Governments damaging recovery

Around the world, led by President Obama and the EU, governments are busily making the recovery slower and more difficult. It is fashionable to urge and welcome recovery, and even more fashionable to sand bag it at the same time. In vogue are policies to cut bank lending and credit expansion, to tax enterprise, investment and saving, and to raise public spending.

The President has been especially keen to regulate and limit banks more, on a tide of anti bank sentiment. This anger towards the banks has been partly worked up by governments wishing to deflect attention from their own huge mistakes in controlling the money supply and regulating the banks in 2005-09. The rest was brought on by excessive behaviour by the banks themselves. This is not the right time in the economic cycle to throttle credit and clobber banks, popular though it may be politically.

The EU sees this as a time of huge opportunity to regulate “Anglo Saxon capitalism” and is ready with a big raft of measures to control financial activities in a way which will drive more of them out of the EU altogether. The European Central Bank is adamant it will not solve the problem of inadequate money growth anytime soon, though its hands could be forced by markets again.

In the UK the government has taken some welcome steps to assist recovery. It is cutting the Corporation Tax rate to 24% from 28%. It has cut Labour’s planned increase in National Insurance, cut the small business profits tax and promised a review of IR35. It has started to cut Labour’s planned increases in public spending and the huge deficit that went with them.

The measures which have attracted cross party support are less helpful to recovery. The government has confirmed Labour’s hike in Income Tax to 50%. Labour has supported raising Capital Gains Tax to 28%. All main parties support the tax on bank balance sheets, a tax which will limit the banks’ willingness and ability to lend credit to companies for expansion.

Any study of the UK’s recent economic history will show that the consensus measures have been the killers in the past. The Exchange Rate Mechanism was a three party act of vandalism on the UK economy introduced by a Conservative government which understandably took the main public anger for it. The so called independent Bank of England was a Labour measure which Conservatives supported which led to the biggest post war boom and bust in money and credit.

Fortunately the present range of cross party policies will not do damage on anything like that scale. One of the reasons consensus policies can be so damaging is they do not attract the degree of scrutiny, debate and criticism that contested policies attract. Politicians too readily adopt them, thinking that because they are cost free politically they should also be cost free in terms of their impact on a fragile economy. That is rarely the case.

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20 Comments

  1. Alan Jutson
    Posted July 17, 2010 at 7:31 am | Permalink

    Yes, a bit like asking our sprinter to run the 100metres, but his coach tells him to do it without spikes in case he hurts the other competitors and rips up the track.

    All the other runners wear spikes.

    Our sprinter comes last, battered, bruised and bleeding having used more energy than all of the others, because running down the track he slips, falls over and gets spiked by all those who run over him.

    Looking at the winners rostrum his coach complains, its just not fair. they just went for it and did not consider anyone else. I will lobby the organisers and get spikes banned for next year.

  2. Bill Grant
    Posted July 17, 2010 at 8:25 am | Permalink

    You have identified the main problem with government- it's total inability to help the economy except by being smaller and doing less. The best thing politicians could do is mind their own business and stick to talking rather than interfering. What a shame that the Conservative government is not actually cutting anything and still allowing public debt to snowball at such a fantastic rate.

  3. Tony_E
    Posted July 17, 2010 at 8:30 am | Permalink

    The independence of the Bank of England was always a political tool rather than an economic one. It was designed to insulate a Labour government against the problems that the previous Conservative administration had faced.

    By removing this from political control, we lost control of the overall economic situation. I would like to see the situation reverted and for the Chancellor to be ultimately responsible for interest rates. This way we can actually hold a government to account for economic success or failure, but a chancellor can ultimately assess the bigger picture free from artificial targets set by a government which wants to insulate itself from responsibility.

    Nobody took responsibility for what happened between 05 & 08 when rates were too low. Government hid and the BOE blamed the targets.

  4. Brian Tomkinson
    Posted July 17, 2010 at 9:47 am | Permalink

    Reading this I am reminded of some of Ronald Reagan's memorable quotes:

    "Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

    "The problem is not that people are taxed too little, the problem is that government spends too much."

    "The most terrifying words in the English language are: I'm from the government and I'm here to help."

  5. Javelin
    Posted July 17, 2010 at 10:38 am | Permalink

    Absolutely right to keep this issue high on the agenda.

    Small businesses lead the recovery. Large corporates were favoured and small companies disowned by New Labour. Even worse the spirit of creatvity and growth have been kept alive by one TV program. If it weren't for dragons den I would forget we weren't in a Soviet economy.

    Sadly the Northern Labour heartlands are no SO dependent on the public sector that any rationalisation will damage them. The North of England is a benefit dependent on a larger scale.

    I believe lower taxes in some Northern regions CAN be used to demonstrate that lower taxes can stimulate growth.

    • Mike Stallard
      Posted July 17, 2010 at 8:43 pm | Permalink

      Why not be really radical and slash taxes really hard? Also make it really hard to get the dole in whatever form (stamps – why were they cancelled?) and introduce training programmes like in 1992 when I was myself unemployed?
      The skills are probably still there – but not for much longer.

  6. oldtimer
    Posted July 17, 2010 at 10:45 am | Permalink

    And add on to all of that the absurdities of the Climate Change Act and our sense of joy is unconstrained!

  7. forthurst
    Posted July 17, 2010 at 11:51 am | Permalink

    The Federal Reserve Bank is a secretive private institution whose lending policies might appear to have been to enable its friends on Wall Street to enrich themselves whilst engaging in activities that would be mistaken by the comon man as being grotesquely greedy, predatory and immoral. Nor would the same common man been much reasured by the further lending policies of the FED after the crash to enable the 'banks' including the newly bankified (investment banks) to be refloated on enormous public borrowing whilst Main Street remained mired in gloom and debt.

    It is certainly true that neither the BoE or the FSA (the regulator at the time) had a clue as to the nature or extent of the 'financial weapons of mass destruction' accumulating in the balance sheets of the banks in this country, temporarily under the management of nincumpoops.

    there is very little evidence that banks are motivated to lend money to businesses, particularly small businesses whilst they perceive easier means of making money, including as before paying themselves large commissions for acquiring derivitive 'assets'. The truth is that making money honestly is hard work and there is very little indication that the incredible amounts of money paid to so-called bankers and banks (ie institutions that call themselves banks but rarely engage in conventional loan and deposit activity) are in any way proportionate to the amount of work they do or the amount of added value they create for the wider economy, consequently it is essential that politctians and regulators get a grip on the matter that most of them seem far too dimwitted to understand, namely the tendency of banks to stray from from their raison d'etre which is to lend money at interest to support activities that add value since it is very hard to see how lending money at interest to create asset bubbles is ever going to be a fairy tale with a happy ending when the prince and princess in their shiny new palace find it is worth less than it cost and they can no longer afford the repayments.

  8. Chris Rose
    Posted July 17, 2010 at 12:11 pm | Permalink

    I cannot understand why the Government has been so timid in implementing the measures you propose, which are so urgently needed to improve our finances. The banks stopped lending to business two years ago and the harmful effects of high taxation have been know n for years. The Government must know what to do by now, the opposition is otherwise engaged with internal dissention, so why not act?

  9. Javelin
    Posted July 17, 2010 at 2:55 pm | Permalink

    What about a competition for a borough or county in the North of England to bid to become a low tax zone. In return they would get to keep the increased taxes they produced from rates etc. Hopeullly it would put to bed those who argue that high rates of tax is the only way to increase tax revenue.

    • StevenL
      Posted July 17, 2010 at 11:20 pm | Permalink

      Why not just devolve local taxation so that local government is 100% funded via local VA/sales and land value taxes?

  10. Kevin Peat
    Posted July 17, 2010 at 5:22 pm | Permalink

    The EU sees this as a time of huge opportunity to regulate “Anglo Saxon capitalism”

    The only system ever to have effectively eradicated poverty within its population (and for a large number without.)

    EUSR ( European Union of Socialist Republics)

  11. Austin
    Posted July 17, 2010 at 8:01 pm | Permalink

    You seem to be saying, at least Britain is tredding water whilst the rest of the West slowly sinks. How much stomach do Conservative MP's, such as yourself Mr. Redwood, have for more LibDem compromises?
    I would also add that Obama has at least as much antipathy towards "Anglo-Saxon" capitalism as the French and the Germans. A very poor, sad, and serious situation for British [English] conservatives. Are Conservatives open to talking to UKIP yet? It seems incredible that if only Conservatives could have formed a pre-election coalition with UKIP, Britain would now have a strong Conservative government undoubltedly with the likes of yourself in key Cabinet positions steering Britain back to prosperity maintained by a strong defense and pointing the way for it's allies; both Commonwealth, American and continental.

  12. Mike Stallard
    Posted July 17, 2010 at 8:44 pm | Permalink

    How much longer have we got before this frail coalition falls to pieces?
    I need to know, because once Michael Gove goes, bang goes all our hope of reforming the educational system.

  13. Matt
    Posted July 18, 2010 at 12:10 am | Permalink

    I think you’re spot on, when there is a broad concensus there is less scrutiny, more acceptance more comfort in being in the herd.

    It’s difficult getting existing loans re financed, let alone securing new loans.

    The bank informed us, when refinancing an existing facility that had been in place for several years, without any covenants being tripped,” we see this as an issue of equity rather than debt.” We did secure it after a prolonged discussion, but the terms were worse. Last time the facility was renewed base rates were about 5%.

    Maybe capital requirements need to be relaxed, its above my pay grade, but the chances of securing finance to assist with expansion is remote.

    Yet there are still bank invites to a champagne day the races. What’s the point in that?

  14. FaustiesBlog
    Posted July 18, 2010 at 1:09 am | Permalink

    10 years ago, I'd never've thought that I'd say this, but private banking is a lousy idea. The ability of private banks to create money out of thin air and loan it to people at usurous rates and then contract the money supply to assist bankers in gobbling up prime assets, its downright criminal.

    Government's complicity in usury and counterfeiting is equally criminal. That our economy now relies upon criminal 'enterprise' is even more criminal – thanks to greedy bankers and power-crazed politicians who have been easily bought (and arm-twisted) by the bankers for decades.

    Look at the Dakota and Alaskan banks; they do not leverage, via fractional reserve. And they are sound banks which *serve* the nation – not rip it off.

    So, for once, I look forward to the cutting down to size of the banks. It's just a pity (but not surprising) that an axe wasn't taken to Goldman Sachs (and J P Morgan) by the SEC, when they had a golden opportunity to do just that, last week.

  15. Conrad Jones
    Posted July 18, 2010 at 7:14 pm | Permalink

    When you say "Government Damaging Recovery" are you sure that it's the Government in control? Who finances Political Parties? Surely they are in control and are therefore pulling all the strings.

    I saw a Labour Union Leader on the television today spoating support for all his "members" and my initial reaction was contempt for someone who was attempting to maintain the status quo of "excessive public sector" spending which will lead to an increased deficit. It was some hours later before I realised that people who work in the public sector actually do real work which does benefit all of us. Even when you take into account the apparent waste and excessive pension agreements – at least we get something for the money. Policing, Nursing, Rubbish disposal, Ambulances, Road Maintenance etc.

  16. Conrad Jones
    Posted July 18, 2010 at 7:15 pm | Permalink

    If there is a large cull of public sector jobs – will this really help? Surely there will be an enormous increase in "Job Seekers" allowances – for a short period at least. The problem in our economy is not with public sector workers (I work in the private sector myself) the problem has always been with a fiat currency and with Banks who care nothing for people and who benefit from War, Recession, Debt and misery. The Banks have been "given" £200 billion pounds – where is it?
    If we were in so much debt – why was my money (paid in tax) being paid to Bankers who just carry on as before. "We're all in this together" – I don't think so.

  17. Mark
    Posted July 19, 2010 at 9:01 am | Permalink

    Taxing banks won't help. They have huge losses to work through – bigger still as the property bubble unwinds. That means that bank customers will pay for the taxes and the losses. Those hit hardest by this are the savers and depositors, who have seen their incomes wiped out.

    Letting the property bubble unwind is the key to recovery. Only when the risk of property price falls has been almost eliminated can banks regard property as adequate security, and borrowers can feel more secure in pledging assets to support businesses. Moves to ensure that mortgage lending is based on the real incomes of borrowers rather than self-cert fictions, and to reduce the prop to rental incomes from housing benefit are at least steps in the right direction.

  18. christina sarginson
    Posted July 20, 2010 at 10:20 am | Permalink

    It is all very well taxing the banks as we think of them as the enemy but how will that help us? The banks will just pass this onto the customer and the customer loses all the time how fair is that?

  • 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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