unemployed), and that the only intelligent thing to do is to get it over and done with before a millstone is hung around our children's necks?

    That means reducing the fiscal deficit as rapidly as possible, and eliminating it entirely within the life of the next parliament. There must be a significant reduction in FYR 2010/11 and a really big one in 2011/12. As much as possible should be achieved by cutting waste out of public expenditure. However, that won't be enough. There will, in addition, have to be cuts in public services and modest increases in total taxation. Any reductions in business taxes will have to be more than compensated for by increases in personal taxation.

    A backward glance at recent economic history shows that we should have been reducing public expenditure and cutting the fiscal deficit as soon as house prices had peaked. However, nothing should surprise us any more. The whole post-war economic history of UK fiscal and monetary policy, whether in boom or slump, has always been a case of too much too late.

  14. John Gough
    Posted February 21, 2010 at 3:22 pm | Permalink

    I was thinking much the same thing last night also, see my blog entry 21/2/10
    http://www.furnessconservatives.co.uk/blog.php

    John Gough
    Conservative PPC
    Barrow & Furness

  15. Brian Tomkinson
    Posted February 21, 2010 at 3:45 pm | Permalink

    Perhaps the markets will now start to react to our desperate financial plight, following the latest opinion polls showing the Conservative lead shrinking. Just why they haven't moved before is a mystery to me, even if they were anticipating a future Conservative government. The lack of real determination to win by the Conservatives has already come across to the electorate surely the markets won't be far behind.

    • Stuart Fairney
      Posted February 22, 2010 at 6:41 am | Permalink

      If it was a 'Yougov' poll, ignore it ~ they seem to me to consistently over estimate Labour support

      • Brian Tomkinson
        Posted February 23, 2010 at 10:32 am | Permalink

        Does today's ICM poll fall into the same category?

  16. sm
    Posted February 21, 2010 at 4:02 pm | Permalink

    Start from the top please.

    MP's , House of Lords, Senior Civil Service and associated quangocrats not forgetting our beloved EU and other boltholes,
    end the BBC tax.

    Then look at restricting final salary entitlements to years service at the average salary of the workforce.

    Anything else, if anything else agreed, should be risk based and paid into stakeholders plans or similar that Messrs Brown et al think are good enough for the rest of us.

    Should a notional tax on the 'pension assets of the government be applied' to pay packets equivalent to taxes on private real funds.

    From the bottom try to ensure work and self reliance is rewarded at the margin – not penalised.

    Lets have a sensible interest rate policy which is integrated with fiscal policy.

    Lets ensure the risktakers take the risks and financial consequences and i include the MP's , regulators as well as the casinos.

    How on earth can printing £200 billion+ of funny money not trigger an election?

  17. GJ Wyatt
    Posted February 21, 2010 at 4:05 pm | Permalink

    As I see it there is a diagnostic problem at the heart of the policy discussion. The government and the 58 plus 9 economists who wrote letters to the FT see deficient demand as the issue. But to me it looks more like a supply shock that brought our economies to a shuddering halt with the banking crisis. Banking relies on confidence and trust, which were swept away in the aftermath of a great credit boom built on false understandings of risk and liability. Usually supply shocks are thought of as external price impulses (e.g. oil), but this one is like a car engine losing the oil that lubricates its gears, so it slows down. The natural rate of output of the economy has fallen, and the “output gap” may be much smaller than imagined if based on past experience. If this diagnosis is correct then a rise in output, or a fall in unemployment, brought about injecting demand via government spending will be accompanied by rising prices. Instead, policy should focus on the banks and should devise new mechanisms and incentives to get them lending again. The straight conversion of gilts into money that they call “quantitative easing” is not having that effect. If banks won’t lend to each other, for example, why not devise a way for the government to stand between them as the counterparty to either side of such lending until such time as direct dealing between banks can be restored?

  18. Straus
    Posted February 21, 2010 at 5:29 pm | Permalink

    Another reason for the smaller than expected rise in unemployment is the extent of the grey economy based on semi-legal migrant labour. Some hotels are trimming costs by laying off part-time staff who have limited employment rights in the UK because they are nominally students. In many cases, they are no such thing, but working part-time in different businesses so as to support themselves and, in some cases, send money to families back home. I suspect that many thousands of “jobs” are being shed in this way without leaving a dent on the unemployment figures.

  19. Mike Stallard
    Posted February 21, 2010 at 6:26 pm | Permalink

    Things can only get better….
    Worst of all, there is an article in today's Telegraph by a convicted criminal – Mr Guppy. He says that the banks are in control of the money supply now and that, thanks to clever borrowing and lending, they are more or less issuing paper credits electronically. These credits carry a face value which is expanding geometrically (is that right?) and which has a ridiculously high value compared with the output of the whole world.
    He uses the word "usury".
    Not only are huge parts of the world (USA, Europe) facing Zimbabwe type inflation, but the whole world economy could easily go under as money loses its value.
    Then what?

    PS Mr Brown would have made a really good Minister of the Parish Kirk, if only he had followed in his Dad's footsteps. Iron Chancellor! What an insult to History!

  20. Steve Tierney
    Posted February 21, 2010 at 9:46 pm | Permalink

    All around us the county's finances are crumbling into ruin and the pretty picture of "all is well" and "we are into a recovery" is painted by the gullible, the desperate and the liar.

    The Conservative plan to cut spending right away and dramatically does not go far enough and will need to be revised, quickly. It will also make things far worse in the short term than they seem now. It's also the only plan with any chance of working.

    Hard times are coming. We need to make sure they have some chance of ending in our lifetimes – and that means getting this crazy lunatic spending under control. Now.

  21. JimF
    Posted February 21, 2010 at 10:29 pm | Permalink

    The UK is heading into a perfect political storm.

    We need a halt to QE, a property price bust and tax cuts to offer hope to businesses which make and service things and export them, and for young people to get jobs and buy houses. If achieving this means leaving the EU, so be it.

    In the unlikely event of a large Tory majority we will be saddled with a Cameron/Osborne effort to be nice to everyone on the surface, but with "new initiatives" such as the frightening and authoritarian replacement of PAYE by tax deduction direct from your Bank Account (see Telegraph today). I really couldn't believe that this was attributed as a Conservative policy! No indication has been given that QE will be halted.

    A hung parliament or small Tory overall majority will result in the government putting-off a squeeze for fear of being hounded out, and a Labour government will continue QE to keep the luvvies fed. Again, for a while, nobody will notice that their wage freeze is infact a dramatic wage cut measured in the currency basket. But the ensuing inflation will destroy confidence and businesses, and we will be in banana republic territory.

    Quite simply, the UK isn't being offered what it needs by any of the three main Parties. Whilst your blog lays down economic solutions to our woes, those economic answers have to come out of the political sphere, and that isn't happening right now.
    John Major wrote a mature and elegant press article today. Tebbit writes regularly in the Telegraph. But on the ground, the leadership are bearing water pistols where AK-47s are needed. It would be interesting to hear your ideas as to how this situation might be turned around in the Tory party, and quickly.

  22. Eotvos
    Posted February 22, 2010 at 3:34 pm | Permalink

    "This government has not seen us through the recession".

    John, they never will as we all know.

    How can they when they espouse policies that are diametrically opposed their proposed goals?

    They claim that they want to reduce poverty and decrease unemployment yet destroy wealth creation and increase tax on employment.

    Socialism has a contradiction in its terms of reference.

    John, why does anyone believe in socialism? Is it a lack of intellect, naivete, misanthropy, a lust to control people or a combination of these?

    You see them strutting around Parliament and are closer to them than me (not idealogically, of course). What is the answer? I've given this a lot of thought but cannot come to any conclusion.

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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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