Does more public spending increase growth?

 

            One of the interesting features of the poor GDP figures for the last three months of 2010 was they occurred at a time of rapid increases in overall public spending. Total current spending is up around 7% on the previous year, and in November was up by a double figure percentage increase compared to November 2009.

            Those who think the only thing wrong with the UK economy is too little public spending under the Coalition government need to answer why output fell when spending was so buoyant. No sensible analyst can claim that the problem with the UK economy in recent years has been too little public spending or borrowing.

            They could learn from the poor experiences of Greece and Ireland, that if a state spends and borrows too much it can trigger much higher borrowing costs, a loss of confidence, and  less economic output, not more. They could see from Japan that continuous injections of more public  spending and borrowing over a 20 year period can fail to raise the growth rate, ending as it did this week in yet another sovereign debt downgrade.

             Let us take a very  simple model of the   economy. There are 4 people in the private sector on £20,000 a year each. There is one person in the public sector, on £15,000 after taxes . There is one person unemployed, on £10,000 of benefits paying little tax.

              The private sector people and their employer pay overall 40% in taxes. So they get to spend £48,000 from their income, and the state receives £32,000 from them. The state spends £25,000 on its own employee and unemployed person, and another £17,000 on other bought in goods and services. It pays for this with the  £32,000 of tax from the private sector and £10,000 of borrowings.

              Some say we would all be  better off if the state hired the unemployed person.  Let us suppose it could do so for £14,000 a year net of taxes. The figures would then become:

State spending  on employment £29,000

State spending on bought in services  £17,000

This would require an increase of £4000 in state borrowing, or a 40% increase  from the already extremely high levels. This would take the state well into territory likely to lead to a financing crisis.

Alternatively the state could add say £2000 to the borrowing and £2000 to taxation.  This would then cut private sector incomes by an further £2000, reducing demand and offsetting some of the  demand increases from the extra income in the public sector. Meanwhile the private sector faces having to pay off another £2000 of debt, and in the meantime has to pay interest on it. This will have confidence and spending effects.

As we have seen, there are limits to how far a country can go in extending additional public sector employment on borrowing before there is a collapse as seen recently in various European countries. When a state is at its borrowing limits, it does not add to economic activity to borrow more – it can tip the economy over into worse performance, as in Ireland and Greece.  Even if the state can borrow more, it does not add all the extra spending to output, owing to the impact of the extra spending, borrowing and taxation on the private sector. If the private sector faces tax rises, or expects later tax rises to pay off the borrowing, the effect of the extra spending is offset to a greater or lesser extent. If a country is already setting uncompetitive tax rates it can lose more of its taxable business base quite quickly. THis country badly needs more private sector jobs. That’s why there have to be limits to the rate of growth of public spending and outstanding state debts.

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59 Comments

  1. Peter Cartwright
    Posted January 29, 2011 at 10:29 am | Permalink

    Dear Mr Redwood,

    Much as I enjoy your blog, the pendant in me winces at the many spelling mistakes – I assume that like me you do your own two-fingered typing while staring at the keyboard. I suggest you type in Microsoft Word and perform a spell check or switch your web browser to Google Chrome, which has a built-in spell checker.

    But don’t let me stop or slow your blogging!

    Regards

    Peter Cartwright

    • lifelogic
      Posted January 29, 2011 at 1:08 pm | Permalink

      Spelling is not really important it very rarely causes misunderstanding (and often amuses). Different accents cause far more problems and no one suggests we should have a dictionary ruling only one accent is allowed. Shakespeare used a lot of spelling variety I am sure out or principal. Only socialists think there is only one (government prescribed) correct way.

      What really matters is the maths – which clearly shows that more public spending is needed like a hole in the head. Much spending does nothing useful and a lot just does nothing useful (and positive harm) to profitable businesses sector and diverts many bright people away from doing something rather more useful with their lives.

      • lifelogic
        Posted January 29, 2011 at 1:14 pm | Permalink

        The government should also address pensions to get state sector and private provision to similar levels with a tapered tax. There is a huge imbalance after Gordon’s (guru of destroying “the wealth of nations”) mugging.

        • lifelogic
          Posted January 29, 2011 at 6:05 pm | Permalink

          If the state employed people efficiently to do some think useful for the country then it might not too bad but they never do. What is better a tax payer spending £100 on something they want and need (like a new washing machine) and can buy efficiently. Or the government taxing it off you wasting 20% in tax collections costs, then another 20% debating how to spend it .Probably finally fixing on something like trying to buy win votes in marginals, MP wages and pensions, on some daft fashionable ideology, more regulators or large consultancy fees for friends of the powerful).

          Then you find you have a tiny share in a white elephant wind turbine, an athletics stadium that will be used for a few weeks only, a millennium dome, a large state sector pensions liability and thousands of employments tribunal lawyers, regulators, and an unused high speed train to just outside nowhere.

          And all will need ongoing funding and management too.

    • stan francis
      Posted January 29, 2011 at 5:37 pm | Permalink

      ..it’s obvious he needs something to do, how about a candidate next local elections, as an INDEPENDENT?..hope no mistakes in the word INDEPENDENT?

    • zorro
      Posted January 29, 2011 at 8:49 pm | Permalink

      ‘the pendant (sic) in me winces’…..I think that you mean pedant….life just isn’t fair sometimes….pot…kettle….black

      zorro

    • nic regan
      Posted January 30, 2011 at 9:01 am | Permalink

      ! I assume you meant to write “pendant” ?!! I suggest the spell check isn’t foolproof…

    • Andy
      Posted January 30, 2011 at 10:04 pm | Permalink

      Spell checks didn’t help your post, your pendant.lol.

  2. michaelmph
    Posted January 29, 2011 at 10:35 am | Permalink

    Don’t you have a spell checker? Should that be ‘pubic’ in the heading? Also ‘spending’ in the penultimate line.

    Reply: FAIR CRITICISM. Sometimes I am in a great hurry and do not manage to check it carefully.

  3. Alte Fritz
    Posted January 29, 2011 at 10:44 am | Permalink

    An argument to throw into the debate may be to object loudly when it is said that public spending cuts take money out of the economy. Superficially that is true, but if you need not borrow and later pay interest and principal nor raise taxes, the net eventual effect is to increase money in the economy. It is just in a different place, that is to say, in the hands of the public.

    It is frustrating to listen to discussions in which Conservatives fail to pick up on that infuriating phrase.

  4. alan jutson
    Posted January 29, 2011 at 10:46 am | Permalink

    Sad that so few media interviewers understand this simple maths. Perhaps if they did, then the argument that it is better for the state to employ someone (anyone) rather than have them taking unempoyment benefit, would be put to bed once and for all.

    But do not forget the a non financial benefit, that the discipline of working is better for the mind and spirit, than sitting on your backside and getting bored, or constantly being rejected when making job many applications.

    One is forced to ask yet once again, why the Government cannot get simple messages across to the population.

    Perhaps we should adopt a State of the Kingdom broadcast every 6 months by the PM on TV (all channels) so at least he has the opportunity to get some points across direct, without the media editing out the sensible bits.

    For a PR man, Cameron does not have a good PR team behind him.

    • lifelogic
      Posted January 29, 2011 at 5:37 pm | Permalink

      I think his PR is actually quite good on a superficial level – but you do still need to be heading in the right direction. It you are steering the Titanic toward the “ever bigger state” ice burg your good PR, smiles, jokes and distractions will only work until you hit it in about 3/4 years time.

  5. Ralph Musgrave
    Posted January 29, 2011 at 10:47 am | Permalink

    I don’t favour a bigger public sector, but your reasoning is flawed.

    If current national debt to GDP ratios are a problem, how come the ratio was at least double the present level immediately after WWII (in both the US and UK) without any big problems? And as regards the UK, same applied just after the Napoleonic wars.

    Second, you go along with the current conventional wisdom, namely that more public spending means more debt. Even if more public spending is NOT covered by tax, the resulting deficit can accumulate extra monetary base, rather than extra debt. That was what Keynes recommended, though he kept a bit quite about it. Abba Lerner, in contrast, a contemporary of Keynes’s, was more blunt and open in advocating the “extra monetary base” option.

    Indeed, the extra monetary base option is pretty much what is happening as a result of QE.

    Reply: The bulge in employment and borrowing was temporary for the war, so accepted by markets. There was then a huge transfer of spending and personnel out of the forces into the private sector.

    • Stuart Fairney
      Posted January 29, 2011 at 12:01 pm | Permalink

      In fact your reasoning is flawed, one of the notable things about the post war UK economy is the persistent and often high inflation. This is exactly as predicted by von Mises when any notion of a commodity backed currency is abandoned in favour of the fiat money that served Weimar Germany so well. The “extra monetary base” just converts into price increases, (a symptom not a cause) which are themselves no better than criminal theft.

      • Gary
        Posted January 30, 2011 at 11:25 am | Permalink

        There is deflation in the centre, in the USA, where the reserve currency is created and in which most global debt is denominated, and there is inflation in the periphery amongst those who are debtors of the reserve currency and whose currencies are essentially derivatives of the reserve currency.

    • lola
      Posted January 29, 2011 at 12:52 pm | Permalink

      Nope. Money is debt. Ever read your tenner’ “I promise to pay the bearer on demand….”.

    • Gary
      Posted January 29, 2011 at 4:02 pm | Permalink

      Debt spending is a diminishing return. Eventually you are pushing on a string. When you start exhausting your pool of real funding of real savings and just create money , eventually the market discounts this and with the ever increasing burden of servicing the debt you end up with the diminishing marginal productivity of debt, where for every new £ of debt created you create somewhat less than a £ of extra GDP growth, until eventually you start LOSING a £ for every new £ of debt created and then you are in a debt trap. If growth could be endlessly obtained by deficits , then Zimbabwe would be the richest country on earth.

      Why on earth should anyone think that govt can appropriate wealth from the private sector, because that is exactly how govt gets all of its money, and then reallocate it better than the private sector after extracting huge salary and overhead costs in the process ? Just cut the govt middleman out and let the the private sector directly allocate investment and be done with it.

      The diminishing marginal productivity of debt :

      http://www.financialsensearchive.com/editorials/fekete/2009/0330.html

    • lifelogic
      Posted January 29, 2011 at 8:28 pm | Permalink

      You reply is spot on as usual what we need now is a large return of labour from the state sector (rather than the forces) to productive industry. The sooner the better if you wish to win the next election.

      Do not forget that many people who work in the state sector and even the unemployed are some the most aware of the pointlessness of many of the so
      called “jobs” many do.

      They would be far happier doing something useful I am sure.

      Just release them please! It might help Cameron’s silly “happiness” index after all.

  6. StrongholdBarricades
    Posted January 29, 2011 at 11:03 am | Permalink

    Whilst the UK needs private sector jobs, the banks are not able to play their part in the normal economy.

    It would appear that only cash rich SME’s can actually expand.

  7. a j k
    Posted January 29, 2011 at 11:12 am | Permalink

    I read that public spending has increased recently but that a good part of this was debt interest repayment. This is dead money and to compound the error that money had to be borrowed – is this country entering into a “Cub Med” type destructive debt spiral.
    Why is there no honest fightback by proper government representatives, as opposed to the vacillating shills put up as frontpersons.
    Rabid leftwingers, particularly the BBC, get away with murder.
    People know the dire straits we’re in but the message is continually distorted.
    I’m finding I get a better picture of straightforward news from Russia Today channel.

    On a similar note we are now finding out about the expensive and destructive (bad forecasts ed) by the Met Office regarding the “warmist” winter forecast – will that appear on the Religion Channel – aka BBC.

    • Ken
      Posted January 29, 2011 at 6:52 pm | Permalink

      Yes, I find myself increasingly watching Russia Today. Saves me having to take a mean average between Fox and BBC.

  8. norman
    Posted January 29, 2011 at 11:44 am | Permalink

    Even Labour now seem to have accepted that so far there have been no cuts but their new tack of blaming the thought of cuts won’t wash either. It’s nice to see someone standing up for the private sector and saying that the thought of all the new taxes we are going to have to find in the next 4 years (moreso if growth is not above trend) could be restraining the activities of the private sector.

    After all, we borrow and pay the money back out of our own pockets, we don’t have the tax payer to fall back on if we make a mess of it.

    • norman
      Posted January 29, 2011 at 11:44 am | Permalink

      Unless your business is a bank, of course.

      • zorro
        Posted January 29, 2011 at 9:08 pm | Permalink

        …..aptly sums up the monopoly money nature of our current financial system. It is difficult to put much credence in the banks as they are welfare cases themselves and perhaps should be joining John’s lone unemployed man in his example…..After all it would be cheaper in the long run and they wouldn’t cause the toxic damage which they have unleashed over the last 10 years.

        As for SMEs, they haven’t a hope in hell whilst the banks have access to funds at close to 0% and loan at 10% many times over to the public. A far cleaner way of earning their bonuses without the long term risk of companies failing……

        zorro

    • John
      Posted January 29, 2011 at 9:37 pm | Permalink

      Councils (and other public sector employees around the country) are currently issuing redundancy notices to hundreds of thousands of workers. Even if some of them eventually manage to retain their jobs, the fear and uncertainty created is bound to deter them from entering into spending commitments. The latest survey of consumer confidence yesterday shows that it has plummeted.

      Add in VAT rises and plans by councils to increased charges on a wide range of services (due to Mr Pickles’ grant cuts) and it’s no wonder people are inclined to hang on to their money.

      Opinion polls show a growing concensus that the coalition is cutting too fast, too recklessly. Meanwhile, there seems an unlimited budget for Mr Cameron’s own pet projects, like elected police commissioners, free schools or a £200m re-organisation of the NHS that most medical groups oppose.

      Talk about shuffling the deckchairs on the Titanic!

      • Simon
        Posted January 30, 2011 at 11:29 pm | Permalink

        John , I’d like to question the accuracy of the points you are making and ask you a couple of questions please .

        1) “the growing conscensus that the coalition is cutting too fast”

        Is there any surprise when the majority of the public think “the deficit” and “the debt” are the same thing ?
        They evidently think the coalition is cutting the debt !

        2) “Councils (and other public sector employees around the country) are currently issuing redundancy notices to hundreds of thousands of workers.”

        Are they ? Or are most reductions being handled by natural wastage so that the enforced redundancies in total will add up to less than 100,000 ?

        3) Relatives of mine were late with their council tax payment and received a stroppy letter saying they would have to pay it all in 1 lump sum upfront next year .

        Evidently the people on easy street with annual cost of living rises and gold plated pensions cannot be expected to understand the plight of the huge number of people who are taking home significantly less in cash terms than they were 5 years ago .

        Their indifference is reminicent of the bankers .

        Can you suggest any other way of getting the message through to the public sector about the seriousness of the economic state than making some redundant and reducing the pay of people who are left ?

  9. Acorn
    Posted January 29, 2011 at 12:04 pm | Permalink

    Government spending that only increases demand while not increasing the productive capacity of the economy, leads to stagflation. The UK economy is floating around the 40% of market price GDP being drained into taxes. The point at which economies cease to expand. Add to this the effects of a further 11% of GDP in borrowing; and you have an economy which is in systemic decline.

    The vast majority of UK government spending, does not generate a future income stream to build wealth. Until government gets nearer to balancing the “primary budget” – that is neglecting debt interest payments – the economy is not likely to expand at any great pace. The nation’s current account with the rest of the world has been negative for some while. Savings minus investment equals exports minus imports. That equation still needs large amounts of foreign money to make it balance. Let’s hope those foreigners keep wanting to buy our pound note denominated assets. If they stop … don’t even think about it.

    BTW; A good read, Social Trends 41 :- http://www.statistics.gov.uk/articles/social_trends/ST41-Lifestyles.pdf

  10. Richard Calhoun
    Posted January 29, 2011 at 12:13 pm | Permalink

    Alas I have come to the conclusion that 13 years of Socialism + John Major have had the effect of brainwashing a large part of our electorate into believing the Socialist economics of public sector expansion and the ‘rights’ of people, but not of the individual. Hence the increase in the client state.

    At present it seems endemic, from Tory backbenchers opposing / concerned about Lansley’s health reforms to the hysteria about privatising the Forestry Commission.

    I don’t think the present financial crisis is fully accepted yet, not surprising when the 2nd largest party will not do so.

    I just hope when it comes to be accepted, which it will, the electorate will have the stomach to see through the reforms necessary, otherwise we are doomed to socialism and all the misery that brings

  11. Helen
    Posted January 29, 2011 at 12:14 pm | Permalink

    It’s a toughie. The spending won’t be coming from the public, either.

    What compounds the problem, is that millions of people were encouraged [under and with the co0peration of the Labour government] to take out debts they could never repay with ease. Once the cuts start to bite, more people will be defaulting on those debts, which will see businesses and banks enter another phase of economic woes. Gordon Brown was too cosy to the 2nd BoE governor in the beginning. Together they colluded to make debt more available and even to play nationalistic games, by putting a Scot on English bank notes – rather like a dog pees up a tree to mark its territory. It was even announced at a Scottish convention, rather than an English one. Both attended [Brown & BoE governer] to make the announcement, to cheers from the Scottish crowd.

    The depth of Gordon Brown’s true legacy has only been postponed. It’s coming though and will arrive by the end of this year.

    And what happens when the Scottish government take out so much national debt to buy votes that they end up defaulting? Will we English be expected to pick up the bill? Over our dead bodies !!!!

  12. lola
    Posted January 29, 2011 at 12:53 pm | Permalink

    Excellent. Now get that simple sum out to the BBC. Fat chance.

    • lifelogic
      Posted January 31, 2011 at 5:32 am | Permalink

      BBC does not do sums just pure appeals to preferably tv/visual emotion as the Guardian Green Peace and Many Charity appeals such as:

      Renewable good coal, oil, gas, nuclear bad. Go to Chernobyl victims, photos of harmless steam from cooling towers.
      Polar bears good make good pictures too and any animals biodiversity, tropical rain forests all good pictures.
      Government “cuts” always bad for “so call services” see this sad case of photogenic child needing urgent operation.
      Rich and poor differential very bad and ever widening (not bad for BBC leaders apparently)
      Minimum wage always good always too low.
      Employment legislation always good we need yet more
      All health and safely always good however daft and damaging.
      Landlords always bad damp flats (film mould in bathrooms etc.) over crowding (by the tenants usually) any tenants health problems to film etc.
      Cuts always bad find good photogenic sufferers.
      Employment regulations always good to protect workers from horrible employers.
      find a few injured at work or claiming to have been to film. Get someone from large company HR deptatment who will always have to agree with BBC line as they cannot be seen not to on the BBC for political/staff moral reasons.

      Emotion and sad pictures are all. People do not usually do sums they even buy lottery tickets after all and think just with their hearts if you show then enough suitably sad pictures.

  13. Martin
    Posted January 29, 2011 at 1:26 pm | Permalink

    You missed out the gold plated public sector pension in your example!

  14. BobE
    Posted January 29, 2011 at 2:14 pm | Permalink

    “” The private sector people and their employer pay overall 40% in taxes””

    Thats just income tax!. They then pay Road Tax, Fuel Tax, Council Tax and VAT. The state takes in excess of 60% of all private sector earnings.
    Spin still tries to tell porkies!!
    Bob E, Region 6, EUSSR

    Reply: No, it’s not just income tax. Total tax is just under 40% of National Income.

    • lifelogic
      Posted January 31, 2011 at 5:48 am | Permalink

      Yes 40% but government spending far more so higher (as deferred tax). But some actual costs of working such as travel to and from work are not allowable expenses (MPs excepted). Other addition taxes just demand your unpaid time doing tax returns pointless regulations and such other forms or do not get recorded as taxes such as enforcement cameras, residents/other parking, late filings fines, bin taxes, planning and building control fees, and many other similar inconveniences. And regulations and taxes push up to cost of so much of what you buy often my well over 100% (e.g. condensing boilers, oil tanks).

      Reply: MPs who commute have to pay their own travel costs with no tax privileges, like everyone else.

      • lifelogic
        Posted January 31, 2011 at 2:30 pm | Permalink

        Yes but for MP’s (away from London) travel between constituency and London home is, I understand, usually refunded and tax allowable. Whereas someone with two or more different jobs in different places gets no travel tax expenses or relief or parking costs or child care allowed. Even though these are often very clearly needed to do both jobs.

        So they might take 40% of your income in tax but might well be spending another 20% (of your 60%) on the above travel etc. and wasting another 10%+ of your time unpaid on tax matters, record keeping & pointless other regulations.

        Total effective tax in time wasted and money can be thus well over 60% even for people on average wages.

        Reply: When I worked in private business and had to travel to work away from the office the firm paid the travel bill and made the necessary tax declarations. It did not count as my income.

        • lifelogic
          Posted January 31, 2011 at 7:34 pm | Permalink

          Yes you are right if one job plus travel to another site but it does not apply if you have two distinct/separate jobs or directorships in two locations (nor can you even have any accommodation costs allowed).

          Also tax relief on pension is to be restricted to £50K from April (for mortals in the wealth creating sector) but many in the state sector the BBC and some MP’s get more than this every year added to their pension pots every year.

          The state sector has notional pension pots nearly 10 time the private sector, I understand, due to Brown’s mugging time for a balancing tax in some form?

    • Robert
      Posted January 31, 2011 at 3:15 pm | Permalink

      John – when you adjust for those who actually pay tax it is much higher – I am afraid I know, because this last tax year I actually kept a record of all the tax I paid 65% plus – by the way we have overtaken Germany and they even allow taxpayers to offset a proportion of their travel costs to work. Anyone who commutes from my part of the world to London has to earn at least £10/- just to get to work!

      Reply: Yes, of course many individuals pay more than 40% total. I was giving the national average.

      • lifelogic
        Posted January 31, 2011 at 8:33 pm | Permalink

        Yes but does 40% include all the back door taxes and the personal time wasted by big government. Things such as resident parking fees, council tax, the congestion charge, unavoidable parking fines, late filing penalties, over looked SORN declaration fines, planning “fees”, building control “fees”, passport “fees”, bin fines, driving licence “fees”, BBC “licence”. Also now revenue allowed mileage rates tend to mean you make a net loss on those too (with fuel so over taxed and expensive now).

        Indeed with stamp duty at up to 5% it is quite common for people to pay more that 100% tax in the years they move houses.

        Reply: Yes it does

  15. malcolm whitmore
    Posted January 29, 2011 at 2:22 pm | Permalink

    We are all victims of a great delusion in thinking that an increase in GDP is going to improve our standard and quality of life. Unless we face up to this delusion we are going to continue down the road to disaster like swimming in a foggy swamp at night. One end can be forecast and it is not nice.
    A simple way of demonstrating the fallacy inherent in our GDP calculation is tho reflect on the consequences for GDP if I decideto take a car trip into town rather than walk by the river. As I approach the town in my hire car I miss a redd light and cause a fuel tanker to swerve of the road and overturn setting off a huge dertuctive fire that destrys a shopping arcade. Now I think if only I had taken tat stroll by the river!
    But on GDP reckoning my car trip has provided a big boost to the figures,this is because we are not measuring the activities that are needed by society and classifying them as positive and also measuring the negative aspects and subtracting them form the positives.
    It is time to change and you would make a big difference John.

  16. Ken
    Posted January 29, 2011 at 2:39 pm | Permalink

    Of course reducing public sector spend releases money that could be used to expand the profitable private sector (so avoiding so-called crowding out) but the private sector has to be poised ready to use the money. At the moment it seems like only the big corporates are expanding and they are surely mostly doing it from own cash piles. The mechanisms through which SMEs get their hands on liberated money seem less than effective. Deficit and public sector control is important but what action on the supply side seems pretty tardy.

  17. David John Wilson
    Posted January 29, 2011 at 2:43 pm | Permalink

    The mathematics is unfortunately flawed. If we take the £1700o spent on bought in products and services, then if it is tracked right back, most of it is spent on taxes either the 40% that you identified or value added tax. However you look at it eventually it is either paid to the government or lost to the economy by purchasing imports.
    In fact the critical requirement to solve the country’s problems is to increase exports and reduce imports. That importantly must include reducing the interest which is paid out abroad.
    One way of helping to achieve this is to increase the rate at which money in recycled. We critically need laws which force bills to be paid early and promptly. This will have a major impact on repaying the debt because almost every time money changes hands the government takes a cut from VAT, the wages of the people handling it etc.
    Nearly all the other solutions being implemented by the government or proposed by the opposition are simply smoke and mirrors.

    • Simon
      Posted January 30, 2011 at 11:41 pm | Permalink

      David ,

      Just like to link up two of your points . Spending money with local suppliers leads to faster recycling of money than spending it on imports . If people spend it with people around them it will come back to them much quicker .

      It is almost impossible to buy ANYTHING which is made in Britain on our high streets even when you want to . Would the following actions be practical and help at all ?

      1) Remove “By Appointment to the Royal Family” status from companies who attained it whilst using British workers which then go on to offshore their production .

      2) Stop giving KBE’s etc to retail magnates whose entire business model is based on importing foreign goods .

      3) Get big retailers to publish figures for the proportion of their purchases which are spent with British produced goods .

  18. StevenL
    Posted January 29, 2011 at 2:52 pm | Permalink

    What is all this debate about ‘putting money in’ or ‘taking money out’ of the economy all about anyway? Is this what makes an economy grow or contract is it? Putting in money or taking it out? I think it’s a nonsense.

    Policy makers seem slaves to dead economists, in this instance Friedman and his thesis that after asset bubble banking crises all you have to do is print money. It didn’t make Japan grow and Bernanke’s idea that Japan didn’t print enough money seems a bit bonkers.

    I know there has been some bad news on harvests and stuff, and we and other governments have bad policies on agruiculture, but part of the reason food prices are rocketing might just be Mr Bernanke ‘putting in money’ to the economy.

    Ironically, Mr Bernankes pen might just achieve a tide of regime change that make Mr Bush’s sword look rather flacid.

  19. Christopher Ekstrom
    Posted January 29, 2011 at 2:55 pm | Permalink

    Public sector growth in the UK is still a ticking bomb. If the current PM fails to meaningfully alter that growth will be a footnote of history. The short term idiocy of raising VAT just shows that DC failed Conservative Economics 101. Just waiting to see what the horrible unions do to this wet softy.

  20. Denis Cooper
    Posted January 29, 2011 at 4:55 pm | Permalink

    We’d be having a very different discussion if successive governments hadn’t got into the bad habit of borrowing so that they could constantly live beyond their means.

  21. waramess
    Posted January 29, 2011 at 5:02 pm | Permalink

    Ed Balls thinks so, Ed Milliband thinks so, Gordon Brown thinks so David Cameron thinks so and Ozzie thinks so Mervyn King thinks so, and if you don’t believe me just wait and see
    Government spending, like the (latest fashion-ed) is the “in thing” and we are to get a lot more of it.
    What to do about it is a more relevant question. I am digging my escape tunnel.

  22. Mike Stallard
    Posted January 29, 2011 at 5:11 pm | Permalink

    And how about this? A family is £100,000,000 in debt. Their business is being taken away from them by a merciless competitor who is, in effect, running a sweat shop.
    They continue to borrow to pay for the upkeep of their larger and larger family and for all the children they have adopted, none of whom are intellectually capable of earning £100,000,000 for themselves or, really, contributing much to the family income.
    The business is all but forgotten and the family starts to turn its attention to living off borrowed money. Their debt is never mentioned. The interest on the loans grows daily.
    Also they “play by the rules” which means not investing in the business, spending a lot of borrowed money on a Windmill to generate electricity, making sure that their medicine cupboard is very well stocked and that, if any of the many children has the slightest desire or need it is met out of borrowed money. The leading members of the family still continue on their merry way, dining out and drinking and enjoying themselves as if there was no tomorrow.
    Every now and then, a nice man with a clipboard turns up to make sure that they are “fire safe” and “risk assessed”. They spend the week after each visit on paperwork which is full of half truths and lies instead of attending to their rapidly declining business.
    They tell the neighbours that they are “borrowing to invest” and “something is sure to turn up”.
    And they pour out a constant stream of apologetic letters and IOUs to their many creditors.

    Now the end of the story can be completed by you, dear reader and good luck for the Booker!

  23. Geoff M M
    Posted January 29, 2011 at 5:37 pm | Permalink

    Even the proposed changes to the employment regs where employees have to cough up front before taking action after two years will entice me to expand my business so to take on extra staff. I really despair at Cable et all, they seem to be just as much out of touch as Blair and Brown after thirteen years in office. Hell the coalition have only been in power a relative few months, the idea above, of a State of the Kingdom address by the PM should be put in place ASAP starting at the same time as the budget this April; are you listening Mr Cameron–No!!

    JR. Thanks you and the other more enlightened MPs for these excellent blogs

  24. stan francis
    Posted January 29, 2011 at 5:46 pm | Permalink

    ..and now onto you john after my last comment/message, who cares, look at where the REAL money goes like a million for 4 people this week in benefits and George finds it hard to balance the books/ GET AWF IT?..just spotted the little j on john, hey a funny but will keep it to cteate a laff where sometimes it becomes so dull reading bloggs from people that just cannot think, ‘what shall i do today?’..BECOME A BLEEDIN’ INDEPENENT LIKE ME..LOOK OUT BROMSGROVE, STAN’S ON HOS WAY??…look out for the tyiographoucals errors…my attitude/slant ios don’t take it serious or to heart, if you do u will never get an answer that will get u out of the BOX?..hope u all lurved the errorrrrsss??..how sad?

  25. Ken
    Posted January 29, 2011 at 6:55 pm | Permalink

    I agree that we certainly need private sector jobs right now but we have one arm tied behind our backs with excessive employment legislation, especially job protection for the first 12 weeks of a strike, not to mention the high cost of hiring and firing.

    Also, I am probably in a small minority on my next point – and in any case no MP would dare speak these words – but I think the disastrous minimum wage should be scrapped.

    If we could free up the employment market in the UK instead of pricing millions out of work we could compete on every level and get our factories working again.

  26. DavidB
    Posted January 29, 2011 at 7:59 pm | Permalink

    What if the unemployed person was given 37 hours of work for his 10k instead of money for doing nothing . Perhaps they would be incentivised to take one of those millions of jobs which went to a Pole or a Hungarian in recent years. That way the private sector would get to deploy the underused labour and remove the burden from the taxpayers, helping greatly to reduce the deficit in your example.

    Oh, and does the public employee really do a function without which the society could not function?

  27. Mark Wadsworth
    Posted January 29, 2011 at 9:38 pm | Permalink

    No.

    Now answer this: do house price and credit bubbles increase economic growth? Do high taxes on incomes and profits and subsidies to land ownership increase growth?

  28. Brian Tomkinson
    Posted January 29, 2011 at 10:33 pm | Permalink

    Extending your simple example; if the 1 unemployed person could be found work in the private sector, on the same average pay of £20,000, that would reduce state spending by £10,000 and increase tax revenues by £8,000. Total state spending would reduce to£32,000 and tax income would increase to £40,000 allowing £8,000 of debt to be repaid or taxes to be reduced. The previously unemployed person would have £2,000 extra to spend, thereby increasing demand and growth. Reducing the debt would reduce the state’s interest costs which should lead to further tax reductions with additional beneficial effects on demand and growth. If only we could create those private sector jobs.

  29. adam
    Posted January 30, 2011 at 12:37 am | Permalink

    We still produce?
    All consumption by now, shurely.
    GDC

    side note:
    I see Michael J Sandel’s Federalist Communitarian slick propaganda is being broadcast on the BBC as a national discussion about the Big Society. I am sure dissolving the national state and paying everyone minimum wage slavery to do citizenship public service will save the world. We can all but forget GDP as utopia is arriving. Happiness economics anyone.

  30. Frank H Little
    Posted January 30, 2011 at 6:54 pm | Permalink

    The Alistair Darling riposte to this is that businesses were cutting back in the last quarter of 2010 in anticipation of the downturn which would be caused by the VAT increase at the turn of the year (“The Week in Westminster”, Radio 4, last Saturday). This argument has the great advantage of only being testable through a deal of costly research.

  31. adam
    Posted January 31, 2011 at 2:04 am | Permalink

    No single organisation in Britain outside the BBC can set out to challenge the drift of culture, and appear to do so successfully.
    – Storyville editor Nick Fraser

    The establishment knows how powerful the BBC is to control the minds of the masses, which is why its so hard to get them to relinquish control over it,either by cutting public funding or increasing the intellectual diversity of the output.

  32. Javelin
    Posted January 31, 2011 at 12:02 pm | Permalink

    Totally agree – with growth struggling around 1% for the past 5 years it appears public sector is the only growth there has been and that is hiding the real negative growth in the economy.

    It is pretty obvious to me that Government deficit need to be rolled into the GDP figures.

  33. Lindsay McDougall
    Posted February 2, 2011 at 4:24 pm | Permalink

    No, it does not. Since 1979, the years when GDP growth has been highest have been those when public expenditure as a % of GDP was trending downwards. It is not the absolute level that matters but the downward trend.

  • 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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