Borrowing can make us all poorer

The nub of the political argument today is over borrowing. The government claims that state borrowing huge amounts now helps recovery, keeps the economy going, and is evidence of its economic prowess. The Opposition says that borrowing too much is risky, could push interest rates up, lead to a loss of confidence, and shows economic incompetence.

There is another argument critics of too much taxpayer borrowing should use as well. It goes like this.

Borrowing is deferred taxation. It damages output and demand. When the government borrows on behalf of taxpayers, it takes the money from companies and individuals who lend it. They no longer have that money to spend. The government spends it on their behalf instead. So the borrowing cuts private sector demand at the same time as it boosts public sector activity.

Worse still, people sense that whatever the government might say, taxpayers will have to help repay all that debt with interest in the years ahead. They know that means tax increases to do so. More borrowing can make people more negative about spending up to their current incomes, as they are always looking over their financial shoulders at the next increases in taxes and charges the government will place on them.

Under the current regime there is another negative complication. Much of the money the government is borrowing will be lent by banks. This is money the banks will not then be able to lend to the private sector. Instead of the banks’ deposits being available to lend out several times over to the private sector (through fractional reserve banking where a bank can lend out multiples of its cash and capital), the new banking regulations mean the money can only be lent out once to the government. No wonder money supply growth is weak, and no wonder the private sector finds it difficult to borrow enough at a sensible rate.

So far from being expansionary, helping pull us out of recession, all this borrowing takes money directly and indirectly away from the private sector. That is why the economy remains weak.

If they really wanted a strong economy they would change the bank regulations to allow more private sector lending, cut the deficit to take less money away from the private sector, and cut taxes on income and employment to encourage more enterprise. That would be a way of supporting the eocnomy and fostering growth. There seems no danger of them doing that any time soon. They would rather go on misleading us about the consequences of too much borrowing.

If they simply print the money to spend in the public sector it is a different matter. Even this government has stopped that, as I presume they now see that can have inflationary consequences. In the short term it can push up prices by lowering the pound. In the longer term it can trigger a more general inflation as too much money chases too few goods.


  1. Stephen R Jones
    March 6, 2010

    Excellent article.

    Unfortunately this Government has no interest in changing bank regulations as you suggest. Boosting public sector activity will not change either, even when the private sector suffers as a result.

    We need to get them out asap.

  2. johnfisher
    March 6, 2010

    how does an incoming government determine the size the public sector should be? what should be the aspiration? It's clear Labour has thought it could stay permanently in power by having enough of the population employed by the state who will not vote for any party which is perceived to put their job for life at risk. The bigger the state the more government need to tax or borrow to pay for it, how quickly could the country get in a position where all public expenditure was raised through taxation alone with no borrowing? It is counterproductive when successful companies are restricted in borrowing when they see an investment opportunity or consumers wanting to buy a house or car because of the public sectors demand for funding.We read so often of there being no difference between the main parties, no ideological political debate, but this surely is the fundamental clash. It's important the Conservative Party get across to the electorate the solution to the country's problems lie in having a government who's aim is to cut taxes, reward savers and encourage entrepreneurs.

  3. Jim
    March 6, 2010

    There's no 'can' about it, borrowing WILL make us all poorer!

  4. Andy Hoff
    March 6, 2010

    All state expenditure is inefficient. Some is necessary- infrastructure, policing, education etc but everything else is counterproductive. The state takes money from those who earn it and spends it on things that no-one in their right minds would pay for. I doubt any single person could list all the waste and incompetence of the public sector in a life time. The power and scope of a democratic government should be drastically limited to absolutely essential services. Things only ever really improve by individuals and small groups taking action to make their lives better and expecting governments to sort out even the simplest problems is a ridiculous fantasy. Local action and co-operation is the way you create a worthwhile society.

    1. Stuart Fairney
      March 6, 2010

      Education is not a necessary state expenditure.

      Neither is infrastructure.

      Both would be better without the state.

  5. Brian Tomkinson
    March 6, 2010

    The government is spending massively more than its income – £175billion this financial year to add to the already enormous debt. According to Darling the current interest charge on the national debt is £40billion per annum. This figure will continue to grow until we have a government that stops borrowing more than its income and then begins to pay off its debts. The only source of income the government has, other than selling assets, is the taxpayer. As everyone pays tax in some form we are all consequently worse off and will continue to be for many many years.

    1. Mike Stallard
      March 6, 2010

      £40,000,000,000 is, let me remind you, roughly the entire Defence budget in a time of war in Afghanistan!

    2. Paul Hield
      May 27, 2010

      Paying taxes does not automatically make us all worse off, it just means that some of our money will be spent on shared wealth creation rather than private invidual consumption.

      For instance, we are all impoverished when a "baby Peter" is killed by inadequate parents who were not adequately supervised by social services. Prevention of such tradgedies is a form of wealth creation. Every child with learning difficulties who is taught to read, is wealth created. Every park cleared of litter makes us all a little wealthier. Every old person who recieves the support they need makes us as a society a little richer. And the beautiful thing is, that by paying people to do these things through taxation means that no damage is done to the economy because the people engaged will go out and spend the money to replace the money taken in taxation…. it is economically neutral. True it hurts those who would rather spend the money on on themselves; on a more luxurious car, a larger home, more exotic holidays. But it is wrong headed to suggest that, in total, the economic impact is negative. The same money is just circulated through different pockets, and in the process some additional shared wealth is created.

      The private sector has shown that it cannot by itself ensure that everyone is gainfully employed. And even if it could, would it be right to live in a society where everyone was engaged in servicing private consumption whilst ignoring those who cannot express their needs through a financial demand signal.

  6. David B
    March 6, 2010

    I dont agree with the QE policy. I do not think bailing out the banks was a good idea.

    However, if the state borrowed money and used it to construct infrastructure, such as roads or airports, and thus in the long term improved the efficiency of the economy, in so doing the money would be spent in support of the private sector keeping employees in work. The deferred taxation would be less evil since it is wasteful to have people idle in unemployment when they can be deployed productively. They grow old. They cannot work eventually through the ravages of time.

    What is so wrong here is that the government is maintaining its spending on unproductive things. The argument is not being set out clearly I suspect through fear of telling the public unpleasant truths. We really cannot afford diversity officers, and some of those degrees really are a waste of time.

    Many of those in the private sector I speak to dread the cuts which are coming. We all know that staff levels and pointless expenditure will be maintained, and the cuts will fall on the capital budgets and programs. Roads will not be repaired but there will still be 6 figure salaries for social work executives.

    I read yesterday morning a blog predicting all manner of petty state interference in our lives to squeeze more revenue from us. Fines for everything was the jist. And lo, yesterday 20 minutes of my life ( while I was at work ) was robbed by an ambush of vehicles being tested for red diesel. Lots of our expensive Police hardware on show too. I wondered how much less productive it may have been just to visit building sites or other places on work in pursuit of excise cheating. I certainly, and hundreds of others would not have surrendered our 20 minutes free to the state had that been the policy followed, and I expect less policing would have been required.

    When cuts are to be carried out, might I ask that they are specifically mandated to be cuts in staff numbers and salary budgets. It will be a waste of time if all we get is potholes and the same bloated workforce on our public payroll.

    1. Stuart Fairney
      March 6, 2010

      Why could the private sector not build airports or indeed roads?

      Why do we need the state in this regard?

      1. david b
        March 7, 2010

        I agree with you, and have advocated that in regard to the GARL rail project in Glasgow on another forum. However that is a view well to the right of what the public are likely to wear right now.

        John's article did not differentiate between public expenditure which may be useful ( roads ) and that which is not ( diversity officers ) economically. That was why I commented. And I know who will bear the brunt of cuts – and I would be amazed if we got rid of the diversity officers, or the potholes.

  7. Grenville
    March 6, 2010


    They don't understand money. Most socialists think money just "happens" of its own accord, and that when they inevitably run out of it it is always someone else's fault.

    It's useless trying to explain it to them. Which is why the country's bankrupt. Again.

    1. Javelin
      March 7, 2010

      Agreed, but left wingers do have a strong sense of guilt. That's why they want to give money away to the poor and not get the poor to motivate themselves. Left wingers are first to act like victims and talk about fairness.

      So I do agree with you but you need to talk in their language. You need to turn them into the aggressors and you into the victim. To need to develop the language around this.

      The question you need to ask Government workers is "are you bankrupting Britain?"

  8. Stronghold Barricade
    March 6, 2010

    A message I agree with, but what are Team Cameron going to do about selling this message to the electorate who seem to be favouring Brown in the same way that people are rallying around ideas against the state in Iceland and Greece?

    More to the point, why hasn't Brown been held up to ridicule for the "mission creep" in his terrorist legislation that allowed the sequestration of Icelandic assets?

    Is Iceland now on the "axis of evil"?

    Surely if "mission creep" of this outstanding hypocrisy is allowed under the legislation that this administration has passed, what other loop holes are just waiting to be used "when necessary"?

  9. alan jutson
    March 6, 2010

    All borrowing has to be paid back its a simple rule of fact (unless you go bankrupt) its as simple as that, and most of us recognise that fact, if you choose to borrow then you have an obligation to pay back at some stage.

    The problem with Government borrowing, is that it borrows on your behalf, which you also have to pay back through increased taxation.

    Your only choice is to vote for a Party that will not borrow/spend on your behalf, other than on the things with which you agree.

    1. Paul Hield
      May 28, 2010

      Borrowing is defered taxation as are PFI schemes. Better we should pay our taxes for what we consume today, and borrow for infrastructure investment that will be consumed by future taxpayers.

      The central theme of you guys is that any form of government spending is axiomatically wrong and should be opposed whether paid forthrough taxes or borrowing which is just (correctly) identified as defered taxation.

      Whilst it is probably true that government spending is not always the most efficient, the biggest inefficiency is to have someone on their backside at home drawing the dole. If private commerce cannot find gainful employment for these people, then the state should step in, but that means those of us in the fortunate majority with jobs must bear the burden of funding their employment. We also should have a big say on what they do with our money. But please, we are not up to our necks in debt because the govt is spending £50B per annum on "diversity officers"… this is an unworthy parody of the situation.

  10. Lola
    March 6, 2010

    I Bet you won't get to say all that on the BBC.

  11. waramess
    March 6, 2010

    Ken Clarke when interviewed alongside Mandelson by Jon Snow said quite unequivocally that he was convinced the Conservatives could pay down the debt by cutting public spending rather than through taxation.

    Lets hope he is right

  12. oldrightie
    March 6, 2010

    Borrowing has to be repaid, usually at exorbitant cost. The Tories need to highlight DAILY how much interest is lost to debt servicing and taken from our national interest. Pun intended.

  13. David Price
    March 6, 2010

    John – you make a fine point about borrowing being deferred taxation.

    I really think the Tory front bench should be on the front foot about this, but they're not.

    They haven't managed to translate the theoretical drawbacks with Brown's approach into practical problems as felt by voters.

    Borrowing = future tax is an excellent way.

    Another way is: borrowing = future public sector cuts.

    Most public sector workers simply feel immune from the recession, and from economics as a whole. Their prescription for their continued immunity is borrowing. "Why not? Let's just borrow out way out of the recession!"

    The point is of course that this *must* be paid back, at a high price I might add, but saying this doesn't mean much to such people…

    So if the argument was presented in terms of: the more we borrow, the deeper the cuts will have to be, and the more likely public sector workers are to lose their jobs.

    Less borrowing = more job security.

    Of course, the private sector has felt great pain, but the public sector almost thinks (with some justification thanks to Messrs Brown and Darling) it can carry on regardless. It needs to be said that the more borrowing there is, the greater likelihood is that they can't.

    It should be liken to an 'economic law of gravity'; "what goes out, must come in".

  14. Brigham
    March 6, 2010

    Another liability we have to contend with, is this new EU tax. This appears to be a direct tax on the British people by that load of crooks in Brussels. I suppose in one way it may be a good thing. At last the people will realise that a vote for a europhile is a vote to fleece us once again.

  15. Tim Carpenter (Liber
    March 6, 2010

    A couple of points:

    1. The damage of borrowing. Just as with a private company, the State borrowing to fund ongoing expenses, as in running costs, will result in problems you mention. This is basically the situation we have now. However, just as with a private company, if borrowing is taken out to fund capital projects that will result in more future revenue (in the case of the State, growth in national efficiency and competitiveness resulting in increases in tax revenues), then the arguments are a little different. Sometimes the State gets it right*, but so many times it gets it wrong and I do worry in particular about the transparency of so many locally-decided "regeneration projects" which seem to make construction companies happy and few others. Better to reduce or suspend business rates and planning hurdles in an area, if you ask me, and let the original owners get on with it instead of compulsory purchasing land and handing it over.

    2. FRB. Under FRB Banks can only ever lend "once" money deposited. What often happens is depositors do not withdraw cash but keep it on deposit, i.e. they have lent the money back to a bank and so, in effect, the new depositor no longer has it again. If all loans were taken out in cash and not deposited elsewhere, then watch banks "lend only once". I suspect the new rules mean that purchases of T-Bills can no longer be used in place of cash reserves.

    3. I totally agree with the point about not taxing employment or incomes. It is madness to suggest that by taxing incomes and employment, the State can routinely stimulate the economy better than if that money was left in the hands of those who earned it.

    * One example was the London Transport investment in vehicles until the late 1960s. Designs that were unique, more expensive to build but, using massive in house overhaul works at Aldenham and Chiswick, enabled vehicles to last 50 years and still have life in them. The State killed it by no longer investing up front and forcing the purchase of substandard, unmaintainable, essentially "disposable" junk.

    1. Mike Stallard
      March 6, 2010

      By splitting the conservative vote, you may very well be letting the Labour or, even worse, the LibDems in. And all for what exactly?

      1. Tim Carpenter (Liber
        March 7, 2010

        If anyone is to be accused of splitting the Conservative vote, it is Cameron.

        He is the one driving away the Libertarians within his party with his "nudge" Communitarian/Authoritarianism, fake "localism" that seems to be Regionalisation, his Schools policy which utilises a central Arbiter and his preposterous conceit that he can somehow repatriate Sovereignty from the EU within the Lisbon framework.

    2. Stuart Fairney
      March 6, 2010

      "If borrowing is taken out to fund capital projects that will result in more future revenue (in the case of the State, growth in national efficiency and competitiveness resulting in increases in tax revenue"

      Being a libertarian I am sure you realise it is all but impossible to point to good state investment, whereas, the Olympics, the millenium dome, Concorde, the scots parliament, the Welsh assemmbly building etc etc………

      1. Tim Carpenter (Liber
        March 7, 2010

        Indeed, as I said in my post.

        The point is you cannot say that all borrowing impoverishes. It is too blunt a statement.

        The State borrowing for, say, tube networks, crossrail etc AS LONG AS THE PROJECT IS WELL RUN is not necessarily going to impoverish as the infrastructure is focused on improving the efficiency and competitiveness of the nation. However, one must consider if something like Crossrail could not be built with private money as long as the State did not obstruct it via the planning process. I suspect (parts of) it would be open years earlier, for a start.

    3. Lola
      March 6, 2010

      Buses built by LT were in other words wildly over-engineered. 50 years is a helluva long time in the development of diesel engines let alone suspension systems and the like. What was mostly right about the Routemaster (for example) was the hop on / hop off rear access – killed by elf 'n safety. The rest of it was redundant in 10 to 15 years as better mechanical design and strucrural design and materials had come along.

      Sorry, old son, that's the State getting it wrong – again.

      1. Tim Carpenter (Liber
        March 7, 2010


        1. The diesel engines of the Routemasters were upgraded to the latest designs over the years. There is no reason why they could not be series hybrid today.

        2. Some models had air suspension and their ride comfort was better than most vehicles even into the 1990s. All mechanical units were separate from the body on subframes, so the entire suspension mechanisms could be totally redesigned in isolation.

        3. As for structural design, mechanical design and materials? Are you joking? The bus was made of a revolutionary aluminium monocoque body design. They created a front entrance, rear engine version in the 1960's and it used over 60% of the components of a rear-entrance Routemaster. You could have dismantled the existing fleet and used it to build the new because the vehicles were built from prefabricated, bolted uniform sections (to aid repair). Even now many "modern" buses are delivered based upon a prehistoric truck chassis that you cannot maintain properly

        Note also that a Routemaster gives over 8mpg vs 4mpg at best of the "modern" fleets. On big reason is weight. A Routemaster is 8 tonnes vs over 11 tonnes for "modern" vehicles. Due mainly to its advanced body design. Stiffer, stronger and lighter.

        So sorry, Lola, that is you getting it wrong and short-term/disposable thinking getting it wrong. London had and has the scale, especially as the task for buses is quite unlike any other regional city or town.

        Buying new buses every 10 years is like buying new windows every 10 years or knocking down houses or office blocks every 10 years. Bastiat?

        The only daft thing about Routemasters was it was triggered itself by short term thinking – replacing electric powered buses (trolleybuses). These had years of life in them, but the overhead copper wires needed replacing. Diesel was seen "as the future" and the lobbying by vested interests was successful. The modern front-entrance version was also killed by State fiat when AEC, the maker, was forced to be bought by Leyland and Leyland had its own "design" for a similar looking vehicle…

        It is important to see when and why right decisions are made as well as when and why wrong decisions are. As a Minarchist, I recognise the State still needs to do some things now and again, so it is better to know if, what and how to do!

        1. Lola
          March 8, 2010

          I knew most of that and it's is good to see that someone else does. Don't get me wrong I am absolutely for properly engineered solutions, and the Routemaster was well engineered. And feasibly buses, like trains, should have a long service life.

          But my original point stands. Over-engineering is wealth destructive. Engineering is about what I call serviceability, which brings in a whole load of factors.

          Intriguingly property is a very good analogy. Houses/flats all depreciate over time, witness the number of builders and DIY shops. The same is true of shops/offices and factories. All of these need substantial refurbishment and/or replacement very 10 years or so.

          So why not build the best bus for today at the lowest cost and chuck it away in 10 years? Nothing has been 'wasted' because you have not built in extra longevity at extra expense?

          And to further destroy my own argument I drive a 14 year old LR Defender on the very basis that I can keep it going for 20+ years by bolting back on the bits that break. Nevertheless the current LR Defender is better in nearly every respect, excepting that it's not now sufficiently utilitarian for my taste. Mind you I am a bit weird about personal transport.

        2. Tim Carpenter (Liber
          March 8, 2010


          And don't get me wrong, I am for proper cost-benefit solutions and I think one can buy the right vehicle now (e.g. Subaru) and see your 10-20% extra investment result in twice the life in harsh conditions. London, for a bus, is harsh.

          One day we might break the stranglehold we see in vehicles and they will become more like appliances (series hybrid with full regen i.e. no friction brakes). We already have the tech to make them so, but manufacturers, as another poster hinted, have every reason not to see their vehicles last 20 years with little or no servicing or spares.

          As for houses, Victorian houses do not depreciate, but modern houses do, especially those made not to last! It probably costs £80-100k to rebuild a solid house and spending half that every 10 years would keep the average house in very good condition. Most traditional brick houses will last well over 100 years, if not 400 as long as the roof and guttering is maintained. Fitting a new kitchen is no different to putting in a new kitchen into an entirely new house. Putting in a new powerplant into a vehicle no different to putting one in an entirely new vehicle.

          Anyway the point is really that as a private individual, more fool you if you want to keep buying new things. For the State, it is not their money, so the long term value in an environment with heavy usage and bulk operation should be considered.

      2. Mike Stallard
        March 7, 2010

        Let me come back to your original remark.
        The essential choice will be: Labour or Conservative.
        It won't be (worse luck) for Dan Hannan or our host on this blog. Regrettably, Lord Tebbit is not on offer either.
        Your choice in the real world of UK 2010 is do you want five more years of Mr Brown?
        Remember that in 1992, Mr Major quite unexpectedly won an election over the reorganised Labour machine. The present incumbents (mustn't be rude!) could easily do the same if the Conservative vote is split.

        1. Tim Carpenter (Liber
          March 7, 2010


          I guess you have a problem with my being Libertarian? Well Cameron has made it very clear Libertarians are not welcome. He is Communitarian/"nudge", or should I say he is whatever he has been told has the greatest chance of him getting power.

          That is all Cameron appears to want. He has no ideological basis to his stance so one cannot trust or predict what the heck he will do next or what his response will be to anything in the future.

          I am not for ideological purity in implementation, for that is impractical, but unless one has a basis, nobody can predict, understand or trust you. Nobody knows "where one is coming from". How can one delegate sovereignty to such a person?

          I would not wish to speak for any other Libertarian as to what way they would vote. Right now I have no idea how I would vote. Again, this is squarely at the feet of one David Cameron who keeps giving reasons not to vote for him.

          Right now I have nobody to vote for but six parties to vote against (Lib/Lab/Con/UKIP/Green/BNP).

          The question is which one, if at all would I favour. I do not think that Cameron can say anything in the next few weeks to make me want to want him in charge. What I want is the ability to vote so that Cameron knows he is on parole. I want to be able to lend my vote for 1 year and it to return to me at the end of it unless I say otherwise. This is impossible.

          A Lib/Lab pact or even a Lib/Tory pact could mean the end of the LibDems as we know it and not a moment too soon. A Labour failure could split that party and not a moment too soon. Ideally, we should have a Tory win but so slender they cannot do very much harm and very soon a new election will take place, hopefully with a new Tory leader and something more like a less authoritarian, smaller State agenda and a leader with the cojones to have a referendum on EU membership. But I doubt it.

      3. Simon
        March 7, 2010

        Lola ,

        It is cheaper in the long run to do things properly .

        The full costs of standardising on a narrow gauge railway track would not have been appreciated at the time .

        No commercial organisation is ever going to make a bus that lasts forever and has no built in obsolescence .

        The human race may have to find an alternative to the last centuries disposable consumer lifestyle predicated on ever increasing consumption .

        1. Lola
          March 8, 2010

          But Brunel's 7ft gauge was better….

        2. Tim Carpenter (Liber
          March 8, 2010

          I think Simon is saying Brunel was right! (and he WAS!). A commercial company has to think about sales, but a State operator has to think about lifetime costs.

          A State transport operator is a bit like a self-builder. I think you will find that the horizons of a self-builder in terms of quality fittings, heating solutions, construction and maintainability is in general far advanced to that of your average housebuilder selling their product, who makes flimsy tat just barely able to outlast the 10 year "guarantee"*.

          So, if a State operator can invest for the long term so that interest charges are less than the reduction in lifetime costs expended due to upfront investment in infrastructure and in terms of increases in productivity and revenue, then it has a place.

          Rare as hen's teeth, mind.

          * which is, in truth, more like "defects insurance"!

      4. Simon
        March 9, 2010

        Lola ,

        I'm glad you understood my point about the wider gauge being better in the long run . Over the short run it would have made little difference .

        The people who had the vision to design the Routemaster created an icon which later became a tourism icon just like all the other over-engineered attractions of London like St Pauls .

        Overall it will have made a net contribution to London much bigger than three generations of mediocre buses you appeared to be dogmatically proposing instead .

  16. Cat Fancier
    March 6, 2010


    Could you please expand on the point about a loan to the government resulting in a lower money multiplier effect than a loan to the private sector? My undestanding of this process was that once a loan is made, the recipient will spend the cash on a good or service, whose seller will then deposit the cash in a bank, which can then lend out a multiple of the deposit. Why should it matter whether the entity who receives the original loan is the government or in the private sector? Both will end up spending the cash such that it will end up on deposit in another bank account, which can then be lent out at a multiple. I believe that a separate point was being made here to the 'crowding out' effect of the government taking up too much of the overall supply of credit?

    Reply: Under current regulations banks have to lend more to the government as part of their cash buffer – government loans count as near cash if they are short term – instead of lending to businesses. If they had a lower cash ratio they could lend more to business on a geared basis.

  17. Neil Craig
    March 6, 2010

    If it were spent on increasing the capacity of the economy then that would be worth it. Building nuclear power stations, cutting corporation tax, improving roads & airports, X-Prizes, even automating rail. If the economy were to be made to grow even the 5% that is the world average we could pay off borrowings in a few years. Even so cutting building regulations, Health & Safety regs & restrictions on nuclear plants would probably achieve more growth & for negative cost. Better yet – do both.

    Instead the government are spending the borrowed £500 million a day on running costs & quangos.

    1. Simon
      March 7, 2010

      Neil Craig ,

      Are you sure cutting Health & Safety regs & restrictions on nuclear plants is a good idea ?

      1. Neil Craig
        March 9, 2010

        Actually yes. Nuclear is clearly easily the safest significant industry worldwide. Total casualties over the last 20 years have been 2 in an accident in Japan. By comparison coal power costs the lives of (many-ed) worldwide through black lung & emphysema. In fact coal plants (can-ed) release…. more radioactivity than nuclear ones because there is radioactivity in the Earth.

        French nuclear costs 1.3p a unit, ours is assumed at 3 times that which must be regulatory. I suspect even France's could besignificantly reduced. So basically something approaching 90% of our electricity bills are regulatory costs of an incredibly safe industry suffering hysterical attacks. That in turn feeds through to all our industrial costs. This self-handicapping is a large part of the reason China is outcompeting us.

        1. Simon
          March 9, 2010

          I didn't realise it was 24 years since Chernobyl .

          Agree with what you say about self handicapping , it's about time we had a British Government look after British interests – British Jobs for British Workers and all that .

          In the short term perhaps there is a case for buying spare capacity from France whilst we catch up .

          There could be other explanations for the difference in cost besides regulation .

          Greater subsidies , the market in Britain standing for higher prices than the market in France etc .

  18. Kevin Peat
    March 6, 2010

    Off topic, Mr Redwood:

    The Jamie Bulger killer, John Venables being released only to be alleged of committing a vile sex offence and being re-imprisoned.

    This is a clear case of embarassed politicians trying to hide the fact that the public have been proved right and they wrong – yet again. That a dangerous criminal's rights are deemed to be more important than the safety of the law-abiding public.

    And yet we are told when we are issued fines for going 5mph over the limit "if it saves on life."

    Tackle this nonsense and your party may be in with a chance.

    1. Stuart Fairney
      March 6, 2010

      Yes indeed. Well said.

      Mr Cameron could simply say that sex-offender baby-murderers get one new identity on the taxpayer only, and should they be stupid enough to re-offend they must reap the whirlwind.

      Name one person who would oppose this? (outside the government that is)

  19. William Grace
    March 6, 2010

    Borrowing can make us all poorer – Understatement of the YEAR!

  20. Denis Cooper
    March 6, 2010

    Over the past year virtually all of the money borrowed by the government has effectively been borrowed from the Bank of England, not from commercial banks and other private investors.

    Private investors have lent money to the Treasury by buying new gilts, but they've sold previously issued gilts to the Bank at about the same rate.

    Net effect – the private investors have made marginal profits with each turn of this "money-go-round", but after taking off those transmission costs it's the £198 billion of new money which the Bank spent on gilts that has been lent to the government.

    Which is why the Bank now holds a £198 billion portfolio of gilts:

    which I believe is about a quarter of all the gilts in issue, and must make it the government's largest single creditor by far.

    The Labour government has used that money to help pay its bills, supplementing every three pounds of revenue with a pound of borrowed money, and so it has cleverly managed to put off the inevitable spending cuts until after the election.

    And because most people don't understand this they're more prepared to give Labour the credit for apparently getting the economy out of a hole, and they're less inclined to vote Tory.

    1. Sally C.
      March 6, 2010

      Thank you for that link to the B of E website. I thought it was very interesting. It shows that the result of QE is the creation of £198 billion of central bank reserves (literally money created out of thin air), on top of which the commercial banks can pyramid lending by a multiple of those reserves. Traditionally, that multiple might have been ten times or £2 trillion worth of new lending or credit creation. In practice there is no limit to the multiple that banks can lend on ( as far as I know). The only restraint on bank lending right now is cautiousness on the part of the banks and limited demand on the part of borrowers. Two trillion pounds worth of new potential lending means that there is plenty of money to finance the governments borrowing requirements and to finance lending in the economy equivalent to 100% of our annual GDP!!! If that isn't likely to produce inflation at some point soon, I don't know what is!! On top of that we are already suffering the concomitant and inevitable devaluation of our currency!!

      1. Tim Carpenter (Liber
        March 7, 2010

        The money multiple canard is a widespread misunderstanding of Fractional Reserve Banking.

        A Bank cannot lend more than they have in cash reserves or on deposit with the BoE. If someone lends it back to them, however, e.g. makes a deposit, the money is then available once again for re-lending.

        Your bank statements do not tell you how much money you have, they only tell you how much the bank has borrowed from you. Your money has GONE. If you are not unlucky, you should get it back when you want to use it.

        State deposit insurance is a dangerous distortion and should be ended. Now.

        1. Sally C.
          March 7, 2010

          I am not sure why you call the money multiplier a 'canard'. It is the key element of FRB. This is the condensed description of FRB from Wikipedia.
          'Fractional-reserve banking (FRB)is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand.[1][2] Fractional reserve banking necessarily occurs when banks lend out any fraction of the funds received from deposit accounts. This practice is universal in modern banking, as opposed to full-reserve banking.

          By its nature, the practice of fractional reserve banking expands money supply (cash and demand deposits) beyond what it would otherwise be. Because of the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators, and by the excess reserves kept by commercial banks.' End of quote.

          When the Bank of England buys gilts or other securities from pension funds, for example, with brand new electronically created money (out of thin air), as in QE, it sets in motion the money multiplier. If I had time I would explain exactly how the money multiplier effect generates out through the banking system, but, believe it or not, I have a life.

        2. Tim Carpenter (Liber
          March 7, 2010

          Sally C,

          Maybe you should utilise your life a little and learn the difference between loans and money.

          If you were taking about "demand deposit multiplier" then you would be right, but we are not. We are talking about money. Cash and bank reserves.

          If I lend you £5, you then lend JohnR £5 and JohnR lends BorisJ £5, how much money exists? I will tell you, £5. By your understanding you would say £20 and while it is an indication of sorts, you would be wrong in reality.

        3. Lola
          March 8, 2010

          Absolutely agreed on state deposit insurance – only it is not guaranteed by the state, it's guaranteed by me and my little financial services business. I get the regular levy from the FCSC to pay out for businesses that have failed. I have in effect provided insurance but without ever getting a premium! The whole system is utterly bonkers.

      2. Denis Cooper
        March 7, 2010

        I suppose that in principle every penny of that £198 billion must still be somewhere in the world, and apart from money sent abroad or withdrawn as notes and coins it must all be on deposit in this country.

        So if part of it was used to pay a civil servant his monthly salary that would have been credited to his bank account; then he would have spent some it in the supermarket, so that money was transferred to the supermarket's account, and then passed onwards …

        Therefore it's undeniable that most of the £198 billion of new money has been "injected into the economy", as journalists like to say, and it's been very widely dispersed.

        However the crucial point is that virtually all of the new money has been channelled through the Treasury via the gilts market, enabling the government to maintain an illusion of restored economic stability and even recovery over the past year.

  21. Tom Pride
    March 6, 2010

    Or put another way. . . . . you don’t get aught for naught!

  22. Mike Stallard
    March 6, 2010

    Do you know what? I often think that we get what we, as a nation, deserve. And Mr Brown has come to represent that nation – (words left out) prone to irrational fits of temper, never been near the military, once religious, once a convinced socialist, totally out for number one and then for his tribe at the expense of everyone else.
    Oh – and with a hypocritical leer for anyone who has got something for him.
    Let us hope for a miracle:
    He calls an immediate election?
    He works out how to reduce public spending starting with the massive pensions?
    In the kingdom of the blind……

  23. Ian Jones
    March 6, 2010

    We are back in the 1970's, its amazing how the Keynesians have distorted history so people forget the lessons learned last time. Looks like we have to go through the pain once again, who said only Goldfish have short memories. The British public seem to.

  24. Affiliate Network
    March 6, 2010

    that was really funny! Make some more up!

  25. Steve Cox
    March 7, 2010

    There's an interesting article by Liam Halligan in The Telegraph today. Of all the financial commentators, I'd say that he holds views that are the closest to your own, John. (And are therefore eminently sensible!)

    The following extract from Liam's article struck me:

    "Britain's monetary base expanded three-fold, from roughly 7pc to 22pc of GDP. That happened over almost a 50-year period which, of course, included two world wars.

    A similar monetary expansion has taken place since QE began last March. The UK has tripled its monetary base once again, but this time in a single year."

    The sheer scale of the QE folly is breathtaking, and what has it achieved? £200 billion is around 15% of GDP – and creating that much extra money has supposedly helped the economy by around 3% of GDP, according to a report this week. It sounds to me very much like we have simply thrown away a sum equivalent to 12% of GDP. And then there will be the inevitable inflationary consequences when the fools in Threadneedle Street start unwinding their QE madness, which will impoverish every prudent saver in the country and reward only those on comfortable index-linked pensions, like MP's and BoE employees, for example. 🙁

    And as for the misguided people living in the last century who think that trashing our currency helps, well just look at how much a truly collapsed currency has helped Iceland. After its economy shrank by 7% last year, the government there is still predicting a 3% shrinkage this year – and possibly much more if the Icesave compensation scheme can't be sorted out quickly to allow IMF funds to be disbursed. So much for the benefits of a worthless currency.

    This government and the BoE have got EVERYTHING completely wrong in the last two years or so. That a socialist administration screws all of its economic decisions up is no big surprise, but for the BoE to do the same thing is a disaster for the country. I sincerely hope if a Conservative government is returned at the next election, it will seriously look at holding a deep inquiry into the BoE's inexcusably politicised and amateurish behaviour.

  26. Doc Snoddy
    March 7, 2010

    I have a better chance of knitting fog than the Tories winning the General Election. The simple reason being is that the policies of all three main parties are about the same.(allegations against Brown deleted)

  27. Ralph Musgrave
    March 7, 2010

    Some people are so appalling ignorant that it is near impossible to get across to them the sheer scale of their ignorance. John Redwood writing on economics is an example. It would take 10,000 words to deal with all John Redwood’s mistakes. But I’ll deal with a couple.

    Take the sentence “Borrowing is deferred taxation.” This is not true to the extent that monetary base expansions (which for slightly bizarre reasons are counted as borrowing) are permanent. E.g. the monetary base has expanded roughly by 5% a year over the last few decades. This will never be repaid, it needn’t be repaid, and it would result in unnecessary deflation if it were repaid.

    Moreover, the relevant “debt” is owed by the Treasury to the Bank of England, i.e. it’s owed by one arm of government to another! It’s really a nonsense to count this as a debt. It’s just a book keeping entry.

    Re his next sentence, “It damages output and demand”. He is referring here to what economists call “crowding out”. Why does Redwood have to use a hundred words to expand on the phrase. Anyone acquainted with economics knows about crowding out. When referring to it, they don’t use a hundred words: they use two words – “crowding” and “out”. Moreover, they know when it is likely to occur and when not.

    Almost by definition, it cannot occur at near zero interest rates!

    Reply: Crowding out is occurring owing to the lop sided regulation of the banks. try talking to small business people and they will tell you there is no money for them at near zero interest rates. I don't think the Tresury has yet announced it will be cancelling all the debt owed to the Bank of Eng;and!

    1. Ralph Musgrave
      March 7, 2010

      Crowding out is where government borrowing pushes up interest rates which in turn makes it more difficult for the private sector to borrow. This clearly cannot happen where the government – central bank machine is holding interest rates at near zero.

      As to why banks are reluctant to lend, I suggest two factors. 1. Having just made fools of themselves over the last five years or so with totally irresponsible lending, they will be much more cautious for the next five years or so.

      2. They’ve still got plenty of toxic stuff on their balance sheets and they are husbanding resources to deal with this. There is an analysis here which suggests that this problem is so serious, at least in the U.S., that U.S. banks effectively have no reserves.


      And scroll down to the heading “2: There Are No Excess Reserves”.

      The fellow on whose blog this appears (Steve Keen) is associate Prof of economics at the university of Western Sydney, Australia.

      I agree that the “Treasury has not yet announced it will be cancelling all the debt owed to the Bank of England.” However, households (just like the above mentioned banks) have had a shock. They’ve seen the foolishness of too much debt, and they are saving as never before. When the private sector saves money, the central bank absolutely must make more monetary base available, else you get “paradox of thrift” unemployment.

      IF this desire by the private sector to finance itself from saving rather than borrowing proves permanent, then the above so called debt owed by the Treasury to the Bank of England will never be repaid (i.e. the extra £200bn printed in 2009 will just be left in circulation). Alternatively, if it looks like being inflationary, this money will have to be taxed out of existence. We can’t predict exactly what will happen.

      There is a good article on these two alternatives (saving and borrowing) by James Galbraith, one of Obama’s economic advisors, here:

      (Skip the first two paras, if you like.)

      Reply: You are missing the key point – the private sector cannot borrow new money at anything like 0.5%

  28. Maryellen
    April 2, 2010

    Dear Friends, Happy April Fool's Day!!!

    After just a few years of marriage, filled with constant arguments, a young man and his wife decided the only way to save their marriage was to try counseling. They had been at each other's throat for some time and felt that this was their last straw. When they arrived at the counselor's office, the counselor jumped right in and opened the floor for discussion.
    "What seems to be the problem?"
    Immediately, the husband held his long face down without anything to say. On the other hand, the wife began talking 90 miles an hour describing all the wrongs within their marriage. After 5 – 10 – 15 minutes of listening to the wife, the counselor went over to her, picked her up by her shoulders, kissed her passionately for several minutes, and sat her back down. Afterwards, the wife sat there speechless.
    He looked over at the husband who was staring in disbelief at what had happened. The counselor spoke to the husband, "Your wife NEEDS that at least twice a week!"
    The husband scratched his head and replied, "I can have her here on Tuesdays and Thursdays."

    Happy April Fool's Day!

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