Growth warning

 

                Yesterday the Bank of England revised their growth forecast downwards. They are not always wrong. Commodity markets had their second sharp sell off in a fortnight, as world investors recognised the impact of tightening money in the emerging markets and looked forward to the ending of the second phase of quantitative easing in the USA.

                   On cue, we had a debate  about  the government’s economic and financial plans last night in the Commons. It was one of those events wrapped in cross party agreement. It was to launch the government’s charter for independent assessment of our economic prospects by the Office of Budget Responsibility. These days politians happily sign up to giving things to experts and others  to do.

                   I wish the Office of Budget Responsibility every success in forecasting the economy. Their figures underpin not just the public debate  but also government policy to steer the economy and determine the size and role of the public sector. I did , however, point out that just because a body is independent of government does not guarantee it will  b e right in its forecasts. We have had a so called independent Bank of England for more than a decade, but we have also had a long period of inflation well above its target and many missed inflation forecasts from this body. The Office of Budget Respoonsibility itself had to revise its growth forecast down in March this year, revising a forecast which was just a few months old.

                  These two independent official forecasters, the Bank and the OBR, need to get inflation and growth correct as they are crucial to the government’s strategy. If the Bank could get inflation right and the OBR growth, they would help a lot in the two key areas that matter most to the strategy. The government’s whole fiscal strategy, its deficit cutting programme, rests on forecasts of rising and then sustained growth. If the growth disappoints the deficit will be larger and the country will have to borrow even bigger additional sums than the £480 billion pencilled in for the five year period of this Parliament. My advice to the TReasury is not to assume the OBR growth forecast is as low as it could be. The world background is deteriorating for growth. Growth could disappoint again. Controlling spending with a view to an undershoot in the less important and sensitive areas would be a sensible precaution against the possility that revenues will fall short of the OBR estimate.

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62 Comments

  1. lifelogic
    Posted May 12, 2011 at 6:49 am | Permalink

    My advice the government would be to assume that, with the current high tax, high regulation, anti-growth government in place, there in unlikely to be much growth at all.

    I see George Osborne has announced a review into employment laws. This from the government who recently announced the imposition of employing over 65 year olds for ever on all companies without any such review. Anyway whatever the review’s conclusions Westminster can do little in this area due to our EU membership which he seems not to have noticed or rather not to mention.

    I assume this is just a duplicitous way of chucking it into the long grass as usual. I thnk now that the sooner this government goes the better. At least then we might finally get a sensible Tory or UKIP party next time. This pro EU, socialist light, Cameron might as well be Labour for all the positive change so far.

    Why exactly should employees be compensated for loss of office by more that a few month pay anyway. If they are any good at their jobs they can just get a new job (or could if do were the government to have a sensible growth and employment regulation strategy).

    A further noxious proposal seems to be instant tickets for yet more traffic offences. I assume these will be rather like the parking tax, bus lane tax and the speeding taxes. Where you pay one fee if just pay up quickly and double if you have the temerity (and the time) to challenge it. This way you loose if you are at fault (but if you are in the right you loose even more the time and inconvenience and risk of the challenge) – which is never recompensed.

    So just yet another tax to pay in effect I assume.

    At least the BBC, for once yesterday, had someone sensible (Jon Moulton) on PM. He was taking sense about cutting the state down to a sensible size and how much better it will be if they did it quickly to get some private sector growth – rather than later when forced too. The issue was of course balanced out by the usual BBC nonsense of too much to quickly. What are these so called public services anyway I never saw very much of them?

    • Simon
      Posted May 12, 2011 at 10:14 am | Permalink

      “Why exactly should employees be compensated for loss of office by more that a few month pay anyway. If they are any good at their jobs they can just get a new job (or could if do were the government to have a sensible growth and employment regulation strategy).”

      The only form of job security worth a damn is being able to get another one when one source of income finishes .

      Even if you are a hotshot that is very difficult at the moment , particularly with the fashion for bringing in cheap industry from the Indian subcontinent which our magnificent government is trying to promote .

      The people in Westminster don’t understand that business opportunities are transient and that transient opportunities are worth pursuing .

      If they did they wouldn’t be so brainwashed by this idea of a paternalistic (large) company providing for people long after the working relationship has ended .#

      The irony is they are doing everything possible to drive them out of business at the same time !

      Employers are there to create jobs and make money , not administrate pensions or other .

      Why do they hate small business so much ?

      • lifelogic
        Posted May 13, 2011 at 10:38 am | Permalink

        The state sector is the predator and small business the easiest prey on which to feed until it has all gone.

    • waramess
      Posted May 12, 2011 at 11:48 am | Permalink

      It is all too late. Voting UKIP is too late. There is no remedy, the UK is already too far along the road to ruin and its determination to follow Keynesian/monetarist policies will simply accelerate the momentum to the bottom.

      They ignore sound advice and find reasons why the UK will not end up in the same pickle as Japan but they are stubbornley clueless and will determinedly continue with this nonsense, telling us that it would otherwise have been much worse.

      They are unwilling to note the measures taken in 1920/21 and determined to follow Keynes when there is absolutely no example of Keynesian policies working other than as a bit of a side show to a market correction or, in the case of 1929 the destruction eventually caused by a world war.

      So where will the UK discover its growth now that it requires such high taxation to support a bloated public sector that simply will not go away?

      There is nothing left and nobody to do anything about it. The Conservatives seem to feel that they need to keep the economy weak in order to ensure they do not take the blame for remedial policies and to ensure an incoming Labour administration will not benefit from any improvment and we can be sure that the game of ping pong will continue into the indefinite future to the great disadvantage of the electorate and in particular the poor.

      The politicians will continue to dig the hole deeper and deeper whilst ensuring that they are not personally disadvantaged and that, I’m afraid, will be it.

    • EJT
      Posted May 12, 2011 at 1:38 pm | Permalink

      “A further noxious proposal….”

      There are some countries where the economy is so bad that they can’t pay their public sector employees properly. So, the police for example will extort £50 in exchange for letting you off a £100 fine, justified or not. Government’s happy as they will still its bidding when pushed. Of course that would never end up happenning here.

      • lifelogic
        Posted May 12, 2011 at 6:50 pm | Permalink

        Is there, in practice, very much difference between being mugged by the foreign policeman or by a, virtually undemocratic state, that organises its parking, its bus lanes, it no left and right turns and speeding fines with cameras and the very clear intention of entrapping motorists. The intention is very clear in London at least from the arrangement and positioning of the cameras, signs, road layouts and speed limits. All in all a very inefficient, back door taxation system.

        The policeman may, at least, I suppose spend it more wisely than the state is likely to (and it cuts out some of the middle men).

    • REPay
      Posted May 12, 2011 at 3:06 pm | Permalink

      Reference to the ”Public Services” is a play to shut down any debate as public services are assumed to be good. The truth is that public services is really code for public sector jobs, many unnecessary, many overpaid and certainly over-pensioned. Around 30% of any new money going to he NHS goes on pensions for retired NHS workers.

      • lifelogic
        Posted May 13, 2011 at 9:15 am | Permalink

        Agreed – role on the private/state sector equalisation tax to redress Browns mugging of the private sector pensions.

        When I think of “public services” I tend to think of traffic wardens tickets, bus lane cameras and enforced form filling, taxes, fees and licences for almost any activity to be allowed.

    • Bazman
      Posted May 12, 2011 at 7:27 pm | Permalink

      When your and many other ultra right wing fantasies come true how do you intend to control civil disobedience and social unrest ie riots! Until I hear some answers on this I cannot take people like you seriously. If you say there will not be any because the BBC will be abolished and everyone will understand I just laugh. There will be riots because we do understand only to well. They have the temerity ( and time) as they are on the dole, to protest. It’s in our pay and benefit cuts. You have to earn to pay taxes and everything is expensive without a job. What the government should do is enforce laws that already exist.
      Just write me ticket.

      • lifelogic
        Posted May 13, 2011 at 9:09 am | Permalink

        In the small state world the unemployed will be likely to get a job and why should people riot just because they have a better chance of a job and keep more of their earnings after tax?

        • Bazman
          Posted May 14, 2011 at 12:34 pm | Permalink

          It’s like the 1980’s never happened.

  2. Mike Stallard
    Posted May 12, 2011 at 7:36 am | Permalink

    I have just read Dan Hannan’s thinggy on Ireland which, apparently, is facing inevitable bankruptcy. Even the BBC has noticed that Greece is on the point of bankruptcy. The USA is playing fasts and loose with the Almighty Dollar.
    Interesting times lie ahead.

    • norman
      Posted May 12, 2011 at 9:00 am | Permalink

      Anyone with a whit of sense (that’s why it passed most of our politicians by) could see at the start of the bailouts that Greece and Ireland were de facto bankrupt and would never repay their debts.

      Looks like we’re going to be into Greece for another £3.2bn – may as well add that on to the £480bn we’re going to be borrowing – what’s a few billion between friends!

      And before anyone blames Darling what’s to stop Osborne (apart from the lack of a backbone and aforementioned sense) saying ‘enough’ and see who blinks first, him or the EU?

    • Stuart Fairney
      Posted May 12, 2011 at 9:09 am | Permalink

      This is a very interesting chart

      http://www.bbc.co.uk/news/business-13366011

      Look at the Irish debt and deficit and decide if we were wise to loan ’em money

      • Mike Stallard
        Posted May 12, 2011 at 9:07 pm | Permalink

        Erm…..
        No.
        Nothing like a chart to show up the truth is there.

  3. Alte Fritz
    Posted May 12, 2011 at 7:42 am | Permalink

    An emerging theme in Mr R’s posts is abnegation of responsibility. As he rightly says, alleged independence is no guarantee of accuracy. The country has a right to expect the government and its (expensive) civil service to do some hard thinking and put their name to the result. They may be wrong, but the buck has to stop somewhere.

    On the same day, the Chancellor made noises about reforming employment legislation. What scope will he have given that much of it is derived from European directives?

    Having been close to many employment problems, albeit in SMEs, not large companies, I cannot see that any, and I mean any, employment legislation has a net positive effect. I have never seen it protect jobs, nor have I seen it avert unfair treatment. It is a genuine drag on businesses. I believe that one could construct a credible argument that abolition of the whole statutory scheme since 1965 would have a net benefit to the nation. That would be worthwhile deregulation which will not happen. So bold a move would free resources towards something positive like making and selling things.

    • lifelogic
      Posted May 12, 2011 at 8:15 am | Permalink

      “I cannot see that any, and I mean any, employment legislation has a net positive effect.”

      I agree fully it just makes good management far harder and people less likely to take people on so few jobs available.

      • Bazman
        Posted May 12, 2011 at 7:51 pm | Permalink

        One word lifelogic. Exploitation. Do you know what it means?

        • Alte Fritz
          Posted May 13, 2011 at 8:03 am | Permalink

          That was my point; legislation does stop stop that where it happens.

        • lifelogic
          Posted May 13, 2011 at 9:21 am | Permalink

          “Exploitation”

          Yes 50% income tax, 20% VAT, 22+% NI (employer and employee), 40% IHT, fuel and other duties, road tax, air travel tax, insurance tax and all the rest. That (almost) pays for state sector employees to do little of true value for 35% more than the actual wealth creators.

    • norman
      Posted May 12, 2011 at 9:03 am | Permalink

      In the eyes of the delusional left we’re a country of racists, mysogonists, homophobes and xenophobes so if that was to happen every woman, ethnic minority, gay person and foreigner would be sacked the next day.

      • lifelogic
        Posted May 12, 2011 at 6:54 pm | Permalink

        I like most employers would not care who does the job – person, robot or trained white rabbit so long as it is done efficiently and at reasonable cost.

        • lifelogic
          Posted May 13, 2011 at 9:22 am | Permalink

          The rabbit or robot are preferable (if cost is the same) as they do not come with the employment tribunal risk though.

      • forthurst
        Posted May 12, 2011 at 9:51 pm | Permalink

        You cleary have not understood the threat to our country and to Western civiilisation in general posed by Cultural Marxism which is a lot more organised and malevolent than a bunch of Dave Sparts griping in the the columns of the grauniad.

    • Mark
      Posted May 12, 2011 at 10:39 am | Permalink

      Just think of the unemployment it would cause in HR departments! Too many cuts too fast! (Switches off BBC mode)

      • lifelogic
        Posted May 12, 2011 at 9:00 pm | Permalink

        Great the more pointless jobs, both state and (regulation created) private sector ones that go the more competitive we all become. And the more real & lasting proper jobs we create.

  4. alan jutson
    Posted May 12, 2011 at 8:16 am | Permalink

    Its all very well and good for an independent organisation to make forecasts, but the accuracy still depends upon the information they in turn recieve from government departments.

    A so called independent organisation, providing they work to a consistant model, does however to a degree, stop the political manipulation of comparisons of the different parts of the economy, a tactic in the past often used by Mr Brown, in an attempt to confuse the real facts.

    Only time will tell if the OBR are on the ball.

    With so much faith being put on the performance of the OBR shaping Government policy, we must hope they are accurate.

  5. StevenL
    Posted May 12, 2011 at 8:32 am | Permalink

    Growth is being stunted at a local level. Macro economics is all very interesting but pull all these levers isn’t going to create growth on its own.

    I spent some time going through the refused planning applications on my LA’s website. There were many private projects, which would have created investment, jobs and growth, that had been refused because the luddites seem to have a veto on everything.

    One section of the councils website is strategic managers blathering about how they are supporting the economy, while another section lays bear how their policies (and in fairness those of Westminster) are positively obstructing it.

    The NIMBY luddites don’t want growth, they want everything to remain as it is bar one thing – their house price going up. The are now conditioned to believe that house price inflation = economic growth. I guess the UK has made it’s be and has to lay in it.

    Osborne seems a sensible chap who is supportive of business and wants to free things up, but I fear he will be vetoed by the EU on one side and the NIMBY’s on the other.

  6. acorn
    Posted May 12, 2011 at 9:04 am | Permalink

    You have to hand it to Merv King, every time he speaks you expect him to say “nuffing-to-do-with-me-govna”. The OBR and the ONS both have difficulty getting up to date data out of the BoE, so what chance getting forecasts correct. The BoE even times its data releases so as not to upset big bank accounts publication. The best way to get rid of debt is to inflate it away. Merv is literally banking on it. Straight out of the economic text books, he now wants us to think inflation is going higher. This, so we will go out now, and buy that new sixty inch plasma TV, before the price goes up!

    It will be interesting to see how the BoE unwinds its balance sheet, particularly all those liquidity swaps they have been doing which expire by next year. Will those banks have made enough from super normal profit margins – courtesy of the BoE, to dig themselves out of the toxics pit?

    PS. Did you see that collectors are paying US $5, for the now defunct 100 trillion dollar Zimbabwean notes.

    • acorn
      Posted May 12, 2011 at 9:41 am | Permalink

      PPS. If you are a follower of Steve Baker MP, (a younger fitter version of JR), have a read of the review his Cobden Centre did of “Deep Freeze: Iceland’s Economic Collapse”. It’s a cracker.

      http://www.cobdencentre.org/2011/05/book-review-deep-freeze-icelands-economic-collapse/

      Reply: Why do you think I am unfit?

      • rose
        Posted May 12, 2011 at 3:27 pm | Permalink

        I was going to ask the same question. The best way to stay fit is to bicycle rather than drive, unless you can keep horses as HM does.

        • lifelogic
          Posted May 13, 2011 at 9:26 am | Permalink

          Unless of course you have an accident – bikes are about 15 times more dangerous than a car when used or roads.

          • rose
            Posted May 13, 2011 at 12:57 pm | Permalink

            I was driven into by a speeding teenager a few months ago, but the bike and I are now back on the road. How fit will he be when he is my age? Presumably he grew up strapped into the back of his mother’s car and has gone straight into being strapped into the front of his own, without ever learning another way of getting around.

            It is his motor car which is dangerous – a potentially lethal weapon in fact – not my bicycle. If I were a motorist, I would be ashamed of the statistics you refer to, and pressing for something serious to be done about them.

      • lifelogic
        Posted May 12, 2011 at 6:57 pm | Permalink

        I hope JR that you are not unfit – the country urgently needs you to drag some sensible action out of this mad socialist government.

  7. Stuart Fairney
    Posted May 12, 2011 at 9:05 am | Permalink

    Experts eh, maybe it’s my advancing years making em cynical. When the governor of the Bank of England tells us he expects inflation to be around 5% because of energy prices, why does no-one continue the logic?

    Setting aside the fact that energy prices are only one aspect of overall increasing price levels as measured by RPI, why are energy prices high? Is it demand lead or is it because they are priced in dollars?

    If the latter, why isn’t Sterling powering ahead against the debased US paper making notional dollar price increases irrelevant to us? Is it because we also debased and have minimal interest rates?

    Given that the B of E has at least a nominal target of 2% inflation* and we now all accept we won’t be close to this for years, why isn’t the bank discharging its remit?

    How does the bank expect savers to continue to defer consumption and save money when it is a guaranteed losing bet given negative real interest rates, so where will the capital for business investment come from?

    In short what is the point of the monetary policy committee or the central banking function, why not simply return to sound money

    (* 2% is itself disgraceful. Why not hope for flat or falling prices as efficiency improves, is it because government tolerates inflation because it allows spending to always exceed taxes and see inflation erode the debt, thus crypto-taxation?)

    • waramess
      Posted May 13, 2011 at 11:24 am | Permalink

      @Stuart Fairney “government tolerates inflation”. Surely governments cause inflation, it is a monetary phenomena and the government control the creation of money. King knows this but is happy that the great unwashed do not and so we get the crocodile tears.

      Imported inflation is more hogwash because increases in prices of overseas goods should either result in discretionary spending or where the increases are the result of inflation (money printing) in US dollar denominated commodities, in an appreciation of our currency against the dollar.

      The entire business is a massive fraud against the British people by both this and the last government and so long as the inflation is not matched by a wages push by the unions is well within their grasp to control.

      • StevenL
        Posted May 13, 2011 at 11:07 pm | Permalink

        What makes you think policy makers wouldn’t like a price/wage spiral? It would solve a lot of their problems.

  8. Damien
    Posted May 12, 2011 at 9:46 am | Permalink

    JR as you say commodity prices have been all over the place and will continue to do so for the foreseeable future while the US and Europe grapple with the recovery. Added into the mix is the continued growing demand from China’s one billion population, India’s one billion population and Indonesia. In-fact the US represents only 5% of the worlds population but consumes 25% of the energy resources. As the China and India’s population and economies grow so also will their demand for the remaining resources available. Whatever the temporary relief in the price of commodities the trend can only be upwards given the numbers!

    Irrespective of how accurate the independent forecasters are they cannot change the global economy, but certainly accuracy can assist politicians plan better. What is clear now is that the Labour were reckless in never having a credible national energy plan to prepare the country for falling North oil production and rising demand for scarce resources worldwide. It is important that the current government does not continue to operate without a well publicised plan, much like the deficit reduction plan.

    The immediate problem is how the BOE can increase interest rates while the country struggles to grow alongside a trend of persistent high commodity prices. Rates can only rise and along with that millions of people with mortgages will be faced with falling property prices and loss of equity and possibly worse.

    • waramess
      Posted May 13, 2011 at 11:43 am | Permalink

      @ Damien Commodity prices are driven not only by demand but also by the excessive money printing going on in the USA. This money needs to find a safe home and at the moment paper money is not viewed as a safe haven.

      Bernenke prints the money whilst recipients find the safe haven and Bernanke will be the prime cause of hunger and food inspired riots in the immediate future. He knows this but cares not because his job is seen as looking after USA, not the world.

      Dwindling North Sea oil should be seen as an opportunity to reduce consumption as prices increase and then for the private sector to drive through alternative energy options.

      Never underestimate the private sectors capacity to produce solutions if the rewards are right (low taxes) but of course politicians consistently do so and we reap what we sow.

      If the Bof E (government) would stop looking after the homeowner and start looking after the economy by raising interest rates then we might start to see some economic activity. Interest rates at this level punish the saver and encourage marginal investments. Is this really what they want for UK?

  9. Brian Tomkinson
    Posted May 12, 2011 at 9:54 am | Permalink

    Mervyn King’s record at forecasting inflation is appalling, only matched by his total lack of activity in even attempting to control it, as he and the MPC are mandated to do. Just how he keeps his job is another mystery along with why the government is always talking of massive spending cuts when they are in fact increasing spending and why the markets haven’t worked out that the deficit reduction plan is all down to increased taxation and, as the government can’t stop being a spending junkie, it is depriving the private sector of the means to achieve meaningful growth. Perhaps Cameron should give urgent consideration to the words of Private Frazer “We’re doomed!” instead of those of Michael Winner and Benny Hill he has been using lately.

  10. Peter mercier
    Posted May 12, 2011 at 10:06 am | Permalink

    Thx John

    If the current forecasts for uk and global growth are at risk then so too are the government’s own deficit plans which, as you have said many times before, rely mostly on tax riseson a growing economy.

    We are then back where we started

    – Either begin to truly cut spending rather than, as at today, only its forecast rate of growth or

    – Borrow, inflate, further debauch the currency.

    Given the PM’s former private sector job in PR he seems ti have boxed himslef in on the first. Most people think, I expect, that cuts have happened and we are already down to the bone. How to message the need for actual cuts as Greece and Ireland have been doing?

    That leaves the easy option as the second.

    On past performance – I suspect that is the plan.

  11. StrongholdBarricades
    Posted May 12, 2011 at 10:19 am | Permalink

    Mr King put a huge caveat into his figures yesterday by expressing concern about commodity prices

    Given that last week there was a 10% fall, and this week a 5% fall just how long will it be before politicians start seeking to regulate the specualtors of the West?

    • Stuart Fairney
      Posted May 12, 2011 at 7:27 pm | Permalink

      I buy commodities, not to ‘speculate’ but as a hedge against inflation and currency debauchery. This is as a result of the actions of the last government and an Austrian take on economic theory on my part. If I can protect my assets, all well and good. No speculation is intended.

  12. English Pensioner
    Posted May 12, 2011 at 11:25 am | Permalink

    We were promised less regulation, but each time I look at my newspaper some new regulation seems to be about to be introduced. Our civil service is “hooked” on more regulation and the ministers seem to do absolutely nothing about it. Occasionally some minor out of date regulation is withdrawn with a great fanfare, but nothing else ever happens.
    No wonder when I met an American businessman a couple of years ago he was praising the EU and our government control and regulation; apparently over the past 10 years or so, his business has become far more competitive and he is getting orders from places where twenty years ago, his company wouldn’t even have bothered about. All because Europe is busy pricing themselves out of the market due to huge regulation overheads.

  13. Lindsay McDougall
    Posted May 12, 2011 at 12:08 pm | Permalink

    They make a right pair, don’t they. The Bank of England exceeds its mandate by targetting growth and inflation rather than just inflation, whilst the Office of Budget (IR)Responsibility assumes economic growth well above the 30 year average.

    We might add the Financial Serrvices Agency, which pressures so called Independent Financial Advisors to steer pensioners towards annuities, the so called safe option. It’s bad advice; annuities give crap rates of return because they are loans to governments, who only waste money. It’s especially bad advice now, because sovereign debt is not risk free. How about a bit of transparency, with annuity providers forced to provide the information behind quotatons – mortality tables, profit margin, rates of return to the customer etc.

  14. Michael McGrath
    Posted May 12, 2011 at 12:23 pm | Permalink

    “Controlling spending with a view to an undershoot in the less important and sensitive areas would be a sensible precaution”

    A sensible approach indeed in light of a likely volatile and uncertain future. However, it will require a steely determination to resist the siren calls from special interest groups, egged on by the likes of the BBC Today team. Does DC have the will? I hope so. But the pressure from the, by now, desperate NC, may prove an even more potent counter to what actually needs to be done

  15. rose
    Posted May 12, 2011 at 12:42 pm | Permalink

    This will be heresy here, but I don’t like growth, especially one which is founded on a rapid and deliberately planned unnatural growth in population. With so many lorries and vans rushing around, and huge numbers of people pressing all about one, to say nothing of our collapsing public services and transport systems, how has it been worth it? The finite amount of land cannot sustain it, and the built heritage is wearing out with the abuse. The future looks bleak, with inflation and unemployment, and increasing disorder as housing and other resources run out.

    What is so wrong with a static or declining population, and a higher standard of living all round as a result? That is what happened in Europe after the Black Death, and Norway does very nicely today with just 4million people. We have more than that in our underclass.

    That is why I don’t deride the governement’s wish to measure happiness rather than economic growth, and why I don’t share the common view that Japan has been worse off than us without growth – despite her bigger population. Civilization is the true measure of wealth, and we appear to have lost it.

    • lifelogic
      Posted May 13, 2011 at 9:39 am | Permalink

      I agree that GDP growth is not everything. If you employ a child carer you increase GDP if you alternate with a neighbour or use Grandma you do not. We certainly need to consider growth per capita not growth due to any increase in population. If you go to a concert and eat out you increase GDP but if you cook in and watch or listen to something free on the internet you give little increase but probably eat better.

      Any happiness index, designed by politicians, is clearly going to be a pointless waste of money. It will just become a political weapon and no one will believe it anyway.

    • waramess
      Posted May 13, 2011 at 11:50 am | Permalink

      @ Rose, quite right, too much emphasis placed on growth; lets start learning how to do things better. Cutting the size of government would be a start and I’m afraid that would be the end of the happiness index because hopefully there would be nobody left to compile it

      • rose
        Posted May 13, 2011 at 7:28 pm | Permalink

        When I said I didn’t deride the Government’s wish to measure happiness rather than economic growth, I only meant the PM’s sentiment that economic growth wasn’t everything, was right, not that HMG really should be bureaucratically measuring our happiness. That would be just as misleading about our true prosperity as its crude measurement of growth.

  16. Mark
    Posted May 12, 2011 at 12:42 pm | Permalink

    Many of us have been commenting on these pages that high inflation is built into the economy as a consequence of the BoE’s actions to pump it via QE and to let it reign unchecked via low interest rates. As we know that monetary policy only acts with a considerable lag, it is now possible to forecast with a high degree of certainty that inflation will remain above target for at least another two years, and longer unless policy is changed.

    For now, inflation is resulting in lower standards of living via higher prices for the things we buy. In turn, that does raise nominal tax take modestly via VAT. However, incomes are only increasing at 2% p.a. – far lower than inflation that is already well over 5% (recent period RPI inflation on an annualised basis is sharply higher: 1 month is 6.4%, 2 month is 9.5%, 3 month is 7.4%, 6 month is 6.5%). That means that the contribution to taxes from fiscal drag will be small. It also means that household incomes are being squeezed, and even at low nominal rates of interest some will find difficulty in meeting loan repayments. Deflation in the real burden of mortgage debt depends on increased incomes in real terms, and in the longer term on falling real house prices so that new mortgages are smaller relative to incomes.

    We already know that some elements of the tax regime have been set with a view to political grandstanding to appease Lib Dems rather than aiming to maximise tax yield. Among these are the 50% income tax rate, the CGT regime that is a swingeing tax on realising long held wealth made worse by inflation, tobacco taxation that gifts smokers’ taxes to other EU countries, hidden energy taxes that make our businesses uncompetitive and so forth. If tax is going to make a maximal contribution to reducing the deficit this sub optimal ignoring of Laffer curves will have to stop.

    At present, the government is in the fortunate position that trouble in the Eurozone makes UK gilts look like a safe haven in comparison with EU debt. Once the PIGS bubbles have truly burst via default and devaluation that will no longer be the case.

    In any event, investors have chosen to divert funds to commodities as a store of value in preference to government bonds, pumping up bubbles that burst and reinflate, transferring their wealth to those who are more nimble at reading the bubble cycles. These bubbles are inflated by QE funding, and by expectations. If expectations that governments will default on debt either explicitly or implicitly via inflation can be defused, then commodity inflation will subside. Those expectations can only be dented by serious monetary policy aimed at curbing inflation via higher interest rates, and action to reduce spending rather than rely on taxes that won’t be forthcoming. We don’t want to know that PIIGSUK.

  17. Mark
    Posted May 12, 2011 at 12:46 pm | Permalink

    I can thoroughly recommend Prof Morgan Kelly’s recent article in the Irish Times that explains the history of the Irish bailout and considers policy alternatives for the future and their implications:

    http://www.irishtimes.com/newspaper/opinion/2011/0507/1224296372123.html

    Failure to tackle our own problems could see us with similar problems.

  18. Javelin
    Posted May 12, 2011 at 1:14 pm | Permalink

    As long as you’re sure your cutting unproductive services ethically and cutting tax fairly where it will encourage growth then you’re onto a winner. I would trust the process rather than trust the measurements (of the BofE or OBR) in the short term. The levels of accuracy you require can’t always be met. It’s like double entry book keeping, whilst it’s ok to cross check your figures you shouldnt use cost accounts to drive the strategy.

  19. forthurst
    Posted May 12, 2011 at 1:23 pm | Permalink

    Of course we can cut back on capital investment (or hide it off balance sheet), but without trimming back on the obligations and regulations with which we are constrained by parliament to obey and to pay for, is there any realistic possibility that substantive cuts in expenditure can be achieved without attacking essential services? Why is there no attempt to remove people who do not belong here and are taking our jobs but not necessarily paying our taxes? We need to withdraw totally from Afghanistan before the neocons escalate hostilities in Pakistan using their derisory Obama, Osama saga as a pretext.We need to entirely withdraw from the phony ‘War on Terror’ including ‘saving’ Libya. We need a parliament which puts us first, stops trying to micro-manage our existences and stops legislating and acting on the basis of lies that have been endlessly exposed outside of the controlled media.

    • BobE
      Posted May 12, 2011 at 7:57 pm | Permalink

      Mr Forthurst,
      Cut MP numbers by 100.
      Cut Their staff.
      Cut all Public sector and Council wages to by less than the PM.
      Convert all public sector pensions to contributary. Close all final salary.
      Sell all public service cars and use GWizes for government business.
      Withdraw from all war zones, we are a tiny country now.
      Shut all overseas embassies as they serve no purpose now.
      Thats a fair start.

  20. S Whitfield
    Posted May 12, 2011 at 2:33 pm | Permalink

    It would indeed be sensible to take a precautionary approach, bearing in mind the fragility of the economy and it’s growth potential and further reduce public spending. Unfortuanately Cameron et al. do not have the courage or will to do this.

    Unfortunately, the ruling elite do not recognise the factually correct truth (to your credit Mr Redwood you do and probably explains why, shamefully, you have been excluded from front line politics) , only the politically correct ‘truth’ and that is the problem.
    This will never change until they are humbled by some kind of further economic crash that causes a step change downwards in living standards. We have lost so many of our key economic advantages by our own neglect, stupidity, muddled PC thinking and bad poor decision making that I fear it will be impossible to maintain our current living standards unless we change course.

    What is surprising is that a Conservative led administration refuses to concede that massive spending isn’t always good for society and individuals alike. They offer only empty words – this country deserves so much better from our leaders.

  21. Kenneth
    Posted May 12, 2011 at 4:01 pm | Permalink

    Welcome news that the government is reviewing employment law which is one of the main impediments to our economy and the cause of so many wasted lives on the dole.

    Hopefully they will also review recruitment practice/law where unemployed people waste their own time and businesses’ time applying for jobs in order to qualify for JSA when they have very little intention or no prospect of getting the job.

    There is also the stupidity of laws governing recruitment ads where prospective candidates of a certain age or sex are looking for coded words (such as ‘vibrant office’) in order to decipher whether they would be welcome or not. Once again, a waste of everybody’s time.

    NB So sad to hear the PM not fully backing Parliament’s opinion on votes for prisoners.

    Calling for the outcome to be ‘as close as possible’ to the will of Parliament is not close enough in my opinion.

    I hope Parliament will take this matter in hand, up and above party politics. A rainbow of MPs could be formed to stand up for democracy. Hopefully the whips will be persuaded to stay out of this one.

  22. lola
    Posted May 12, 2011 at 5:08 pm | Permalink

    ‘Forecasting the economy’. Hah! They are no better than the soothsayer in Up Pompeii. Trouble is they are not as funny as Frankie Howerd, although they are a big joke. The fact is no-one can tell the future. If we could we’d all be sitting on a beach collecting 20%.

    What you can forecast is that central bankers and their political masters will cock it up. And the best way of dealing with that is make them go right away and leave it and us well alone.

  23. Bazman
    Posted May 12, 2011 at 8:22 pm | Permalink

    The Irish have an even more extreme version of the UK economy put there by crony capitalism lending to building companies on a nod and a wink helped by lack of control of mortgage lending. The banks where being told by the companies how much they should lend giving new meaning to the word ‘deregulated’.
    Osborne when Labour was in power, was still calling for less regulation of the City and to this day many people still believe it was to much regulation that caused the problem and want to abolish the minimum wage and other all employment and safety laws and scale back any benefits to pay for all this. Lower taxes for the people that caused the problem will also help and if they don’t get them they will leave the country.
    These are the same people who have blind faith in nuclear technology and can be built and run privately, but believe that house building techniques cannot be advanced enough to generate and retain heat and be liveable at a price worth paying. Again by private companies, which is probably true at the moment.
    Have my helicopter and private jet put on permanent standby.

  24. John Ward
    Posted May 12, 2011 at 9:03 pm | Permalink

    I think the Bank of England is about as independent as Pakistan’s ISI.
    George Osborne doesn’t like someone on the MPC? Replace him with a Goldman Sachs chap.
    Mervyn King says (in 2007) “It is not within the remit of the Bank of England to bail out the ill-advised business strategies of failing banks” – ie, Northern Rock. Cue vitriolic phone call from Chancellor Brown, followed by silence from Merv.

  25. Bernard Otway
    Posted May 13, 2011 at 12:22 am | Permalink

    Apropos all this addiction to Laws and Regulation,any day now I expect a knock on my door
    from an Inspector from the dept of the environment Huhne’s fiefdom,announcing himself as the local human effluent inspector charged with the task of inspecting my wife and I’s personal production of personal effluent in case we produce more than an alloted allowance
    upon which we will be Taxed for any extra,my title for the person will be …T inspector,I will personally tie the person down and Tatoo the title on the forhead.

  26. Javelin
    Posted May 13, 2011 at 11:54 am | Permalink

    With Germany at 1.5% and France at 1% and the UK at 0.5% in the past quarter what does this say about short-termism in the UK. Rather than nuture the UK business tries to squeeze as much out of each company on a quatley basis. A million cheap labourers imported and left to the Government to look after because they are not net tax payers, a million jobs exported leaving a million unemployed youngsters. House prices 30% too high and money being spent on rent rather than being invested in our future. What a sorry state.

  • 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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