Why is public spending still rising?

 

               This week I want to examine the UK economic strategy in more detail.

               The last year has shown that  running a very large public sector deficit does not give you fast growth. Those who say we need a bigger fiscal stimulus, a polite way of describing more borrowing, need to explain why the present massive  fiscal stimulus has produced so little growth.

                 Critics of the large deficit, including the government, rightly warn that if the “stimulus” becomes too large markets worry about the level of borrowing and force interest rates up. It becomes self defeating. In cases like Greece and Ireland the borrowing country reaches the point where it is forced into making much larger cuts in public spending  because the markets will simply no longer lend on normal terms.

                  The trouble with the fiscal stimulus theory is it ignores the fact that borrowing is just deferred tax. If the state borrows to spend more,  much of the beneficial impact of more spending on demand and jobs is offset. The private sector has to lend the money to the government and cannot spend that same money itself. The effect is similar to the impact of higher taxes, which clearly damage private sector demand. Only if the money is printed or borrowed from outside the country can there be a better  temporary stimulus. That comes at the risk of international money lenders putting up the price when they think you borrow too much, and at the cost of future inflation in the case of printed money.

              Inflation  turns into a tax on the private sector, cutting demand once again, as people can afford to buy fewer items. The combined effect of the inherited inflation, running now at 5% on the RPI, with higher taxes and low wage increases has been a big squeeze on the private sector, bigger than the squeeze so far on the public.

               The UK government is correct in saying it wishes to restrain public spending. Its rhetoric of self denial has helped keep interest rates low. The problem is that the restraint in public spending will be more severe in later years than in the first two years of the strategy. This means that the powers of compound arithmetic work against the government, as the early years increases stay with us and increase the base on which future public spending is calculated. In the first year current cash  public spending rose by £33 billion, and this year it will rise by a further £24 billion.

                 The strategy of keeping spending down has also been subject to a number of distractions that have served to boost it in unforeseen ways when the initial Coalition budget was drawn up.  The government decided on the Libyan military intervention. It went to the aid of Ireland through loans. It backed a substantial recapitalisation of the IMF. It was talked into increases in the EU budget despite seeking to stop them, as it has no veto on the immediate budget. If you wish to stop public spending  rising you need to be single minded in your determination to do this.

                  The government  also decided to have priority areas like Overseas Aid where it wished to put through substantial increases, and sensibly recognised that a large scale reorganisation of the NHS coupled with rising demand for services necessitated increased cash spending.

                   It has found implementing its good ideas to curb the costs of the overhead difficult. According to one estimate it spent £1 billion in the first year on redundancies. I am seeking to get detailed  figures through Parliamentary Questions. Meanwhile it has not taken full advantage of natural wastage, replacing around half the numbers leaving . It has decided to go ahead  with two very large computerisation programmes, which will be costly even assuming they are better controlled than previous such schemes in Whitehall.

                          The mood of many in the country is to get on with the adjustment of spending levels. Some of the government’s chosen areas for increased spending have proved to be more unpopular than some of their cuts, reflecting that mood. As I travel the country there seems to be an abundance of cash available to remodel many railway bridges, to put in a wide array of aggressive kerbs, new paving, restricted lanes, new surfaces and the like. It does not feel as if everything is cut the bone, but in some Councils it does feel as if the priorities are not the ones that many of us would choose.

            Reducing the rate of increase in cash public spending can be achieved by relatively straightforward means. The large planned savings in overhead can be brought about by a refusal to appoint any new people from outside, coupled with an active policy of promotion, retraining and movement of people already on the payroll. Expensive redundancies can largely be avoided. The two year wage freeze will help, if sensibly enforced.

            The government needs to continue making good progress with its ambitious programme to get more people back to work. Switching people from benefit to work incomes is central to curbing public spending and creating a richer nation.

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55 Comments

  1. norman
    Posted August 1, 2011 at 7:08 am | Permalink

    Maybe government departments / councils are taking advantage of the chance and getting rid of some ‘dead wood’ that they previously couldn’t, seeing as how it’s more or less impossible to get sacked from the public sector?

    Or maybe attractive redundancy packages are being offered and the better equipped workers, who know they’ll be picked up by the private sector, are taking advantage? Or even coming back the next week, redundancy cheque safely in the bank, as consultants on higher wages (but no benefits, pension, holiday pay, etc.)

    I know which option my money is on.

  2. lifelogic
    Posted August 1, 2011 at 8:07 am | Permalink

    It is not hard to work out why government expenditure is of so little benefit it is because it is spent so inefficiently on pointless things or often worse things that just handicap the private sector. The project like the silly kerbs and pavement work you mention, the joke green house Bling, wind farms and general political indoctrination – these are chosen either for the enrichment of the state sector employees & contacts and expansion of their power base or for absurd political agenda reasons like HS2, “equality”, “discrimination” and similar.

    Sensible government in the UK is at least 8 year off I suspect it is best to leave for a while.
    If government could spend well and wisely it might not be so bad but they simply cannot. Just abolish redundancy payments beyond 1 month and fire the 50% who do nothing of any use. Use the savings to get the banks lending to UK business who will do something sensible with it.

    • uanime5
      Posted August 1, 2011 at 5:50 pm | Permalink

      “fire the 50% who do nothing of any use”

      Who are these 50% and what do they currently employed to do? I suspect that the 50% is just a number you made up because you don’t understand what the public sector does.

      • Bazman
        Posted August 1, 2011 at 7:44 pm | Permalink

        Lifelogic is just full sweeping statements and generalisations. Like ‘motorbikes stink and make a deafening noise’. How little redundancy payments are, how easy it already is to hire and fire and health & safety in the real world have been pointed out a number of times to him. Cutting the state by 50% is a fantasy as it would mean cutting benefits for millions and the private sector could never being able to fill the gap. I saw Russia not long after the state collapsed. Not good. How civil unrest would be controlled in a collapsing country has not surprisingly not been answered and you can be sure when he gets his car stolen nobody will shout louder and why should the public take this race to the bottom with the idle rich getting richer? How he can criticise the BBC for bias and half truths is laughable.
        Basically he wants a Chinese system of government without the dictatorship.

        • alan jutson
          Posted August 2, 2011 at 9:24 am | Permalink

          Bazman

          Think I take the middle ground here, no of course you cannot sack 50% of state workers at a stroke without absolute chaos, but the state does employ huge amounts of people who are not productive in any way.

          We have family members who have worked in both Public and Private business, and the difference in attitude and the culture between the two elements really has to be seen to be believed.

          The admitted waste of resources, work practice, working conditions and lack of monitoring and accounability in the public sector is frightening, when compared the their Private sector counterparts.

          Its like two totally different Worlds.

          We simply cannot afford the present system, run the present way, something has to give otherwise the state may as well take all of our earnings and just give us pocket money in return.

        • Susan
          Posted August 2, 2011 at 1:32 pm | Permalink

          Bazman

          I have read many of your posts, and you make sweeping statements and generalisations too. As far as I know, freedom of speech in Britain is not dead just yet, and lifelogic is as entitled to his opinion, the same as you are. Therefore, it is just opinions on both sides of the argument.

          Unless you can prove lifelogic wrong in his assertions, it is perhaps polite to respect others views and not send such posts.

          Furthermore, how do you know, that if the UK does not get to grips with its debt and over large state, that all the UK public services would not start failing in time, producing the sort of collapse you speak of. Then one would assume, it would be you shouting very loudly, that more encouragement should have been given to wealth creators to come to Britain to create growth to pay for state spending. It works both ways you see.

          BTW Motorbikes do tend to stink and most certainly make a deafening noise. A rather poor analogy on your part one would think.

          • Bazman
            Posted August 2, 2011 at 6:17 pm | Permalink

            More loud and polluting than than that bus that anyone can drive through your right wing middle class prejudice that political opinions and policies are based on and will never have to live with the consequence of? I doubt it, though I am not sure what a ‘BTW’ motorbike is. Are you? If you mean a ‘BMW’ then you need to check your facts are right and up to date.

        • APL
          Posted August 3, 2011 at 11:42 am | Permalink

          Bazman: “How he can criticise the BBC for bias and half truths is laughable.”

          Because it is the state broadcasting organ. Such organizations specialize in misdirection and half truths.

          Bazman: “Basically he wants a Chinese system of government without the dictatorship.”

          The Chinese system of government IS a dictatorship.

  3. Alison Granger
    Posted August 1, 2011 at 8:19 am | Permalink

    As far as I can see Britain has no economic strategy. The politicians pay lip service to cutting the deficit and the BBC spews propaganda about cuts but in reality there are simply a few adjustments to the budget whilst the total continues to grow.
    Every minute that passes that we run a deficit interest payments increase. Nobody points out that reducing the deficit is not enough- it’s elimination and reversal is what is needed. As long as the public sector sucks money out of the real economy we will continue to suffer anaemic growth that is inadequate to pull us out of recession. The drunken sailor spending binge by government must stop, not in 5 or 10 years but now.

    • Bazman
      Posted August 2, 2011 at 6:24 pm | Permalink

      Seems to most people that it is the private banking system that has sucked a lot of money out of the economy?

  4. Steve Cox
    Posted August 1, 2011 at 8:37 am | Permalink

    I’m afraid that this government is like an alcoholic who has recognised that he has a problem and decided to do something about it. So, no more beer or gin and tonic, no more wine or vodka, but he decides to make an exception for single malt Scotch and tequila. And after a few months he starts back on the wine. Well, we all know where that poor fellow is heading, and a government that recognises the problem of the deficit but still displays so much gross fiscal incontinence seems to be heading in much the same direction. They need to get a firm grip on themselves, stop ring fencing any spending and stop making exceptions every time some lobby group threatens to throw its dummy out of the pram.

    • Mike Stallard
      Posted August 1, 2011 at 10:01 am | Permalink

      I warmly support this metaphor.
      When my wife and I were in debt in 1990, we made sure that we stuck to our plan for cutting down spending and we both tried hard to get a job in the new environment because we had just moved house.
      If we had to do it, why shouldn’t the government?

  5. alan jutson
    Posted August 1, 2011 at 9:08 am | Permalink

    John

    Does Cameron not realise that with the so called planned cuts due to bite harder in the later years, not only does compound interest work against him (and debt increases) but so to does public opinion.
    In three years time people will wonder why we are starting to have so called bigger cuts, when in their mind the crisis of the Labour years should have been well and truly over by then.
    The only explanation possible then, is we should have cut earlier but did not, thus exposing the original policy as a failure.

    This is more and more looking like a one term government, and a government who yet again wasted the early years of public goodwill.

    Given the performance and ability of all three Parties (if nothing changes), what real hope do we have ?

    • norman
      Posted August 1, 2011 at 9:51 am | Permalink

      The main advantage that the late cuts deal has is that, as long as the government doesn’t u-turn and does hold to the spending plans, practically no one who doesn’t work in the affected department will notice that spending is growing at a lower rate than the economy is growing at (if everything goes to plan, which has a nasty habit of not happening).

      Managers and bean counters can also be making plans and implementing efficiency improvements now, whilst money is still being thrown around, so that when the slow down in increases does start to happen it won’t be felt.

      That last paragraph wasn’t satire btw.

  6. Brian Tomkinson
    Posted August 1, 2011 at 9:13 am | Permalink

    “Why is public spending still rising?” – A good question which needs answering. This government has been happy to allow the media to repeat on a daily basis the doom and gloom of spending cuts whilst they are happy to “find” money for all sorts of things which the public would find unnecessary. Today we have spin from Francis Maude claiming that bloated Whitehall budgets have been cut by £3.75billion in less than a year. What a pity that those savings have not resulted in a decrease in public spending but an actual increase! Most people think that the government has reduced spending when it hasn’t. Just why the markets believe that we have a government that is capable of resolving the public deficit and debt problems still remains a mystery. Perhaps I should be pleased but I feel it will be even worse when the penny drops and sentiment changes.

    • APL
      Posted August 1, 2011 at 10:22 am | Permalink

      Brian Tomkinson: “What a pity that those savings have not resulted in a decrease in public spending but an actual increase!”

      Yes, the usual politicians ploy, ‘we are reducing the rate of increase in spending’, which is really we are increasing spending slower than the other party, is presented as we are cutting spending.

      That is a lie.

  7. wab
    Posted August 1, 2011 at 9:28 am | Permalink

    “The last year has shown that running a very large public sector deficit does not give you fast growth.”

    I would be surprised if anyone had claimed that. It probably gave faster growth than your preferred alternative strategy. So the real question is the effect versus the cost, compared with alternative strategies, not whether it was “fast” growth or not (unless you ran your alternative strategy in a parallel universe and can show that it miraculously gave “fast” growth).

    • David Collins
      Posted August 1, 2011 at 6:41 pm | Permalink

      Agree with Wab. Bit more QE is preferable to a full on Depression.

  8. Gary
    Posted August 1, 2011 at 9:49 am | Permalink

    If the govt abandons the bribes to voters , it may face the unpleasant prospect of being out of power. That makes cuts unpalatable for them. When over 1/2 the working population is employed by the govt, it becomes a catch-22.

    We are in a pickle. The correct thing to do for the long term health of the economy, would be to do the equivalent of Iceland. Stop borrowing and take the govt and failed banks off life support. That means the property bubble would collapse along with the banks. That would be very painful, but like Iceland, we would soon emerge stronger. Until we deal with this bad debt, we cannot move forward. But this will cost the govt votes and the govt thinks only of the short term.

    I know what Osborne is thinking. He is hoping to some God that growth will materialize. Growth of more than 2.5%. If he had read some history and if he had studied Austrian business cycles, he would get a dose of reality. We are in the process of a huge credit bubble bursting, the prospects for growth are small. We are going to suffer great pain being led by these dreamers. If borrowing/printing and spending was the way to economic wealth, then Zimbabwe would be the wealthiest country on earth. Stuffing more debt into an already deeply indebted system, eventually stops working. At some stage Osborne will learn about the will realize there is no free lunch. By then we may be properly ruined.

    • Caterpillar
      Posted August 2, 2011 at 1:04 am | Permalink

      Ah “the property bubble” – it was indeed saddening to see the headline in money section of the weekend FT ‘Mortgage rates hit all-time low’ (Chelsea five year fixed at 3.39 per cent, Skipton 2 year fixed at 2.48 per cent). The property bubble is not going to burst in nominal terms – the aim is for a slow deflation via high inflation. In the meantime virtuous savers won’t spend, the economy won’t rebalance from houses to productive assets, businesses which were marginal in boom times will be supported (so slowing the expansion of more efficient / innovative businesses and hence growth) etc.

      I think simply (both meanings) that the BoE/MPC policy must be to have high inflation to gradually devalue houses without caring that inflation over a 2% threshold slows growth (presumably the MPC ignores ECB research). I can no longer believe that the MPC are dumb enough to think that ZIRP/QE is either good economically or good ethically – they might be trying to do an academic experiment but even for slow learners the result is in.

  9. Mike Stallard
    Posted August 1, 2011 at 10:07 am | Permalink

    Let me be honest.
    The party’s over.
    We need to halve our civil service which is monstrously inefficient (tax and defence are the worst).
    We need to reduce taxes as a matter of urgency so that it really is worthwhile to work.
    We desperately need to cut back on the Welfare State which is corrupting people and making us Britons into liars and cheats and couch potatoes.
    I do not see this government doing that – especially with the Libdems on board.

    And Labour is even worse.

    • uanime5
      Posted August 1, 2011 at 5:59 pm | Permalink

      Let’s be intelligent.

      Halving the Civil Service will cause the Government to incur massive redundancy costs and will make everything take twice as long because there are fewer people.

      Reducing taxes means less tax revenue for the Government, so they’ll have to cut costs sharply or borrow more. Both cause the Government greater problems than leaving taxes as they are.

      2.5 million people are on welfare because there is a shortage of jobs. All cutting back will do is make their lives worse and reduce how much they spend in the economy. Even working people need welfare because salaries are so low.

  10. margaret brandreth-j
    Posted August 1, 2011 at 10:10 am | Permalink

    There are three main points there John
    1) When the squeeze is on fewer items are not necessarily bought What happens as in the case of Primark , Matalan and other cheaper outlets is people buy cheaper and look around for the best bargains This can be anti competitive in itself though as competition becomes so difficult to maintain that to make cheaper products larger firms exploit impoversihed countries.
    2) The computer programmes , which we all rely on now can spoil effective and effecient work. Overhauling costs , mistakes , time whilst old systems break down and stress levels amongst staff .
    3) Pavements , roads which are not maintained are a haven for the opportunist who like to make money out of councils .Whilst many can see the saving effeciencies and play nicely the morality is not the same as it used to be where we played the game in a fair British way. Times have changed .

    • alan jutson
      Posted August 1, 2011 at 1:41 pm | Permalink

      Margaret

      Your point 3 would be very valid if it only meant existing facilities were being kept up to standard, but unfortunately that is not the case.

      Councils and government are spending more and more, on more and more control systems.

      More white lines, more yellow lines, more speed humps, more traffic obstruction systems, more signage, more coloured tarmac, more traffic lights, etc.
      The problem, all of these extra facilities also require maintainance, so this type of expenditure adds to a growing yearly maintainace bill.

      Report in the Telegraph today warning that cheap fast repairs on roads and paths made last year are already breaking up, before the Winter even starts.

      Just back From Austria, where in Innsbruck road repairs (relaying of tarmac) were being completed in a most proffessional manner with extreme care and precision. Roads made negotiable each evening, with cones and temporary lights being removed every evening to allow traffic to continue to flow.

      Same thing in Spain a couple of years ago with well supervised rolling road repairs being the order of work, with no roads closing.

      Contrast:
      Example outside my house, green tarmac layed to form a cycle line, with white line boundary, so far has had to be relayed each year for the last three years due to it lifting each year.
      What was wrong with the original white boundary line for demarkation ?
      Why spend money on green tarmac?

      Our problem in this Country is we do not do the simple basics right first, before we dream up expensive pet schemes which probably comes from another budget..

  11. Alex
    Posted August 1, 2011 at 10:21 am | Permalink

    “Meanwhile it has not taken full advantage of natural wastage, replacing around half the numbers leaving .”
    This is appalling. A senior manager of a private company who was executing an expensive redundancy program but was replacing half the voluntary leavers would rightly be sacked.
    2 questions …
    Which departments have the worst record for this?
    How come the government payroll includes so many people who are incapable of retraining in a new role? Presumably the inflation of requirements for formal qualifications under the last administration is part of this problem.

    • uanime5
      Posted August 1, 2011 at 6:02 pm | Permalink

      It seems that the Government said that X number of staff had to be fired, the departments complied, then everyone realised that they didn’t have enough people and had to rehire them. This often happens in the private sector as well when cuts are made but not thought through.

  12. NickW
    Posted August 1, 2011 at 10:53 am | Permalink

    How much local Government spending is predicated on the fact that local councils have direct works departments which “need ” to be kept busy?
    Unnecessary road schemes are multiplying like topsy where I live.

    Why is everyone so determined that GDP must grow year on year and it is a disaster if it doesn’t?

    We need to compare our GDP figures with Greece and Ireland who have forced rebalancing of their economies. A contraction of a fraction of a percent is no disaster, (apart from demolishing the OBR’s arithmetic).

    A fiscal stimulus of any kind would be ridiculous, impossible, impractical, ineffective, irresponsible and useless. The only stimulus that IS possible is deregulation.

    It is a great pity that our MPs do not understand what it is like to run a sole trader business and make the transition to one or more employees. Rules, regulations, forms, tables and the like make the task damn near impossible.

    It is becoming patently obvious that the deficit reduction programme is not working; one of the main reasons for problems in this area is that our state broadcaster issues daily propaganda against the necessity of spending cuts. What can be done about it?

    An alternative and more radical approach to deficit reduction is becoming more and more necessary, otherwise we face a credit downgrade and spiralling interest charges.

    • JimF
      Posted August 1, 2011 at 12:32 pm | Permalink

      Agreed; the obsession with growth is driven by taxes needed to keep the deficit under control. However it is surely rebalancing rather than growth which is needed. I am sure that if 25% of public service workers were able to turn their hands to export products or services to even half the value of their current assumed GDP we would be all better off even with a lower overall GDP.

  13. NickW
    Posted August 1, 2011 at 11:14 am | Permalink

    Inflation is becoming a problem for everyone, due in part to rising commodity prices.

    I read recently that a biofuel facility in Tees-side consumes 100,000 tons of grain a month; over a million tons a year.

    Every time I see a local bus with a notice on it, claiming that it is “Green” because it runs on biofuels, I think of the starving African children who are paying for our obsession with green energy.

    To what extent is the African famine linked to the diversion of crops into biofuel production?

    No Government should allow its policies to contribute to the causation of famine.
    Can we have a report from our Minister of Energy please, (assuming he can spare the time from his family and legal problems)?

  14. Winston Smith
    Posted August 1, 2011 at 11:21 am | Permalink

    Succinctly analysed, although you deliberately ignored the issue of mass immigration, which is preventing any attempt to reduce the 5m on out of work benefits and help the 1.3m part-timers seeking full-time employment. Also, I think you may be confusing utility upgrades for repairs and investment in roads. The condition of roads in my area is the worst I can remember, with only irregular patchwork repairs. Talking to the older generation, they say local roads are now back to how they were in the early 50s.

  15. lola
    Posted August 1, 2011 at 11:29 am | Permalink

    Switching people from benefits to work as a saving only works if they go for jobs in the private – wealth creating – sector. At the same time we have to shed millions of jobs from the State – wealth consuming – sector, making them available for real more rewarding truly wealth creating jobs in private business. Moving these poor people – utterly let down by New Labours client state – from non-jobs onto the dole will not create a cost increase it will create a saving, since the benefits costs will be less than the sinecure osts costs they currently occupy.

    • uanime5
      Posted August 1, 2011 at 6:05 pm | Permalink

      So you want public sector doctors, nurses, and teachers to be encourages to go into the private sector? I trust you’ll be willing to pay for private care and schools to support the ‘wealth creating’ sector.

      • norman
        Posted August 1, 2011 at 10:56 pm | Permalink

        I never understood the ‘paying for private health’ etc. argument. We’re taxed massive amounts. Rest assured, if the government didn’t do everything for us we are more than capable of doing things for ourselves (collectively, of course).

        Thinking that government is the only organisation capable of doing anything is a myth. If you saw what you were paying for your ‘free’ health care, taxes on top of taxes in some cases, you’d be astonished and be asking ‘how can we afford to go public’!

        Why is it anyway you want to sack teachers, doctors and nurses? Surprised you never mentioned police. Whenever there are cutbacks to be made certain people want to cut the most vital services first. Baffling that you hold them in so little regard.

        • norman
          Posted August 1, 2011 at 10:58 pm | Permalink

          Oops, sorry read your comment too fast. Ignore that last paragraph, you want them to go the private sector. Agreed if taxes can be cut too then we could all afford to ‘go private’.

  16. Acorn
    Posted August 1, 2011 at 12:00 pm | Permalink

    Unless your government repeals legislation that gave birth to these high spending programmes, things ain’t going to change. By the next election, your spending is planned to rise by 8%, at current prices (what a pound note will buy then), while dropping 3% at constant prices (fixed at what a pound note bought at the last election). Not exactly earth shattering “cuts” on the surface; but, a considerable exercise in suppressing public sector expansion. The 17% increase in constant price tax revenues, by the next election; is the bit I am having trouble with.

  17. Martin
    Posted August 1, 2011 at 12:01 pm | Permalink

    Why is public spending rising? Well West Oxford shire council has money to spend moving a recycling center from near Dave’s house to near Jeremy’s house!

    http://www.express.co.uk/posts/view/262195/Jeremy-Clarkson-gets-town-tip-on-his-doorstep

  18. Javelin
    Posted August 1, 2011 at 12:32 pm | Permalink

    Spending is rising because taxes are not because growth is low.

    This excellent report by Tim Morgan and his team at Tullets clearly summarises our knife edge economy.

    http://www.tullettprebon.com/Documents/strategyinsights/Tim_Morgan_Report_007.pdf

    The UK Government has been weened onto debt and now is hesitant to lose support of the public by returning spending to pre gluttony levels. Bottom line is our level of public services cannot be afforded. It is only a matter of time before sufficient members of the public state this is focus groups and the depending can fall.

    Across Europe and the US predictions of a long drawn out anaemic recovery are coming true. Growth is 0.75- 1.5% at best and debts are getting bigger. I’ve said this before many times – and I believe I’m correct that low interest rates puts economic cycles into slow motion. The dot com crash took a year and a half to do what the 1987 crash did in a month and a half – because poor stick yields still looked better than very low interest rates. Again on the way up low interest rates mean high asset costs and low savings for investment.

    • Javelin
      Posted August 1, 2011 at 1:04 pm | Permalink

      I just need to add. It’s clear that we are bow entering a new economic age. I’m not sure what to call it. The one I’ve heard most often is The Age of Austerity. But that seems to imply we’re being austere and voluntarily tight with our money – when we simply are having it forced upon us.

      I prefer a term like the Great Deleverage to parallel the Great Depression. When the economy fell and fell again through a number of Bear markets. The first Bear market was in corporate Debt. We are about to enter a second Bear Market based on deleveraging Government spending. We also have a Bear Market to face based on Personal Debt. (the US housing bubble burst with it’s corporate bubble).

      So we are a third of the way into the Great Deleveraging. It will last at least 6 more years. The climb out of this downward spiral must start with the economy and wealth creation.

      • Robert
        Posted August 1, 2011 at 2:57 pm | Permalink

        Totally agree, it is sad that the political cycle as alluded to by John, means that yet again the period of adjustment will be more severe and prolonged that it needed to be if they were bold from the beginning. There is no panacea to ‘our’ debt problems, but the quicker we face reality the quicker the medicine can get to work.

      • APL
        Posted August 3, 2011 at 11:58 am | Permalink

        Javelin: “I prefer a term like the Great Deleverage to parallel the Great Depression.”

        Second Great Depression?

        It’s the second time politicians have done the same thing and produced the same result. They really aren’t too bright, the dears.

    • Acorn
      Posted August 1, 2011 at 5:10 pm | Permalink

      I demand a re-count JR. How come when I have linked to Tim Morgan at Tullet, my links get blanked, but Javelin gets a free pass?

      While we are at it, can we get a little thing straightened out. If you are a dodgy sovereign borrower, you can expect to pay a bit over the odds for a loan. Due a thing called “convexity” your outstanding debt gets a bit of a non-linear discount as well.

      The market does not get to make all the decisions. If you are a pension fund or mutual fund manager representing the “market”; you get a shed load of money coming in that has to go somewhere to earn a coin or two. Where are you going to put that money? Gold futures; oil futures; put options or short sell a few million shares in an Enron or African Bank? No; you are going to buy a truck load of US Treasuries yielding a couple of percent, so that you can sleep at night and still have a job the next day. Safe in the knowledge that your mates at other mutual houses are doing the same thing. Ben; Merv and their central banker mates have you by the short an’ curlies.

      reply: I had a b it more time so I checked some of the site out. Usually I do not have time so I just cut out the reference.

  19. Tedgo
    Posted August 1, 2011 at 12:55 pm | Permalink

    It gobsmacks me that Government does not have a common set of pay scales and conditions for all government departments and Quango’s. Before embarking on a bonfire of Quango’s the Government should have forced through much less generous redundancy terms, like they a have done with the MOD civilian staff.

    Even then the MOD terms are quite generous, if you volunteer for redundancy you get 1 month for each year of service up to a maximum of 21 months pay. If you are made compulsory redundant you are capped to 12 months pay. Unfortunately if you approaching 60 you are capped to 6 months pay, which is blatant age discrimination.

    This compares with minimum statutory redundancy pay of 0.5 weeks per year of service were the age of service is less than 22, 1.0 weeks per year for ages 22 to 40 and 1.5 weeks per year for ages 41+. Only pay up to a maximum of £400 per week (£20,800 per year) has to be used in the calculation. Of course employers can be more generous if they wish.

    I am quite sure that senior civil servants would realise the redundancy cost implications but seemed to have done nothing about it, after all it could effect their own gravy train. The civil servants are probably having a quiet snicker about it behind their Ministers backs.

    The only redeeming feature is that redundancy payments over £30,000 are subject to income tax, so yes, lets keep the 50% tax rate.

  20. Javelin
    Posted August 1, 2011 at 1:12 pm | Permalink

    If HSBC can cut 30.000 jobs whilst making higher profits. Then why can’t the UK Government. Truth is they are moving jobs from low growth areas like the EU and US to high growth areas like China. The sign of things to come.

    • uanime5
      Posted August 1, 2011 at 6:09 pm | Permalink

      Companies can easily cut jobs in non-productive sectors. I doubt the public would be happy if the Government closed down all failing schools and hospitals, and told the pupils and patients to find somewhere else to go.

  21. A.Sedgwick
    Posted August 1, 2011 at 1:24 pm | Permalink

    Gary Johnson for President

    Daniel Hannan »

    Today’s Daily Telegraph – clearly a politician using his head in office.

  22. Stabledoor
    Posted August 1, 2011 at 4:36 pm | Permalink

    Having suffered all the misinformation from the BBC about the “savage-cuts” being thrust upon the countries front line services, they may as well start cutting properly.

    The broadcasting wing of the labour partyprobably can’t ratchet up the cuts rhetoric any further than they already have – get cutting; both spending and taxes

  23. Mr Leslie Smith
    Posted August 1, 2011 at 5:25 pm | Permalink

    Cut both the numbers, salaries and all pensions of ALL Civil servants and Town Hall staff by 50% ,except those earning under £30,ooo. Have a sliding scale to £50K Use this model to cut Police Pensions too and NHS Senior Staff, then of ocurse the BBC as well. There salaries are totally safe money, no risk, little chance of an immediate firing or closure of the company and its all simply NOT FAIR. No Public Servant, no matter who, should ever eanr more than our Prime Minister, it undermines his authority and prestige. The Civil Service is keepings its head down, planning to undermine any cuts it can. ( colluding with both Labour and the BBC) it is my money too that they are “legally” stealing. If the Voters knew the truth about all the money going to the top 10% of the BBC, Civil Servants, NHS, Police and Quangoes, they would have a fit!!!

    • rose
      Posted August 2, 2011 at 7:56 pm | Permalink

      And most important of all they shouldn’t be index-linked. As long as they are, they won’t care how much inflation they foist on us. If they and their families have huge mortgages and debts, they actually benefit from inflation: they have a direct interest in it, not just immunity.

  24. Bernard Otway
    Posted August 1, 2011 at 5:51 pm | Permalink

    The comment that said leaving for a while was the best option,does not realise that people are doing just that, except permanently.There are no accurate figures to hand but I would accurately guess that we are losing better than 350,000 per annum ,these are all from the wealth producing private sector ,emmigrants leaving permanently export capital,and more importantly abilities that we lose and the immigrant country gains.In talking to many many people they all are fed up and the possibility of leaving is no longer a NO NO,because these
    people with exportable skills realise that time is now of the essence.HOW are we going to replace these peoples abilities given the TYPE of immigration we are now having.That is why I tell people under the age of 45 [the immigration age limit in AUS/NZ/Canada] to go
    ASAP especially to AUS/NZ the weather is better as well.Our political class has shown
    itself incapable of doing anything except getting us in deeper debt ,so these people realise
    they have nothing to lose except I tell them that the pound devaluing gives them less to take the longer they leave it. While we have the political system we have and these politicians
    there is ONLY one way and that is DOWN,especially as our voters are basically ignorant
    and still want to be BRIBED with their own money.In 50 years time when the history is
    written very very few politicians will get any good analyses,and the emmigrant destinations will be largely CLOSED. The people of this country will have caused their own downfall .

  25. uanime5
    Posted August 1, 2011 at 7:30 pm | Permalink

    “The government needs to continue making good progress with its ambitious programme to get more people back to work.”

    I disagree as the Government is doing exceptionally badly regarding this. Though unemployment has fallen recently this was partially due to the census the Government paid the private company Lockheed Martin to conduct, which resulted in a lot of short term private sector jobs being created. Now that this census has ended its former employees are back to being unemployed.

    Below are some Government schemes, the problems associated with them, and possible solutions.

    1) Scheme: encouraging people to become entrepreneurs.

    Problem: by becoming self-employed you lose almost all benefits, so this discourages almost everyone from trying as it causes short term losses for everyone and medium term losses if unsuccessful. It’s also a non-starter if you lack the skills needed to run a business.

    Solution: allow entrepreneurs to keep all benefits, including Job Seekers Allowance or the equivalent, until they start earning money.

    2) Scheme: Work Trial:

    Problem: the unemployed have to find a company willing to hire them and the job Centre will give the company extra paperwork to fill out. So the job seeker has to do 100% of the work and the Job Centre is a 5th wheel.

    Solution: unless the Job Centre starts doing some real work and providing the unemployed with a list of companies looking to take part in Work Trials this scheme will continue to fail.

    3) Scheme: Work Programme.

    Problem: like the Flexible New Deal it replaced this programme is completely worthless. Making the unemployed go to a private company for 2 years to look for jobs online isn’t going to magically make people more employable. This course is only useful for those who don’t have Internet access or a printer but offers little else. I predict that its success rate will be even lower than that of the Flexible New Deal’s 10% rate of employment and 8% rate of sustained employment.

    Solution: either completely scrap it or make it optional. No job seeker should be forced to attend this pointless course.

    4) Scheme: Mandatory Work Activity.

    Problem: no one wants to do 30 hours community service for no extra money, it’s little more than slavery and most likely a human rights violation, and it distorts competition as most businesses can’t compete with another business that doesn’t have to pay its workers.

    Solution: scrap it before people revolt.

    In short if the Government is serious about getting people into work they need to stop with all these worthless schemes designed to hide vast number of unemployed people from official statistics and replace them with training programs that give the unemployed skills that employers actually want.

  26. Conrad Jones (Cheam)
    Posted August 2, 2011 at 12:43 am | Permalink

    The Hills are alive – with the sound of gun fire:

    Wars in Libya, Foreign Aid handed to India
    Iran and North Korea, what’s next? Is it Syria?

    A Monetary System Backed by Debt, A Conservative Party turning to the Left.
    High House Prices, another EURO Crisis

    Donations to Europe, Donations to the IMF
    A Money License to the Banks, In return we get no “Thanks”

    Third World Agricultural Policies, Rediculous Ideologies

    – these are a few of a Bankers favourite things.

  27. Steve Whitfield
    Posted August 2, 2011 at 1:40 am | Permalink

    My answer is simply poor governance by the Coalition. Not the outrageous slash and burn style of governence we got used to under Labour but just downright poor , lacking in drive and purpose. I’d suggest a few reasons for the Coalition’s dire record on controlling spending.

    – They are out of touch with or cocking a deaf ear to the mood of the nation on so many issues. People want to see substantial savings and better value for money but they aren’t getting them under this government.

    – The Conservative leadership is so afraid of being disliked or looking ‘nasty’ it is prepared to spend and spend like a drunken sailor to buy popularity. In my book that makes them quite nasty and irresponsible.

    – A strangely infantile, and entirely misplaced and wrongheaded sentimentality surrounding bloated NHS, welfare , foreign aid spending and involvement in foreign affairs that are none of our business.

    – A 1970’s economic mindset at the heart of government fostered by the deeply unpopular Liberal democrats and David Cameron himself . Inconvenient lessons from history are forgotten or ignored. Together they need to show that ‘where all in this together’ so badly that wealth creators must be queuing up to leave to avoid paying over half they’re earnings in tax. The tail is wagging the dog far too much.

    Mr Redwood, I am surprised that in your analysis you didn’t relate the dismal growth results with the Coalition’s pledge/ soundbite – ‘Eliminating the deficit within one parliament’.
    This now looks almost as ridiculous as Labour’s ‘Too far, too fast’ line they keep trotting out . How far off target will the Coalition pledge be if growth stays so low over the course of the parliament ?…and will the government do the right thing and cut spending more and possibly reduce taxes to stimulate the economy ?.

    This is so depressing that this massively important debate has been infantilised to such a degree that the argument has been reduced to two simple.. but entirely bogus positions!. It says much for the contempt that politicians hold the electorate in if they believe that repeating an untruth often enough will make us believe it.

    Credit to you Mr Redwood for opening up a more informed debate.

  28. rose
    Posted August 2, 2011 at 9:01 pm | Permalink

    In local government we are always told there is no money to do the things they used to do – like policing, and looking after the parks and pavements, manning the libraries and museums, painting the railings, and pointing the walls; yet there is money to burn on horrible new additions, like forests of hideous signposts rammed into pavements to trip people up and obscure the architecture. When these are later found to have contravened h and s regs, equalities legislation, and conservation area guidelines, suddenly there is no money again to remove them. So there they stay, a permanent blight, serving no purpose at all.

    A more complicated problem is Adult Care. This means domestic service for some people who need it, paid for from the council tax. So while there is no money for a policeman to walk up and down the streets to prevent crime, there is money for some people to have one to one supervision at home. No money to do the public gardening, no money to clean the grease, sick, urine, and chewing gum off the pavements, no money to grapple with the litter, but money for some people who need help to have their cleaning done for them at home.

    I’m not heartless, but how was it decided, and presumably by socialists, that the council could no longer afford to look after its own property and obligations, but it could afford to look after other people’s, individually, because they can no longer do it themselves? Or did it just grow, like Topsy, the idea that subsidised domestic service for some random individuals would now take priority over all the former public services? The worst of this is that it is a bottomless pit of obligation. No matter how much care is given, some people always feel they are getting a raw deal, and that they should be getting more domestic help from the heartless council.

    The council is now spending more than the GDP of many a small nation. Project development officers on maternity leave, community development officers on maternity leave, equalities officers on maternity leave, enforcement officers on maternity leave, and managers galore above them all, some on maternity leave, and some amazingly not. Then above them the executive officers, not just one, but one for each department; and then above them, the chief executive officer, she who is paid so much more than the PM. Yet, whenever the attention of anyone still in the various immaculately smart offices is drawn to the general filthiness, dilapidation, and squalor of a once proud city, the same old excuse is given: “There is no money… ” and everyone just accepts that as a true and fair and reasonable explanation.

    The council tax on a small terraced house is now well over £2,000 p.a., but how far would that go if every other council tax payer eventually qualifies for domestic help at home? Meanwhile the small labour force of useful and practical men who were once employed to look after council property, no longer exists. The repair work is done, if at all, quickly and badly by contractors, and no-one ever checks.

    • Bazman
      Posted August 3, 2011 at 8:18 pm | Permalink

      It’s a scandal the amount of money wasted by the council on it’s buildings and staff, but targeting the old and vulnerable and somehow putting the two on the same level is not right. Secondly there is few ‘council’ houses left and where I am at are they are well maintained by I presume a council subsidised company. Two thousand pounds a year in council tax for a small terraced house? Got to central London? Move out if you cannot afford it. The wealth creators need to remember that they are using our infrastructure and education system to earn they half they keep. You can be sure like everyone else they can get another job in another country if they do not like it. The tail does not wag the dog as yo7u put it. If a company is of no use to this country and costing us money than why are they allowed to be here?

      • rose
        Posted August 4, 2011 at 12:51 pm | Permalink

        I’m not targeting the old and vulnerable in the way you suggest. I am saying the council cannot afford to give them all domestic help at home from the present system of collecting council tax. You telling them to get out of their houses if they can’t afford to pay the council tax isn’t any more helpful.

        The same thing happened in the seventies, with schools on the rates. Lord Houghton brought out his report, and the cost of salaries and pensions for teachers rose to such a degree that councils could no longer afford to do the other things they always used to do. Like looking after the parks and public gardens, and all the maintenance they used to do as a matter of course.
        Education took the lion’s share of local expenditure, as the schools came to cost far more than could ever have been envisaged when the rates system was first set up and parishes charged with educating the children of the poor. Especially as every comprehensive teacher had now come to expect the same status as the old grammar school teachers, and to be paid a lot more; and every middle class family now expected to have their chidren educated on the rates.

        In recognizing there was an imbalance in local government expenditure, and doing something about it before it was too late, politicans would not have been “targeting children” as you would perhaps have put it. They should have faced up to the problem of the imbalance, and reformed the way education was paid for. But they didn’t. They just cut out the gardening and all the other civilizing work in cities, and at the same time kept on raising the rates. Until one day they decided the rates themselves had to be reformed. But that wasn’t the answer either as it turned out.

        They have a similar problem nationally with the NHS. Do you think they are “targeting the sick” in trying to address it? I should jolly well hope so, in the good sense of the phrase, not the bad that you imply. With so many old and ill people, and so many expensive treatments now available that Beveridge could not have imagined, the way it is all paid for has got to change.

  • 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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