A little figure with a big impact

 

            The problem with the provisional figure for GDP in the last three months of 2010 is it was a long way short of the consensus. That means many people have to explain and change their viewpoint. It will mean a greal deal of politics will be generated around it.

               Labour and their friends in the media will say it just proves that you should not cut public spending  too far and too fast. Their analysis and conclusions will be miles out. Any proper analysis of the figures shows public spending rose swiftly in the last three months of 2010, so on their analysis the economy should have done better. There have been no overall cuts so far.

                Establishment supporters of the Bank of England will say it just goes to show how they needed to keep interest rates on the floor, and might need another round of quantitative easing. They need instead to answer how come inflation is so high if output is so depressed, and answer why the last large QE and permanently low short rates have not done the job.

              The government says that it is mainly a weather related incident. The damage occurred in December, when ice and snow closed down service businesses, made life difficult for transport and construction, and stopped people getting to shops and restaurants.  They have on their side the fact that manufacturing output accelerated, rising faster than in the fourth quarter. Energy also rose. Most planes were grounded for many days, train  services were much disrupted and even cars and vans  found it difficult to get around.

                 On any analysis the figures are disappointing. There may be a  bounce in January as last January saw very bad weather. All surely can agree, however, that we need more growth for the private sector led recovery which is central to the government’s economic policy. The government needs to listen carefully to those who say we need a deregulatory and tax package that promotes enterprise and job creation, and a banking system that can deliver more credit for worthwhile projects including the  construction of new power stations, roads, homes and factory capacity. We also need to work out how to snow proof more of our economy, just in case we are in for more bad weather.

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13 Comments

  1. lifelogic
    Posted January 26, 2011 at 8:12 am | Permalink

    The figures are likely to remain bad until they sort out the lack of any bank lending. Then people can restart developments and investments all put on hold for lack of lending. That and halving the size of the state sector and abandoning most of the green nonsense and absurd regulations.

    • lifelogic
      Posted January 26, 2011 at 8:32 am | Permalink

      Just to illustrate the absurd complexity of the current tax system. I am doing my and my wife’s tax returns which are now quite complex. They now take me about 20 working days to bring them all together and file them even after my book keepers help. So nearly ten percent of my time plus my book keeper’s is wasted on this nonsense and that does not include VAT, NI and other government dealings.

      Leaving me much less than 90% of my time to actually earn any money.

      • lifelogic
        Posted January 26, 2011 at 8:14 pm | Permalink

        Then because HMRC site is overloaded (or just does not work properly) I have to waste most of the afternoon try to submit the return finally just got it accepted on about the 15th attempt.

        Doubtless, as my affairs are complex, they will launch an inquiry just to waste even more of my and their time. How many pointless jobs in accountancy, tax advice, in complex tax structures and at the HMRC are created by this absurd game of complex tax chess they have created?

  2. lojolondon
    Posted January 26, 2011 at 8:28 am | Permalink

    Aha – snow proofing our economy.
    Well the first step is to understand and believe that cold weather is here and more is coming. Invest in grit and gritters. Do not fine BAA, that is pointless, force them to spend money on snow blowers. I am anti-legislation, but here is an exception, create a law about winter tyres similar to all other Northern European countries.

    Unfortunately, this is common sense, but it is all contrary to the religion of global warming, so it will never happen, and next year we will have exactly the same again. (Probably worse as the earth is cooling). Mark my words!!

  3. Brian Tomkinson
    Posted January 26, 2011 at 8:51 am | Permalink

    Stripping away the blatant political hypocrisy of Balls’s position, his main argument seems to be that there is a lack of confidence due to the government’s proposed deficit reduction plans. He has been touring the TV and radio studios putting across his negative message. As usual the government’s position is barely articulated. Justine Greening is doing a good job but shouldn’t there be more political heavyweights supporting her? All the negative talk about cuts when the government has been spending even more than Labour is, as I expected, rebounding on the government.

  4. Lindsay McDougall
    Posted January 26, 2011 at 9:45 am | Permalink

    I’m beginning to think that a rise in base rate will actually help economic growth. Banks’ lending rates have bourne little relationship to 0.5% for some time and savers spend money too. Also, it is a much more practical way of helping pensioners than showering them with concessions that distort markets. Or do we want pensioners to be “things” controlled by government, the medical profession, drugs companies and the social services?

    So if inflation destroys growth – and post war economic data says that it does, except in the first year while money supply is feeding through – then we need higher interest rates.

    And we also need a brand new Govenor of the Bank of England and MPC that do not exceed their authority and do not worship false Gods.

  5. Winston Smith
    Posted January 26, 2011 at 12:16 pm | Permalink

    I think the reaction of commentators and the media is systematic of short-termism in our approach to the economy and, indeed, many other areas of Government. Some well-paid analysts described the drop as a “disaster”. All this is led by a hyper, reactionary media and politicians who prefer to manage perception, rather than reality. Well run businesses do not react to a minor dip in trend, they operate on 5yr, 10yr and sometimes 20yr plans. We need people running the Country who have our best long-term interests at heart

  6. sm
    Posted January 26, 2011 at 12:56 pm | Permalink

    Should GDP and debt numbers be split out between.

    1) The public banks ( and the so called ”private banks”)
    2) The private sector
    3) The public sector
    4) Off the books sector (debt owed but not on anyone balance sheet)

    Could the numbers be adjusted for inflation and debt spend and interest spend, what would the numbers indicate? It seems so confusing but maybe that is what is intended.

    At least we know that claimed cuts in overall spending are just false.

  7. Mark
    Posted January 26, 2011 at 1:06 pm | Permalink

    It is largely irrelevant to suggest that current economic performance is responding to Osborne’s measures. QE did not stop until just before the election, and it will take two years to work its way through the economy creating price inflation. Much of the current tax regime is Labour’s (we’ve only just had the VAT increase in the past few days), as is most of the new regulation such as the batty Equalities law that is adding cost to businesses.

    Brown and Darling chose to try pulling up the nose of the aircraft when they found the economic engines had cut out. As any pilot will tell you, that may give you a temporary increase in altitude, but it is a recipe for a stall and complete loss of control leading to a crash. They left behind bombs designed to explode when they were no longer on the scene: the need to refinance the banks’ BoE bailout funding, PFI and other off balance sheet government liabilities, absurd spending plans that have to be cut back sharply even to halt the rise in spending, trying to reignite the house price bubble and so forth. In short, Labour did everything they could do try to create a double dip for after they left .

    Instead, we need a shallow dive to pick up some airspeed and a controlled glide while we try to restart the engines. That will involve unclogging the banking fuel lines with their reliance on mortgages that waxed too great by lowering the temperature in the housing market; ungumming the burdens of regulation and unfreezing the economy with lower energy costs and reduced tax rates designed to increase tax yields. It means implementing real cuts in government spending – not perpetually deferring them. Perhaps we also need a message from the Captain, and for the BBC cabin crew not to spread false rumours.

    • Iain
      Posted January 26, 2011 at 8:28 pm | Permalink

      ‘QE did not stop until just before the election, and it will take two years to work its way through the economy creating price inflation’

      I agree, and I am surprised that the Government hasn’t been making this point, especially in light of Labour’s attack on them, firstly because Ball’s wants it both ways , blaming the recession them and inflation, if the cuts are going to do anything its going to bear down on inflation. Secondly, it is the attack the Government should be making on Labour’s deficit denial policy, but they don’t. I am not sure why the Government can’t make a half decent argument, they are either too bright and can’t be bothered to lower themselves to tell people the issues, or else George Osborne is completely out of his depth, so incapable of insuring the Government has an economic message to tell.

  8. stred
    Posted January 26, 2011 at 3:51 pm | Permalink

    I would not be surprised if the dip in growth continued in January. The change to filing tax returns online has resulted in many of us disappearing for a couple of weeks. I have not received tenders promised after Christmas, or done work myself that was urgent. This break in productivity comes just after the long break in December.

    Or is trying to find the right box to put your earnings and allowances counted as production and added to growth?

  9. Michael Kennedy
    Posted January 27, 2011 at 1:56 pm | Permalink

    “Establishment supporters of the Bank of England will say it just goes to show how they needed to keep interest rates on the floor, and might need another round of quantitative easing.”
    Given that Mervyn King, the Governor, says “”Of all the ways of organising banking, the worst is the one we have today” should we not be looking in depth for a fundamental change to a better system that will correct our deep-seated problems permanently?
    I would be interested in your views, John, on the proposals from the “Positive Money Campaign” and whether you think they would work as proposed.
    The proposals can be seen on this website;
    http://www.positivemoney.org.uk/

  10. Kevin Marshall
    Posted January 27, 2011 at 11:56 pm | Permalink

    Thankyou for putting this into perspective. The harsh winter, can partly account for some of the decline, especially some of the drop in construction. There is also the notorious issue of statisitical reliability – the adjustment in a month or two will be around 0.2% either way.

    Those who say that we should abandon any progress made so far are letting their political prejudices get in the way of balanced analysis. We face huge risks at the moment of run-away national debt and the severe economic problems of Greece & Ireland spreading to other, larger, eurozone economies. If this happens in the next three to five years then, in order to save the British economy going the same way, large and painful cuts will have to be imposed.
    Anyone who believes in delaying the deficit reduction program awaiting times needs to demonstrate their vastly superior and robust economic forecasts. Otherwise they may simply be displaying their pushing for political populism and personal aggrandisement over sound stewardship of the Government’s finances and the Nation’s prosperity.

    We should not forget that a the entire amount of the “cutbacks” in real terms (though not in nominal terms) are to eliminate the structural deficit of £70bn that was acquired prior to the 2008 slump. The recession only added to this. We will not cut into this part of the deficit for another four or five years, even with a bit of fair economic fortune. the result is that Labour’s contribution to our forecast £1.4bn national debt of 2014-15 could exceed £600bn with compound interest. Each year of delay in tackling the issue will add around £100bn to this debt.

  • 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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