The private sector squeeze

 

             A little while ago I argued on this site that the squeeze is and will be tougher on the private sector this winter and well into 2011 than the squeeze on the public sector. Indeed, overall the 7%  increase in public spending  under this government so far compared to a year earlier shows there has not yet been any squeeze on the public sector. This does not of course prevent individual cuts and hard done by areas, resulting from poor management or from the allocation of the extra cash. Nor does it prevent much talk about future cuts, as public sector managers try to find ways to get more money out of government or Councils.

           The Governor of the Bank of England has now highlighted the other side of the case I was making – the intensity and duration of the squeeze on private sector incomes.  The increases in Income Tax, CGT, National Insurance, VAT, and fuel duty always meant the private sector was going to take a big cut in spending power  as its  share of the deficit reduction. This has been made worse by the rapid rise in inflation, with big increases in fuel prices which in turn extracts more tax revenue and by the large increases in various pullic sector fees and charges like rail fares.

         The public debate has spent too much time talking about the spending reductions, implying they hit the economy at the end of last year and caused the poor GDP figures, when they haven’t begun, and ignored the squeeze on family incomes. The government needs to take action to cut the public sector’s contribution to the squeeze. It could begin by introducing the fuel price stabiliser, much in need at a time of instability in the Middle East again. It needs to bring inflation back under control by following a more successful money and banking policy.

           To get enterprise growing, creating the many new jobs we need and welfare reform requires, we need tax cuts. The Chancellor should be dusting down plans to get the UK back into shape as a competitive place for business and investment. Recent years of tax increases has left us struggling, losing capital, talent and companies that could make a difference.

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32 Comments

  1. lifelogic
    Posted January 31, 2011 at 7:01 am | Permalink

    Any money they do not take from business will probably be invested/spent wisely by them on increasing future tax revenues and creating real jobs. If the government takes it then it will mainly be wasted by the state, with little or no actual benefit, job creation or future tax income generated.

    The main problem in my industry however is still an almost total lack of sensible lending by any of the banks. Thus everyone is holding off making investments. That and a lack of confidence that Cameron/Clegg will make the needed cutbacks in the state sector and regulations.

    Anyone who forces employers to keep on pensioners, against their judgement, and “invests” hugely in silly pointless wind turbines is clearly sending out exactly the wrong and very damaging signs to industry.

    Namely we do not care what works in reality just what looks good, kind and green to the likes of the BBC and voters who cannot do sums.

    • lifelogic
      Posted January 31, 2011 at 8:26 am | Permalink

      You say “The Chancellor should be dusting down plans to get the UK back into shape as a competitive place for business and investment”.

      Instead, reported in the Sunday times, he seems to just trying to command directors to invest. Could you perhaps explain to him that director’s duty is to get the best return for shareholders, if that is clearly overseas so be it. If in business you are not competitive you will surely go bust anyway.

      George Osbourne simply has no choice but to make the UK competitive or he will surely loose the next election. Time is far shorter than he seems to think and many thing they have done already have actually been very negative. And if business thinks he will loose the election (as I currently tend to) it will have a huge negative impact on business confidence and investment now.

      An uplifting vision is what is needed and needed now where is it?

      • Stuart Fairney
        Posted January 31, 2011 at 10:47 am | Permalink

        I read that and at that moment realised the Chancellor really believes in the whole Keynesian ‘demand deficit’ debunked nonsense. Just spend a bit more and we’ll all be rich?

        Heart-breaking and perhaps unsurprising bearing in mind he has never had a real job and (I do not mean to be pejorative, but) is unqualified for this one.

    • waramess
      Posted February 1, 2011 at 9:18 am | Permalink

      Banks are unable to lend so long as asset values are not apparent. Banks may talk cash flow but in this country lending has always been asset based and how do you value assets when interest rates are set at zero? And so it will continue until our Keynesian friends at the Bank of England manage to see through their mist of rhetoric at what is happening in the real world

  2. norman
    Posted January 31, 2011 at 7:31 am | Permalink

    We hear all the time about public sector spending cuts. What politicians need to remember is that a tax rise is a private sector spending cut. Do we really want to be cutting private sector spending at such a time as now?

    Obviously we do as we are seeing a raft of tax rises from this government.

  3. Mike Stallard
    Posted January 31, 2011 at 7:41 am | Permalink

    You are so right! Tax cuts are the thing that will make it more worthwhile to take all those risks that businessmen in the private sector live with on a daily basis.

    And what about all that red tape which keeps so many public sector “officers” busy?

    Meanwhile the government seems to be dragging its heels and Ed Balls goes so far as to blame the imaginary cuts on the bankers! Has the man no sense at all of reality?

  4. Mr J Leslie Smith
    Posted January 31, 2011 at 8:15 am | Permalink

    Dear John,

    Public Sector bosses seem to be playing a longer game in that they wish to hit the Government together with their Unions, when these “Cuts” really start to bite. Meanwhile, they are retaining and upping their rhetoric. A sound YES to tax cuts anytime.

  5. Richard
    Posted January 31, 2011 at 8:40 am | Permalink

    Did I misunderstand it, I thought the big idea was that 80% of the deficit reduction was to come from reduced public spending and 20% was to come from increased taxation?
    Well, the way we are currently heading it will end up the opposite way round.
    Politically this will be disasterous because the Government will receive the same level of organised resistance in cutting public spending whether the cuts are deep or not.
    However, the electorate will become much more unhappy at reductions in their standard of living if they see the public sector still growing.
    More crucially, economic growth and tax revenues will be depressed as a consequence of this unbalanced approach to deficit reduction.
    What on earth is the point in raising tax rates if it results in reduced revenues?

  6. alan jutson
    Posted January 31, 2011 at 8:43 am | Permalink

    Agree with much of what you say John, but the fact is you seem to be the only one who is able to communicate the tax, spending, and cuts programme clearly.

    The Government have manifestly failed to get the policy backed up with facts across to the population as a whole, so Labour are making all of the running in the media war and winning.

    Many well educated and politically interested people are now believing that the cuts are doing us damage, and are not aware that public spending has increased at all, let alone at 7%

    The Governments policy will fail if they do not get the message across and soon.

    As for a fuel stabiliser, no its too complicated, if they want to keep the price of fuel down, then simply use a fixed rate of tax per litre, and not a percentage.

    Increases in oil prices are then just the raw material increases, which would not include the larger percentage of tax increase as well.

    Keep it simple.

  7. waramess
    Posted January 31, 2011 at 9:09 am | Permalink

    As the cuts fall on the private sector and the pips begin to squeak the public sector will be getting bigger, not only as a result of the growth shown in the Red Book which you have drawn our attentions to but also as a result of its size relative to a shrinking private sector.

    There seems to be no alarm at what is happening to the structure of our economy and, has anybody had the wit to consider at how our economy would look now without the oil revenues, or would this just be seen as a silly exercise?

    Not so long ago we were self sufficient and now the revenues have reduced to leave us requiring to source 25 percent of our requirements externally. Maybe our masters have decided that windmills will relieved the problem.

    If this present government is indeed managing a deceit over the public and its own right wingers and at the end of this session we have a bigger public sector and a bigger deficit than before they took over then we really are in trouble.

    The British public will have nowhere safe to go; the Socialists still want to spend the Liberals still want to spend and the right wing of the Conservative party seem to have their hands tied by the rhetoric of their own left wing.

    Maybe we will by then have resigned ourselves to politicians just continuing to manage the decline, in their own incompetent way and for those who might still be left in the private sector to devote most of their productive hours in keeping The Revenue away from their doorsteps.

  8. Richard Johnson
    Posted January 31, 2011 at 9:31 am | Permalink

    Tories call for tax cuts – big surprise! I’m not disagreeing, but I can totally understand why Osbourne may be reluctant to be seen to be cutting taxes when people at the lower end of the pay scale are suffering. It would look bad. It would give Labour ammo and reinforce the image of the Tories being for the few not the many. I think that taking the poorest out of the tax altogether is something this Coalition can be proud of and I hope they continue to do so over the next 5 years. Also, Osbourne has cut corperation tax so it’s wrong to say that he favours higher taxes.

    • alan jutson
      Posted January 31, 2011 at 11:36 am | Permalink

      Richard agree George O has made a small cut in corporation tax, and a small increase in personal allowances.

      But we are not trying to lance a pimple here, we are trying to rid ourselves of a whole series of huge carbuncles to which we need to take a knife, and give a dose of antiseptic medication, before we can dress it and give it time to heal.

      The longer he leaves it, the worse it will get and the more painful the treatment.

  9. stred
    Posted January 31, 2011 at 11:22 am | Permalink

    Your piece on the change in our perceptions of class and the Welfare State was excellent and should be published in a broadsheet. Sorry the comment section did not connect so had do comment here. SR

  10. Iain Gill
    Posted January 31, 2011 at 11:59 am | Permalink

    John,

    Great post today.

    Cheers

  11. NickW
    Posted January 31, 2011 at 12:20 pm | Permalink

    What we need more than tax cuts is the identification and removal of all the obstacles that Governments place in the way of the man who wants to start a business and employ people. A ruthless and determined effort is needed, otherwise we are done for.

    Osborne and Cameron need to get hold of a SPAD by the neck, and tell them to employ somebody NOW, doing all the work themselves, on top of all their other duties, and report on the obstacles.

    This is where it really matters that politicians live in ivory towers, divorced from reality and totally insulated from the consequences of their own legislation. How many MPs have done all the work necessary, without any help whatever, to understand all the employment laws and requirements involved in recruiting a worker, then keeping track of pay, NI and income tax, and maintaining a safe disciplined workplace in such a way as not to fall foul of an employment tribunal.?

    The only announcement I have seen so far is that the Government is going to stack employment tribunals even more against the employer’s interest by adding a large fine if the case is lost. This is profoundly and stupidly anti-growth because it discourages employment.

    The first and most important right of an employee is to actually have a job.
    That right has been taken away.

    • NickW
      Posted January 31, 2011 at 1:15 pm | Permalink

      Governments in the Middle East are being overthrown because the political leaders were insulated and had insulated themselves from the reality of the Governed.

      We and Europe are inexorably heading in the same direction.

      • BobE
        Posted January 31, 2011 at 5:35 pm | Permalink

        Lack of income and no cash to pay the state sector employees caused Germany to expand into other nations in 1939. It was either that or rampant inflation and massive unemployment.
        Bob
        Region 6
        EUSSR

  12. sm
    Posted January 31, 2011 at 12:25 pm | Permalink

    What is the private sector these days?

  13. Javelin
    Posted January 31, 2011 at 12:49 pm | Permalink

    Moodys (and other rating agencies) have been giving the US Government increasingly harsh warnings about a a US debt downgrade. After Obama pulled out of tax cuts in the State of the Union speech – I now believe a US debt downgrade is a must in the next few years and this basically means the rating agencies must give a downgrade as soon as possible, otherwise the US will drag the T Bill market into a long period of uncertainty.

    I think the question is now, not whether there will be downgrades to the US, but what will a post-US Debt-downgrade world look like.?

    Or to put is another way once Governments competence is down graded what will the balance of power be between the private and public sector? How will the US Government rebuild credibility? What will happen to the dominant Governmental philosophy of political correctness and public relations? I think the shockwaves will be deep and long – even if Obama keeps smiling.

  14. Bernard Otway
    Posted January 31, 2011 at 1:39 pm | Permalink

    How on earth John do you persuade the limp wristed part of your party to listen to you on this let alone the jelly wristed Libdems,how about pulling out of the EU ,get back our sovereignty control our own fish and agriculture,buy what we want from where we want,export to those
    on the up and up etc etc,NOOOOO,that is why at the age of 65 if there was an organisation
    to achieve what I have said and it was as ruthless as the IRA was I would join it and be active
    with NO hesitation.

    Reply: Direct action politics puts people off creating jobs and prosperity, and usually breeds another side who fight back.

    • waramess
      Posted February 1, 2011 at 9:35 am | Permalink

      We are where we are because of successive Tory as well as Socialist governments over the past 55 years, starting with Macmillan, who viewed the nationalised industries as the family silver. All wanted bigger government and all thought government was the answer to Britains woes from Benn and his Concorde project to Heath and his Nationalisation of British Leyland. Even Margaret Thatcher was not willing to go so far as progressively relieving corporate taxation with the North sea oil revenues.

      What is needed is a sea change and so long as left wing politics are the politics of choice taught in British schools and universities, nothing will change.

  15. John Jervoise
    Posted January 31, 2011 at 2:08 pm | Permalink

    We do not see enough about “supply side” issues. There is much that could be done to remove bureacracy / paperwork / regulation that costs the Governement nothing but is vital if we are to grow. Regulation is still incrasing and wasting time: The Equality and recent additions to Maternity rights as examples, but the regulation has not stopped. Businesses need time to think of ideas and evolve – if we spend a day on paperwork that is one day less creating jobs. Someone should be made competiveness czar witha remit to get us back into the top 5 internationally and come up with a 3 year plan to do so.

  16. Blue Eyes
    Posted January 31, 2011 at 2:09 pm | Permalink

    I never thought that I would read a John Redwood post which agrees with Ed Balls, but here it is.

    The problem with Laffer tax cuts is that the additional money takes time to come back to the Treasury. In the meantime the deficit would be bigger. Which means that Mr Redwood either you agree with Mr Balls that planning a bigger fiscal deficit would not cause a short term financial crisis, or you think that the government’s already difficult-to-sell combination of reductions in departmental spending and shift from business taxes to VAT are not enough.

    Reply: The Laffer effect can be quite rapid, as Income Tax rate cuts in the 1980s demonstrated. We need more investment in jobs and business expansion.

  17. Alte Fritz
    Posted January 31, 2011 at 4:00 pm | Permalink

    Many years of malign neglect has seen the erosion of our manufacturing base. If it is doing well at the moment, can we attribute that to anything but the exchange rate?

    It seems a monumnetal task to fix in four years the problems of competitiveness, for manufacturing and service industries, but a more benefiocial capital allowances regime would be a start. Not a give away to the rich, and something which looks positive.

  18. StrongholdBarricades
    Posted January 31, 2011 at 5:19 pm | Permalink

    Today I learnt that it is an objective of the DWP to get everyone on Incapacity Benefit off it, probably to the ESA as this then plugs in the benefits barriers to those things that can only be got once you have been “on” for so long.

    On top of which 90% of all job seekers should be found a job or cease their claim.

  19. jonnyhammer
    Posted January 31, 2011 at 5:46 pm | Permalink

    As an SME owner I can endorse Mr Redwood’s view that the private sector, rather than the bloated and inefficiant public sector, is at present feeling the greater squeeze despite years of improvements to efficiency and investment in IT and outsourcing techniques .

    The simple and unavoidable truth is that businesses small and large are being slowly strangled by excessive red tape, ridiculous health and safety and employment regulations and unsustainable levels of persoanl and coporate taxation. Consumers are not spending and businesses are not investing because the NET income/ profit is simply not there.

    Mr Cameron and Mr Osborne implore businesses to invest mightily to pull the country out of the hole that Messrs Brown, Balls and Milliband left us in. That ignores the simple fact that to invest, ones needs profit and capital. Cut the burden of regulation and taxes and we MIGHT have the profit and capital to do that with great vigour.

  20. JimF
    Posted January 31, 2011 at 6:48 pm | Permalink

    I note people on around £40K with children are waking up to the fact that their marginal tax rates are approaching 70% once they earn above this level, due to the combined effects of NI, child benefit changes and income tax changes. Given the fact that many such people will also be repaying student loans, which are income dependent, aren’t we seriously disincentivising anybody at that level from taking extra responsibility or working longer hours?
    They will be earning an amount approaching the minimum wage for every extra hour worked, viz remaining pay of 30% of £40K = £1k per month, or around £7 per hour.

  21. Brian Tomkinson
    Posted January 31, 2011 at 8:40 pm | Permalink

    Considering that Cameron is a PR man he has failed miserably to ensure that the government’s policies are explained clearly and concisely. The fact that he appointed Andy Coulson as Director of Communications, when it was obvious to anyone with a modicum of sense that he would be hounded from office, adds to his lack of competence in his own speciality. As a result of this, the government has conspired to see its poll ratings drop like a stone before the actions for which they are now disliked have even been implemented.

    • alan jutson
      Posted February 1, 2011 at 9:32 am | Permalink

      Brian

      Agreed.

  22. Bedd Gelert
    Posted January 31, 2011 at 8:56 pm | Permalink

    OH come come now Mr Redwood…

    The squeeze will be FAR FAR harder on those poor hard-done-by saps in the public sector…

    I know this, because I read it in a handy shroud-waving feature in the Guardian…

    http://www.guardian.co.uk/commentisfree/series/the-cuts-get-personal

  23. Frugal Dougal
    Posted February 2, 2011 at 3:14 am | Permalink

    The government might think about keeping the current rate of VAT, but cutting wage taxation; that would both help working people and spread the load of taxation more evenly.

  24. Lindsay McDougall
    Posted February 2, 2011 at 4:14 pm | Permalink

    Let us tackle the tax issue. In FYR 2009/10, total tax was 37% of GDP. The Coalition’s financial plans rely on this rising to 38.8% in FYR 2014/15 before beginning to fall back. So if some taxes are to be cut, others will have to rise.

    Income tax rates and thresholds are a complete and utter mess. I read some figures in today’s Independent that showed winners and losers. Pensioners and the average family will be slightly better off. The rich (the example shown was for a main earner on £200,000 and a spouse earning £50,000) will lose £2,200 per year.

    The upper middle class family, with one bread winner earning £43,000 per annum plus company car, is to be hit by increased VAT, a lower threshold for the 40% tax rate, loss of child benefit, increased NI and fiscal drag from inflation – a quintuple whammy. That will cost him/her £3,200 pa on a gross income (even including the company car) of £47,000, a 7% increase. As a % of take home pay, it is nearer 10%. Such families are natural Conservative and LibDem supporters. Hitting your supporters hardest is not clever.

    Upper middle class families with one bread winner are a dying breed. I retire in June, after which I shall receive pension and work part time overseas so that my total taxable income is just below the 40% threshold. Eat your heart out, Mr Osborne, you won’t fleece me.

    UKIP’s income tax policy is much better. Zero tax for low earners, consolidation of NI into income tax, and a flat rate of income tax. At the last General Election, they suggested a rate of 31%. If the minimum taxable income is raised to £10,000, that 31% rate will not be enough, but it is easy enough to do the calculations. There is an extra bonus. The NI bureaucrats in the Civil Service can be got rid of.

    In summary, capital gains tax and profits tax should go down, VAT has already gone up and an intelligent approach is needed to maximise the income tax yield.

    PS The total tax take was 38.2% of GDP in Mrs Thatcher’s heyday.

  • 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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