Controlling the deficit

 

            Yesterday the government reported that its additional borrowing in May amounted to £17.4 billion, £1.1 billion less than in May the previous year. 

            In the first two months of 2011-12 total borrowing reached  an additional £27.4 billion, compared to £25.9 billion in the same period the previous year.

            Total national debt as a proportion of National Income ( excluding the bank debt, PFI, PPP and pension deficits)  hit 60.6% compared to 53.8% a year earlier.

              These borrowing figures confirm the pattern in the Red Book and regularly reported  on this site. Public spending  is still rising overall. Public debt is not yet at an alarming level in relation to the size of the economy, but the government does have to tackle pension liabilities and state owned  banks as the totals are much higher than the stated narrow public debt figures.

              It is difficult looking at these figures to claim that overall the government is cutting spending too much. If fiscal stimuli worked the UK economy should be picking up speed, as this still represents a huge fiscal stimulus. The fact that we have had a flat performance for the last six months shows there is no automatic boost from borrowing more by the state.

             The markets do believe the Uk government will curb its deficit, and this belief has allowed the Bank to keep interest rates low so the government  can carry on borrowing on affordable terms. The numbers tell us that the government will have to get tougher from here to bring the monthly increases in borrowing down from current levels. This remains essential to keeping the confidence of markets.

           As recent events in Greece have shown, a country with high borrowing that is not under control and coming down can end up with very high interest rates indeed. This in turn becomes self defeating, as more and more of the tax revenue goes on paying the interest on all the debt. The tax revenues this year are rising strongly as planned following the tax increases. Spending is also still rising  above the forecast rate of increase.

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38 Comments

  1. Liam
    Posted June 22, 2011 at 6:27 am | Permalink

    The figures show that both alternatives (Labour’s ‘slowly, slowly’, and the far-left’s ‘not a penny, not at all’) would be utter economic suicide for the UK and our wider partners.

  2. lifelogic
    Posted June 22, 2011 at 6:35 am | Permalink

    It is private industry that need to borrow on reasonable terms and invest to produce real employment and growth and have the confidence so to do. This confidence will not come with the endless more daft regulations, no reduction in the huge state waste, expensive green energy, higher taxes and a PM who clearly is set against private sector growth.

    How could it – companies with money to invest will find somewhere sensible to invest it probably not the UK.

    • lifelogic
      Posted June 22, 2011 at 6:58 am | Permalink

      And hugely obstructive bank lending rates and terms from state owned banks and indeed all the banks.

    • lifelogic
      Posted June 22, 2011 at 11:20 am | Permalink

      £17.4 Billion just for one month a mere £290 each including every child, pensioner, and the unemployed. Who is going to pay it all back when all the productive ones have sensibly left or just want to take it easy due to over tax and pointless regulation?

  3. Mike Stallard
    Posted June 22, 2011 at 6:37 am | Permalink

    At last the BBC is waking up to what is going on and I would very much like to congratulate Evan Davis on the excellent programme which he is hosting.
    The fact that, here, we cannot seem to manage to cut back seriously and quickly should say quite a lot about what is going on in Greece, shouldn’t it?

  4. Gary
    Posted June 22, 2011 at 6:47 am | Permalink

    I wonder how much of that market optimism is due to the BOE selling put options on long term gilts, and banks buying those gilts with almost free money from the BOE?

    Since we don’t have access to the BOE books, we have to make an educated guess based on what has been circumstantially determined in other countries. It would help if the Bank did make its books public, then we could dispel speculation.

  5. davidb
    Posted June 22, 2011 at 7:53 am | Permalink

    But does the figure include the money we are borrowing to lend to the Euro basjket cases and IMF? And then theres our foreign aid.

    Everyone needs to get real. Our Government too.

    • Tim
      Posted June 22, 2011 at 11:40 am | Permalink

      I agree that we could make annual savings of £14 billion by leaving the EU and a further £11.5 billion if Cameron reversed his ridiculous foreign aid policy that no one apart from him supports. Then we could really take a look at the our public services and the backroom staff who were created under Labour and no one would notice if they disappeared. Then there is the Equalities Commission and similar useless trouble making quangos.
      Then we should take a serious look at immigration and economic migrants who arrive on these shores to lavish our tax funded benefits and free housing. When are foreigners going to be charged for their health and public services? I’m afraid we are led by cowardly politicians who live in a parallel universe never having had a proper job and in fear of the PC brigade. Mr Redwood why don’t you stand for leadership of the Tory Party as Mr Cameron is pleasing no one with his twists, turns and socilist policies.

      Reply: I stood twice and the answer was No. I am not planning to stand again. There is no current vacancy and Mr Cameron is well supported.

      • Bazman
        Posted June 22, 2011 at 7:00 pm | Permalink

        It’s more likely Politicians are afraid of the Daily mail brigade than any PC accusations. Take the issue of drugs as an easy example. If drug was where relaxed, as soon as one person died of an overdose the Daily Mail and its readers would have a field day.

      • Tim
        Posted June 22, 2011 at 7:07 pm | Permalink

        He may be well supported by MP’s but out here in the real world people think him as a PR showman with little substance. After New Labour people know that politicians can only be judged on what they deliver, not what they say. I see no improvement on the issues that concern the public, in fact they’re worse e.g. The EU, immigration, increases in direct and indirect taxation, no repeal of the Human Rights Act, increases in public spending, self defeating climate change legislation to hamper our industries based on non proven science, no energy policy except windmills, paid for by 20% stealth taxes in our bills!! etc. Too many broken promises.

        • APL
          Posted June 23, 2011 at 10:24 am | Permalink

          TIM: “…but out here in the real world people think him as a PR showman with little substance.”

          Cameron fills the roll he is expected to. He pretends to be the leader of a Pretend government, meanwhile the real decisions are made – or otherwise in Brussels.

          Cameron & the Tory party are a fraud, and people like Redwood who support him are party to the fraud.

          A little like the judas sheep, the animal that leads all the other sheep into the abattoir to be slaughtered, he is let out alive and repeats the performance the next time.

      • lifelogic
        Posted June 22, 2011 at 8:14 pm | Permalink

        How on earth could anyone prefer John Major to you? Apart from your ability to look good singing in Welsh perhaps. We need a compass not a salesman. What we really needed is your sense of direction and Cameron to present it. He is very good at presentation far better than Blair and it would be even easier to present a sensible direction rather than his current daft one. Could you not pull the strings somehow – it would benefit him, the party and the country.

        Cameron would have been a very good photocopier salesman but needs someone to point him the right way.

  6. Caterpillar
    Posted June 22, 2011 at 7:56 am | Permalink

    Nothing to see here then.

    The Chancellor of the Exchequer does not hold the MPC/BoE to account for apparent disregard of its CPI inflation target (- even though inflation slows growth). The PM seems to have sent a clear message, whether forests, NHS or justice, he appears to wish to put appearance ahead of rational argument whatever the cost. We have already seen how the military brass are speaking out and yesterday we heard how Unison may respond.

    It is a pleasant surprise that markets are currently believing the “UK government will curb its deficit”. Given who is buying UK debt, noting that Fisher & Posen are still talking up QE (despite the likelihood that with constrained consumption all that may happen is a drop in velocity) and that sterling remains weak, I am not convinced markets will believe this for much longer.

    Perhaps the Govt and the BoE/MPC just need to get real rather than believing the country is a superhero – ‘a leap and abound and he was free’.

    [Get off the emergency interest rate thus relaxing the constraint on savers and freeing up the property market (with relaxed constraints QE may even be considerd). Keep the sensible policies – forests, NHS etc. Explain and convince, stop looking nice, stop performing and do the job.]

  7. JimF
    Posted June 22, 2011 at 8:30 am | Permalink

    “The tax revenues this year are rising strongly as planned following the tax increases. Spending is also still rising above the forecast rate of increase.”

    Never again, please, accuse Labour of being the tax and spend party. More glad every day I voted UKIP.

    • lifelogic
      Posted June 22, 2011 at 10:51 am | Permalink

      Not really “tax and spend” it is worse “tax and waste” or often even worse still “tax waste and use some to hassle and inconvenience the productive sector”

  8. Steve Cox
    Posted June 22, 2011 at 8:38 am | Permalink

    You’re 100% right about the abject failure of all the government’s and Bank’s immensely costly stimuli. Several of these have unfortunately also had highly negative and pernicious effects. QE is a case in point. It has stoked inflation and led to asset bubbles. (Anyone doubting this should look at this graph: http://static.seekingalpha.com/uploads/2011/4/7/164524-130217654123059-Michael-McDonough_origin.png ) Oh yes, it has also allowed a profligate government to continue borrowing far too cheaply. Beneficial for Mr. Osborne, perhaps, but not for future generations who will have to repay that money one way or another. Now we are treated to the midsummer madness of one Paul Fisher at the Bank mulling the possibility of a British QE2, as he is so deeply worried about deflation. Why isn’t this man doing his job and figuring out how to get partly Bank-inspired inflation under control again, instead of musing about the incredibly unlikely? The lunatics truly are in control of this asylum.

    Then there is the abject failure of the Bank’s exchange rate policy – a massive devaluation of Sterling in order to boost the competitiveness of our exporters – to stimulate the economy. Our lazy corporate bosses prefer to sit on mounds of cash rather than invest it in new manufacturing capacity, so in spite of a few blips that have looked positive, more than 3 years of debauching the pound has done virtually nothing to help the economy. Instead it has caused high inflation as we are massive net importers, and this was always completely predictable, in spite of Mervyn King’s dull-eyed confessions that the strength of the effect has surprised him. What a joke!

    Let’s face it, the people making monetary and fiscal policy have failed abysmally and need to be replaced from top to bottom. Britain is in the toilet and will continue to be there until we get some fresh new faces in charge who worry about today’s issues (inflation), rather than fantasising about deflation, which is less likely in Britain today than Threadneedle Street being wiped out by a meteor strike.

    • Caterpillar
      Posted June 22, 2011 at 10:44 am | Permalink

      “Mervyn King’s dull-eyed confessions that the strength of the effect has surprised him. What a joke!”

      Yep, this alone should be string enough for “Sir” to be moved along, as you suggest

      “get some fresh new faces in charge who worry about today’s issues (inflation), rather than fantasising about deflation”

      I can do nothing but second this.

      [I really hope that some of the back benchers or even Opposition start to seriously question the (PM and) Chancellor on why they refuse to hold the BoE/MPC to account. Even if the UK really needs continued emergency rates, rather than policy aimed at price level stability then it still remains for the BoE to rate set based on CPI inflation and the Chancellor, as allowed in the Bank Of England Act, to take control if necessary. That way there is debate and accountability, as it is all the UK has is a burgeoning problem and a none working democracy. I am actually shocked that backbenchers remain in their party whilst this democratic deficit is allowed to fester.]

  9. Bob
    Posted June 22, 2011 at 8:55 am | Permalink

    Cut spending. Borrow only to invest.
    Trim up the foreign aid budget and invest the money into much needed infrastructure projects here in the UK, where it might actually do some good?
    And let Ken Clarke use public transport where he can rub shoulders with hoi polloi, thus saving another £200k p.a., which could keep about five criminals in jail.
    Come to think of it, if we cut Ken Clarke completely how many criminals would that keep off of the streets?

    Reply: I think you overestimate the costs of Mr Clarke’s travel

  10. Brian Tomkinson
    Posted June 22, 2011 at 9:20 am | Permalink

    JR: “The markets do believe the Uk government will curb its deficit, and this belief has allowed the Bank to keep interest rates low so the government can carry on borrowing on affordable terms.”
    However, according to today’s Daily Telegraph: “The Office for Budget Responsibility (OBR), the independent fiscal watchdog, said that spending is going up faster than projected because the UK is paying higher interest payments on gilts – government bonds – which are linked to inflation, while tax receipts are not yet growing at the expected pace.” Do we really have a government that has borrowing under control? I’m not impressed by their performance.

    • norman
      Posted June 22, 2011 at 12:31 pm | Permalink

      If worst comes to the worst and borrowing isn’t under control enough to fund the wishlist of the 2014 ‘everyone’s a winner’ giveaway budget we can just redefine what the structural deficit consists of (how proud Gordon Brown must be that his financial sleights of hand live on) and, voila!

      No (structural) deficit, plenty of cash to spray around, maybe even enough to reverse one or two of the tax raises that have been foisted on us.

  11. Bryan
    Posted June 22, 2011 at 10:23 am | Permalink

    How much less I wonder would our borrowings been if we had not engaged in a costly, hypocritical war in Libya – following Japanese history in failing to warn that a no fly zone was actually an excuse for regime change and hypocritical because we merely utter platitudes when the biggest mass murder of civilians is taking place in Syria?

    How much less I wonder would our borrowing be if we did not borrow money to give away to feather the nests of despots and to fund space programmes etc?

    How much less would our borrowing be I wonder if we did not borrow to increase our ‘give’ to the EU and the IMF to bail out failing countries?

    How much less would our borrowing be I wonder if Mr Cameron told the Libdems that they are a recipe for disaster and like it or lump it Conservative policies, ie those in the manifesto, would now be implemented in full?

    I wonder!

    • lifelogic
      Posted June 22, 2011 at 10:41 am | Permalink

      It looks as though Libdem policies are also Cameron policies and the Libdems are just a useful fig leaf and a defence for him from the sensible, but rather tiny Tory winglet.

    • Javelin
      Posted June 22, 2011 at 1:51 pm | Permalink

      Boris wrote yesterday that “We now need the anagnorisis – the moment of recognition” – I can see all around the world this moment has come. I have not found a blog, comment or newspaper article suggesting otherwise.

      He then said “Then there will be catharsis, the experience of purgation and relief. ”

      We all know Greece is going to go belly up – and Ireland and Portugal. As far as I can guess more tax payers will keep bailing out these countries until covert stress tests within the banks will indicate an economic melt-down wont happen.

      The only spanner in the works will be if the Greek population revolt. My friends in Greece, in even wll paid jobs, are at the point of revolting. They see themselves as taking on more and more debt to prop up French and German banks. The Greek Government are talking about £20 billion more cuts and asset sales. The vote yesterday along party lines of 143/155 was predictable, partly because no other MP wants to carry the can. Getting the austerity measures through Parliament will be very difficult because individual MPs will risk their seats by voting it through.

      • Bazman
        Posted June 22, 2011 at 7:05 pm | Permalink

        What has Boris got to say about feckless fathers? Not much it seems. Funny that. He seems to have a strong right wing opinion on everything else.

        • lifelogic
          Posted June 22, 2011 at 10:04 pm | Permalink

          Feckless father are behaving as the system encourages them to do. Boris is not really right wing I see him as pretty much dead centre but with a lefty, green, silly bicycle tinge.

          Though right and left are rather vague terms. I am perhaps “right wing” as in freedom, liberty, belief in logic and science, atheism, democratic control, innocent till proven guilty, juries, not rewarding the feckless and a much smaller state. As opposed to left wing as in pursuit of equality of outcome, unfair so called “fairness/equality”, a huge growing state sector, with no democratic control thereof and an absurd oppressive state regulation system – in the Cameron, Clegg, Heath, Blair, Brown style.

  12. lojolondon
    Posted June 22, 2011 at 10:26 am | Permalink

    John, this is because we have been talking the talk, telling everyone there will be cuts, and fortunately the international investor/banking community bought the story. BUT then we lack the commitment to ensure those cuts happen, ASAP, because everytime someone objects the government backs off. With one notable exception – HS2 is proceeding despite no-one being able to find a single good thing about the project except the builders of trains and tracks.
    If you really want to make cuts, the obvious place is where Liebour raised spending excessively with no benefit to the community – NHS Trusts can almost all go, NOW. International aid can almost all go NOW. The whole windmill scam can stop right NOW. And the EU spend and bailout – there is no excuse for the whole idea except politicians ensuring a job in the future. I bet I could achieve most of this in a week, so why so slow?

  13. william
    Posted June 22, 2011 at 10:51 am | Permalink

    The useless MPC need to start increasing interest rates by half a point every six months to stop imported inflation and provide a reward for savers.So far, the real pain has been postponed for all those people who geared up and bought houses at historically silly prices.I suppose it is too much to ask this government to take a knife to the area of largesse that is really paid for by borrowing,and hence future taxpayers,namely current welfare payments.King got a knighthood for restoring permanent inflation to the system.

  14. Neil Craig
    Posted June 22, 2011 at 1:29 pm | Permalink

    Also the tax rises the government has broyght in probably bring in more at the start. Their negative effects and indeed measures of avoidance, build up. So a 7% cut in the deficit is not 7% of a good start.

  15. Caterpillar
    Posted June 22, 2011 at 1:41 pm | Permalink

    Well the BoE/MPC minutes are out and the pound is red across the board, more currency weakening. It is as though the MPC are actually trying to stoke up inflation, observing that it will go higher but concluding that means it will come down quicker. How long are these ‘experts’ going to be allowed to continue with this absurdity before any politicians react (idf it is not already too late). I really wonder whether some of the MPC see the UK as an academic experiment for their research interests, but have not yet realised we have the result. Do no MPs understand the seriousness (stupidity) of this continued course? Could someone point out to the Chancellor a simple observation – looking backwards price levels have been rising much faster than the target, looking forwards price levels are forecast to rise much faster than target – hmmmm, perhaps the conclusion is price levels are rising faster than the target and by doing nothing (infact worse than nothing) the currency goes down further and guess what – more price increases. (I would currently prefer to be banging my head against a brick wall, which is not a very productive activity, but I suspect I am not alone in this feeling.)
    —————————————————————————————————–
    From the Guardian (http://www.guardian.co.uk/business/2011/jun/22/bank-of-england-what-economists-say),

    “Chris Redfern, Moneycorp dealer:
    This morning’s BoE minutes delivered the opposite of what the markets wanted, as the possibility of further QE was brought back into play. New MPC member Broadbent has joined the dovish camp by voting to hold interest rates leaving only two members voting for a hike after the departure of Andrew Sentance. With the MPC discussing QE again and no sign of an interest rate rise until well into 2012, sterling has dropped by 1% against the euro over the past day alone.”

    • JimF
      Posted June 22, 2011 at 9:42 pm | Permalink

      Sterling is now more than 10% below it’s lowest level against the Swiss Franc when Labour were in charge.

      Look on the bright side. This is austerity by stealth-public sector wages and benefits go down in nominal currency terms, while export earnings in LSTG go up. It never works long term, of course, but, hey, long term we’re all dead and our children can pay. This experiment is going horribly wrong, as confidence in Sterling has been lost for a generation, or more. Real estate is being used as our gold standard, and real estate itself is in a bubble. This is no way to run a developed economy.

  16. A.Sedgwick
    Posted June 22, 2011 at 1:45 pm | Permalink

    “The markets do believe the UK government will curb its deficit” – foreign exchange market may be dubious and then there is the continuing disastrous balance of payments deficit which presumably one day will have to be corrected by importing vastly less or endless devaluation.

  17. Simon
    Posted June 22, 2011 at 2:17 pm | Permalink

    Won’t be long before Greece does default and our banks come cap in hand for another loan from the taxpayer for their CDS and synthetic CDS losses .

    In the financial hole we are in wouldn’t it make sense to stop digging by banning the writing of new synthetic CDS business by banks the UK taxpayer underwrites and ban shorting ?

    Allowing people to make money on the way down like this is only going to have the net effect of transfering wealth to the financial services industry .

    Plenty of moral hazard there too , a recipe for manipulation and society will be expected to pick up the tab .

    • Robert
      Posted June 23, 2011 at 11:59 am | Permalink

      The losses you allude to are primarily due long positions.

  18. Richard
    Posted June 22, 2011 at 2:53 pm | Permalink

    Do our leaders become isloated in Westminster, do they get mesmerised by the constant demands of a 24 hour news media and a natural desire to be popular and get re-elected, do they get side tracked by events and their civil servants often deliberate delaying tactics.
    I only ask because the trends of recent Goverments has been for some quite radical and promising manifestos at the time of the election which then melt away into compromise and U turns as soon as the going gets tough and there are any strikes or marches or shouting crowds.
    “We are listening” equals we are giving in to minority pressure groups who do not represent all the elctorate with their selfish requirements.
    And this is what is happening with the spending cuts which are nowhere near the levels announced originally as here and there small concessions are made which all add up.

    • BobE
      Posted June 22, 2011 at 10:48 pm | Permalink

      They get whipped into the party line, effectivly sterilising their views.

  19. Ron Forrest
    Posted June 22, 2011 at 6:22 pm | Permalink

    Despite the chaos in Greece and the grim outlook for the Spanish , Portuguese and Italian economies, the exchange rate for the pound against the euro is today near an all-time low. That shows the lack of faith of the international community in the British economy. When will Cameron wake up?

    • Caterpillar
      Posted June 23, 2011 at 1:02 am | Permalink

      I definitely agree with this. Weak against the currency of Greece, Spain and Portugal, also weak against the currency over the Atlantic that just keeps printing. This is absurd, everyone in the UK who tried to save has taken a 20-30% haircut in the international values of their savings, and yet the trimming continues. (On the plus side shops are still taking GBP and not yet only accepting RMB, AUD etc. … not yet.)

      (aside: – Could it be that the Chancellor of the Exchequer does not want to tackle the Governor/Sir, perhaps biding his time for a move into number 10? Chancellors have been known to eye up the big job.)

  20. BobE
    Posted June 22, 2011 at 10:35 pm | Permalink

    The Euro was a political currency and did not follow economic rules. It must fail. Excellent. Please fail soon.

  • 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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