The squeeze – some simple arithmetic

 

               Roughly half of all the money spent is in the public sector, and half in the private sector.  Around one fifth of all the public money spent is borrowed.  The other fourth fifths comes from taxing the private sector.

                Most people now agree we cannot carry on borrowing at the rate we are to pay for all that extra public spending. There are two choices on how to stop the borrowing. The first would be to cut spending. The second is to take more tax from the private sector.

               The Coalition government has ruled out cutting the amount we actually spend on the public sector – indeed, they want it to go up a little over the next five years. This is presented as cuts, because it entails cutting  previous plans to increase spending. In a few areas it entails actual cash cuts, and in more areas cuts after allowing for general inflation. Bad management or politically inspired  management will ensure there are some unpopular cuts in some areas. In other preferred programmes like overseas aid, EU contributions, health and pensions it entails real increases. In an area like Health because the increases will be much smaller than the service is used to, there could well be tensions.

           That means that all the reduction of the deficit is planned to come from increased tax revenue. Some is going to come from increased tax rates. The government has put in place or confirmed higher rates of Income Tax, VAT, fuel duty and others, and has lowered Income Tax thresholds for higher rate tax. The bulk of the required increased tax revenue is forecast to come from the proceeds of growth.

               This simple arithmetic will dictate the politics of the next few years. The squeeze will be most intense on the private sector, as it struggles to find all that extra tax revenue and faces those higher tax bills. Nonetheless the public sector will feel hard done by, as the contrast with the spend and borrow more years will be sharp.

               All rests on growth. If the economy starts growing at above its trend rate of growth and sustains that until 2015 the strategy will succeed. If  growth continues to disappoint, and it turns out the government has not done enough even to recreate the old trend rate of growth that was so damaged by the experiences of the last few years, the deficit will stay obstinately high. Getting to an above average rate of growth with badly regulated banks and with a rising tax burden is not going to be easy.

              The sad truth is we all have to take a hit as the country stops living 10% beyond its means. The current plan is the private sector takes more of the hit. That’s why the Governor of the Bank of England made such a gloomy speech about real incomes last week. If the private sector hit is too big the recovery will be weakened.

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77 Comments

  1. Sue
    Posted February 3, 2011 at 6:45 am | Permalink

    It’s OK for you lot, you earn a good salary, plus considerable expenses and perks.

    If you had had any loyality towards the people of this country at all, you would have voted for the in/out referendum. £48million a day is a big saving, coupled with the ability to get rid of foreigners who are non productive and or in prison who are costing the taxpayer millions, you’d be well on the way!

    You’re looking riots soon. The mood is getting ugly. Everyone I speak to is furious and has had enough of subsidising foreign countries and their people.

    Reply: Parliament did not consider an immediate In Out referendum. It considered an In Out after the government had lost a referendum on transfer of powers, so it was all academic.

    • APL
      Posted February 3, 2011 at 11:20 am | Permalink

      Sue: “If you had had any loyality towards the people of this country at all, ..”

      I think at heart our host is a good sort.

      But I also think that the arrangement we have for the remuneration of our MPs is far too cushy.

      We need MPs that actually work in the real world, MPs that day to day stand along side the rest of the working population, MPs who experience the result of the torrent of often mindless leglislation and regulations that fall on our heads each day.

      In short we need MPs who are NOT paid full time, we would be better off if MPs attended Parliament on a needs only basis a little like the TA.

      They should be paid a living allowance and possibly recouped for loss of earnings if the MP actually has a real job. Expenses should be recipted and accounted for or claims should be rejected.

      Currently we have the worst of all worlds, MPs who focus on what his or her Party demands not what the consitituency wants. And just on the criteria of performance, what with us being in the middle of an economic crisis, they are over paid too.

    • wab
      Posted February 3, 2011 at 8:30 pm | Permalink

      I think you’ll find that on the whole foreigners are at least as productive if not more productive than Brits. Anybody who has enough motivation to get up and move countries is already way ahead of the game.

      And given that the UK is hugely in debt, I think you’ll find that in fact foreign countries are currently subsidising us, not the other way around. Although of course we, or more correctly our descendants, are supposed to eventually pay it all back. Well, maybe that will happen by 2525 (if man is still alive).

      And I hope you are not threatening to riot. We don’t need the Tea Party craziness over here.

      • Sue
        Posted February 4, 2011 at 7:40 am | Permalink

        Firstly. I did say “unproductive” foreigners. Unemployment is rife in areas of high immigration.

        Secondly, I live in Spain and run my own business, so don’t lecture me on motivation.

        Thirdly, The EU is stifling private enterprise (I should know), so it’s killing small businesses like mine. The EU red tape has cost me a fortune!

        Lastly, if a (demo -ed) is the only way a government will listen, so be it. You can stay at home with your complacency and watch X Factor in the knowledge that you have supported a government guilty of betraying its people.

      • martin sewell
        Posted February 4, 2011 at 6:28 pm | Permalink

        When did the Tea Party activists ever riot?

  2. James
    Posted February 3, 2011 at 6:50 am | Permalink

    This is a straightforward analysis of the situation and one that I would hope some Government Ministers might read and admit.

    I would be interested in your views on the balance between supporting growth, through increased public expenditure, and the impact such borrowing has on the debt interest rates etc.

    By my (very limited) understanding, we generally even now see no problem with people borrowing several times their annual income to fund a mortgage – for sake of argument, someone buys a house for £100k, puts down a deposit of £20k and borrows £80k for 25 years at an interest rate of 5%. I’m not going to do the maths, but as our total national debt is not even yet close to equivalent to one times our annual GDP, if we were a homeowner using our income to buy a house, we would be a very, very safe bet.

    Why is it that individuals – surely more prone to being buffetted by winds of misfortune than an entire nation – can borrow so much more than is seen as wise for a country?

    I’m sure this is 101 Economics, but all the same, I don’t grasp why increasing the country’s debt, as long as there is a clear strategy over the longer term, is a bad thing, if it boosts growth and employment. Surely the coalition’s current policy is potentially restraining growth, increasing unemployment and thereby reducing the tax take and adding to those who are a burden on the state?

    Or am I missing something?

    • lifelogic
      Posted February 3, 2011 at 9:52 am | Permalink

      You ask “Why is it that individuals – surely more prone to being buffetted by winds of misfortune than an entire nation – can borrow so much more than is seen as wise for a country?”

      Because individual will, in the main, do something useful with it such as buying a needed asset such as a house. The government will mainly waste it buying votes, paying for propaganda, pushing silly equality agendas, Millenium Domes, jumped up sports days and white elephant stadiums, HS2, wind turbines and the likes. Or worse still they will spend it regulating and inconveniencing actual wealth producers.

      • Stuart Fairney
        Posted February 3, 2011 at 11:37 am | Permalink

        “…jumped up sports days…”

        Brilliant!

    • norman
      Posted February 3, 2011 at 10:00 am | Permalink

      The largest outlay in most peoples monthly direct debits is the mortgage. Do we really want to be spending more on debt interest than on health, or education, or defence, or all three combined? Also, after 25 years (or sooner) your house is yours and it has also increased in value (more than inflation in our recent history) and is an asset that you can either sell, remortgage, or bequeath to your children.

      Our government is bequeathing the mortgage to the children without the property that goes with it.

      Also, there is no guarantee of growth when government spends money, if there was communism might actually work rather than impoverishing every country that has ever tried it.

    • Sally C.
      Posted February 3, 2011 at 10:24 am | Permalink

      The answer to your question is complex. First of all, think about a society with no public sector at all. People are busy making a living by producing things and selling them to other people. This is the private sector at work. Over time, if these businesses are successful, the business creators will employ more people and those people will spend their earnings on other goods being created within the economy – a virtuous circle.
      The problem is that some people steal, and women don’t feel safe walking around on their own, so everyone gets together and agrees to pay a small percentage of their earnings on a police force. This is the first tax if you like, but everyone is happy to pay it for the extra security it provides. However, the police force is not productive and is dependent on the ordinary citizens and business people for its existence. It has to do a good job or people won’t pay for it because it is taking money away from the private sector that could be spent on building new factories or employing more people.
      The next problem that business owners want to solve is the level of education of their staff. Some will set up their own schools but eventually the private sector gets together and agrees to pay some more money, the next tax, in order to set up schools for their young people. Everyone is happy to pay this tax, even though it reduces the spending power of the private sector, because they want a better future for their children. However, the teachers, though useful, are not productive and are dependent on the private sector for their jobs. They have to do a good job or the private sector will stop paying for them.
      You can guess what the next problem is. The private sector gets together and agrees to pay yet another tax in order to fund a community hospital replete with doctors and nurse, who again are not productive and take money away from the private sector which could be spent on new factories and productive jobs.
      Over time, the demands of the public sector overwhelm the private sector and the tax revenue alone cannot support the huge publicly funded structure, which now includes a fully fledged government, inflation linked pensions for all staff, unemployment benefits and the BBC.
      The government doesn’t want to upset the private sector, because they want to be re=elected, so they issue bonds/gilts to the capital markets to cover the shortfall in revenue required to keep the public sector afloat. After a while even this revenue is not enough, so the government creates a National Debt and just adds a small amount to it every year, but over time the interest costs demanded by the capital markets to finance the National Debt become a bigger and bigger percentage of the annual deficit. (I believe that our current annual interest costs in order to finance our National Debt amount to approx £40 billion a year. )
      This is a precarious financial position and the capital/money markets know this. If there were to be a major shock to the economy, the country – that is the private sector and the huge publicly funded structure that it supports – would become bankrupt, unable to pay its debts, unable to support that expensive public sector.
      Have you heard of Sir Fred Goodwin or Adam Applegarth?
      So the current situation is that we, the private sector, are bankrupt. Over the years we have allowed the public sector to grow too large, to become too expensive.
      The Bank of England made borrowing incredibly cheap over the last fifteen years. They and the banks gave us all enough rope to hang ourselves and them.
      The government doesn’t want us to know that we are bankrupt, because they want to be re-elected so they have committed us, the tax payer, to backstop the banks.
      So we are still accumulating more debt, as JR keeps pointing out ‘ The Coalition government has ruled out cutting the amount we actually spend on the public sector – indeed, they want it to go up a little over the next five years. ‘
      In order to appeal to their core voters and crucially the capital/money markets,’ This is presented as cuts, because it entails cutting previous (Labour) plans to increase spending.’
      Heaven forbid that the interest costs in order to fund our massive National Debt ( just increased by £1.3 trillion according to the Office for National Statistics due to bailing out RBS and HBOS) should rise. Then we would really be in trouble.

      • Andrew Johnson
        Posted February 4, 2011 at 10:30 am | Permalink

        A superb Masterclass. But how do the political classes fix it?

    • Geoff not Hoon
      Posted February 3, 2011 at 10:58 am | Permalink

      James, I feel sure JR will give the actual number for GDP and Britain’s total debt but your statement that we are not even close to debt equalling GDP is not right. What the very latest numbers are I’m not sure but with interest added we must be already close to 80% borrowed ( ie debt to GDP) and the number gets worse each month that goes by of course.

    • Acorn
      Posted February 3, 2011 at 1:22 pm | Permalink

      James, it’s what you do with the “debt” that matters. If you invest it for a future income stream OK, otherwise you just end up with a future debt to be paid off without that income stream.

      Owner occupied property is part of the nations capital stock that generates little or no income for the nation. The Irish made the mistake of thinking they were getting wealthy, by buying houses at ever increasing prices from their neighbours. We know where that has ended.

      Have a read of http://www.quebecoislibre.org/05/050415-9.htm . At the bottom of the page there is a link to “A Tale of Two Islands”; a good read for kids doing economics.

    • BobE
      Posted February 3, 2011 at 2:42 pm | Permalink

      The house can be sold to repay the debt.
      Government dept can only be repayed out of future taxation or by selling bits of our country. (Not a lot left to sell now).
      BobE
      Region 6
      EUSSR.

    • Winston Smith
      Posted February 4, 2011 at 10:56 am | Permalink

      You are missing an important point; the State’s out goings are currently much higher than its income. If I applied for a mortgage and told them I currently spend more than my salary every month, they would laugh at me.

  3. lifelogic
    Posted February 3, 2011 at 7:17 am | Permalink

    “Getting to an above average rate of growth with badly regulated banks and with a rising tax burden is not going to be easy.”

    I would say virtually non functional banks in terms of lending to smaller businesses. Getting growth at all without cutting the public sector and its regulation is going to be virtually impossible.

    Raising more tax by increasing tax rates is also unlikely to work as people will go black market, work less or leave the country like Pfizer. The only good tax to raise would be one levied only on the public sector and their fat pensions as it would be very hard to avoid.

    Interesting program last night on the lack of mobility “Who gets the best Jobs” with the usual BBC slant of course. Largely since, mainly the Tories, got rid of Grammar schools from the 60s on mobility has declined significantly.

    It is depressing however that so many just wanted to be well paid Lawyers/Doctors. The country needs more over paid lawyers like it needs more public spending and wind farms. I have never really understood why lawyers are able to earn so much more than someone who designs say a jet engine or similarly complex task. Nor why a knee operation is far better paid than many other far more complex engineering tasks.

    I suppose because these professions are both fairly immune to overseas competition and have been able to exploit their protected position. They are also allowed, to a degree, to control professional entry. If a sector is highly paid for little real intrinsic reason, to do with the nature of the job, then perhaps the industries need some serious competition investigation and restructuring. Particularly when so much fee income to these professions is coming from the public purse anyway.

    In many cases the work is mainly done less qualified minions anyway.

    • Tom
      Posted February 4, 2011 at 10:53 am | Permalink

      Totally agree with lifelogic. I also strongly object to the claim that you have to pay obscene mega bonuses, or salaries, because everyone else is doing so and you would not get people of the right quality if you did not.

      Firstly “independent” remuneration committees are made up of people who have a vested interest in keeping salaries high “mutual back scratching”. Lawyers, in particular, are a closed shop (if you ever meet a poor lawyer steer well clear).

      Secondly, incompetence is rarely punished, and if it is the “compensation” is grotesque.

      Thirdly, there are masses of capable people who could do, for example, the jobs of senior local government or NHS officials/administrators for a fraction of their salaries.

  4. Sue
    Posted February 3, 2011 at 7:22 am | Permalink

    Total Cost to DFID: £3,819,385 on “Stories for Change (Bangladesh), a pilot TV drama on mythical stories of Nigerian women”

    The British Taxpayer is funding this.

    Now, you tell me what’s going on?

    • wab
      Posted February 3, 2011 at 8:19 pm | Permalink

      It seems from the DFID website (http://www.dfid.gov.uk/R4D/SearchResearchDatabase.asp?ProjectID=50160) that some of this money ended up funding academics in Britain, rather than going abroad. Although personally I think this kind of project is a waste of money, one can imagine that the people behind it believe that it will (somehow) lead to better lives for women in developing countries, and if these women have better lives then their country will also be better off, so that it is less likely that waves of poor immigrants from there will want to settle in Europe. And we all know that the Tories will think every penny is worth spending if it keeps Johnny Foreigner out.

      Anyway, that amount is going to be dwarfed into insignificance compared with the billions of pounds that Cameron and the rest of the ruling elite want ordinary British citizens to send abroad as compensation for Britain’s historic carbon emissions. Needless to say, most of that money will end up in the Swiss bank accounts of corrupt dictators.

  5. Nick
    Posted February 3, 2011 at 8:57 am | Permalink

    28% is the overspend last time I looked. That’s closer to 33% than 20%

    !/3rd is borrowed is closer to the truth.

  6. Nick
    Posted February 3, 2011 at 8:58 am | Permalink

    f the economy starts growing at above its trend rate of growth and sustains that until 2015 the strategy will succeed.

    ==========

    That’s spin.

    When you say growth, you mean growth in taxes. You mean that the government takes more money from the public.

    Shame on you for the spin.

  7. JimF
    Posted February 3, 2011 at 9:00 am | Permalink

    Perhaps this should be top-to-tailed?
    If the country is living 10% beyond its means, where is that 10% being spent?

    In any normal household that would be analysed and answered, and the appropriate cuts made. With this government, it is like the non-wage earner totting up the figures and sending the poor wage-earning partner out to work another 5 hours a week so he/she can continue to stay at home and party.

  8. Stuart Fairney
    Posted February 3, 2011 at 9:05 am | Permalink

    I just finished an excellent book by two German economists recently translated into English called “The global debt trap” It’s a run of the mill Austrian critique but they did make one excellent point. Previous major currency hyper-inflations have been confined to say Weimar Germany or much smaller countries.

    This time around the whole world is fiat and has only been so since 1971 when Nixon abandoned Bretton Woods. So the currency system we now have is fairly new and largely untested. Also the Fed, the ECB, the B of E and many other central banks have significantly increased their balance sheets. This can only be inflationary if you accept inflation as a monetary phenomena.

    So it seems the choice has been made by the world’s banks and politicos; to monetise the debt rather than take tough decisions (please spare me the denial) and the only question remaining is will be see a re-run of the Heath/Wilson inflation of the 1970’s or something really serious which wipes out the currency.

    If it means a return to gold and an end to deficit financed big government, I shan’t complain. Events sir, maybe swiftly moving out of your hands.

    • APL
      Posted February 3, 2011 at 11:31 am | Permalink

      Stuart Fairney: “This can only be inflationary if you accept inflation as a monetary phenomena. ”

      You would think so and it may be if they can inflate and pay off all the debt in inflationary $,£ € etc.

      What if we get another sovereign default before that? Ireland, Spain … China.

      That would be deflationary, which despite the printing may lead to much bigger deflation that inflation.

      However, if the authorities succeed and pay down the debt in inflated currency units, then we will still have to deal with the undoubted corruption in the banking sector.

      By the way Iceland which was the first to default, is now two years later doing reasonably well.

  9. Brian Tomkinson
    Posted February 3, 2011 at 9:07 am | Permalink

    JR: “That means that all the reduction of the deficit is planned to come from increased tax revenue.”
    So much for Osborne’s claim that the deficit would be reduced by 80% cuts in spending and 20% increased taxation. We have heard nothing but talk of cuts which is a prime example of Sir Humphrey’s rule of Inverse Relevance: the less you intend to do about something, the more you keep talking about it. Readers of this blog know that this government is spending more and borrowing more than Labour but the bulk of the public I would expect to think they are spending less. Apparently 85% think that the country has been in recession for the past year.
    Whilst we are being taxed to the hilt to reduce the deficit, inflation is being stoked up to deal with the enormous debt. Apart from there being no credible alternative government, why on earth did we vote Conservative?

  10. Johnny Norfolk
    Posted February 3, 2011 at 9:11 am | Permalink

    People of my age have seen all this before and know that the answer is a Mrs Thatcher type of government. At the moement we have a Heath type government and he gave use the 3 day week, as he was not prepared to do the right thing( no pun intended).

    Watch this space as there are plenty of people that know what will have to be done.s

    • lifelogic
      Posted February 3, 2011 at 9:42 am | Permalink

      If they keep on with the wind/green energy stuff we will soon have the power cuts like Heath too.

      • David John Wilson
        Posted February 3, 2011 at 1:01 pm | Permalink

        What ever the arguments are about green/wind energy the one thing it does do is provide a buffer against Heath like three day weeks. Even if the country can’t afford to buy oil and coal the green energy will still be available along with that which is nuclear generated. Unfortunately currently it is such a small percentage.
        Solar panels on your roof will continue to generate electricity even during a three day week. Perhaps the cost should be seen partially as an insurance.

        • lifelogic
          Posted February 4, 2011 at 6:40 am | Permalink

          But wind and photovoltaic cells only generate when it is sunny and windy and cost perhaps 5 times as much as coal/gas/oil/nuclear and for a supply than is not even produced on demand. Electricity cannot be stored cost effectively so this makes this electricity worth far less than on demand electricity. Just look at the costings.

          Nuclear yes the rest is just pointless expensive green badging.

        • APL
          Posted February 4, 2011 at 8:26 am | Permalink

          David John Wilson: “green/wind energy the one thing it does do is provide a buffer against Heath like three day weeks.”

          Then you had better pray that the three day week does not occur during a period of no wind.

          And by the way, the investment in intermittent power supplies amounts to several hundred million if not more, and it only provides 2% of the required power (when the wind blows ). A couple of hundred million might pay for a new nuclear power station, that when commissioned could provide continuous 10% of the required power load.

          • David John Wilson
            Posted February 4, 2011 at 3:59 pm | Permalink

            I was trying to avoid the debate about green energy but consider the following:

            There are 28 weirs on the river Thames each of which is capable of providing enough continuous power for an average of 500 houses for most of the year and will pay back any construction costs in under seven years. Each of them is attached to a lock which has a keeper who already operates the weir They were after all originally built to power water mills.
            Solar panels do not need continuous sun to provide power and will actually generate mostof the year.
            The tides and currents around this island are easily capable of providing 10% of the country’s power requirements.

            As I originally said it is not just about cost effectiveness at the present time but assurance of power in the future

        • D K McGregor
          Posted February 4, 2011 at 10:00 am | Permalink

          Thr coal mines were not closed because they have run out of coal , Britain is built on coal. The moment in time will come when these assets are exploited again , let us see who benefits.

          • APL
            Posted February 5, 2011 at 9:26 am | Permalink

            DK McGregor: “Thr coal mines were not closed because they have run out of coal ..”

            Perhaps. But. The easy thick and good quality coal had been largely extracted. It is always the way, after a hundred years of extracting the coal the cheapest to extract mostly has been extracted.

            There may be a lot of coal left underground, but much of it is low quality or in difficult geological conditions, making it less advantageous to extract.

    • Michael McGrath
      Posted February 3, 2011 at 12:04 pm | Permalink

      I remember the three day week very well. Upon being told that we had to cut our working hours from five days to three, management got together and introduced changes in working practice which meant that, in those three days (60% of normal time) we prduced around 94% of previous product volume

      If only government could do the same

    • davidb
      Posted February 3, 2011 at 6:08 pm | Permalink

      Seconded!

    • Christopher Ekstrom
      Posted February 3, 2011 at 11:26 pm | Permalink

      This is worse than Heath. At that point one could be forgiven for confidence in statist solutions. Not after Thatcher. This country has fallen under the spell of foolish paternalist over promise. At no time does the vast public buy that the absurd coalition is anything more than a false solution. Certainly JR knows thus will end in tears: for the British people. UKIP is right: Sod the lot!

  11. Javelin
    Posted February 3, 2011 at 9:19 am | Permalink

    John, you’re absolutely right to keep it simple. There is so much noise in the statistics that it really confuses the situation to be exact.

    Through all the noise what rings clear to me was the 2% rise in public sector spending before the election kept us out of recession, and we only have a 1 % growth and a 20% cut in public secding coming up.

    Where I dont think it’s simple is explaining the cuts.

    What’s interesting (from the incessant whining on the BBC) about the cuts is the the public views a contracting public sector as a bad thing – this importantly confuses actions with intentions. If you look at the “theory of mind” (our ability to attribute mental states to another person) and developmental psychology – you see around the age of 5 children being able to attribute mental states to other minds, and you see the same thing in the public, where the Labour party want to keep an immature view of keeping actions and intentions as identical. So what’s key is to seperate out action from intention. The Conservatives want to increase public services but can’t afford it.

    Thus you may be able to see a person act in a way that was not their intention (for example an accident). People with “dysfunctional” minds (e.g. autism) blame people for actions that are not intentional (e.g hurting somebody by accident in a game of rugby) – and the public currently have a Dysfunctional Theory of Government (like a dysfunctional theory of mind). They can’t see that even though the cuts are necessary that the Conservatives want to make the cuts.

    So when you make a 15% cut to the public sector and a hike in taxes, the public do not understand they have been living beyond their means – and could (in my opinion) have not have had the cuts if they had worked harder (e.g. education, coming of benefits), and introduced less liabilities in the UK (e.g. red tape and low value immigrants).

  12. Gary
    Posted February 3, 2011 at 9:37 am | Permalink

    So we have bet the farm on growth. We refuse to allow deleveraging, we are going to grow our way into our 466 percent of GDP debt jacket. No cleaning out the malinvestments, no allowing for inefficiencies to wither and die, no penalty for tying up trillions of capital in non-productive houses. Instead we are going to plow on, further sucking the only engine of growth, the private sector, dry. And that growth must be no less than 2.5 percent. You would have to be a blind optimist to believe this is going to work. Read Rothbard’s Great Depression free online to see how Hoover followed this script word for word after 1929 and by 1932 all he had achieved was a complete collapse. We had better hope this time is indeed different.

    • Stuart Fairney
      Posted February 3, 2011 at 5:50 pm | Permalink

      Rothbard was quite a man, I have great respect for his work, (and a great speaaker in his way, check some of his lectures on youtbe) but this time around it is different. Far from a deflationary cycle (which public works could not remedy) this time we will see serious inflation. As evidence of this I offer the gorged balance sheets of the ECB and the Fed along with the B of E. This can mean only one thing

  13. Malcolm Stevas
    Posted February 3, 2011 at 9:48 am | Permalink

    As always I admire the clarity of your statement of the facts. I wish (as always…) the rest of the political class were prepared to be so honest and straightforward, if only in monetary matters. The crux for me is when you write, ..we all have to take a hit as the country stops living 10% beyond its means..
    It’s inescapable that we “all have to” share the pain – because we have no choice, our political masters having decreed that this is the least worst option for them, the lowest common denominator policy that will arouse the least active opposition. I dare say they are aware that we are not all ingenuous, compliant little baa-lambs, though: a great many of us simmer with bitterness and frustration at being shafted yet again by politicians. Our personal pursuit of financial security through diligence, prudence, delayed gratification, absorbing the political lessons of 1970s Labour economic sabotage, keeping a wary eye on the future – it might not be all for nought but our expectations have been brought low. Not only do we have to suffer for the gross profligacy of successive governments (especially but not exclusively the Blair/Brown years), we see both the public sector and the parasitic benefits-consuming class continuing largely in the featherbedded style to which they have become accustomed.
    It really does reinforce the burning question of the moment: for whom does one vote? What is the point of voting for any of the major Parties, since they have conspired to undermine my future and that of my children – ? I voted UKIP last year, but my vote would have vastly more meaning if John Redwood and likeminded people would abandon Cameron’s queasy social-democrat cock-up of a Party, do the decent thing, and join UKIP…

    • Michael McGrath
      Posted February 3, 2011 at 12:15 pm | Permalink

      I do hope that you are pleased with your waste of your vote. It is interesting that in Morley and Outwood, the UKIP candidate came last with 1506 votes…if those people had voted conservative, Ed Balls would have lost the seat to the conservative candidate

      • Malcolm Stevas
        Posted February 4, 2011 at 10:09 am | Permalink

        I dare say you did not intend to be insulting. But reflect: your implication is that a Conservative vote would not have been wasted. Please re-read what I wrote. The mainstream Parties conspire collectively to deceive us, they are irresponsible, they are not to be trusted. I liked Sally’s succinct explanation (above). Would you seriously suggest that if I and other UKIP voters had instead cast our votes for Tory candidates, we would now have a Tory government of a markedly different (i.e. fiscally/financially prudent) complexion to that of the Coalition?

        Reply: I merely point out that after years of UKIP no UKIP MP has ever been elected. This undermines the Eurosceptic case, as successive governments say the failure of UKIP at the polls shows it is not a popular cause. It is also the case that a Conservative government with a majority would have been more Eurosceptic than a Coalition including a federalist party within it. The choice is yours, but you are also partly to blame for the outcome.

        • Malcolm Stevas
          Posted February 4, 2011 at 11:26 am | Permalink

          “More Eurosceptic” is too vague a prediction, too optimistic. In general terms it is unarguable, but specifically, Cameron is no Eurosceptic, his occasional soundbites notwithstanding. It is impossible to believe that a Conservative administration reinforced by ex-UKIP votes would be sufficiently more robust towards our EU mebership to deal with that aspect of our present bankruptcy. In the meantime, voting UKIP is the principled thing to do, for the growing number who despair at the Conservative Party’s betrayal of its former principals and who wonder at the continuing loyalty to that Party of rational, principled folk such as John Redwood.

        • Simon
          Posted February 4, 2011 at 1:24 pm | Permalink

          J.R.

          The Conservative party only got as many votes as it did because people were paranoid about the possibility of another Labour term in office .

          Take that threat away and an awful lot more people who voted Conservative in protest would have voted UKIP .

          People can see through the charade that is Cast Iron , Hague and Osborne’s Euroscepticism .

          Would you deny that the Conservative Leadership is Pro EU ?

  14. Richard
    Posted February 3, 2011 at 9:53 am | Permalink

    I will predict that over the next few years of this Parliament, the amount of taxes raised will be less than expected and the reductions in public spending will be less than expected and that growth will be less than expected.
    I also predict that unemployment will be higher than expected and that inflation will be higher than expected and that our trade gap will have widened
    I also predict that the EU will greatly increase its powers over us and that recent levels of immigration will not be reduced.
    Yours-reaching for the pills…..Richard

    • Sally C.
      Posted February 3, 2011 at 11:08 am | Permalink

      I love your comment, but I also wanted to make a point to JR and the world at large, re certain areas of public spending that we could get the banks to pay for. The banks owe all of us a huge debt. Let’s face it, RBS would not exist without us, the UK taxpayer. We are implicitly backing all of the UK banks. Therefore we should have no qualms about asking them to pay for certain things. I don’t know the exact costs involved to maintain current spending on tuition fees and our universities, for example, but I am sure that the banks could pay for those costs without blinking. We need to get them to stump up money to help the rest of us out and to show goodwill to the taxpayers that have kept them alive.

      • Simon
        Posted February 4, 2011 at 1:40 pm | Permalink

        Sally ,

        Surely the banks should be lending the money to industry so we can actually generate wealth to pay for education ?

        Where would the banks get the money to pay for education other than by stiffing the average man in the street and the taxpayer with extortionate fees and appauling savings-loan interest rate margins ?

        Modern financial services are about concentrating wealth for the people working in it by sucking it from the masses .

        • Simon
          Posted February 4, 2011 at 1:49 pm | Permalink

          Furthermore , if the Govt wants to use the banks to collect money which should be collected through the tax system then it will cost the country more because the banks will take their profits from it .

    • norman
      Posted February 3, 2011 at 11:42 am | Permalink

      The corolary to this is that borrowing will be higher than expected (I’d not be surprised to see borrowing of £60-£80bn) when the next election rolls around. Not only will this make it difficult to do a giveaway budget (but they’ll do it anyway) it will also open up the coalition to the charge from Labour that for all the vicious cutting they have manifestly failed to wipe out the deficit and we’d all have been better following Labour’s plans in the first place.

      All pain and no gain from the Tories they’ll say.

      It would be one thing to admit now that the deficit will take time to get rid of but the coalition have staked the farm on wiping out the structural deficit this Parliament which is the only answer they have to continual charges of ideological, wanton cuts.

    • Robert
      Posted February 3, 2011 at 11:42 am | Permalink

      Richard, spot on. That is where the risk lies, and if I were a betting man that is where I would put my hard earned cash. John though transparent as ever, still fails to grasp that growth will not reverse the tide of government interference in all aspect of our lives undermining both individual self-esteem, social mobility and holding back the true potential of our country. Bluntly put, the political class and in particular the Tory party, who should know better, have to date failed this country.

      • Richard
        Posted February 4, 2011 at 6:29 pm | Permalink

        Im glad you agree, but it gives me no pleasure to feel that the economic measures being taken aren’t going to provide the success we are all hoping for, both politically for the Conservative party and for the economy in general.
        I think you are perhaps being a little harsh on Mr Redwood regarding state inteferrence, as I believe his position has always been in favour of a much smaller state, reduced centralisiation and greatly reduced EU powers.
        It is just a shame that his opinions are not shared by a majority in his party

    • lifelogic
      Posted February 4, 2011 at 9:24 pm | Permalink

      Sound like good predictions to me.

  15. Iain Gill
    Posted February 3, 2011 at 10:06 am | Permalink

    have you got any figures for the impact of different levels of inflation?

    for instance what does inflation running at say 5 % do to borrowing that is different to inflation running at 0%

    like most i assume much public debt will get reduced as any denominated in GBP will be reduced with devaluation in real terms

    of course inflation also provides an easy way to push everyones pay down without making it quite as obvious what your up to

    thoughts?

  16. waramess
    Posted February 3, 2011 at 12:00 pm | Permalink

    Well, the delusions will continue and the state will get bigger and all the politicians can think of is more tax. Forget the spectre of 1922 and consider the last time we called in the IMF as a direct result of workers emigrating and the Bank of England running short of foreign currency.

    Every 1p more collected in taxes from now on will see a further contraction in the size of the private sector. The very same private sector we are counting on for growth to support a larger and ever increasing public sector. Can you really believe the madness?

    The so called coalition is not cutting anything it is simply cutting down the speed at which it incurs more debt. Moving deckchairs around. And that presupposes they will be successful

    The sad thing about all this is they profess to be doing it in our names. We are not immobile and as we decide to depart these shores then we leave the debt behind, so. it is far from being our debt.

    As we go so will large companies who will find the wealth of the country reducing and the capacity to service debt diminish, whilst the need to increase taxation will become more and more urgent.

    The question is whether bankrupty of the nation will occur before it is too late or will the destruction preceed bankruptcy.

    Our politicians would do well to consider the reduciing revenues from oil and financial services and to ask themselves; from where are they going to magic the growth?

  17. Derek Buxton
    Posted February 3, 2011 at 12:13 pm | Permalink

    Well I did have a good laugh over the “we will all have to take the hit”. I wish. Between government stealth taxes and local councils ripping us off, MPs and above will not be taking too much of the hit. Local authority CEOs will still be raking in their £150k to £220k. Meanwhile the poorer section of society, pensioners and those with savings, are already taking a huge hit, this must be “social justice” Cameron style. “Let the poor pay, they shouldn’t be poor, I’m not”.

  18. Jacqui D
    Posted February 3, 2011 at 12:44 pm | Permalink

    I agree with Richard.
    No pills, just a one way ticket for my sons on graduating, followed by me!

  19. Damien
    Posted February 3, 2011 at 12:50 pm | Permalink

    “The Coalition government has ruled out cutting the amount we actually spend on the public sector…”

    Contrast this with what is actually happening already. Cumulatively, net mortgage repayments since the second quarter of 2008 now stand at £49.7 billion. Indeed the rate of repayments has increased for the past 10 quarters to repaying £6.1 billion to the end of September 2010.

    This would imply that households have adopted their own personal austerity measures and
    are restoring their personal balance sheets. A voluntary squeeze if you like.

    Also the CML, not known for talking down the housing market, have predicted that for 2011 net mortgage lending of £6 billion, which is a 95% plunge from the market peak in 2007 (hat tip to moneyweek) ergo expect further stagnation in the housing sector.

    Given that many measure their wealth by the value of their main asset, their home, and we can now safely predict further declines in house prices.People will feel worse off not solely as a result of the government cuts.

    As this voluntary squeeze preceded the new coalition and continues with gusto I conclude this is not a result of some grand design by the government but in reality a reaction to the biggest crash since the 1930’s

    Apart from restoring personal balance sheets this will mean we are importing less housing related products and manufacturers who previously supplied the local markets will look to exports to survive and grow.

  20. Simon
    Posted February 3, 2011 at 2:04 pm | Permalink

    We need some measures to help peoples money go further .

    For a start the regulator needs to ensure that retain Gas and Electricity prices bear some relationship with wholesale prices .

    Also measures to prevent the constant syphoning off of the fruits of peoples labour by the financial services industry . The charges for private pensions and their poor performance condemn people to a barren old age and discouraging people from saving at all . Not everyone is capable of operating a SIPP of self invested ISA .

    Instead of making token changes to the public sector pensions they should be replaced by a universal scheme open to people in the private sector too .

  21. lifelogic
    Posted February 3, 2011 at 2:33 pm | Permalink

    Penny Mordaunt MP on World at One today seemed to be on a one woman mission to make MP’s even less liked than they are already. The poor lady seemed to be down to her last £22 at Christmas and had to borrow from her boyfriend as the fees office are apparently a bit tardy in settling her expenses.

    She seemed to think that this would deter people on modest incomes from becoming MPs. They get £65,738 salary, pension contribution of circa £50K PA, travel, office expenses, a second home allowance and subsidised food and drink facilities.

    I do not begrudge them this but do not imagine many on a typical £25,000 salary would be deterred by slight delays in paying expenses.

    But with the county in such a mess anything which deters MPs whose main concern seems to be prompt payment of expenses might be no bad thing.

    • APL
      Posted February 4, 2011 at 8:32 am | Permalink

      lifelogic: “I do not begrudge them this .. ”

      Measured on what MPs actually do, how much of their own authority they have ceded to the European Union, how well the UK has done under their stewardship, I do.

      • lifelogic
        Posted February 4, 2011 at 9:11 pm | Permalink

        Perhaps I do begrudge it going to people whose main concern is clearly prompt payment of their expenses and not the proper management of the country. And how can they be so out of touch as to think that they do not have a very good deal indeed and worse still to think that it is a good idea to go on national radio to complain about these slow payments after all the expenses publicity.

        Perhaps, on balance, no remuneration would be best or maybe one fixed by a free vote in the constituency each year.

  22. stred
    Posted February 3, 2011 at 2:48 pm | Permalink

    Local Authorities are busy stretching their highly paid executives in search of deficit reductions. To sack anyone at the top with a golden goodbye would not save anything. So they have decided to implement the 1992 Act, allowing Council Tax to be charged on empty properties. This will now apply to houses in process of improvement and extension, in order to encourage owners not to leave them empty.

    In our case, the house extension and major work has been held up byLA Planning approvals for 9 months and we had hoped to be occupying by now. But after 6 months we are now paying Council Tax.

    Under Mrs T, cuts were made by simply reducing the amount available and leaving decisions to Local Authorities. They rarely cut at the top and usually went for the sevices that we actually want, perhaps to teach us a lesson. Nothing has been learnt and it seems the same will happen now.

    But all the extra nonesense, such as inspection of boilers and electrical work, designating HMOs in special areas, all the Greenballs measures, speed humping, and social workers confiscating and giving away children for no good reason, to name but a few, will continue.

    If only Mr Pickles would lay down the law to LAs and reduce the ridiculous salaries and pensions paid to top admistrators, from the top down to £70k pa. If it is illegal, then pass an unfair contract law to reverse the conditions of contract, which were often devised and written by the legal department of LAs and applied to their own officers.

    Of course, the Ministry of Defense has already done its bit to choose the most ridiculous cuts. The almost finished Nimrods are in pieces, the Ark Royal is in dock and the two aircraft carriers without planes are creating employment and votes in Brownland. If I remember rightly, their CO was a Sir Jock too.

    • lifelogic
      Posted February 4, 2011 at 9:22 pm | Permalink

      I agree with this, in the main, even simple jobs like electrical wiring (that I used to do when I was 12 or 13) now need building control. Even a simple oil tank replacement, in essence a plastic bucket and a pipe need these nonsense people to stick their noses in and be paid a “fee” for a silly bit of paper. Release them to do something useful and have a law that says employers and the state can fire anyone for 2 weeks pay for any (or even no reason at all).

      Then people might start employing people again.

  23. Electro-Kevin
    Posted February 3, 2011 at 3:33 pm | Permalink

    The public sector could be cut back without hitting essential services very much at all.

    What of those councils that lost money in Iceland ? Apart from ‘lessons will be learned.” has there been much in the way of heads rolling ?

  24. stred
    Posted February 3, 2011 at 6:41 pm | Permalink

    Forgot to mention, along with the Council Tax demand another letter arrived from the Council. They are running a ‘Waste Awareness Week’ with a series of meetings and events. Not for themselves, but to tell us how to us to recycle our rubbish.

  25. Bazman
    Posted February 3, 2011 at 6:57 pm | Permalink

    The real test will be the price of petrol. £2 a litre will be the same as a shortage if coupled with rising interest rates. Nothing is cheap without a job however.
    I predict the next scam will be an alignment of gas and electricity prices. The smug oil fired boiler owners aren’t so smug now prices have risen 65% and don’t forget the higher maintenance costs of oil fired systems, so this proves it is possible.
    The nightmare is the electricity supply going down. No lighting or heat for most people, modern boilers don’t run without electricity. Pretty soon you would be breaking up your furniture. Get off the streets.

  26. REPay
    Posted February 3, 2011 at 6:57 pm | Permalink

    To listen to the BBC you would think that there were massive cuts afoot. The problem is not enough cuts and the management of our pubic services by well-heeled, politically motivated aparatchicks who will cut the front line and spare themselves. The Coalition’s strategy is failing in PR terms and looks like the aim of rescuing us from bankruptcy is eluding us as they trim their course.

    Richard, pills and a stiff drink all round!

  27. alan jutson
    Posted February 3, 2011 at 6:57 pm | Permalink

    John

    Many thanks for your simple explanation, which exposes the Government lie about 80% cuts and 20% tax increases to pay off the deficit.

    The reality is as many on this site have suggested, no real cuts at all, just a reduction of an increase in expenditure.

    Now please, please, tell me why the conservatives have taken all of the flack for nearly a year, about the decimation of our public services, when no such cuts are going to be made.

    Can I suggest the Conservative PR department copy your post, and send it to all newspapers, and TV studio’s so that they are all aware as the the real situation.

    Were they (the Government) trying to keep the cat in the bag, because they were worried that the IMF and other like organisations, may have downgraded UK Plc if the real truth were known (no real cuts at all).

    Now all we need is a statement to show that they are proceeding to inflate away the deficit, and the reduce the value of the voters savings. That the economy will not grow as much as suggested, and we will then have a full house of revalations.

    You reap what you sow, and I am afraid that this looks more and more like a one term government.

    The bigger worry is what comes next.

    God help us.

  28. Stephen Prince
    Posted February 3, 2011 at 7:17 pm | Permalink

    Now we have three parties bent on turning this country into a government dependent hell- hole, so I will not be voting for the Libcon socialist workers party again. All that work that Thatcher and Reagan did to make the West a safer, richer and more grown up place has been totally destroyed by my idiot generation. Now the west has been bankrupt by moronic banking practices and government meddling trying to enforce their utopian fantasies on us, and because of their incompetent foreign policies the world is returning to a much more dangerous and unstable state. Still at least we’re spending billions of borrowed pounds on saving the polar bear from the carbon cycle.

    Where are the real conservatives? John we have to fix this, or else we will go so far down this idiot road and this country will finally be finished for good.

  29. Andrew Johnson
    Posted February 3, 2011 at 7:32 pm | Permalink

    My philosophy Professor taught us that all arguments have at least one crucial supporting premise. The argument stands or falls on the veracity, logic or appropriateness of the premise. I believe this is yours John – ” Most people now agree we cannot carry on borrowing at the rate we are to pay for all that extra public spending.” I don’t believe they do. Evidence? The Coalition is 11-12% behind Labour in the polls.
    I and others have commented before, that there is a massive counter propaganda campaign needed to counterbalance the many years of Statist propaganda which continues unabated via the BBC and NUJ journalists.
    “There is no deficit. There is no need for cuts, we can simply borrow more and repay it some time in the future. After all things can only get better with us in charge. We are for the working people – not like those evil Tories”
    So far the coalition has been absymal at getting the real message across, with the exception of a few real conservative MP’s like yourself. Our debt is increasing £9,000 pound every minute.
    Mr. Cameron and Mr. Clegg are betting their all on growth, not real cuts. We shall see.

    • Simon
      Posted February 4, 2011 at 2:19 pm | Permalink

      Andrew ,

      If only our debt was “increasing £9,000 pound every minute.”

      The deficit is approx £0.5billion per day which works out at £5,787 per second doesn’t it ?

    • Posted February 4, 2011 at 11:23 pm | Permalink

      Andrew, The Tories alone are actually running only a few percent (certainly less than 10 percent) behind Labour. See BBC Poll Tracker.

      The real poll story is the collapse of Liberal Democrat support.

  30. John McEvoy
    Posted February 3, 2011 at 8:26 pm | Permalink

    When are the sensible voices (Redwood, Hanna, Carswell, Tebbit etc.) going to get togather and ACTUALLY DO SOMETHING – instead of just talking about it! The country desperately need action.

    • waramess
      Posted February 4, 2011 at 9:37 am | Permalink

      Far too late and certainly too messy. Better to stay quiet or join another party.

  31. Posted February 4, 2011 at 10:15 am | Permalink

    So the plan is to hammer the only productive sector (private) in order to fund an inefficient, unproductive, largely unnecessary public sector. Why is a Conservative led coalition going down such a socialist road? Almost every single thing the government does is wasteful, badly thought out and better left to the private sector or not done at all.

    • Simon
      Posted February 4, 2011 at 2:33 pm | Permalink

      It’s an exaggeration to say that the public sector is unproductive and largely unneccessary and that the private sector is the only productive sector .

      Consider a school teacher who teaches 60 kids per year over a 40 year career and the effect it has on those pupils ability to earn a living , and the way they behave .

      Would you disagree that a good school teacher is going to indirectly add to the wealth of the country at least as much and probably much more than the majority of people who work in an office or a factory ?

      Do you think they will feel appreciated if they read your comments ?

      I’d hazard a guess that three quarters of what they do is very neccessary , it’s the other quarter that is killing us – regulations , red tape , non-jobs , overstaffing , overpaying for procurement and salararies .

  32. RightwingHippyChick
    Posted February 4, 2011 at 9:55 pm | Permalink

    The punitive taxes and removal of tax rebates (aka ‘benefits’) on people with kids will result in middle class wages being depressed. Why?

    Because, if you lose £1000 in child benefit if you go over the current threshold, then any raise that produces less netto than the CB that you lose is unattractive. But no business can really afford to give such a huge raise, and so, the tax man is in essence setting a maximum wage for lower middle class parents here, which of course is going to be the benchmark pay for everyone else.

    Either way, even if people put the surplus into pensions, the money is still removed from the circulation, and much of it is the high velocity money too.

    So, more tax revenue isn’t going to happen, there isn’t going to be the ‘flow of money’ going round for that one.

    Moreover, the first thing people stop to buy are the high cost-cheap value things that make money for companies and the taxman, so the drop in takings will be far harder than people realise.

    Mr. Osborne does not understand that the only way out of our dilemma is to *earn* the money we need to pay, not rob our meagre reserves for the last spare pennies that we have.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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