$1.43 = £1 £6 billion in 40 days time is not enough

I had composed this headline in my mind when I heard on the radio that the government will announce its first cuts next week, following urgent review of the projects and plans the last government approved for spending in the first four months of this year. They are right to do so.

Sterling has devalued by 5% against the dollar since the election. The markets are not in panic, but they are making their point. The government needs to start reducing spending early next week, and to show they are serious about getting on top of the deficit.

There will be some easy cuts to make from the political projects Labour waived through in the last few days in office. If there are cancellation costs, then pay them. It will be much cheaper in the long run, as the state does not have the money to pay all the bills.

The government does also intend to publish its own figures for the off balance sheet items. The debate on this site has seen some suggesting it will be too much to tell us the truth. I think it essential they tell us the truth about the financial position. Some of us have been telling the public to add in large extra sums to the claimed figures for public debt, so it would be silly for the government to think that by refusing to acknowledge it they could fool the markets.

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36 Comments

  1. Norman
    Posted May 17, 2010 at 8:19 am | Permalink

    Let's hope these figures not only get published but get placed back 'on book'. No use publishing them then they disappear again to be forgotten about. Also let's hope any future PFI projects (if there are any, they seem like a good idea in theory but in practice, like everything else Labour did, have been a financial disaster) will be included in the figures.

    As for not publishing the figures, it's nice to think that something like that can be hidden but the same firms (PWC, KPGM, etc) who are active in the markets and in advising large investors are also active in the government sector. They probably know more about the true state of affairs than the Treasury.

  2. Mick Anderson
    Posted May 17, 2010 at 8:28 am | Permalink

    Correct, it's not enough. Nor is the promise so make a substantial dent in the deficit by the end of the Parliament.

    Better to reduce the deficit to zero by halfway through the Parliament, and have a chunk of the outstanding debt paid back by the time the next election arrives.

    The new Government has a few months to find out where all the financial bodies are buried and declare the true costs. The longer they leave it, the harder it will be to pin the blame on the true guilty party, Mr Brown.

    It's also one of the things that bothered me about the Lib-Dems. We generally accepted that taxes were going to rise to fund the deficit, but the Lib-Dems wanted to raise the national tax burden to pay for some extra spending. It seemed to miss the point rather badly.

  3. Duyfken
    Posted May 17, 2010 at 8:39 am | Permalink

    It's a pity UK plc is not subject to the provisions of the Companies' Act, and more particularly to the strict regulations to which insurance companies are subject in relation to solvency ratios and provision for future liabilities.

  4. alan jutson
    Posted May 17, 2010 at 9:15 am | Permalink

    Pleased to see that action has already started according to the Telegraph this morning.

    Its small, but its a start.

    Reported that Andrew Mitchell Seretary of State for International Development has scrapped five schemes saving over £6,000,000 already.

    Funding of £146,000 for a Brazilian dance troupe in London has also been cancelled.

    The mind boggles at why, and who authorised some of this type of expenditure in the first place, but then of course it was not their money was it, it was the Taxpayers, and the decision probably did not see the light of day, so another reason for increased transparency.

    If this sort of excess expenditure can be found in just a few days in one Department, imagine what else will come to light.

    Just imagine what could be shaved off of some other projects in some of the major spending Departments.

    Pleased to see that you are a supporter of coming clean on the deficit and debt John. You cannot possibly hope to have the trust of the markets, if they do not trust you to give accurate figures.

  5. kevin
    Posted May 17, 2010 at 10:04 am | Permalink

    John when you complete the spending review will you list all government waste by the previous Labour Government the public has a right to know just how much waste labour has made of tax payers money and should there be a law preventing them running up huge deficit at tax payers expense

    • Peter Stroud
      Posted May 17, 2010 at 5:03 pm | Permalink

      kevin, I am 100% with you on that point. The public really need to know just what an utter mess Brown and his gang have made, and soon.

      • Alistair
        Posted May 17, 2010 at 5:54 pm | Permalink

        Well said, Kevin. Gordon Brown has gone but how many decades will it be before we are rid of his colossal waste? We have a right to know.

  6. waramess
    Posted May 17, 2010 at 10:34 am | Permalink

    Worth remembering this is a soft left wing government and its resolve to do anything will be second only to its desire to utter the right words.

    A great shame but the choice we were presented with was to vote for one of three left wing governments.

    We may be quite certain that the agenda will be to raise taxes because this is far easier than cutting the size of government and that any effort to cut fat from the amorphous and glutinous civil service will ultimately be abandoned.

    It looked like a good idea at the time but not so good now something has to be done about it.

    So lets settle down to five more years of socialism and not make such a fuss. After all they bid for managing the decline of UK plc and that is no doubt what we will get.

    • Kevin Peat
      Posted May 17, 2010 at 4:15 pm | Permalink

      My advice to anyone with the skills, talent, wealth.

      Leave Britain. It's over.

      • BillyB
        Posted May 17, 2010 at 8:21 pm | Permalink

        How patriotic !

        you prefer neing an immigrant in someone else's country?

  7. Acorn
    Posted May 17, 2010 at 10:38 am | Permalink

    It will be interesting to see how close the Coalition forensic accountants get to Nadeem's forecast. This link is when he was at his most evangelical. He puts total UK government sector liabilities at £4,600 billion.

    Doing discounted cash flows that get to a net present value for liabilities like public sector pensions; is well and good; but, government is about cash today. Stretching those liabilities well into the future – like raising pension age – is a good trick. Along with a decent dose of inflation and no index linking.

    They tell you in the books on studying company accounts; if you really want to know how well a company is doing, "follow the cash". It is the same for governments. When UK PLC is burning cash at £4 for every £3 of cash income; then, "do the math" as the yanks would say. The company has a solvency problem. Printing your own money for a liquidity problem works for a while; but, does not cure the solvency problem.

    One day, they will teach this stuff in schools you know.
    http://www.marketoracle.co.uk/Article18622.html

    • Sally C.
      Posted May 17, 2010 at 7:41 pm | Permalink

      Great link, Acorn. Should be required reading for everyone in the current government.

  8. Lindsay McDougall
    Posted May 17, 2010 at 10:39 am | Permalink

    My guess is that the markets will require the fiscal deficit in THIS financial year to be about £30 billion less than Labour's planned £163 billioin. What doesn't come from public expenditure cuts must come from increased tax receipts. George Osborne and David Laws have just announced that the public expenditure of the devolved parliaments/assemblies can not be reduced in this FYR, so public expenditure cuts will fall on England alone. With this background, a VAT rise is beginning to look more attractive.

    • backofanenvelope
      Posted May 17, 2010 at 12:54 pm | Permalink

      Fair enough – just announce that their budgets for 2011-12 will be cut more to take up the slack.

  9. Sally C.
    Posted May 17, 2010 at 11:06 am | Permalink

    I was of the opinion that the Conservative Party could not be completely open about the size of the cuts in public spending, or the increases in taxation, that would be necessary once they took over because of a potential backlash against them that could have wiped out their lead in the polls. I think that the reaction to George Osborne's attempt to be open, prior to the election, proved that point. Now the Conservatives can be completely open and I was encouraged listening to George Osborne this morning, but then, unlike some, I have always had quite a high opinion of him.
    I still feel, however, that there need to be changes to the composition of the MPC. The Austrian school of economics should at least be represented on the Committee.

    • Acorn
      Posted May 17, 2010 at 1:51 pm | Permalink

      Sally, well said. You may remember that last year, George O., made a fuss over not being able to have opposition access to the Treasury COINS database. He said that if he was Chancellor, he would make it public! I, for one, am not holding my breath; but I hope to be surprised. I assume he, and his new Office of Budget Responsibility, will have.
      http://www.conservatives.com/News/Speeches/2009/0

      The database is rumoured to have 24 million rows of data and an unknown number of columns / fields. Presumably, they all add up to circa £700 billion of government spending this year.
      http://www.ckan.net/group/wdmmg

  10. Ex Liverpool rioter
    Posted May 17, 2010 at 11:54 am | Permalink

    John
    READ THE VERY LAST LINE! http://news.bbc.co.uk/1/hi/uk_politics/8685989.st

    NO MONEY LEFT!
    Mike

  11. michael read
    Posted May 17, 2010 at 1:43 pm | Permalink

    Along with 6,500 tenants and leaseholders, I am the victim of the Labour government's involvement with PFI-funded housing management.

    In this particular contract, "Partners" in the London Borough of Islington, the government effectively locked us into a 30-year monopoly contract with a construction company.

    The contractor self-certifies its own work and charges leaseholders double the rate which it pays its sub-contractors.

    It is a financial disaster for the taxpayer. The contractor is charging double the management fee that the freehold owner of our properties, charges to manage the other parts of the local authority's estate.

    It is also a disaster for residents. "Self-certification" means the contractor can do effectively what it likes.

    For residents, public sector efficiency is not an academic issue. Our experience challenges the wisdom of public sector involvement in the provision of any service whatsover.

  12. oldtimer
    Posted May 17, 2010 at 1:56 pm | Permalink

    After occupational pension funds were more or less taxed out of existence, we are now faced with the prospect of private savings going the same way – if 50% CGT comes to pass. Where is the sense or justice in that? Lord Forsyth had some sensible remarks on the World at One today why this rate would be a dumb idea and reminding us of the proposals he made in the report that was commissioned by George Osborne himslf a few years ago.

    Your thoughts on this contentious proposal are awaited with interest. Specifically, why should anyone bother to save or invest for the future under such a regime? What will happen to Sid, when the government decides to sell its holdings in RBS and Lloyds Group – or is the private shareholder to be banished along with occupational pension funds? What will happen to business angels? Why should they bother?

  13. Javelin
    Posted May 17, 2010 at 2:38 pm | Permalink

    I don't believe the Government should withhold the truth but they should be prepared to tell it straight on budget day. I'll call in "T" day simply because the word Trillion will enter our vocabulary, just as we were getting used to the word Billion.

    This means a clear narrative about how we got into this hole and who is to blame.

    It may mean looking at prosecutions for Government officials for giving misleading information to the markets.

    It may mean preparing the markets for shock news before budget day.

    It may mean having the BofE interest rate committee forewarned on budget day and be prepared to raise interest rates.

    It may mean having a dialog prepared to resist any action or threats that may cone from the EU or IMF.

    Future laws to prevent this kind of accounting abuse need to be in place to placate public anger.

    Telling anybody they owe £3 trillion is going to be a shock to the system. Parliament must be prepared for the public wrath.

  14. John Wood
    Posted May 17, 2010 at 2:42 pm | Permalink

    By the way John – are you still the Tory candidate – or have you been elected as MP?

    If the latter some titles need altering on your site.

  15. John Wood
    Posted May 17, 2010 at 2:45 pm | Permalink

    Oh and I believe that Labour 'Waved' through the political projects. Would that they had been "Waived".

  16. Deborah
    Posted May 17, 2010 at 2:46 pm | Permalink

    If there are contractual costs for cancelling contracts agreed in the dying days of labour the other parties should be asked to waive them – and named and shamed if they refuse.
    It was clear for all to see that the government was likely to change. How can the companies concerned claim good faith in such circumstances?

  17. Tony Wood
    Posted May 17, 2010 at 4:09 pm | Permalink

    John,

    6 billion is not enough by a long way. Far more is needed and soon, otherwise the foreign exchange markets will demand it and the BOE could be forced into much higher interest rates that would hold back the recovery.

    But cuts and higher taxes need to be thought through. Arguably one of the very few things nulab got right was CGT. How will the changed CGT treat shares acquired by a private investor in an IPO or placing? Such equity finance is a crucial part of the "seed capital" new or growing companies need to pay for plant and machinery, premises and hire staff. The stats show such investing is highly risky, more so that buying shares with the click of a mouse as part of everyday trading.

    The sales of both kind of shares are taxed in the same way and at the same rate of 18% now. But would private equity investors be prepared to take the higher risk if faced by a 40 or 50% tax rate? If not, then private equity finance could be reduced or the companies raising funds would have to sweeten their offer to attract investors. The latter effectively raises the cost of equity finance to new companies – the last thing we should be doing if we are going to try and grow ourselves out of this appalling deficit.

    This is just one area where the possible consequences of tax changes really need to be thought through. Hopefully, with your experience, you will be able to put such points to the decision makers, that is of course only if you agree!

  18. Steve Cox
    Posted May 17, 2010 at 4:29 pm | Permalink

    I was reading elsewhere (a source in Zurich) that we are headed towards USD/GBP/EUR parity in 2011. The way both the Euro and pound are tanking against the dollar, we won't have to wait that long by the look of things. The bizarre thing is that for all our problems in the UK and Europe, at least we are admitting them and starting to do something about them, whereas the USA is still living in a left-wing cloud-cuckoo land, where money grows on trees and debts need never be repaid. By all rights, it's the dollar that should be collapsing.

    • APL
      Posted May 18, 2010 at 12:22 am | Permalink

      Steve Cox: "The bizarre thing is that for all our problems in the UK and Europe, at least we are admitting them"

      I think the dynamic in play here is that most debt is ultimately denominated in US$ so even though the US is in dire straights – some states nearly or actually bankrupt – everyone else in the world demands dollars to settle their debts. That drives the price of US$ higher compared to other currencies.

      It has been accentuated too because of a loss of confidence in the Euro, mainly because the ECB didn't cut Greece loose.

      You debts are denominated in US$ you are trying to get what assets you can out of the Euro zone, you probably don't want to touch Sterling nor the Swiss Frank. The Chinese Yuan is fragile because despite the dollar peg and the rhetoric no one really knows what is going on in the Chinese economy, Canada and Australia is poised on the brink of a property crash similar to that we have just suffered ……

    • StevenL
      Posted May 18, 2010 at 3:38 am | Permalink

      Whenever I speak to young American voters I find they are increasingly sharpening their pitchforks. Many now even advocate a return to the gold standard.

      The dollar won't collapse, but when they eventually vote for sound money policy we'll sure as hell feel it this side of the pond.

    • BillyB
      Posted May 18, 2010 at 2:04 pm | Permalink

      then why isn't it?

  19. gac
    Posted May 17, 2010 at 5:43 pm | Permalink

    I may have missed this but has Mr Redwood been given a role in our new Government? even if only behind the scenes?

    Reply: I was not offered a Ministerial job, and was not suprised by this. I will be offering my advice on sorting out the banks and the economic mess both in public and in private.

  20. Simon2
    Posted May 17, 2010 at 7:21 pm | Permalink

    They should start looking at getting the cost of housing down too, and end this dangerous necessity to take on heavy debt in order to buy a home and get on with life.

  21. Rich
    Posted May 17, 2010 at 8:03 pm | Permalink

    The cuts announced today are but a small drop in the ocean, if the deficit is to be reduced, and even more if the overall level of debt is to be reduced. Don't forget that even if the deficit is reduced by £6 billion, the national debt continues to grow.

    I think it is possible to make the £6 billion of cuts fairly painlessly, there are numerous QUANGOs ripe for the plucking (including the £100 million Equality and Human Rights Commission) and the RDAs are fairly easy to replace, if councils are given some of their powers,

    As for the long term cuts – Welfare is one key area, although I doubt it will be possible whilst unemployment continues to rise. There is also the small matter of the EU………

    I would also try and lengthen the time it takes for migrants to be able to claim benefits- at the moment any EU citizen can claim benefits here if they have worked for just 12 months – this provides a huge incentive for them to stay. We cannot justify the number of Poles and other migrants coming here when there are at least 5 million indigenous people economically inactive.

  22. A.Sedgwick
    Posted May 17, 2010 at 10:05 pm | Permalink

    I cannot see the deficit being brought down fast enough. I do have sympathy with the average public employee whose job may be under threat when we are squandering huge amounts on the EU, Afghanistan, illegal immigration, climate change, overseas aid, housing benefit. Unless I have missed something these items are not on the savings agenda.

    If the Liberal Conservatives concentrate on hitting Mr. and Mrs. Average-Worker with tax rises and low income job losses there will be trouble, probably not on the scale of Greece but protests that will seriously undermine the coalition.

  23. ManicBeancounter
    Posted May 17, 2010 at 10:06 pm | Permalink

    Would you Mr Redwood support an investigation into the pattern of spending projects signed up in the last few months?

    In particular two alleged by the Sunday Times are quite serious

    – A series of defence contracts signed shortly before the election, including a £13 billion tanker aircraft programme whose cost has “astonished and baffled” ministers.

    – £420m of school building contracts, many targeting Labour marginals, signed off by Ed Balls, the former schools secretary, weeks before the general election was called.

    The first, for the sheer size. The second for the implication that commitments were being used to influence votes.
    http://www.timesonline.co.uk/tol/news/politics/ar

  24. Mark
    Posted May 17, 2010 at 10:25 pm | Permalink

    It is important that the truth be told – but also not over-egged. The truth itself is horrifying enough. Dangers for exaggeration include capitalising future exposures by using low discount rates, counting exposures at potential maximum values and other similar devices. I'd rather see spending cashflow forecasts in real terms over a span of years, and some sensitivity analyses rather than attempts to quantify everything as a balance sheet liability on a mark-to-market/model/fiction basis. It might also be nice to see what is REALLY on the BoE balance sheet these days. Well, horrific I expect – but we ought to know.

  25. Ism-skism Game
    Posted May 18, 2010 at 12:27 am | Permalink

    It seems that some in Whitehall were having an emergency spending spree.

    If we are going to have fixed term parliaments/governments, is it time to have a transition period immediately prior to an election when governments are restricted in what they can do or at least subject to more scrutiny?

    Just an idea 🙂

  26. Martin
    Posted May 18, 2010 at 8:42 pm | Permalink

    Maybe I'm missing something?

    We have a falling Pound, a lot of imported inflation and the BofE is keeping interest rates close to zero. If the BofE were to put interest rates up to say 2 or 4% surely this might stop the inflation. Borrowers will moan – so what? Borrowers currently have a real negative interest rate.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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