Price rises, growth and jobs

 

                   It seems likely that the economic recovery will resume this quarter, after the poor figures for Quarter 4 2010. Manufacturing continues to advance. The latest service sector surveys show improvement in January.

                   Growth is, however, likely to remain relatively slow overall, thanks to the impact of rapid inflation on people’s spending power and consumption. Savers still get a raw deal and so have little to spend. This recovery has to make headway against the backdrop of large increases in the tax burden hitting private sector demand. It has to occur despite the need of the private sector to reduce its debt and the public sector to cut the rate of increase in its borrowings.

                     This week the Monetary Policy Committee have to think again about why price rises have been so fast and persistent. They need to revisit their stance at the end of last year that this was nothing to do with them, and take some responsibility for the inflation they have encouraged by their attitude to rates and the value of the pound. This month we might see them have a better debate about whether they should do something or not, but it seems likely the Governor’s view that rates should stay down will prevail again.

                     Meanwhile, the  spin that the public sector cuts will be deep and difficult is having its impact on public sector employees.  On the overall figures there is no need to have any compulsory redundancies. Yet on the doorsteps I meet public sector employees from a range of areas who are genuinely worried about their jobs, as they expect their bosses to cut jobs instead of taking other action to reduce costs and achieve more for less. It seems that many public sector managers either do not understand how to use natural wastage as the best way to cut employee costs, or who want to make a point by pushing through redundancies. It is an expensive and an unpleasant way of cutting the costs, which could be achieved in a  much simpler and less damaging way.

              To promote and speed up the economy, the government needs to come up with a Growth package of measures soon.

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38 Comments

  1. norman
    Posted February 7, 2011 at 6:59 am | Permalink

    I know this is a simplistic view but if inflation is outstripping growth aren’t we in reality still in recession, although technically not if growth is greater than zero? Every governments benchmark should be that it raises the living standards of its citizens.

    As for the cuts, the government really needs to get a grip and get it’s message out there that the cuts aren’t near as severe as is being portrayed. This morning on the way to work the BBC were headlining their Scottish bulletins with an item saying that North Ayrshire council are considering cutting the school week to four days. That type of story will get people rightly angry but all this anger is going to be wrongly directed at the coalition unless they can start to get the media, and especially the BBC, to start using facts rather than scare headlines.

  2. Posted February 7, 2011 at 8:08 am | Permalink

    Also posted on Twitter

  3. Geoff not Hoon
    Posted February 7, 2011 at 8:22 am | Permalink

    Mr.Redwood, as someone close to the heart of government can you offer an opinion as to the thinking behind the enormous cuts being forced on Citizens Advice across the UK? If there was ever a time that the UK needed such a service with its 20,000+ volunteers (yes I am one) it is now dealing with debt, unemployment, benefits and housing. For many thousands of people the CAB provides the necessary expertise to resolve serious problems with free, unbiased advice and yet at a stroke it looks very likely much of it will dissapear to be replaced by what? Nothing. A shocking indictement of the Big Society plan.

    Reply: I will be writing about the Big Society and Council cuts on Wednesday. Councils often find it easier to cut grants to worthy outside bodies, than to cut their own overheads and inefficiencies.

  4. Nick
    Posted February 7, 2011 at 8:42 am | Permalink

    Why not implement a 10% pay cut across the board.

    1. It can be done now.
    2. It is equitable for all state sector employees.
    3. It is equitable because the private sector is being hit by you tax rises and failure to cut the state.

    After all growth only works for you if it means growth in taxes.

  5. lifelogic
    Posted February 7, 2011 at 9:14 am | Permalink

    Redundancy you say “It is an expensive and an unpleasant way of cutting the costs, which could be achieved in a much simpler and less damaging way.”

    Yes it is only so because of silly laws making it expensive and preventing you getting rid of the right people. Just change the laws to the benefit of all state and private sectors alike.

    “To promote and speed up the economy, the government needs to come up with a Growth package of measures soon.”

    Something to make banks (or someone else) lend to business is the most needed and something to inspire confidence. Stating that the government is moving towards the state sector being no more than 30% of the economy and inheritance tax and CGT will abolished shortly (in order to encourage investment and increase the actual tax take).

  6. Brian Tomkinson
    Posted February 7, 2011 at 9:32 am | Permalink

    I read today that Mr Cameron’s role as Prime Minister has become to be regarded as a non-executive chairman and that he is about to become more “hands-on”. He certainly has presided over a government which has been woeful in both the formulation of policy and its communication. This has resulted in many myths circulating regarding cuts and almost every other policy announcement. Having allowed months to pass by where the wrong perception has been allowed to take root, the task of convincing people of the real intentions will be so much more difficult. It comes as no surprise that those in managerial positions in the public sector portray the worst outcome of what they perceive is being asked of them by the government. As for growth, the government has yet to put action behind the fine rhetoric delivered before the election.

    • Reynard
      Posted February 7, 2011 at 6:12 pm | Permalink

      http://www.adamsmith.org/blog/tax-and-economy/text-book-response/#

      This is the sort of stuff this government has been failing to counter properly. To have allowed things to drift on for months like this is amateurish in the extreme. I don’t agree with a lot of what is going on in this government, but at very least I would expect them to engage and slap down this Labour opposition. They should be sitting ducks at the moment but they are winning the propaganda war at the moment.

  7. alan jutson
    Posted February 7, 2011 at 9:33 am | Permalink

    If this mornings Press reports are accurate, I see Mr Cameron is from now on going to be more hands on, and take a closer interest in what is going on with regard to Policy detail within the various the departments, and the manner in which they are announced.

    About time.

    Perhaps he may then find that some of his Ministers are not all they have appeared to be, and they also need to get their hands dirty.

    A good boss circulates around the shop floor at least once a day, if only for a few minutes on occassion. If he has never worked in a real production environment he would not know the value of such action.
    You simply cannot act as chairman and remain aloof in your office, just expecting things to happen because you have given the instructions. On occassions you need to follow it down to the lowest level.

    To implement Public sector cuts, you need the right people, in the right positions, with the right skills, with the correct authority, with clear and correct instructions/information/brief to implement the plan.

    Failure in the link will result in failure of the task.

    So far we have had abject failure of the explanation of the task, so failure of the plan is not surprising.

    • Simon
      Posted February 8, 2011 at 12:48 pm | Permalink

      I despise proposals to flog off the family silver as one of the Conservatives worst traits so give Caroline Spelman the benefit of the doubt that she might not agree with the sale of the forestry commission .

      Be that as it may , we saw from her performance that she is not all she’s cracked up to be . Wouldn’t get offered a job anywhere I’ve worked .

      Apparently she and her husband ran a lobbying firm .

      Does DC really need any other excuses to get wrid of her or is he going to wait for some glorified cash for questions allegations .

      If he is choosing his team then he’s made some poor choices .

      • Simon
        Posted February 8, 2011 at 12:57 pm | Permalink

        Poor choices in both flunkies he has surrounded himself with and talent he has left out , like J.R.

        Not offset by the more inspired choices such as Frank Field , though he may find his new boss no more ready to think the unthinkable than his old one .

  8. Alte Fritz
    Posted February 7, 2011 at 9:40 am | Permalink

    It is an interesting thought that public sector managers simply do not understand how to maximise value so they can only downsize. Union influence may be there also hating the idea, for example, that employees go on a four day week or take an overall pay cut or simply do more if someone has left and not been replaced.

  9. waramess
    Posted February 7, 2011 at 9:52 am | Permalink

    Is there an illusion being created as a result of the “inflation” or more properly the increase in the price of goods shown by the CPI and the increase in the price of goods experienced by the average person? If we show the GDP figures net of CPI, what about the difference between that and the increase in prices being experienced by us? Does it show up in the figures as growth?

    Perhaps we have once again an example of the politicians being deceived by their own deceptions.

    I can see no reason why we should be experiencing growth. It is just laughable to suggest that it is coming from exports even though we are giving the stuff away. We may see a short spurt whilst excess capacity is used up but no evidence that new manufacturing capacity is being installed.

    The Coalition is in a fine mess and managing to appear unconcerned even as the flames get closer; the Bank of England are at a complete loss as to what they might try to do next and so they defer to the Guv who wants to do nothing and, the public sector will continue to wag the government dog notwithstanding Erics size because they are being given control of where to make the cuts

    It’s a pickle, if you’ll forgive the pun.

  10. Acorn
    Posted February 7, 2011 at 10:22 am | Permalink

    Dame Hoodless was venting her spleen on the BBC this morning; as she exits the CSV “charity”. Government cuts killing the voluntary sector etc etc; usual stuff. I can understand why she is a bit pissed off. The accounts of her “charity”, tell why.

    As always with company accounts, the (interesting information-ed) is in the “notes to the financial statement” of the “group” accounts. CSV is nominally a £29 million a year ….charity. Have a good read of these accounts. Look out for the big hole in its staff defined benefit pension fund in Note 25. The fraction of funds it spends on staff in Note 9.

    Particularly look at Note 4 and see how much of that £29M actually comes from taxpayers, via a myriad of taxpayer sponsored entities listed in Note 27.

    This charity is (very like -ed) a quango. There are thousands like it. http://www.charity-commission.gov.uk/ScannedAccounts/Ends22/0000291222_ac_20100331_e_c.pdf . If this link fails, I can’t see my pre-moderated posts at all at the moment; this is charity291222 on the Charity Commission web site. http://www.charitycommission.gov.uk/index.aspx

  11. StrongholdBarricades
    Posted February 7, 2011 at 10:26 am | Permalink

    Surely the answer to the whole of the localism campaign is to ensure that no local authority gets any central grant, but is completely reliant upon the money that they can raise from their own area.

    With the release of schools (and I would argue that libraries should also be separated out) from local government control this should mean that the councillors become very accountable for the money that they can or are unable to spend on their “pet” projects

  12. Posted February 7, 2011 at 10:32 am | Permalink

    There is no long term prospect of improved living standards for UK citizens whilst we are shackled by a high taxing, deficit making government that will not deal with the overwhelming number of regulations spewing from Brussels.
    A recipe for a real renaissance in the UK would be a flat rate tax of 15% personal and on business, a cap on government spending of 30% of GDP, a repeal of almost all employment legislation, selling off banks, ending of subsidies to any business and withdrawal from the EU.
    Within a year you’d see a huge number of new businesses and a vast expansion of existing companies relocating here.
    Not that any of that will ever happen- far too many vested interests.

  13. stred
    Posted February 7, 2011 at 10:39 am | Permalink

    Norman’s point about growth measurement against inflation is very important. Does anyone know whether growth is discounted for inflation?

  14. Nick2
    Posted February 7, 2011 at 10:46 am | Permalink

    Norman, GDP is inflation-adjusted.

  15. Damien
    Posted February 7, 2011 at 11:31 am | Permalink

    It is only now that we are learning of the excessive pay scales of Chief Executives in some of London’s poorest boroughs. The figures from April 2010 show then that Joe Duckworth CE of Newham received £281,085, Derrick Anderson CE of Lambeth £269,836, Andrew Kilburn Waltham Forest £257,000 and Mark Elms a head teacher in Deptford received at the time £250,000 and so forth. The investigation and publication of these public sector salaries is the only way to convince the public on the necessity of cuts and that they need not necessarily fall on the lower front line services.

    Pickles has enabled the public to now see a monthly list of expenditure by our councils using this link http://local.direct.gov.uk/LDGRedirect/index.jsp?LGSL=1465&LGIL=8

    Concerned citizens and journalists no longer have to invoke FOI to access this information. The online publication shows Tower Hamlets in December 2010 alone spent £11,242 on the controversial Osmani Trust and in the same month £12,500 on the Al-Huda mosque. This is on top of the £4.4m to build the Osmani Trust youth centre even though there was a secular one nearby. (words left out re these institutions-ed)

    The public can easily identify waste and so the more the government does to enable access and publicise the waste the stronger the support will be for the necessary cuts and reforms.

  16. grahams
    Posted February 7, 2011 at 11:54 am | Permalink

    Your repeated warnings about redundancies are well made and vexing. The Coalition knew from Day 1 that big job cuts had to be made to cut the deficit. Managing those cuts to minimise the cost to taxpayers, services and the employees innocently affected should have been the top priority for ministers after identifying budget cuts. Instead, time and political energy have been wasted on constitutional Bills and university fees that could have been put off for a year.

    So public sector managers are just aping the quoted private sector, which prefers redundancy programmes to cull the underperforming and to cut the future cost base regardless of the one-off cost. That “exceptional” item is typically tucked away in the dying year’s accounts, to which City analysts pay little heed.

    Managing staff cuts is not simple. Redeployment and retraining will only take place if there is a prolonged ban on hiring or temporary staff elsewhere, in all but strictly essential operational posts. But that is a disaster for young people coming on to the labour market. They need to be diverted into the private sector by equally prolonged National Insurance holidays, especially for employers.

  17. The ESSEX GIRLS
    Posted February 7, 2011 at 12:03 pm | Permalink

    “but it seems likely the Governor’s view that rates should stay down will prevail again.”

    Jolly good on behalf of we Granny Landladies and our hard-pressed tenants who benefit from these low mortgage rates!

    AND social landlords like us are increasingly important in society as even the professional 25 – 35 year-olds – including our own tenants – simply cannot raise the deposits to get themselves on the housing ladder let alone the high rates for new borrowers.
    We’re fortunate to have obtained very low tracker rates before 2008.

  18. Acorn
    Posted February 7, 2011 at 12:05 pm | Permalink

    YOU COULD NOT MAKE THIS UP as Littlejohn would say.

    If you have read page 5 of the Mail today, you will know about the “jungle drums” race hate probe at Wiltshire County Council. http://www.dailymail.co.uk/news/article-1354370/How-referring-gossip-jungle-drums-led-month-racism-probe.html

    A “registered charity” (Number 900383), complained about racist language at a meeting of a Wiltshire County Council funded group; big expensive enquiry; naturally. You will not be surprised to learn that this “charity” – Wiltshire Racial Equality Council – gets £87,000 of its £113,ooo income from; you guessed it; Wiltshire County Council!!! In fact, £110,000 of its income comes from taxpayer funded entities. See its accounts at http://www.charitycommission.gov.uk/ScannedAccounts/Ends83/0000900383_ac_20100331_e_c.pdf

    JR; you and your MP mates have got to put a stop to this Quango / Charity nonsense. It is far too easy to become a “charity”; and, it is far too easy to get taxpayer’s money out of taxpayer funded entities.

    • APL
      Posted February 7, 2011 at 8:05 pm | Permalink

      Acorn: ” MP mates have got to put a stop to this Quango / Charity nonsense. ”

      No chance, an MP must have something to do when he/she retires. Can’t sit around twiddling his or her thumbs for ever.

      A fake charity fits the bill nicely.

    • lifelogic
      Posted February 8, 2011 at 3:40 am | Permalink

      Unbelievable tax and tip down the drain yet again. How can anyone be offended by that comment anyway?

  19. fake
    Posted February 7, 2011 at 12:48 pm | Permalink

    @Geoff not Hoon

    Tell me if I am wrong, but is Citizens advice not a charity?

    So surley the question should instead be “why are the council giving money to a charity in the first place”.

    I don’t pay my council tax, for the council to give it away to a charity of theirs and not of my choosing.

    (Just to clarify, I am not saying it is or isnt a worthy charity, but it is not appropriate to give tax money to ANY charity).

    • Geoff not Hoon
      Posted February 7, 2011 at 9:54 pm | Permalink

      fake, Citizens Advice is the national charity and the local bureau’s are seperate charities with their own management, usually with a Chief Eec who is salaried, virtually everyone else is a volunteer. I dont have the exact figure for all the charities but roughly 90%+ of income is from Local Authorities. As JR says it is the LA’s that have used ‘the cuts’ to prune deeply into CAB in the regions. In my area’s case by around 30% even though the LA have been given a single figure cut by central government.

  20. Steve Cox
    Posted February 7, 2011 at 2:14 pm | Permalink

    I follow many blogs and discussion boards, and it is evident to me that few people any longer believe the Bank’s (and government’s) commitment to low and stable inflation. Mr. Osborne must do something as soon as possible to try and restore not only the MPC’s credibility, but also the Coalition’s v-a-v inflation. If he fails to do this – and it should not be too difficult – then a wage-price spiral will follow as surely as economic chaos follows a Labour government. 🙂 The ball is in Mr. Osborne’s court – is he going to play a straight game or throw a bender?

    • Simon
      Posted February 8, 2011 at 12:25 pm | Permalink

      I think your conclusion is wrong .

      The private sector is going to shed a lot more jobs and the jobless figures are going to increase and pass the magic 3 million . At some point on their way to 4 million the game will be up and all bets are off .

      Because it is an employers market even if they could afford to pay more they won’t .

      The only people who will be getting pay rises which keep up with inflation will be public sector workers .

      Please explain why you think this would not be the case .

  21. JimF
    Posted February 7, 2011 at 2:55 pm | Permalink

    Yet Cameron refuses to cut taxes, so there isn’t even the beginning of a start, really.

    Perhaps we have to sacrifice his thinking, like Brown’s before, on the bonfire of UK enterprise before we have someone in charge who starts to create a virtuous spiral, just as Thatcher did, instead of the vicious one we have now.

  22. Javelin
    Posted February 7, 2011 at 5:08 pm | Permalink

    Public sector managers fully understand how to make cuts. But cutting spending means cutting the empires they have spent years building. What does a public sector manager care about how their spending benefits society when their main concern is head count. Because a higher head count means a higher grade and a higher salary. To remedy this they want to make the cuts as public and painful as possible. So we see cuts to libraries and front line police. I’m surprised to to see more intensive care beds going.

  23. zorro
    Posted February 7, 2011 at 6:53 pm | Permalink

    On cutting tax, it is clear that this government lacks the courage to go for a tax cutting growth strategy. It is relying as long as possible on fooling people that it is serious about inflation whilst pursuing a cash flattish strategy in the light of real 6-8% inflation over the next five years…..as simple as that.

    John,
    Your views are very accurate on the quality of public sector management. However, their hands are tied in being unable (incapable?) of managing out poor performers and instead bribing people (voluntary redundancy) to leave. Despite the protestations that they are ensuring that there is quality control on those leaving and they are not denuding their business of capable staff, the truth is often clear to see. Look at the growth in middle/upper management in public service over the last 10 years and all the recent legislation they ‘quality control’. It is clear that there is fat there, but, as you say, they could easily control their budgets if they undertook well targeted voluntary redundancies and cut out work which is not necessary to the delivery of efficient services. I have to say though that in order to do that, some very litigious vested interests have to be taken on and you know full well that this will not happen any time soon. The public services need leaders who can visibly (i.e. taking pay cuts) show that ‘we are all in this together’…….unfortunately sadly lacking.

    zorro

  24. Mr J Leslie Smith
    Posted February 7, 2011 at 8:10 pm | Permalink

    I feel that there is a coordinated campaign now taking place in the Public Sector, where the Council Managers are going to be “Bloody Minded” and make the cuts with the worst political impact. for the Government and the Coalition. ( and for Council Tax Payers too)

    John, the Conservative Councils and also the Coalition need to head these people off at the Pass. Otherwise, the Public will be getting angry at the wrong people. Keep the focus on how much these Civil Servants are paid to administrate our Council Taxes and show the whopping size of their index linked pensions too. THEY are not going to hurt. But they will make sure, ( Labour Councils particularly) that both the Council Tax Payers and Front Line Service get hit first, not last. The Coalition must realise that it has very serious political enemies… They have not gone away. They are waiting for the right moment to strike and that is not far off now.

  25. Jon Burgess
    Posted February 7, 2011 at 10:43 pm | Permalink

    Personally I’m all for raging inflation, as it will see my mortgage reduced to nothing in no time. And I think there are a lot in Government who think this too – what better way to reduce the deficit by inflating it away to nothing?

    But the problem here is that inflation is a blunt tool and it may not do as it is told – how much quantatitive easing is enough? Once you let inflation take off can it be brought under control again?

    The experience of history tends to suggest that it can’t.

    • Simon
      Posted February 8, 2011 at 12:33 pm | Permalink

      Surely you can only inflate away the debt .

      I do not see how a deficit can be inflated away .

      It can only be addressed by the tough job ensuring expenditure does not exceed income .

      • Jon Burgess
        Posted February 8, 2011 at 7:50 pm | Permalink

        But do you see any evidence that the coalition aspire to reducing spending or even grasp this?

        Osbournes answer is to tax more and increase government spending (in that government spending is higher this year than last – despite the ‘cuts’.

        It’s as though Golden Gordon never left.

        • Simon
          Posted February 9, 2011 at 11:29 am | Permalink

          No , I don’t think they grasp that they needed to cut deep and fast to prevent events overtaking them .

          The income tax and corporation tax take is going to go down as peoples incomes reduce in cash terms and increasing the rates of taxation is not going to compensate for this .

          So we’ve got more spending and have reached the limit with what can be taken in taxes so far from reducing the deficit it could very likely increase .

          I don’t imagine for a minute it would be any different if the Conservatives had got an outright majority , or for that matter if Labour had got another term of office .

          The Govt could do so much to reduce the cost of living by several hundred pounds per year by by regulating energy suppliers properly and breaking up the cartel .

          It’s time to call the financial services industries bluff .
          Far to much of it is parasitic and needs to be jettisoned .

          Sure they pay a lot of corporation tax but what proportion is derived from exports and what proportion is demanded as tributes from the real economy and the man in the street by way of extortional mortgage margins , derisory savings rates and high charges for poor performing private pensions ?

          Why can’t we have a pensions system like the Dutch one open to everyone , public and private sector , which typically generates a pension 40% higher than UK private pensions for the same amount of money invested ?

  26. Javelin
    Posted February 8, 2011 at 10:55 am | Permalink

    The recovery will only happen in the UK after house prices have fallen and people feel they don’t have to borrow up to the eye-balls to meet higher interest rates. Sadly many will not be able to afford higher interest rates as they foolishly thought rates would remain low forever now that Gordon Brown has conquered boom and bust.

  27. Gary
    Posted February 8, 2011 at 11:08 am | Permalink

    govt can do this , govt can do that. Govt is little more than a facilitator of special influence, lobbies and graft. That is how the American tax code grew originally from 400 pages to 77,000 pages now. All addendums, exceptions and favours for lobbies and various hangers-on. Really, let’s not ask what govt can do next, let’s rather ask how we can make govt so small we can drown it in the bathtub(apologies to Norquist).

  28. Posted February 9, 2011 at 12:02 am | Permalink

    ‘Read the small print and weep buddy.’

    Globally the large economy managers/central bankers appear to be retaining a low interest rate in an effort to reduce borrower default while turning a blind to the spectre of inflation. (Indeed not so long ago deflation was the concern.)

    Low interest is now causing increased inflation.

    Increased inflation also benefits the indebted borrowers and helps reduce default risk keeping the global banking system intact.

    ‘Quantitive easing’, or in plain english ‘money printing’ is another tin of instant inflation designed to stimulate ouselves away from deflation with the added inflationary effect of ripping off deposit holders while shrinking the real value of the debtors burdens. ‘AT THE DEPOSIT HOLDERS EXPENSE’ .

    Its all a bit of ‘double jeopardy moral hazard’ as diligent savers who may have worked hard are fleeced to protect the foolish borrowers and banks which recklessly lent the money entrusted to them by their diligent savers.

    Trains crashes are infrequent as is hyper inflation. These things really do happen now and again and central bankers need to take heed and apply an interest rate at least level to the inflation rate.

    The world is now used to the idea that there are problems in some parts of the banking world. We are no longer hysterical about it. Rates need to rise, occasionally there will be banking losses here and there but we need not all withdraw and take to the streets with our cash in wheelbarrows.

    Its about acceptance. Once it is accepted that losses have happened we stop panicking.. take stock, pick ourselves up and start to rebuild. Foolish lending happened, losses need to be accepted and paid for instead of raiding depositors savings.
    The banks may face increased defaults, bond holders may take occasional haircuts, depositors in badly run banks may take losses. (read the small print and weep buddy) The banking system will however not end when interest rates have to rise.
    Conor

  • 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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