A tale of two squeezes

 

For most of the last year I have been explaining that the public sector squeeze much commented on and debated has hardly started, whilst the private sector squeeze thanks to inflation and tax rises is tough. The latest figures support those forecasts. Over the last year public spending rose more than 5% in cash terms, was up in real terms, and made a positive contribution to GDP growth. Meanwhile, 5% RPI inflation against 2.5% income growth with increases in VAT, Income Tax and National Insurance have squeezed private consumption. The latest figures show signs of predictable slowdown in the economy and even a growing headwind for the previously successful manufacturing sector.

In 2009 I called o n the MPC/Bank of England to raise interest rates to head off the entirely predictable inflation, which hit us badly at the end of last year because the MPC could not see it coming and did not understand weak sterling was behind much of it. Last year I called for  relaxation of the banking squeeze by the FSA and Bank to avoid the current slowdown. Again they did not seem to understand the threat. Today they need to wake up to the world slowdown likely to  hit early next year. China, India and Brazil are all applying the brakes to their monetary systems. The US may slow next year as the tax breaks and quantitative easing drop out of the picture.  The UK’s money supply is falling again already.

This week I have been mainly writing about ways they could stimulate private sector led growth. They boil down to more sensible banking regulation, less expensive regulation of general business, and more competitive tax rates. Centrica has confirmed it will not reopen Morecambe  south  for gas production owing to new taxes. It is a simple example of business locked out by tax. We will import the gas and lose the jobs in the UK as a result.

The UK needs faster growth. The banking regulators are hindering that. The big tax increase to pay for all the extra public spending still going through in cash terms is increasing the squeeze on the private sector. If the government truly wants private sector led growth it needs to relax  the private sector squeeze to allow it to happen.

Tomorrow I will  complete the growth suggestions by looking again at infrastructure and other major investment.

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27 Comments

  1. Alison Granger
    Posted June 3, 2011 at 6:36 am | Permalink

    Less regulation and less tax, absolutely. What a pity we don’t have an effective Conservative government to do it. Instead we have a pale yellow coalition with weak leadership and a deficit reduction plan that relies on increased taxation and a great deal of wishful thinking regarding rapid economic growth. Loads of waffle about hard decisions and big cuts but no real action at all.

  2. lifelogic
    Posted June 3, 2011 at 6:39 am | Permalink

    It is one think to squeeze the private sector another to kill it or push it all overseas.

    The good old BBC yesterday talked about a tale of two sectors. I assumed they we going to point out the huge over payment circa 43% of the private sector relative to the private but no. The point they made was that state sector, median pay has been static for the last year and the private sector had risen by 3%. So just 12 more years to redress the balance at this rate.

    Tomorrow infrastructure you say. I have not seen anything much in infrastructure for years road bridges, better roads, new power plants, water reservoirs, or anything much of real use since the channel tunnel. This despite the hugely high tax levels. Just lots of mucking about with bike lanes, pointless junctions, pointless additional traffic lights, green bling, PR spin and coloured tarmac. Start with an large expansion of road capacity at the Blackwall tunnel, M25 and the north circular.

    • lifelogic
      Posted June 3, 2011 at 1:39 pm | Permalink

      Absolutely typical of the BBC to worry more about the 0% increase for the 43% over paid state sector workers rather than the real issue the huge 43% differential.

      A sort of BBC apartheid system between workers and drones I assume.

  3. Stuart Fairney
    Posted June 3, 2011 at 6:54 am | Permalink

    I don’t disagree with much of this with the exception of the idea that QE had ended in the US. I know what Bernanke has said, but 2012 is an election year and I can’t see Obama wanting to run on a shrinking money supply

  4. A.Sedgwick
    Posted June 3, 2011 at 7:25 am | Permalink

    Good piece – unfortunately most people when they reach some political power leave the planet.

  5. Javelin
    Posted June 3, 2011 at 7:48 am | Permalink

    John you are the only politician worth listening to – sadly.

  6. Acorn
    Posted June 3, 2011 at 9:16 am | Permalink

    “Today they need to wake up to the world slowdown likely to hit early next year.” [JR]

    Agreed; watch for the next flight to safety into Sovereign Debt, get the strength (?) of the taxpayers behind your investments. Naturally, all the hot money will have to come out of commodities and precious metal speculation, to raise cash to buy those Treasuries. As there will be a lot of paying down debt; you will need to buy the currencies the debt is denominated in. A lot of global debt is in US dollar and Euro. BTW, [recent poster], because a global commodity is priced in Dollars, does not mean it is exclusively traded in Dollars.

    PS. Having listened to the Public Accounts Committee on the great NHS IT disaster; you have to conclude, that we should never let government apparatchics run any big money project. The outfit has a CEO who appears to have no control over anything. Various bits of the outfit were allowed to opt-in or opt- out Willy-nilly. They all wanted to write their own local “apps” for an ill defined network platform. The frustration of the PAC members was understandable as very few of their questions got a straight answer; in fact, none of them.

    Surely, every GP; every hospital basically does the same job, and has the same organisational framework requirements for service delivery. Can you imagine if TESCO or John Lewis, let its shops opt-in or-opt-out of executive control; and wanted to run its own point of sale IT systems.

    Within the plethora of Boards and Committees the DoH has, you will find it has an AUDIT Committee; I wonder what they do all day.

  7. waramess
    Posted June 3, 2011 at 9:16 am | Permalink

    Surely if public sector spending goes up in real terms it’s inevitable that it will ” …make a positive contribution to GDP growth”. This is hardly the point, is it?

    The Guy Fawkes blog yesterday gave an unusually good account of the Bank of England’s and the Treasury’s behaviour over the past years and that was, whilst they were wringing their hands over the prospect of deflation they knew all along that their policies would cause inflation, and that is indeed what we have, to the great disadvantage of the British people.

    How your repeated warnings must have irritated them, particularly when they thought they were getting away with the great heist without being rumbled.

    And now you are imploring them to take action to promote growth when top of the list of things they do not want is growth. After all if they get growth then there is the possibility that they might hand over a strengthening UK economy to Labour, and that would certainly not represent poetic justice, would it?

    They wish to cruise until the next election and then hand over the mess to the next administration. If on the other hand they have a resounding victory at the next election, which does not look likely, then they will look at something more positive.

    It’s a great pity because there is no evidence that if they really tried they might make a difference and, maybe it is this that is holding back their popularity.

    I really do believe that with this administration you might find that a bucket load of caution is necesssary when endevouring to assess the motives for their actions

  8. alan jutson
    Posted June 3, 2011 at 9:17 am | Permalink

    When will they learn that increasing rates of TAX, kills the golden egg called GROWTH.

    The less people have to spend in disposable income, the lower the volume of business completed, other than on essentials such as, food, heat, light, power, all of which are increasing with inflation above admitted inflation levels.

    With Govenment increasing taxes and regulation on the utilities (carbon tax etc) that increases the costs of those services even more., thus the public have even less to spend on other commercial items.

    With the official Bank interest rates at the lowest in history, just wait to see how the economy drops when interest rates increase (as they will) and subsequent mortgage rates rise substantially.

  9. Nick
    Posted June 3, 2011 at 9:28 am | Permalink

    Why does growth matter?

    It’s down to something you repeatedly fail to address.

    The government has a black hole in its finances.

    It can

    1. Cut spending to get rid of it.
    2. Increase its income.

    Point 2 is the relevant one. The growth you talk about is increases in taxation. You’re planning on taking more money from us.

    Cutting spending by creating jobs doesn’t work and certainly won’t close the gap. That’s Labour’s little lie.

    Lets say someone who is unemployed takes 12K a year in taxes, gets an above min wage job and pays 3K in taxes once employed (wishful thinking).

    So for each million you get back to work, you save 15 billion a year

    Your black hole is 165 bn a year.

    You aren’t cutting spending. The amount is going up year on year.

    The 150 billion short fall then has to come from increases in taxation from the rest of us.

    That’s the government’s dirty little secret.

    Growth means INCREASING TAXATION.

    • StevenL
      Posted June 4, 2011 at 2:46 am | Permalink

      5% inflation is wiping clean all the ‘growth’.

  10. Javelin
    Posted June 3, 2011 at 9:39 am | Permalink

    In chaos theory the best predictions come if different models predict the same outcomes. Its a technique (montecarlos simulation and volatility threshold analysis) I used in a Global Investment Bank a few years ago to sort out their Mortgage CDSwaps – before the US housing market went pop.

    Today I see Allister Heath in City AM repeats what I said yesterday “Trichet finance ministry … is as brazen as it is predictable”, “Crises are useful because they allow a fresh power grab.”

    Similarly I see in the WSJ Allan Mattich make the prediction I said yesterday that “The big risk is that U.K. real estate suffers a dramatic collapse. The second big risk is that it takes decades to return to normality” “Another risk is that the Bank of England has left the U.K. with such a deep addiction to cheap money that it won’t be able to raise interest rates even if high inflation becomes embedded.”

    I think the UK cannot move forward without severe risks. I think politicans need to educate the public of these risks (EU Power grab) and (House price crash or embedded inflation). I have always said the economy cannot move forward without house prices returning to normal levels. I believe the squeeze you are talking about will actually push house prices below the long term average because disposable income is going to fall. Politicians cannot keep their heads in the sand.

    • StevenL
      Posted June 4, 2011 at 2:49 am | Permalink

      But there is a massive demand for better housing from people who can pay rent.

      Building more houses = real GDP growth. Far better to let the bubble down against a background of GDP growth than a slow ‘real’ deflation against stagnation and decline.

      The REIT model and planning auctions are the way forward.

      • sm
        Posted June 5, 2011 at 12:47 pm | Permalink

        Encourage money supply into real projects where demand exists, this will have a long term positive effect. e.g new builds/major renovation.Discourage money into re-purchases of existing stuff.

        Fulfilling real demand for real assets whilst keeping construction moving.Meanwhile get immigration under control and deflate the bubbles and balance income/outcome.

        Understand why banks do not want house prices to fall, whilst they cannot advantage themselves of the fall.

        “” I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
        Thomas Jefferson, (Attributed)
        3rd president of US (1743 – 1826)””

        I also think ‘Hoover dam projects’ need to be dusted down in case we have a full blown deflation bust caused by insolvent banks.
        When money/interest rates lose utility as a price signals- measuring rods- government must think real long term citizen value and avoid anarchy.
        This means employing people to fulfill a real need while the banks are reconstructed/reset with bondholders/controllers taking the hit or losing control.

  11. Blue Eyes
    Posted June 3, 2011 at 9:40 am | Permalink

    If the UK money supply is falling again, do you still think the Bank needs to raise rates?

  12. Caterpillar
    Posted June 3, 2011 at 10:26 am | Permalink

    It is interesting that the BoE website states “The MPC goes to great lengths to explain its thinking and decisions” and yet it is extremely difficult to see how anyone could not appreciate that the severe devaluation of the currency would impact inflation – and presumably since there have been few international purchases of recent gilt issues then the world knows that inflation and low interest rates are here to stay. Has the unelected MPC chosen the UK’s equilibrium? Nor does the BoE/MPC seem to report how much capital has been taken from savers and given to the banks and mortgagees – this is redistribution and so really ought to be in the public domain for politicians to debate.

    So, Mr Redwood, please could you have a regularly updated CPI graph (the actual index not the inflation) on your site – you can fit from Dec 2003 to Jan 2008 with an annual rate of 2%, but from then on you’ll need just under 3.8%., so with three and a half years of failure one would have thought that it was obvious that the medium term had already happened! The price level increases that the Chancellor seems have been happy with the BoE pursuing have reached the situation that even if the inflation rate dropped to 0% it would take until the end of 2013 for CPI to be at the level that would have been achieved through a stready 2% rise.

    Mr Redwood, may I also humbly suggest that you ask the Deputy PM whether the rate setting independence of the BoE is a contribution to democracy, afterall the Deputy PM is considering many constitutional issues. It is a remarkable situation that in the future the electorate might be able to recall their MP but the major economic decision is made by an unelected MPC.

    Mr Redwood, would you also be able to ask the Chancellor of the Exchequer to publicly expalin why he apparently does not hold the BoE to account over its remit? Is this political fear of what the opposition would say? Is it that a 4% rate has been agreed behind closed doors? Is it wishful thinking? Is it support of a misallocation of capital to home ownnership?

    And finally, to aid the public debate. Would you be able to ask the Chancellor to ask the Governor to issue a page describing what would happen by raising rates to rapidly get inflation back to target (or as above implies a little deflation might actually be needed)? It is worrying to read quotes such as that from Mr Posen, “We could get inflation back to target really fast if we put the economy through the wringer” (www.guardian.co.uk/business/2011/mar/27/inflation-cuts-consumer-spending-mpc ), without having a clear description of what the “wringer” would actually be, and of course it is inflation first that is the BoE’s target.

  13. StrongholdBarricades
    Posted June 3, 2011 at 10:32 am | Permalink

    The over complex tax structure, the perilous state of the banking system, localism and public sector entrepreneurial spirit still need to be tackled

    All need fully reforming so that industry can provide the work for those that want it, and our public sector can deliver services which people can actually access.

    as an example:

    The main users of libraries are the elderly and those still in education. What is the point in restricting opening hours of these bodies that preclude those in education? Why are most libraries closed at the weekend? If the same principle was applied to Tesco would shoppers go elsewhere?

  14. Damien
    Posted June 3, 2011 at 11:34 am | Permalink

    The Home Office report ‘Control of Immigration: Quarterly statistical summary, Q1 2011′ (below) shows in the year to March employment visas grated increased 6% to 161,815. In the same period there were 308,340 grants of extension to leave. Also ’employment related grants of extension to leave ‘were 124,805. Another category ’employment related grants of settlement’ permitted another 75,155 to remain. Under the category ‘family and reunion grants of settlement’ 56,885 were permitted leave to remain.

    These figures do not include the 8 accession countries who do not require visas under the agreement, however the UK quarterly Labour Force confirmed migration from Poland has risen from 490,000 in Q4 2009 to 550,000 in Q2 2010.(From April 2011 accession migrants are not required to register)

    These statistics throw up some interesting questions;

    Why are employment visas up when unemployment is rising among young graduates and others in the UK?

    Does more migration mean more remittances and what is the impact on the economy?

    If the 2.5 million workers from accession countries continues to increase at this rate (above) how will this impact on the low skilled unemployed in the UK?

    Is the UK Immigration Department ‘fit for purpose’?

    Bill Clinton signed into law the Welfare Reform Act 1996 which successfully reduced ‘welfare immigration’. Is there an element of ‘welfare immigration’ in the UK statistics ?

    http://www.homeoffice.gov.uk/publications/science-research-statistics/research-statistics/immigration-asylum-research/control-immigration-q1-2011-t/immigration-control-q1-2011snr?view=Binary

    • Martyn
      Posted June 3, 2011 at 8:41 pm | Permalink

      I do not believe for a moment that the Border Agency is fit for purpose – the evidence to the contrary mounts daily and one has but to compare, say, the polite, well dressed French border control staff at Lille as one boards the Eurostar for England with the scruffy and seemingly bored individuals who represent the UKBA at Lille.
      I think that this goes beyond simple immigration numbers; Great Britain, when it consisted of the Scots, Irish, Welsh and English peoples possessed a unique national makeup quite unlike any others in the world. The character of each race (for that is what I mean) differs and each had their own specific and unique qualities, the sum of which was greater than its parts combining to make an unbeatable combination through times of war and peace.
      Now, however, there is no such place as England on the map of Europe and Scotland, Wales and N Ireland are moving, perhaps properly, towards governing themselves. The English have been left out of this and I believe it to have been a very deliberate policy by the previous government – and apparently the present government – to further weaken and perhaps even disenfranchise the English peoples through uncontrolled immigration. What other race of peoples, other than the English, has in recent history been disenfranchised by the removal of their mother country from the map?

  15. oldtimer
    Posted June 3, 2011 at 11:46 am | Permalink

    You should add the Carbon Plan, the consequence of the Climate Change Act, to your list of baleful influences on the UK economy. It declares, apart from the many subsidies on offer for investment in uneconomic and unreliable energy sources (wind and solar), that consumers and businesses must pay extra via feed in tariffs. Furthermore, in a measure worthy of Alice in Wonderland, businesses are to be paid for negawatts – the energy they do not consume by shutting down their operations! I still await to hear from my MP a good reason why any business should contemplate investing in this country in the face of this Carbon Plan – signed off by Cameron, Clegg and Huhne. Can you think of any?

  16. Winston Smith
    Posted June 3, 2011 at 1:04 pm | Permalink

    If the MPC/Bank of England did not see inflation coming over the last 3 years, why has the Bank of England pension fund moved significantly into index-linked gilts over the same period? Mervyn King is due to retire in a couple of years.

    See Guido’sblog for the details.

    • StevenL
      Posted June 4, 2011 at 3:01 am | Permalink

      They see it as ‘the greater good’ ‘for the little people’ you know?

  17. BobE
    Posted June 3, 2011 at 2:26 pm | Permalink

    John please explain what do you expect to grow?
    We no longer make anything. Or do you mean finacial services?
    The only growth I see is in unemployment.
    Please describe what you mean by growth?

    Reply: Growth in jobs, incomes, activity – manufacturing and services – we do still manufacture a lot

  18. RDM
    Posted June 3, 2011 at 2:42 pm | Permalink

    “Tomorrow I will complete the growth suggestions by looking again at infrastructure and other major investment.”

    Infrastructure spending will only support growth, not create it?

    Taking a Micro Economic view point:

    Surely what is needed is Investment and Export focused startups, meeting the worlds demands, solving problems. Sorry for stating the obvious, but Technology!

    Technology startups need Project finance, but Banks, VC’s, angels, etc … will not provide the require finance, even in the good times! Technology startup’s should not depend on short term loans, etc … Trying to meet payments, etc … they have no way of earning yet!

    Equity: Even if you had your own collateral, you should not base a decision to develop a Technology(product) on liquidating it, no matter what the rewards are! Too develop a successful Enterprise culture you are doing to need too take the Risk in terms of the viability of each of the Products, and not the liquidity of the developer’s, in other word, we also need a stable social structure. So, whether or not you have collateral should not be used against you, it’s the idea and you’re ability to develop it, which is what counts, and it is where we will get enough successful companies to meet the growth requirements! Not an elitist hierarchy, we need as many enterprises in every town and village as we can get.

    Project Management (Relationship banking) with defined mile-stones and an End-point would be a good basis upon which we could develop Technology startup’s. A formal Project has a Beginning and a pre-defined End-point (and associated Exist Strategy). Making a good structure upon which to make an investment decision, and a formally understood interface between Banks and developers.

    Also required; Many more local, or specific Technology, banks would be a good idea, has anyone got any capital I can borrow for the next thirty years, say, at 3.2% + 1.2% cost?

    Throughout the 1750’s and onwards, we, within the UK, had a large number of independent, locally based, banks. It seems to me that with the networks available today, and with the concentration of our banking system, the banks have lost sight of the locally available opportunities? Time for a culture change?

    Hope this helps expand the scope of the much needed discussion. There is no point just talking about the Marco Economic situation without looking deeper into the real problem?

    Yours sincerely, The long term unemployed.

  19. JM
    Posted June 3, 2011 at 9:29 pm | Permalink

    Growth…
    I have a client who wants to spend £500,000 building an extension to his 70’s farmhouse. The council don’t like the traditional design because they would like something more modern and have stopped him. The builing stands in 500acres of woodland and can’t be seen from anywhere. But a lack of any public interest does not stop the State once it gets involved.

    I bet they don’t have this problem in China?

    • alan jutson
      Posted June 4, 2011 at 1:49 pm | Permalink

      JM

      Big Brother knows best, and to boot, if your cient does build an extension he will be paying close to £100,000 in VAT for this enjoyment.

      Whilst planning is a problem that I have also encountered over decades, the simple size of the tax take is now a real problem for most people to get over in their minds, especially if the project is not just for improvement, but for essential maintainance and repair.

  20. Bazman
    Posted June 5, 2011 at 9:03 am | Permalink

    Centrica need reminding who this gas belongs to. If the argument about tax was true then you would see other fields closing and they are not. They should be threatened with having their licences revoked and another company brought in to do the work. Just like all the fantasists would say if it applied to an individual work dispute.
    This argument about business going abroad is false. Britain is a massive market and by most countries standards they have quite an easy time of it. China? Russia? India? Yeah right! They could loose everything there and they know it. Tax take is increased by growth and the rates of tax are irrelevant. Britain cannot win a race to the bottom and the ones who advocate this race will never have to take part.

  • 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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