2011 – the government needs to move quickly to avoid the new year’s potential crises

 

  Happy New Year to all my readers. Thank you for your New Year resolutions.

             I have suggested the government  resolve to get inflation down (December 30th) and to make it more worthwhile to grow a business here (December 29th) in the UK. There is a third resolution that  I propose to them if they wish to have a successful year handling the economy. They must avoid all further involvement in the gathering Euro crisis.  

              The government gave themselves some room to avoid more invovement in bail outs when they stressed that the Republic of Ireland was a very special case as a near neighbour sharing a land frontier with us, with substantial banking connections. None of the other Euroland members meet the first of those criteria.

               The Euro countries need work outs more than they need bail outs. Indeed, forcing them into IMF/EU packages of future borrowings may make the problems worse, not better. The Republic of Ireland may express disapproval when the electors go to the polls. There could be trouble forming a government which simply accepts all the conditions imposed on the Irish loan and accepts the package as presented which will be a straightjacket for the Irish economy for many months to come.

                  Spain needs to buttress its banks quickly and convincingly. The EU itself found five groups of Cajas did not meet its unstressful stress texts last summer. The UK should not fall for the argument that because there are cross holdings with UK banks we have some duty to help in this process. Nor is it necessarily the right thing to do to refinance the Spanish state on special terms so it in turn can finance the banks. If there are problems with any Spanish banks continuing to own UK banking interests, then let them sell those to new private sector owners. Governments need to get away from thinking they must act as lenders or share buyers of last resort to banks in trouble. There need to be market based solutions. In the meantime the European Central Bank should continue to act as the lender of last resort to Euroland banks, as Euroland regulators tell us they are all solvent.

            Nor should the UK be dragged into any refinancing of a governement which has been overspending. There may need to be a third package for Greece, still struggling under the weight of debt and the deflationary policies forced on it by the last two ackages.

               2011 could bring the next phases of the Euro crisis. The bail outs of Greece and Ireland have not mended those troubled economies. They needed work outs, not bail outs. The UK government should make sure it is not part of any future bail out party. We cannot afford to dish out more of  the wrong medicine to failing Euro economies.

                     In the New Year in Ireland it may prove difficult forming a government in the new Parliament of MPs who want to follow the letter and word of the EU/IMF  bail out agreement. Adding cuts and  tax rises to tight money and an overvalued currency is  not a great formula for fixing a distressed economy. Greece too might find the going tough under its revised terms from this autumn. The Greek economy is not growing, under the EU/IMF cosh.

                    The UK government said that Ireland was a very special case. If the officials seek to argue that Spain has strong common bank holdings and substantial links through the financial sector, Ministers should respond that the Spanish owned banks in the UK are solvent businesses which the Spanish banks can sell to new owners in the private sector should need arise. There is no need for the UK to ride to the rescue, to help refinance European Central Bank loans to Spanish banks.

                            Nor does it make sense for heavily indebted and high borrowing UK to borrow yet more to lend on to overstretched Euro member states governments. Those of us who fought long and hard to keep the UK out of the Euro did so in part to avoid UK taxpayers having to go to the rescue of  states in the Union who overdid the borrowing. It makes no sense to behave as if we had joined when it comes to paying the bills for this ill judged scheme.

                 The UK’s government finances are still stretched. Taxpayers will not take kindly to any further extension of the UK’s credit to lend on to Euro governments. The UK can help Euroland sort itself out by not offering an easy palliative in the form of more loans. Somehow Euroland has to learn to live within its means, and grow its means to get closer to its amibitions. Lending more without putting in place a currency and a monetary policy that allows recovery is not the right answer. The ECB was keen to scramble out of some of its lending to Ireland. It did not necessarily result in a policy for the Republic that will guarantee economic success.

               The Uk has to concentrate hard on getting its own spending under control and its deficit down. It needs a stronger growth strategy, to take advantage of the freedom it has by not belonging to the Euro to set a competitive level of its currency and a sensible monetary policy. The freedom so far has helped a bit with the growth, but at the expense of higher inflation. It is going to be a difficult year ahead getting the balance right.

                As the PM says, the heavy lift to cut the deficit gets underway in 2011. Readers should remember that as total public spending goes up every year in cash terms this Parliament, the heavy lift takes place through more tax revenue. That’s why 2011 starts with a hike in VAT and  petrol duty, not with spending cuts.

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37 Comments

  1. lifelogic
    Posted January 1, 2011 at 7:49 am | Permalink

    Correct in every respect, but I doubt they will follow your advice.

    I see that government economies and the supposed concern for global warming co2 “co called pollution”does not extend as far as the vast new year fireworks show.

    I also scan the new years honours list and see remarkable few real wealth creators mainly the usual, do not rock the boat, state sector time servers and a few usually of the famous – lefty actors and the like.

    Perhaps, as people survey their presents, it is good to remember that when you spent your money on something you need it is usually more efficient than some one buying you a present they think you might need. But the worst of all is the government taking your money, wasting half in collection, then spending the rest on something they think would make you vote for them or they think would be good for you.

    • Stuart Fairney
      Posted January 1, 2011 at 9:43 am | Permalink

      Manyof the wealth creators have “gone Galt” to coin a phrase and bailed out themselves. I was recently speaking to a remarkably successful young man regarding some funding for a project I was involved with.

      He used to live in the UK but finds the idea that 62% of his profit should go to the government (compared to zero in Dubai) less attractive. He also rather likes the idea that he design his 10,000 sq.ft. home rather than wait a year for some council drone to say ‘No’ quite appealing.

      I plan to join him as soon as I am able since I have no faith in the Cameron/Clegg show to implement JR’s halfway sensible ideas and I fear the next decade is one of turgid socialdemocratic decline under Cameron and then one of the Millibands.

      No future for my son here.

      • lifelogic
        Posted January 1, 2011 at 2:52 pm | Permalink

        I tend to think it is only when the wealthy and creative all start to leave in droves or just give up working hard that Cameron will finally realise the the ever bigger state is doomed to fail as tax revenues slowly vanish.

        • FaustiesBlog
          Posted January 1, 2011 at 6:08 pm | Permalink

          Indeed, as per John Galt.

          However, while Cameron might realise that the ever bigger state is doomed, it is within his personal interests to ensure that it prevails for as long as possible. He is a creature of the globalists.

          He needs incentives to do the opposite (supporting big state) and those incentives need to come from the grassroots. We cannot assume that principle and common sense will compel him to “do the right thing”.

          2011 will surely be the year when the powers that be are levened by peaceful non-co-operation – civil disobedience via the wallet.

          Watch out, Cameron. Your “progressive” propensities are in our cross-hairs.

          • Stuart Fairney
            Posted January 1, 2011 at 9:33 pm | Permalink

            “while Cameron might realise that the ever bigger state is doomed, it is within his personal interests to ensure that it prevails for as long as possible”

            Exactly right, and it is the same story for Clegg, Milli and the rest of them. I would not however suggest witholding taxes if that is where you are going because that is the road to jail (Incidentally, this is why they hate terrorism so much, they like to have a monopoly on political violence).

            I am sorry to strike a note of gloom but 2011 through 2020 in the UK is a re-run of 1970 through 1979 with inflation, busts, decline and jaunts to the IMF when we are bankrupt again.

        • Bazman
          Posted January 1, 2011 at 7:29 pm | Permalink

          The wealthy and creative just need to sod off.

          • lifelogic
            Posted January 1, 2011 at 8:34 pm | Permalink

            They will

          • Stuart Fairney
            Posted January 1, 2011 at 9:26 pm | Permalink

            You had better hope they don’t, unless you want to live in a Euro version of North Korea

      • Ian Pennell
        Posted January 2, 2011 at 3:22 pm | Permalink

        Dear Sir John Redwood

        Haapy New Year, Sir and I do hope (and pray) that Britain will remain prosperous despite the much-needed austerity measures,

        To quote Stuart Farney:

        “Many of the wealth creators have “gone Galt” to coin a phrase and bailed out themselves. I was recently speaking to a remarkably successful young man regarding some funding for a project I was involved with.

        He used to live in the UK but finds the idea that 62% of his profit should go to the government (compared to zero in Dubai) less attractive. He also rather likes the idea that he design his 10,000 sq.ft. home rather than wait a year for some council drone to say ‘No’ quite appealing.

        I plan to join him as soon as I am able since I have no faith in the Cameron/Clegg show to implement JR’s halfway sensible ideas and I fear the next decade is one of turgid socialdemocratic decline under Cameron and then one of the Millibands.

        No future for my son here.”

        I will say that I ceased to be a Member of the Consertvative Party in September and joined UKIP because I have no hope that the Prime Minister, David Cameron who (in hock to the Liberal Democrats) is willing to engage in policies that might seem to be “grossly unfair” through fear of losing the next General Election. The top rate of tax must MUST come down to about 25% (the basic rate should be 10%) and the spending cuts must be a bit stronger to pay for this. We need to invest more in nuclear power before the lights go out (which they will with current green policies) and Britain needs to leave the European Union (which has become a serious threat to our economy and national sovereignty).

        Britain needs a Government with guts, to risk the wrath of the scroungers and Public Sector fat cats so that debt and economically damaging taxes are cut much more rapidly. Public Sector cuts combined with high taxes on “the rich” will cause the dreaded “Double Dip”, deeper cuts combined with tax cuts will still ensure growth. We must also face down the CND supporting NIMBYs to ensure our future energy security and we must face down the European Union.

        If David Cameron continues to be timid and fear the Lib Dems walking out so that he has to face an electorate angry at cuts (but who might respect him for having cuts), we will surely have economic stagnation, heavy electoral defeat for the Conservatives and a Labour disaster following 2015 as they persue even more extreme socialist policies.

        You, Sir along with some of your Conservative colleagues must realise the weight of responsibility for running the economy the electorate places on you, short term back-downs and U-turns to ensure Labour does not get ahead in Opinion Polls will count for nothing when recession is re-entered, the lights go out and stagflation hits. You must (collectively) remind and warn the Prime Minister of what he must do.

        Yours, etc

        Ian Pennell

  2. Electro-Kevin
    Posted January 1, 2011 at 10:30 am | Permalink

    I don’t imagine for a minute anything other than further capitulation to the EU from this Government.

    Happy New Year.

  3. Alte Fritz
    Posted January 1, 2011 at 10:31 am | Permalink

    This is a genuine question to Mr Redwood. Why has Estonia joined the €? What good can it do for a tiny country on the periphery of the EU?

    Reply: Ask them – I did not recommend it!

    • lifelogic
      Posted January 1, 2011 at 3:38 pm | Permalink

      It probably won’t do them any good but it makes some of the less able politicians feel a bit more important while actually diminishing them and their power.

    • Bazman
      Posted January 1, 2011 at 7:33 pm | Permalink

      There is some absolutely delightful woman in my new part time job from Estonia that will be a massive benefit to the UK. I am being serious.

    • grahams
      Posted January 2, 2011 at 1:56 am | Permalink

      A bit sad really. The kroon was, I believe, the only currency to be backed by reserves of standing timber. Wood is stronger than paper.

  4. Nick
    Posted January 1, 2011 at 10:56 am | Permalink

    So its wrong for the UK to bail out other countries.

    Why is then right that I have to bail out the incompetence of UK politicians?

    You’re carrying on the incompetence.

    For example Crossrail. Why should I subsidise the 20 quid a day cost per passenger?

    Reply: I do not myself favour bail outs of politicians any more than of banks

    • Bazman
      Posted January 1, 2011 at 7:46 pm | Permalink

      This is the real problem. The bail out of politicians and the other people who sign everything off. Thank God for the free market.

  5. Brian Tomkinson
    Posted January 1, 2011 at 11:04 am | Permalink

    Happy New Year.
    I have been watching the early episodes of ‘Yes Minister’ made some 30 years ago and yet still so very topical today. ‘Open government’ was one of the main planks of the manifesto along with cutting a great swathe through the Whitehall bureaucracy. Very quickly it transpired that the minister didn’t really want open government when his career was threatened and reducing the numbers merely meant redeploying them. Sir Humphrey explained the law of Inverse Relevance: the less you intend to do about something, the more you have to keep talking about it. This made me think of all the present talk of cuts but no action and no talk of tax increases but plenty of action. In a later episode the minister decides that to give millions of pounds of British taxpayers’ money to another state so that they can buy British products is a necessity. The recent ‘loan’ to Ireland immediately sprang to mind. Clearly, in Whitehall, nothing changes.

  6. English Pensioner
    Posted January 1, 2011 at 11:54 am | Permalink

    If Spain gets into trouble we should look after British, and British, interests only. As you say, the Spanish banks in the UK are apparently solvent and could be taken over by UK interests if they need to realize assets. And if the owners of Heathrow (need to raise cash -ed), I’m sure there is someone in the UK who would make an offer in a “Fire Sale”. But no way should the UK give any support to Spain whilst we still have such a large deficit.
    But I bet this Government will under orders from the EU!

  7. norman
    Posted January 1, 2011 at 11:54 am | Permalink

    A happy and prosperous new year to one and all, and many thanks for a years worth of outstanding posts.

  8. alan jutson
    Posted January 1, 2011 at 12:34 pm | Permalink

    There is a saying.

    No Pain no Gain.

    Not always true, but perhaps in the case of Government expenditure it is.

    Having bloated ourselves as a Nation on an excess of borrowing and Government expenditure, we now need to go on a diet and slim down.

    The slimming down process always takes time but the more effort you put in, the quicker you see the results (as long as you do not continue to stuff yourself)

    Given that 2011 will not really start to have any real impact until April, we have already lost the first 12 months period of this Government.

    So one is forced to ask why it has taken so long, when such simple things could have been done from day one. Like no new staff be taken on, to replace natural leavers.

    I am not looking forward to the pain, but we need the results and fast.

    At a New Years dinner party (10 people) last night, I asked if anyone had noticed any difference at all in life style during the last 12 months. Answer from everyone NO, except that they thought their savings were being screwed.

    To the question should something be done about the Benefits System, all said the present system was a nonesense, and a farce which did not encourage work.

    It would seem to me that in the coming years the wrong people are going to feel the pain, but those who manipulate the system, may be getting the gain.

    I hope the Coalition prove me wrong.

  9. Ken
    Posted January 1, 2011 at 1:18 pm | Permalink

    What worries me in 2011 is an obsession with keeping the Coalition together and with keeping the media sweet, at the expense of the country.

    • Paul from MK UK
      Posted January 1, 2011 at 3:48 pm | Permalink

      JR has got it mostly right. Ken has highlighted two of the reasons why it wont happen, though. Cameron has no backbone.

  10. Steve Cox
    Posted January 1, 2011 at 1:27 pm | Permalink

    “Readers should remember that as total public spending goes up every year in cash terms this Parliament, the heavy lift takes place through more tax revenue. That’s why 2011 starts with a hike in VAT and petrol duty, not with spending cuts.”

    And isn’t that the real tragedy?

    Have a good New Year, one and all, but for savers and many of the the elderly I doubt that it will be a happy one.

    (unsubstantiated allegation about the Cameron family inheritance-ed) As I wrote recently, Mr. Cameron and Mr. Osborne have little idea how ordinary people are having to cope with the fallout from Gordon Brown’s dreadful mismanagement of the economy. This just proves it. (suggests Mr Cameron pays more tax -ed)

  11. BobE
    Posted January 1, 2011 at 1:31 pm | Permalink

    The government should switch to all electric cars.

    • lifelogic
      Posted January 1, 2011 at 2:43 pm | Permalink

      Why? Electric cars make no sense, save no C02 (unless you use nuclear electric), have limited range, take many hours to recharge, have batteries that are heavy expensive & polluting and do not last very long and cost far more even after the tax advantage / subsidy. Like DAB radios they are usually fairly pointless. Unless you just wish to make a “visible statement” about your personal religious beliefs – but a badge or green ribbon would be far cheaper and rather more green.

      • BobE
        Posted January 1, 2011 at 3:55 pm | Permalink

        This was my ironic dig at the latest “exciting” offer to subsidise people buying electric cars. You can claim £5,000 pounds back from a particular range of electric cars. Described as exciting by the government. I was implying that if MPs want us to move in a particular direction then they should lead by example.

        • lifelogic
          Posted January 1, 2011 at 7:28 pm | Permalink

          Sorry too subtle for the obtuse me to spot but at least my (physicist/engineering) views on electric cars were aired again.

    • FaustiesBlog
      Posted January 1, 2011 at 6:20 pm | Permalink

      Why not hydrogen fuel cell cars? After all, they run on water!

      But hey, there’s no profit in selling water for the oil cartels which run the world.

      • lifelogic
        Posted January 1, 2011 at 7:35 pm | Permalink

        The water need to be spit in to Hydrogen and Oxygen using lots of energy, preferably nuclear when the powers that be finally get round to building some after ditching the nonsense liberal views.

      • alan jutson
        Posted January 2, 2011 at 9:05 am | Permalink

        “Its only water”

        The problem, they will tax it like petrol and diesel !

        To make sure you do not fill up from your tap, they will colour it and do roadside checks !

  12. Richard Calhoun
    Posted January 1, 2011 at 1:40 pm | Permalink

    ” The Uk has to concentrate hard on getting its own spending under control and its deficit down. It needs a stronger growth strategy, to take advantage of the freedom it has by not belonging to the Euro to set a competitive level of its currency and a sensible monetary policy.”

    I agree with the above completely but must ask how we can expect growth without some radical tax changes.

    Should this country not be adopting a ‘Flat tax’ ??

    I would be interested to hear your views.

  13. grahams
    Posted January 1, 2011 at 1:52 pm | Permalink

    “Set a competitive level of its currency and a sensible monetary policy.”
    Ssurely sshomething wrong here, as someone used to say. We cannot do both.

  14. FaustiesBlog
    Posted January 1, 2011 at 3:43 pm | Permalink

    Happy New Year, JR, and thank you for your efforts regarding monetary sanity and the EU. Please keep it up and continue to pile on the pressure.

    Old Holborn produced a set of 10 New Year’s Resolutions which I wholeheartedly endorse – as do a growing number of people who are absolutely sick of the current power structure, corruption and increasing control over every aspect of our lives, which the CP seems to endorse.

  15. Éoin Clarke
    Posted January 1, 2011 at 3:44 pm | Permalink

    Dear John,

    Speaking as a Labour Party member, I have to say that your argument regarding the forthcoming Euro-Crisis is very convincing indeed. If need be, Spanish and Italian banks should be allowed to fai…

  16. REPay
    Posted January 2, 2011 at 9:03 pm | Permalink

    This is the year when we will see if this is really a government that can make a case. The style reminds me so much of the Blair government that i would never be able to get a blind tasting test correct. By not giving a clear narrative on the credit crunch (it was not just the banks) the chances for a second term look weak. But then being a senior UK politician nowadays is just a strpping stone to something better – viz A.J. Blair.

  17. Javelin
    Posted January 3, 2011 at 9:13 am | Permalink

    Having looked after credit derivatives IT at HSBC for the past 3.5 years (and they didn’t lose money) my concerns are with Italy. They have lower tax conformance than Greece, a more fragmented banking system than Spain, a more strike prone workforce than Spain, a higher deficit than most EU countries and a less popular leader than any where else. It all adds up to a very volatile country.

  18. George Rowley
    Posted January 7, 2011 at 9:52 am | Permalink

    Happy new year! This is a phrase which we have used for so long but with all the current talk of job losses and tax increase do you really think it will be. The sentiment is there but how the effect the state of the nation has on the people I really doubt if any of us will have a happy new year or beyond unless we do things differently!!

  • 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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