Slow growth or no growth?


              This week-end has seen various economists claim there was no growth in the second quarter of 2011. The British Chambers of Commerce thinks export led manufacturing did well enough to ensure 0.3% growth for the second quarter.

            I find it surprising that people are surprised that growth is slow. It all goes back to the misunderstanding about which sector, public or private, took the hit last year. If it had been cuts for the public sector and stimulus for the private sector, growth would have been higher. The private sector is still a lot bigger than the public  sector, even after the years of large increases in public spending.

                Instead, as readers of this site will know, the first Coalition year saw continued growth in overall public spending, along with substantial tax increases (imposed by both Labour and the Coalition governments) and a big surge in inflation. The continuing large fiscal stimulus did not work. We need a private sector stimulus, not more public spending. Constantly increasing public spending and borrowing can increase the squeeze on the private sector, as it is allied to present and future tax rises to pay for it all. The smaller increases in cash public spending  in the later years of the strategy should be directed to the government’s spending priorities like health and education.

                Wage growth remains very subdued. As a result of tax rises and inflation, consumers have been badly squeezed as forecast. The inflation was easy to forsee, as too much printed money depressed the value of  the pound and led to a large increase in import prices. Now higher energy is doing the damage, partly designed by the policymakers as part of their drive to get us all to use less of it. This site called for anti inflation measures in 2009 including higher interest rates then to stop the pound’s fall. The authorities decided against. This site has also called for an energy policy which meets demand with more efficient and cheaper supply – we will return to this later this week. We need more cheaper energy if the manufacturing revival is to take wings, as manufacturing is energy intensive.

               The government’s deficit reduction strategy relies heavily on tax revenue rises, which in turn depend heavily on accelerating growth. If the government is to hit these exacting targets in 2013-15 it needs to cut selective taxes and reduce the overall regulatory cost burden soon, to give some uplift to a struggling private sector. It can’t all be done by exports. If it doesn’t, it will end up borrowing even more than the £485 billion extra  forecast for the 5 years. This will mean higher interest rates, a further depressant for enterprise.


  1. norman
    July 11, 2011

    My money’s still on a second run of the printing presses between now and 2015.

    This government has shown it is willing to back down at every turn and when the increased tax revenues don’t materialise something will have to give, and with an election looming I don’t think it will be ‘savage spending cuts that has got us into this mess’, as Balls will gleefully announce to the BBC and Guardian at every opportunity.

    1. alexmews
      July 11, 2011

      i agree. the opportunity i think has been missed. folks believe from the government PR that the cuts have already happened. they have not. it looks now like they won’t. instead – ever greater demands for more spending. all that talk of learning from Canada to get whole areas of government cut back – nothing. weak.

  2. lifelogic
    July 11, 2011

    Slow growth well what a surprise. A huge parasitic state, new employment rules, little bank lending, 20% VAT, many tax increases, 50% + NI tax rates, increases in fuel cost due to weak pound and Huhne’s green nonsense, Cameron lost with no vision and a broken compass and perhaps Labour in 2015. Sound like conditions for boom, boom, boom to me!

    And now I see Italy is starting to go bust too – so is it now the EU PIGIS will Cameron did his hand in our pockets yet again for this I wonder?

    1. lifelogic
      July 11, 2011

      So is Cameron’s priority given all this – he goes off to meet the parents of Milly Dowler.

    2. lifelogic
      July 11, 2011

      I just read your blog a second time I was a bit sleepy the first time. All very true and even more depressing this time. The squeeze on the private sector will just get worse at this rate, taxes go up yet more and tax revenues decline yet more.

      Positive feedback is not a positive thing it tends to cause people to crash as Major’s ERM showed and as every decent engineer and economist knows very well.

      Perhaps control systems and the maths of feedback systems should be on the Oxford PPE course?

  3. Mike Stallard
    July 11, 2011

    “The private sector is still a lot bigger than the private sector, even after the years of large increases in public spending.” I make it a rule never to correct people’s errors but this one really does need looking at. We know that in large parts of the North of Britain three quarters of the workforce are living off our taxes. It really would be nice to know which sector is actually bigger across the whole country.

    ” The smaller increases in cash public spending in the later years of the strategy should be directed to the spending priorities like health and education.” Well no, actually. Education is going in entirely the wrong direction so spending more on it will make it move faster in the direction of huge faceless factories spewing out illiterate no hopers (at least where I live).

    Would you believe that a Polish girl of 15 whom I have actually taught is pregnant? It broke my heart to hear that. What are we doing?

    1. GJ Wyatt
      July 11, 2011

      Quite so (your 2nd para)! Are health and education always“priorities”?

      If public spending is anywhere near optimally allocated the notion of “priorities” is inappropriate. A little bit more (or less) in any area should have roughly the same effect on total welfare — unless of course public preferences about spending have changed.

    2. alan jutson
      July 11, 2011


      “What are we doing” ?

      Just about everything the opposite of what we should be doing.

      We are paying people tax free money to do nothing.
      Workers are being hammered with tax increases.

      We are paying people tax free money to do nothing.
      In many cases they are taking home more than those working.

      We are paying people tax free money to rent an expensive home (housing benefit)
      People who are working have to rent or buy a home they can afford, after paying taxes.

      We allow a vast amount of immigrant labour to come into our Country to take jobs, whilst we pay our own people not to work.

      We allow people to come into the country on all sorts of visitors visa’s to use our NHS, and then do not bother to charge them, Whilst our own workers pay tax and insurance to fund it.

      We keep interest rates low on purpose, so that those who are feckless and get into debt are at an advantage, whilst those who save get next to nothing.

      We pay the full cost of nursing home fees to people who have spent all their money, whilst those who have saved and have managed to build their total wealth to over £23,500 have to pay in full.

      Those that pay for private education and healthcare and reduce waiting lists for state funded institutions get no reduction in their state contribution, and thus pay twice.

      Unmarried mothers who have children are given council accomodation ahead of those who get married and have no children.

      Those who commit crime seem to have more protective (human) rights than those who are the victim of those crimes.

      I could go on, but suffice to say the government, not just this one, but previous ones as well, have encouraged people to do exactly the wrong thing for decades.

      The wonder is, that we still have a majority who try to do the right thing at all !

      It simply has to change.

      Tough on your 15 year girl student, but clearly I guess she did not think it would happen to her, and sex education, parental control, self control, self respect, all failed,. Doutless she will now get some state money and state help from us taxpayers, I guess it would be too much to ask for her family and the father to contribute and support her in full.

      1. lifelogic
        July 11, 2011

        Indeed people are behaving as the state has indicated through (the tax, legal and benefit system) how they want them to behave i.e. irresponsibly parasitically and fecklessly what did the government expect expect.

      2. Mr. Soakell
        July 12, 2011

        Correct me if I am wrong
        but is there not a law (age of consent)
        that exists to prevent children having children?

      3. uanime5
        July 13, 2011

        alan jutson you forgot about the people who work but earn so little that they receive ‘tax free money’ to supplement their meagre income.

        Also some tax increases, such as VAT, affect those on benefits.

  4. MickC
    July 11, 2011

    Cameron was always a bear of little substance.

    The turn-out at the next election will be very low because there is no confidence that our rulers have a clue what they are doing. Labour will win, because Cameron cannot attract the Tory vote, and the LibDem voters will vote Labour.

    Milliband, who was bright enought o get the leadership, is certainly bright enough to frame policies attractive enough to form a majority government.

  5. Gary
    July 11, 2011

    The govt forcast 2.5% , we get 0.5%(or zero is some are believed). Yet another example that govts cannot be relied on to make accurate economic forecasts , yet another example of the Problem of Economic Calculation. But being wrong all the time won’t stop them confidently predicting the next set of numbers. They will almost certainly be wrong again.

    You would think, at least, that they have read some history and seen that they are copying Hoover’s failed policies in the last depression , almost word for word. Hubris is one thing, stupidity is quite another.

    The govt does not know what it is doing. Nor does the Bank of England.

  6. Roger Helmer MEP
    July 11, 2011

    Someone asked me recently who on earth could lead the Tory party if Dave and George get into really serious trouble over NI. I immediately thought of John Redwood.

    1. Mike Stallard
      July 11, 2011

      Excellent idea! With Dan Hannan as Minister for Getting us Out of Europe!

    2. Scottspeig
      July 12, 2011

      No offense to John (I would love him as PM), but I read on ConHome that certain members feel he’s too cold – lacks the required charisma in today’s media imagery??

      Anyway, I think he’d do better being Chancellor since his CV is rather babk orienated prior to politics? Then I suppose Douglas Carswell could be the PM championing “The Plan”?? Now there’s a combination of conservatism I would like!

      1. uanime5
        July 13, 2011

        That could work. I hear that current Chancellor has a similar relationship the Prime Minister.

  7. javelin
    July 11, 2011

    As I have been posting for 9 months now the dark horse in Europe are the Italian banks – in particular they have loaned so much money to the Italian Government and not to business – they look smart going into a recession – but have gambled their shirts there will be growth and low interest rates. They have gambled tax receipts will magically appear and pay the Governments debt back. And this is NOT what is happening. Growth just hasn’t happened in Italy because the state has been borrowing all the money and the banks have not been lending to the private sector. I think I also posted that Burlisconi would be a loose cannon who would shoot his own finance Ministers and fail to garner any other Finance Ministers support internationally – and this is happening too. Interest rates are going up now and the Italian banks are now marooned with large debts from a poor creditor – their Government who cant now bail them out.

    Credit Default Swaps on Italian banks were by far the highest in the world a year ago – if you took them as a ratio of Bank and GDP size. It’s not true there are new rumours and a conspiracy against them. Their exposure to debt was well known 12 months ago. It’s very fragile and a near-unstoppable economic momentum is heading towards collapse.

  8. Steve Cox
    July 11, 2011

    A foolish devaluation that has not worked in its intention of stimulating exports (lazy or uncertain companies are sitting on their profits rather than investing them in new facilities and jobs); uncontrolled inflation and zero base rates that beggar the responsible in society and reward the feckless and irresponsible who have borrowed too much; a deficit reduction plan based on huge tax increases rather than public spending cuts; and an energy policy designed to reduce our individual freedom to stay warm in winter and travel where and when we like. Just 4 examples from your article, John, of the Coalition’s policies and outcomes. What I wonder, though, is how this differs from what Gordon Brown would have done if he had been re-elected? Apart from some tinkering in the margins, this sounds almost exactly like what the Labour Party would have ended up doing. Oh yes, and let’s not forget reneging on commitments to a referendum on the EU Constitution, and an extremely unwise hike in Overseas Development spending. David Cameron: a true Socialist champion. He’s even got the trust fund to prove it!

    1. Derek Buxton
      July 11, 2011

      I fear that you are correct, there seems to be no end to the bad decisions being made at the top. That is the trouble if you surround yourself with “yes men”. We do need to look urgently at the energy supply, it is essential, carbon reduction is a sideshow of no moment. Surely someone has told them that CO2 is a plant food not a pollutant.

    2. lifelogic
      July 11, 2011

      Yes trust funds do seem to eat away the brains of the beneficiaries. Perhaps I won’t set one up for my children and get them all to take a Saturday job as I had to.

      The again trust funds only come about because of absurd IHT and other tax laws to steal peoples wealth. Get rid of the taxes get rid of the lawyers and accountants and they call do something productive instead.

  9. Martin
    July 11, 2011

    You talk about cutting regulatory burden then why does the government do the opposite?

    The third Heathrow runway cancellation was a great victory for the Nimbys and a great inspiration to Nimbys everywhere who are busying blocking business.

    1. Iain
      July 11, 2011

      The 3rd runway at Herathrow would have been a disaster for the people living in west London. What Heathrow wanted to do was to annex the living environments of these people to exploit it.

      If you think the 3rd runway would be such an economic success, I’ll tell you what, lets do away with planning controls and make Heathrow negotiate with house holders for the right to pollute their living environemt, lets restore the property rights of these people, or is the 3rd runway only a going concern if it getss the Goverment to allow them to steal peoples living environment without conpensating them.

      1. StevenL
        July 11, 2011

        I’d suggest that proximity superior transport links, like Heathrow, are one of the factors that make west London land so expensive.

        Besides, the NIMBY’s can’t have it both ways. One one hand objecting to anything over 3 stories tall, then on the other making out they own the airspace 5,000ft above their house is just silly isn’t it?

        The air space, new flight corridors and new landing slots are state property and it’ one man, one vote. Not one house in west London, one vote.

        1. Scottspeig
          July 12, 2011

          I would think having the HS2 run direct from Heathrow to Birmingham airport would be a better way, or wasn’t there talk of a thames estuary runway?

  10. oldtimer
    July 11, 2011

    I agree with your prescriptions. It is unfortunate that these are not the policies followed by the coalition. Tax policy is misguided – though the reported climbdown on N Sea exploration taxes was welcome news even if buried under NOTW reporting. The Carbon Plan is the very antithesis of what you call for on energy, yet Mr Huhne yesterday claimed that this would save us money!

    You comment in your last paragraph “The government’s deficit reduciton strategy relies heavily on tax revenue rises, which in turn depend heavily on accelerating growth.” Expecting accelerating growth to live with tax growth based on tax rate increases is naive. Add in the fact that the UK, relatively speaking, is probably the most heavily indebted nation in the western world it is more than naive, it is a nonsense. I fear that nothing will change with the present coalition government.

    1. uanime5
      July 13, 2011

      Currently the UK’s debt is 76% of it’s GDP. Greece’s is 130%, Italy’s is 118%, Ireland’s is 94%, France’s is 84%, Portugal’s is 83%, Germany’s is 74%, Netherlands’ is 64%, and Spain’s is 64%.

      So the UK is not the most ‘heavily indebted nation in the western world’ and has a lower level of debt than many EU countries.

      Though the Government is naive to expect high levels of growth without investing in growth. Also cutting large numbers of jobs in the public sector will prevent growth as many people will have less money to invest in the economy.

  11. stred
    July 11, 2011

    Huhne was on the A.Marr show yesterday, supposedly to answer questions about energy prices. Marr chose to spend most of the time talking about journalism and ex wife problems. I would have liked to see Huhne explain why gas power stations will have to be run ticking over and running inefficiently in order to back up our windmills in the sea when they fail to work. This energy policy is a future disaster in the making.

    1. lifelogic
      July 11, 2011

      And why little domestic pv solar scheme are good but more efficient large ones are to be banned from the absurd feed in tariffs. I see the return figure have been revised downwards again by government.

      Selling people a pig in a poke.

  12. Michael Read
    July 11, 2011

    I come to this blog for a bit of peace and quiet from the doings of Rebecca Brooks.

    However, you continue to irritate with selective reporting (in the best traditions of a NOTW reporter)

    The increase in public spending, which you emphasise at every opportunity, is not because the public sector is continuing to spend on services.

    It is, is it not, because the costs of borrowing – gilts, for example – have risen. The more interesting figures would be to split out these differences.

    And please no malarkey like forgetting to include a figure for inflation which as any fule knows is now a vital strategic part of the government’s economic policy.

    Reply: I use total cash figures. The increases were widespread in 2010-11, well beyond the increases in interest payments. I have set it all out before at some length.

    1. Derek Buxton
      July 11, 2011

      Mr. read,
      “inflation is a strategic part of the governments economy”, would that be to shrink the apparent debt and steal people’s savings to make everything look alright. Inflation is already hitting people hard, especially on food which we cannot access at world prices without paying a levy to Brussels.
      The problem is that two mutually contradictory agendas are in use, we want growth but if you want to start a company we will regulate you and in any case there will be a shortage of energy……so go elsewhere!

  13. forthurst
    July 11, 2011

    Expecting growth to fuel increased tax revenues was alway a high risk strategy; cutting public spending was always the low risk route to fiscal probity. Furthermore, expecting industry to thrive under the burden of the Huhne’s imposts is assuming that the real econmy operates to the same rulles as the phony world of hype and illusion inhabited by the PM and his rural Oxfordshire clan.

  14. Denis Cooper
    July 11, 2011

    I see that the £9.3 billion extra for the IMF will be up for final approval tonight, with no further debate:

  15. Bill
    July 11, 2011

    I find it strange that we can borrow at “German type” rates when the deficit reduction programme is so modest and uncertain.

    If the markets change their view, this will be damaging

  16. Tiger32
    July 11, 2011

    Right and right again why are you not in cabinet? Why is George Osborne not following your competitiveness report you Produced in opposition for him?
    This government needs to heed your words and get serious about reform!!

  17. Neil Craig
    July 11, 2011

    You are right that people are wrong to be surprised that with our current government raising taxes and keeping spending around 50% of GNP (possibly still above if non-tax taxes like the carbon levy and BBC licence fees are counted as they should be).

    However I think we are right to be surprised that there is so little official opposition offering a vigorous alternative to such big state socialism. I know there is UKIP and it is not either your or their fault that they are effectively censored from our state broadcasting monopoly.

    1. uanime5
      July 13, 2011

      1) It’s not a monopoly if there’s more than one company in the market. Murdoch doesn’t control all of the media yet.

      2) UKIP can easily bypass this by using Twitter and other Social Networking sites. The real question is ‘Why don’t they?’

  18. JimF
    July 11, 2011

    We now have the new AWR rules, which complicate the whole recruitment agency/hirer relationship, and add to the burden on hirers to prove equal treatment with their own workers.
    Temp workers, after 12 weeks, have the right to the same pay and conditions as a comparator worker which has done the same job for 20 years. The way round this apparently is to swap the worker for 6 weeks to break the qualifying period, then re-hire them, or to let them go after 11 weeks to avoid the aggro.
    How will this help growth?

    1. uanime5
      July 13, 2011

      If people are constantly being fired and rehired then the Government can keep claiming that jobs are being created.

      Alternatively the company could give people who’ve been there for over 20 years different jobs to avoid this problem.

  19. Bazman
    July 11, 2011

    The lack of comments on the loss of the Bombardier train contract on this site is telling. This would be just BBC propaganda would it? The loss of 1400 the jobs is in addition suppliers jobs and the social costs. Blaming Europe or the previous government is laughable. The phone hacking scandal has helped bury this story.

    1. forthurst
      July 12, 2011

      “Blaming Europe or the previous government is laughable.” The terms of the bid were constructed by the Labour Government in compliance with EU tendering rules. Bombadier, a Canadian company did not put in a successful bid. All pretty laughable examples of self-inflicted misery, but all, nevertheless, true. Is that good enough for you?

      1. Bazman
        July 12, 2011

        Not by a long way. The national governments of the other main European countries get round these rules and so should we. The Tories are the ones in power and talking about ‘Made in Britain’ and’ Best value for Britain’ Not Labour.

        1. uanime5
          July 13, 2011

          “The national governments of the other main European countries get round these rules and so should we.”

          They get around these rules by offering high quality products at a reasonable price. Something most UK companies fail to do because their workforce are neither as well educated or motivated as other EU workforces.

  20. Jan Mac
    July 11, 2011

    Mr Redwood, of topic ( or maybe not) ccould you let me know what is the outcome being voted on tonight in relation to the EU bailout.

    Reply I will put something up when we know

    1. zorro
      July 11, 2011

      Any arm twisting yet….?


  21. zorro
    July 11, 2011

    This government has as much chance of improving our economic circumstances as Bob Willis would have had to hit a six off the last ball of an innings to win a test match with Michael Holding as the bowler – i.e. wholly improbable.

    It is pure hit and hope – soft inflation led default, hoping no-one will notice, 5+ or more % over the next ten years (ha ha), ZIRP with QE2 within the next 12 months. No growth and no hope. The only way they will even attempt to tackle the debt crisis is through inflation. Cameron took less time than Blair to get on his plane saving/conquering the world because he knows that it is hopeless. Just make sure that you have less than £85K in any one banking group and diversify into the shiny metals. SAVERS ARE DOOMED….


  22. Caterpillar
    July 12, 2011

    I would like to comment on three monetary policy concerns, suggest one absurd monetary policy tactic and mention one nuclear aside. The three concerns I have are; (i) the inflation-growth link, (ii) the dangers of confirmatory bias in the MPC and (iii) the lack of clarifying communication to the electorate. The absurd tactic I would like to suggest is to print money for savers! The nuclear aside I would like to mention is that I agree with the concept of a guaranteed price to nuclear providers!!
    (i) There are now several research papers, with growing robustness that find a threshold behaviour between inflation and growth. Namely, in industrial countries once inflation is above a threshold of approximately 2% it hampers growth. The hypothesis that this leads to is that the UK’s missing growth could be due to the UK’s inflation rate. IT IS OF PARAMOUNT IMPORTANCE FOR THE MPC AND OBR TO BE REQUIRED TO COMMENT ON THIS PUBLISHED RESEARCH.
    (ii) Allowing decision recommendation and decision taking to be carried out by the same person(s) is likely to be subject to confirmatory bias. In some situations it is unavoidable, for example when decisions must be taken quickly. Nevertheless these cases do give rise to seminal examples; Three Mile Island, Chernoybl … Consider an academic familiar with the ZIRP/QE playbook, nicely summarised by the conclusions (p76-77) in Ito’s chapter of ‘Macroeconomic Stability and Financial Regulation: Key Issues for the G20’ (Read in particular points 1 to 3 ……. Initially seeing a decreasing inflation rate the academic might, reasonably, recognise the situation as one in which to play the ZIRP/QE strategy but when the data came in against this assumption (see the graphs at the tendency would be to look for additional data that confirms (as nuclear power station accidents) the initial expectations and to ignore the data that rejects the deflationary hypothesis. THE CHANCELLOR AND SHADOW CHANCELLOR SHOULD BE ABLE TO RECOGNISE CONFIRMATORY BIAS.
    (iii) Rather than simply stating inflation rates the MPC should be obliged to graph and show the CPI level and the theoretical 2% fit since December 2003, so that the inflation ‘policy’ change to ~4% at the beginning of 2008 is apparent to all (this cumulative squeeze cannot go away without wage inflation outstripping price inflation – back to 2% is not enough, hence the lock in of ZIRP). Similarly it should be made clear that there is no reason for house prices to have grown in line with real gdp, a slight real increase due to heating/insulation/damp proofing might be expected but as they are not productivity increasing investments growing with gdp is dubious. A penultimate clarification that the MPC needs to make is to admit that the literature relating interest rates and saving is at best unclear, the assumption that low rates discourages savers can be debated (the obvious case being that when saving for a target, if interest rates go down then it is necessary to save more to meet the target). And finally; interest rates and (business) investment … again an unclear relationship if there is additional risk brought about due to inflation and currency devaluation.
    • I guessed on here a couple of days’ back that savers had lost £10 billion due to the BoE, the BBC reported that ‘Save Our Savers’ was estimating £50 billion. The latter number is conveniently the same as Adam Posen is suggesting for QE2. Given that it appears necessary to allow the MPC academics to claim they were right to avoid continuation of the confirmatory bias and interest rate lock-in, and that savers’ confidence needs to be restored, might I suggest that the next print goes pro rata (average from today back 2 years say) directly into saving/deposit accounts. (Of course there are no assets back to the central bank in return, so this may be true quant’ and not qual’). Give this a couple of months then start the interest rate hike.
    • Putting nuclear power into the private sector, as expected, increased operational efficiency. Nevertheless nuclear power stations require 5 to 10 years cash outflow prior to production and so are a difficult private investment to make given political and regulatory uncertainty. This is the reason I would agree with a guaranteed price, to achieve a national secure supply. However I would suggest looking at 30-50 Gen 3 power stations, such that the learning developed allows a move to Gen 4 in 50-100 years.

  23. uanime5
    July 13, 2011

    As long as the Government tries to inflate the debt away the economy will continue to flat line. They need to switch to trying to remove the debt by increasing economic growth.

    Cheap energy is very difficult as all plants that produce energy require a large capital investment and can take a decade to construct. I believe the following methods of generating energy are the best suited to the UK and it’s Carbon targets:

    1) Tidal power: there are a few locations that can generate significant amount of power.

    2) Nuclear power: can be built anywhere and are reasonable safe. Require Uranium or Plutonium.

    3) Breeder reactors: a variant of nuclear power that can run on some of the radioactive materials it creates. Uses Uranium and Thorium.

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