What if the government has not controlled spending enough?

 

            Most of the debate about the government’s strategy has concentrated on the possibility that they are “cutting too fast and too far”. Few worry that spending is still increasing in cash terms, and may prove difficult to finance.

            The government plans to borrow an extra £485 billion over five years, if all goes well.  It might not.

            It is quite possible that growth rates will be lower than the forecasts. We have seen that the OBR had to revise its growth forecast down at the time of Budget 2 compared to Budget 1 from the Coalition. Many think it will need to revise it down again for the current year. Mr Chote of the OBR has now  said as much. My worries have always been more about years 3-5, when the forecast assumes well above trend and well above  past average  growth, sustained for three years. If this does not come about, tax revenues will not surge as advertised.

               When I last reviewed the position I suggested moderately that the government might experience £25 billion less tax revenue, and incur £25 billion more spending over the next four years than planned. This would take total additional borrowing up to £535 billion, well ahead of total UK state debt in 2004.  After all, there was more than £30 billion of slippage in total deficit reduction for the Parliament between Budgets One and Two. As the world economy enters the doldrums, as the US slows and emerging economies seek to cool down, it is possible the global growth prospects will be worse than expected, leading to a further shortfall in revenues.

               I would have preferred the government to have imposed a freeze in public spending in the first year, instead of allowing a 5.3% increase un current spending.  That would have have lopped more than £16o billion off the borrowing over the full five years, giving the government more leeway. I would have pencilled in larger cash increases in spending for the second half of the Parliament than currently allowed, leaving extra total borrowing still well down on the government’s plan .

                    I would have imposed a strong control to use natural wastage in all but front line public service roles, to cut staff numbers more rapidly without the need for redundancy payments. This would yield good savings for the second half of the period. As my recent PQs have started to illustrate, the government has been hiring as well as firing.

                       My advice to the government today is to seek to bring in  total public spending  this year with a lower rate of increase than in the budget. More savings compared to budget this year can be multiplied by four to achieve good savings on the amount of extra borrowing over the complete Parliament. It would also leave more of a cushion in case revenues disappoint, or in case extra spending is needed in crucial areas in 2013-15, as may well  be the case.  It would still be a good idea to use most of the natural wastage available in administration and non core services.

                       In recent months the government has rightly highlighted the very favourable low borrowing rates it has achieved by talking about serious deficit reduction. In order to extend and protect those low borrowing rates, the government needs to show its deficit reduction strategy is hitting the targets. That requires more to go right, both in controlling spending and in faster growth of revenues. The danger of the strategy is not that they have cut public spending too much, but that they are still spending more than the country can afford. Markets can change their minds. It is important not to give them a reason to do so.

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67 Comments

  1. Alan Redford
    Posted August 4, 2011 at 6:22 am | Permalink

    Governments cannot and will not control government spending, beacuse their prime purpose is to remain popular and enjoy a comfortable free ride for themselves. Governments cannot run anything without turning it into a right Royal mess, (see schools, hospitals, foreign wars, steel manufacture, the automobile industry etc. etc. etc.) so why should the economy be any different?

    • anon
      Posted August 4, 2011 at 10:18 am | Permalink

      Its the popularity thing which is the key. The general public have been taught to assume and expect that government’s can magically produce money to spend on all sorts of appealing projects and any suggestion that it cannot is immediately greeted with antipathy.

      The truth is the reason we had a financial crisis was because average people didn’t have enough disposable income. The “answer” provided for this by governments and central banks was cheap cash, lots of it. This was then flooded into the financial system where it was passed on to anyone who asked for it in order to produce a debt fuelled consumer boom. Demand went up because consumers suddenly had access to lots of money and as demand went up business rapidly expanded and we had a boom.

      When the boom turned to bust however this was all exposed as false growth. It wasn’t sustainable because it was not funded by discretionary spending by consumers but by borrowing, borrowing they no longer have access to. Central bankers and governments dealt with the symptoms (lack of demand) rather than the cause (lack of disposable income) which meant that now we are unable to rely on consumption in the Western world to drive up orders and help businesses grow and create jobs.

      Disposable income is the problem. Westerners dont have enough of it. And to have enough of it we need our taxes to come down. However, that cannot happen while Western government’s spends so much because they need the tax revenue to underpin their borrowing. Borrowing that is demanded by the voter to pay for the mass spending projects that they like to hear about at election time.

      The answer to the big question is spending cuts that can then produce tax cuts. However, so long as the general public continue to live with the assumptions of the post-war period government’s will be too frightened by the fear of a backlash to set that process in motion.

      And so the process will continue that government spends more, government taxes more from individuals and businesses and they become even more reliant upon debt for their spending meaning that when credit does dry up the whole thing will fall over again and again and again…

      • uanime5
        Posted August 7, 2011 at 12:32 pm | Permalink

        Tax cuts aren’t the only way to increase disposable income. Raising the minimum wage will also do this. It’s time the multi-billion pound companies started paying their employees a fair wage.

  2. outsider
    Posted August 4, 2011 at 6:51 am | Permalink

    Sadly you are right. The high rates of GDP growth pre-2008 were artificial, based on cheap commodities, falling import prices from China, spending Asians’ savings and large-scale immigration. These were all unsustainable. Our natural rate of growth now is probably no more than 2 per cent, perhaps less, and we should budget on that basis.

    Let’s hope for a short-term surge of recovery. But we shall not reach a sound economic base until our exports of goods and services equal our imports, until the structural Budget deficit has been eliminated and until real interest rates are positive. We seem a long way from that point.

  3. Mick Anderson
    Posted August 4, 2011 at 6:53 am | Permalink

    Quite correct, but regrettably we have been landed with left-of-centre Governments since the mid 1990s, and there is no prospect of change.

    I don’t see the national financial situation improving at the moment, nor do I see policies in place to move towards that. The few things that were promised have been subject to U-turns or poor implementation. Changing university funding is likely to cost the Country more in the short term. Inspired. It’s rained on the bonfire of quangos. As ever.

    We need a traditional Conservative government to balance out the financial ruin heaped upon us by Mr Brown (both as Chancellor and as PM), and that’s not the disparate, flakey PR-minded mob that are in office at the moment.

    To those who would blame coalition government, consider that the electorate didn’t give Mr Cameron a majority because they sensed that he was not up to the job. A hung Parliament is a consequence, not a cause.

  4. Posted August 4, 2011 at 6:54 am | Permalink

    Whilst I broadly agree with John Redwood’s economic argument, I believe that there is an increasing risk of not achieving sustainable cost reduction.

    I differentiate between simple cost cutting (bacon slicer) which I believe is not sustainable and enduring cost reduction which comes from innovation and and business improvement (Best Practice in the Private Sector).

    Recently, we have seen Francis Maude declare cost saving successes which emanate from centralization of decision-making – is this not even more “Big Government”? {Uncle Francis knows best dear!}

    The Government seems slow to define reform agenda and detailed policies. Despite the excellent increase in public accountability and reporting from Government, there is very little data on strategy, transformation and delivery.

    I would encourage John Redwood MP to ask the Treasury & Cabinet Office for greater transparency in achievement of cost savings. For example, most departments are are expected to achieve a 30% plus savings in admin spending yet there is very little public visibility of how this will be achieved (strategy). I would like to see every programme broken out by department and reported monthly, with actual savings prominently featured.

    For me there is probably an urgent need for an independent risk review and of bottom-up costings of the Government’s cost reduction proposals.

    We have every Think Tank crawling all over growth projections, surely we should permit the same Public Sector spending?

    Reply: I agree that more people examining progress would be a good idea. There are monthly figures for overall spending and borrowing which I often comment on, and I am asking questions regularly to see what is happening to staff numbers and costs.

    • startledcod
      Posted August 4, 2011 at 11:19 am | Permalink

      You mention two cost cutting measures ‘simple cost cutting (bacon slicer) which [you] believe is not sustainable and enduring cost reduction which comes from innovation and and business improvement (Best Practice in the Private Sector)’ yet, in my opinion, miss the greatest opportunity of all namely reducing the number of functions that the Government seeks to undertake. Why do we need a Business Department? What does the Department for Education actually do? Why does Edinburgh Council have a Street Naming Officer with two assistants?

      • JimF
        Posted August 4, 2011 at 5:03 pm | Permalink

        That really is crazy. If this were sub-contracted, street naming is the sort of thing that would be done here, in our small Company, between sandwiches at lunchtime. All the time this type of thing goes on, we have nowhere near sufficient cost-cutting!

  5. norman
    Posted August 4, 2011 at 7:03 am | Permalink

    Here’s my take on the 5 year plan, fwiw.

    Inflation is always predicted to be 2% in two years time, and with VAT dropping out in January and other commodities hopefully plateauing soon, after a run of disappointing growth figures we may find that things are worse than we thought, we run the risk of deflation, double dip is on our doorstep, etc. – all the usual nonsense that makes one retch – we can start the presses for another couple of hundred billion in Q4 2012 until Q4 2013.

    This will help keep things going until the giveaway 2014 budget, keep inflation on the right side of 4% (to help reduce our debt) and will mean that any spending cuts can be lessened.

    Who cares what happens after the next election, the most important consideration in politicians minds is to win that election then deal with whatever demons they unleash after.

    After all, we’re stupid enough to believe anything and the important thing is that our politicians ‘learn lessons’ from their errors. Preferable would be for them to learn from history and make fewer errors but we have who we have.

  6. Posted August 4, 2011 at 7:15 am | Permalink

    That requires more to go right, both in controlling spending and in faster growth of revenues.

    Quite so, yet you yourself, and several others on your party’s backbenches continue to prop up this clearly left-leaning Coalition Government. I agree UKIP has no parliamentary voice as you pointed out in reply to my comment of yesterday, that is all the more reason that the tens of thousands of thoughtful and rational people in the country, who therefore eschew the frequent childishness of Farage & Co, are looking to you Mr Redwood, and similar Conservative colleagues, to push your own party the right way.

    As with the EU, concessions will only be achieved when Westminster shows the resolve to contemplate withdrawal, similarly in the Coalition, your sane views, which offer the sole hope for economic survival, will only receive attention when you gather sufficient support to threaten the very survival of the coalition itself. Lib/Dem MPs have grasped this simple fact, hence, IMO, their undue influence on policy, taxation and spending.

    Reply: Because the Conservatives do not have a majority, Lib Dem MPs have influence when they agree with and threaten to vote with Labour. Backbench Conservatives only have voting influence if and when Labour might vote with them. So far the many Conservative rebelllions on the EU have not been supported by enough Labour MPs to win the votes: usually Labour takes the federalist line.

    • A.Sedgwick
      Posted August 4, 2011 at 2:40 pm | Permalink

      “….and similar Conservative colleagues, to push your own party the right way.”

      Regrettably this is never going to happen. Cameron had the opportunity to build on arguably Blair’s only worthwhile legacy – devolution. We are locked into a political system where there are too many benificiaries e.g. MPs. The Liberal Party in the 1960s nearly went out of Parliamentary existence regularly winning only 6 seats, 40 years later they reached 60 albeit with the defunct SDP – another brave try at beating the system and with heavyweight politicians. Building a Westminster Party is at best a very slow burn.
      The latest sop to the people is e petitions, get 100,000 signatures and MPs will condescend to debate the issue, for this level of support there should be a full blown referendum.
      Unless we, the people, are given more direct control over running the country I fear there will be serious unrest in the decades to come.

  7. Mike Stallard
    Posted August 4, 2011 at 7:15 am | Permalink

    I am now on a swingeing diet. Last night, however, I decided on a small bottle of beer. Sometimes I go into the garden and eat a lot of plums. My wife gives me sweets “as a reward”. Why aren’t I losing weight?

    “beacuse their prime purpose is to remain popular and enjoy a comfortable free ride for themselves. ” (Alan Redford above.) This is too harsh. But it must take a very strong minister indeed to resist not only the blandishments of his own civil servants but also the professional lobbyists who constantly pester him/her on every side, offering freebies, goodies and (yearn) lovely free lunches .

    And then there are the Lib Dems…..

    My advice is therefore – get a grip!

  8. Alison Granger
    Posted August 4, 2011 at 7:28 am | Permalink

    The coalition is on course for total failure. It is very unlikely that their growth targets will be met. It is very likely that spending will continue to increase. The public sector is yet to experience any real cuts at all. The private sector has and is experiencing redundancies and tax rises. The North Sea is contracting even faster due to large tax rises and many more businesses will move from Britain as the ridiculous carbon taxes bit in the next few years. There has been no resistance to EU budget increases, bailouts or regulations. We will soon see the cost of massive government debt increase as investors cotton on to the total inability of governments to manage money. We are not only still fighting in Afghanistan but we’ve started a new war that gains us nothing.
    Can someone tell me where the coalition is succeeding?

    • Brian Tomkinson
      Posted August 4, 2011 at 11:09 am | Permalink

      Alison,
      I agree; this coalition has turned out to be a major disappointment.

  9. lifelogic
    Posted August 4, 2011 at 7:33 am | Permalink

    Even your suggestions are far too modest.

    I read that staff pay offs in the state sector are about £40,000 over 4 times those in the private sector. So in the state sector you earn more, have a pension ten times as good, work fewer hours, take more sick leave, retire earlier and get a better pay off. All paid for by over taxing and thus rendering the private sector unable to compete in the world.

    And may of them do nothing useful, mislead with propaganda or worse still merely further inconvenience the wealth producers with absurd regulations and complex paperwork. HMRC can only be bothered to answer half the calls to them wasting vast amounts of productive people’s time.

    • Mike Stallard
      Posted August 4, 2011 at 12:28 pm | Permalink

      I have come to the conclusion that what we need above everything – the debt, the deficit, the aimless foreign policy, the Welfare reforms, immigration, and the ghastly EU – is a reform of the Civil Service.
      India was governed during the Raj by just a few thousand people. The British Empire was run on just a few thousand too. The rest were out there doing their excellent work.
      Private companies today are run with as few people as possible unproductive in Head Office.
      Meanwhile there are far more Civil Servants than there are soldiers and the hardware has been made ridiculous in the MoD. The DfE is interfering a lot in schools now and taking over vast swathes of the system. The Police are rarely seen. And so on.
      We so badly need a Duke of Cumberland.

      • alan jutson
        Posted August 4, 2011 at 1:51 pm | Permalink

        Mike

        Totally agree.

        Complete reform, but only after new terms of redundancy payments are implimented.

        • lifelogic
          Posted August 4, 2011 at 5:06 pm | Permalink

          Indeed many department do nothing of any use anyway or worse – start with the absurd “Equalities Commission” (which just incubates ill feeling) – first get rid of redundancy above say 1 month and then get rid of the commission and thousands of similar departments the day after.

      • rose
        Posted August 4, 2011 at 2:42 pm | Permalink

        And it has been said that half a dozen Jesuits could administer Africa better than her present lot of leaders.

  10. Caterpillar
    Posted August 4, 2011 at 8:32 am | Permalink

    Likely:

    There will be some more QE which will act to keep rates down and then be lent back to the Govt, whilst inflation will remain high. The Mervyn-Posen Couple (or whatever MPC stands for) will refuse to recognise that it is inflation that has primarily slowed growth. The Chancellor, presumably aiming to keep his head down to become a future PM, will continue to fail to hold the BoE to account.

    Hope:

    BoE/MPC sees that QE/ZIRP is wrong (as a longterm policy, rather than a liquidity policy). Opposition sees it should U-turn and call for more cuts. LibDs see that they should call for more competition at the point of service in public sector. A DPhil leads a breakaway party… so that continual, real questioning of whether the BoE is fulfilling its remit, whether all that can be done to rebalance is being done, and whether the ‘cuts’ are sufficient. [And as an aside: the e-petitions site is not massaged for populist distraction (capital punishment) but groups rather than censors petitions.]

  11. Brigham
    Posted August 4, 2011 at 8:45 am | Permalink

    While we are on the subject of economics, why is execution, supposedly, more expensive than life imprisonment? If it is because, like the USA, of all the appeals, then do away with the appeals. I bring this up now because I think that the restitution of the death penalty may be going to be discussed in parliament again.

    • lifelogic
      Posted August 4, 2011 at 5:10 pm | Permalink

      I hope not far more important issues and many convicted of murder are innocent as we have seem time and again – and it does not really deter anyway.

      • Brigham
        Posted August 5, 2011 at 6:42 am | Permalink

        What about the hundreds (true, check it!) of people that have been murdered by murderers that have been subsequently released. These people would still be alive today!

        • lifelogic
          Posted August 7, 2011 at 2:33 pm | Permalink

          Do not release them unless it is save to do so.

    • uanime5
      Posted August 4, 2011 at 6:28 pm | Permalink

      The USA has so many appeals because they have a lot of (possibly-ed) innocent people on death row who are there because they couldn’t afford a decent lawyer (or owing to poor procedures in their cases and trials-ed).(names removed-ed)

      If you do away with appeals expect high levels of social unrest as people take the law into their own hands.

      The death penalty won’t be returning so the point is moot in this country.

  12. Stuart Fairney
    Posted August 4, 2011 at 8:59 am | Permalink

    “My worries have always been more about years 3-5, when the forecast assumes well above trend and well above past average growth, sustained for three years. If this does not come about, tax revenues will not surge as advertised”

    Exactly correct and the problem with the Cameron/Osborne strategy. Stupid in economic terms and dumb politically to go to an election with missed targets, increased borrowing and more ‘cuts’

    Dumb, dumb, dumb.

  13. alan jutson
    Posted August 4, 2011 at 9:00 am | Permalink

    John

    I wonder why government Ministers think that they can guess growth rates for up to and beyond 5 years at a time, and then use those figures to lock in spending budgets/plans.

    Surely it would be best if our spending budgets were calculated on the past years factual income (not pie in the sky guesses of extra growth) and spending budgets, which should include a contingency amount, be based on that.
    Any growth is then a bonus for the good.

    Go to a bank for a business lone and they ask for 12-24 months of turnover and cashflow forecasts, its bloody stupid, as it is a guess, much better to work on factual past history to assess the strength of a business and its mangement skills for a loan.

    How many people work their home expenditure out on what they may be earning in five years time ?
    Answer: Only those with rose tinted glasse who usually then suffer the consequences.

    Time for a serious reality check by government. What is the minimum we really need to spend, rather than how much can we spend.

    See Sir Vince is still promoting his stupid Mansion Tax idea in todays press. When will he learn that the value of the house you live, in bears no comparison to your income.
    What are pensioners supposed to do, sell up what was a family home, sell the funtiture in it, and then move into a bed sit. (if you live in the South East of course)
    Most pensioners are property rich and cash poor, or does he not realise this.

    See your questions on employment levels and redundancy pay in the Public sector made good press reports yesterday.
    Your views appear to be gaining more publicity of late, with TV appearances, and press reports.
    Keep up the good work, perhaps the penny is at last beginning to drop with the media.

  14. ferdinand
    Posted August 4, 2011 at 9:03 am | Permalink

    I think your analysis is sound and we let events run at our peril. What concerns me is the use of the word ‘savings’ . These are loose terms, a saving here can be mopped up elsewhere with no net change. The same applies to cuts. Councils are notoriously competent at this excercise in manipulation. There should be a requirement for all Government bodies to place savings in a central account which would show that true savings have been made.

  15. Javelin
    Posted August 4, 2011 at 10:02 am | Permalink

    My more troubling issue is who is advising this Government. The Mortgage backed bonds collapse was entirely predictable when I was at HSBC looking after CDSwaps. It was also entirely predictable we would have anaemic growth rates. On this site I posted a 0.5% prediction this time last year which has proven pretty accurate relative to the near 2% predicted by This Governments advisors. Further more last November I posted several times that Italian banks were going to be the main failing in the Eu financial system. Again I’ve been proven spot on with that one. Here’s another a prediction I made but I’ll spell it out – when Belgium gets sucked into the contagion then it will only be a very short time – a few weeks or less before the UK Government gets hit. All of these predictions, well before any commentator has made them can be verified by searching back through this site or my CV.

    My advice to George Osborne today would be to assume that the UK WILL get sucked into the debt crisis and to act now before Belgium gets pulled in. Once Belgium gets pulled into the crisis the markets will interpret ANY action by the Government as the Government being controlled by events. George will end up looking like the Italian President saying his banks are sound, looking like Nixon saying he is not a crook. I posted the other day that traders literally have a list of countries on the wall with Belgium and the UK next to be crossed off.

    So if George Osborne is reading this I would recommend to him to make a statement that Eu, US, Chinese growth is still slowing down because of de-leveraging. I would attack and blame Brown and Balls. Currently I’ve always viewed the Tory policy to sail close to the political wind and to not give Labour any room to state a coherent policy. I feel that the Torys now have to abandon that policy and take the view that the existing economic strategy will lead to contagion. I think Osborne needs to say that lower global growth will mean lower tax revenues and lower spending and that he needs to bring deleveraging forward. I don’t think this is a big risk but not doing it carries severe downsides. The UK needs to be in a position of leadership and not reacting to the markets.

    Oh and I’ll repeat another prediction. That the UK economy will not recover until house prices fall to affordable levels. House prices form part of the causal chain in our economy and are not just a symptom.

    • zorro
      Posted August 4, 2011 at 6:41 pm | Permalink

      It has been clear, as you state, that there will be very weak, if any, growth in real terms for years. This is because of the slow, long tortuous deleveraging taking place within the world economy following the fiscal expansion of the noughties and the emergency cash injections/QE following the crash a few years back.

      The only policy which the financial authorities are following with various PR shenanigans is ZIRP and QE, and talking ‘tough’ to try and keep the markets at bay. This is in order to allow the government to continually run a deficit and keep house prices ‘stable’. It is clear that the authorities are petrified about a house price crash, but we will not get out of this until we get the bad debt out of the system.

      zorro

    • Posted August 5, 2011 at 2:22 am | Permalink

      Yes, the house price bubble is the problem, but don’t try telling JR that as he’s votd in by M4 corridor home-owner-ists.

      • Winston Smith
        Posted August 5, 2011 at 12:14 pm | Permalink

        The past 30 years have shown house prices rapidly recover from each ‘crash’. Indeed, just 2/3 years after the longest, deepest recession in 80yrs, prices in some areas recovered and have been surging ever since. The polarisation of the UK grows unabated and house prices reflect these economic, social, cultural and educational differences. Despite an uncertain economic future the population of England is growing rapidly, owing to continued large-scale immigration and the subsequent high birth-rate. These people need somewhere to live. The pressure of demand will continue to increase house prices, especially in desirable areas. The gap between such areas and depressed regions and also badly sited, cheap new builds will grow. Cheap sterling and the draw of London and the SE to foreign money is another driver. Some people will take a short-term ‘haircut’ during the next crash, but a long-term correction across the Country is unrealistic.

    • Posted August 5, 2011 at 3:38 am | Permalink

      I would be most interested to hear your views (Javelin) on whether the ECB will print since Italy is surely too large for a bailout?

  16. Philip Hutchinson
    Posted August 4, 2011 at 10:07 am | Permalink

    Interesting and sobering comments, as ever.

    I would be very interested to read your thoughts on the report by Tullett Prebon’s Dr Tim Morgan, which got some publicity when it was released at the end of last month. It was the final part of the ‘Project Armageddon’ series in which Dr Morgan considers the possibility that (a) the coalition is right that deficit reduction is esssential and (b) the opposition are right that this will have a devastating effect on growth. It’s a very sobering read and (to me) highlighted the very serious structural weaknesses that have developed in our economy over the last 15 years or so.

  17. oldtimer
    Posted August 4, 2011 at 10:19 am | Permalink

    To answer the question posed in your headline “What if the government has not controlled spending enough?” is that it will end badly, very badly.

    The situation is even worse than that. The question is not “what if…?” because the Coalition is already over-running its spending objectives and under-achieving its growth forecasts. Furthermore there is no sign that the Coalition has either the ideas or the will to change policies to change this baleful state of affairs. The fact of the Coalition seems to mean that the lowest common denominator prevails. This mitigates against decisive action. The politicians in charge in the West (in the USA, Eurozone and the UK) are drunk on debt and seem incapable of breaking the habit. If they continue to fail to reform themselves, the bond markets which feeds their habit will decide for them that enough is enough. That will signal that the party time spending spree is over. Quite how the political scene will then unfold is anyones guess.

    You have identified many of the measures that could and should be taken to improve the outlook for the UK. To these I would add a return of the energy market to competitive pricing and the removal of the so-called green taxes and subsidies that add to consumer and business costs and jeopardise future energy supplies for the economy. With this Coalition government I do not see any of this this happening.

  18. StrongholdBarricades
    Posted August 4, 2011 at 10:32 am | Permalink

    What happens if the money that has been spent, has actually been spent on the wrong things?

    All that money, and quantitative easing wrapped up in zombie banks, and yet the economy is finding it very difficult to grow and encourage people not to withdraw from consuming.

    If you do another round of QE, how about actually using it to set up a national bank to bypass the zombies and actually get the credit out there?

    Then, when we look back at th debacle of the banks, instead of all this talk of a bankers tax let the government take shares in their operation and actually be able to take the dividends that will be paid out, but also ensure that their boards don’t exceed their gambling limits.

  19. Robert
    Posted August 4, 2011 at 10:36 am | Permalink

    May I suggest you read at least the executive summary of Dr Tim Morgan’s Project Armageddon ‘thinking the unthinkable’, might there be no way out for Britain? In fact I would extol you to read all 60 pages, I can you tell that I have not said that many times about many, if any, research pieces over the last 26 years! He offers both a dispassionate and lucid analysis of the last 12 years and more importantly suggests some very sensible options that the ‘powers that be’ should take to mitigate the severity of what is going to be a very few tough years ahead. This should be mandatory reading for all Conservative MPs particularly Cameroon and Osbourne. Have you read it John – if not you should ?

    Reply: Yes I have read it. It is similar to the analysis I have provided here for the last four years day by day, setting out the Uk credit crunch and spendign crisis. I also think there is a way out from here, and have tried to set that out as well.

  20. Brian Tomkinson
    Posted August 4, 2011 at 10:39 am | Permalink

    JR: “What if the government has not controlled spending enough?”
    We know that, despite all the rhetoric, it hasn’t even attempted to control spending adequately let alone enough. How could any serious government increase spending in the first year when they were so-called reducing it? Why did they plan from the very first budget to increase spending in cash terms for the next five years? Why do they keep “finding” money to give to the EU, overseas aid and military adventures? I keep asking how Osborne’s pledge of reducing the deficit by 80% cuts in spending and 20% increases in taxation matches up to reality. There is no reply. I have no confidence at all that this government will significantly reduce the deficit let alone remove it. Every day we march closer and closer to the edge of the cliff.

  21. lindsay McDougall
    Posted August 4, 2011 at 11:11 am | Permalink

    We’re into the same old logic loop again. From 30 years of evidence, we would expect growth to be lower than the OBR is relying on. Plan B will to be tougher than plan A, not more lenient. The ostriches in parliament must be told that there is too much red ink around and they have to DO something about it. Four pounds of public expenditure cuts for every one pound of tax increases, that’s what we promised. That was diluted slightly in the ConLib agreement but not by much.

  22. Acorn
    Posted August 4, 2011 at 11:36 am | Permalink

    This is how the government defines a public sector pay freeze; er ……. or not!

    “Average regular pay (excluding bonuses) in the public sector was £470 per week in May 2011. In the three months to May 2011 regular pay in the public sector rose by 2.3 per cent on a year earlier. Average regular pay in the public sector, excluding financial services, was £463 per week in May 2011. In the three months to May 2011 regular pay in the public sector, excluding financial services, rose by 2.0 per cent on a year earlier.” Before you ask, public sector employment dropped by 2.3% to 6.162 million y-o-y March 11. (LMS July 11)

  23. David John Wilson
    Posted August 4, 2011 at 11:38 am | Permalink

    Every day we read about new government initiatives costing a few million pounds but frequently of marginal value.
    Every day we read of plaaned cuts which will now not be implemented.
    Every area of spending is putting up argments as to why it is a special case and should not be cut.
    There is a simple solution. If you want a cut cancelled or anew project implemented you must find and get agreed a new alternative area where that money will be saved. It is not sufficient to point a finger at a potential area because everyone is pointing in the same direction at a target that probably cannot match the required savings.

  24. Posted August 4, 2011 at 11:46 am | Permalink

    China’s 10% growth is easily matchable whenever the politicians want it. That level of growth would , even without further cuts, end the defiticy in about 2 years.

    The politicians instead insist on maintaining Luddism. All economic progress depends on technological progress so obviously when this is prevented on the “precautionary principle” getting out of recession is being deliberately prevented.

    Specifically “In modern times the main driver of economic growth has been, and continues to be, energy”. So long as the politicians arte ensuring that our electricity becomes more expensive, rather than far cheaper as it could be, they are ensuring there will be no real economic growth, indeed reduction, as industries flee to countries that welcome them, is probable.

    I am sure John knows this. Indeed I am sure that every MP capable of counting to 20 with their shoes on does & I assume that is the large majority.

  25. Posted August 4, 2011 at 11:49 am | Permalink

    According to yesterday’s Daily Mail, government departments and Quangos are still recruiting. The MoD recruited 1500 staff in the past year (perhaps to deal with the military redundancies).
    There should be a total ban on both the creation of new posts and the re-filling of existing posts, without approval at ministerial level. Management within the Civil Service would have to explain why the post is necessary, why the work, if required, can’t be spread amongst existing staff or why someone can’t be transferred from some other unnecessary task. This approach works in the private sector, I can see no reason why it shouldn’t work in the public sector.
    And what (as the Daily Mail asked) has happened to the promised “Bonfire of Quangos”?

  26. Damien
    Posted August 4, 2011 at 12:33 pm | Permalink

    JR: I agree with the thrust of this piece and Dr Oldman’s comments also.

    Given that we are experiencing a persistently higher than usual inflation is this factored into your figures of the government ‘slippage’ and what effect does the devaluation of the currency have on all this?

  27. Posted August 4, 2011 at 12:52 pm | Permalink

    The pressure from the BBC for us to spend more is overwhelming. The pressure from the BBC to spend less is virtually non existent.

    If companies spend £millions on tv advertisements and politicians get up at 4am on a Sunday to appear on the tv sofa, the influence on us must be overwhelming.

    There are a few petitions to abolish the BBC or privatise it. My preferred one is to call for a public enquiry into left wing bias from the BBC

    If anyone wants to sign, it is here: http://epetitions.direct.gov.uk/petitions/265

  28. Ian Wragg
    Posted August 4, 2011 at 12:53 pm | Permalink

    This non tory government has no interest in reducing the national debt as they know they will be out of power very soon.
    The only reductions in spending and manpower are with the armed forces as Cameroon relegates us to banana republic status.
    When are you going to start a petition to have a referendum on leaving the EUSSR John?

  29. Susan
    Posted August 4, 2011 at 1:19 pm | Permalink

    I think it is obvious now, that the Coalition will not meet its growth targets. Therefore, a dilemma faces them for the future, either they raise taxation again or much deeper spending cuts must be put in place. As it seems that spending cuts is not something the Coalition seems to want to do, it would appear tax rises is the only option on the table. Tax rises, I feel, would be the last nail in the coffin, for the economy as far as growth prospects are concerned. I would imagine, that investors will get the impression, in the near future, that a Country with a large deficit and debt, may soon get itself into the position where it cannot raise its taxes high enough to pay off its obligations. This would seem especially true, now quantitative easing seems to be rearing its ugly head again.

    QE would seem a very risky strategy to me and the last resort for the UK economy. It is not guaranteed to work and has inflationary effects. It would most certainly put those who are reliant on savings into difficulty, as interest rates are so low as well. Lose of confidence in the UK economy may also be a result of more QE.

    I think it is fair to say the Coalition has lost control of the UK economy, and the results of this may be dire.

    • Robert
      Posted August 4, 2011 at 3:14 pm | Permalink

      Please note we already have the 3rd highest income tax rates out of the top 86 ‘wealthiest ‘ / largest economies in the world – only surpassed by Sweden and the Netherlands. A KPMG survey, page 5.

      http://adamsmith.org/files/tax-paper-final(1).pdf

      • Susan
        Posted August 5, 2011 at 1:38 pm | Permalink

        Robert

        Just a quick thank you for the link. I have taken the time to read it all, and hope others will do the same. I have always believed high tax rates impede growth in an economy, it is nice to be presented with so much evidence that this is the case.

  30. Conrad Jones (Cheam)
    Posted August 4, 2011 at 1:42 pm | Permalink

    Wouldn’t it have been far better to use the £200 billion pounds – that the Bank of England created – for public spending rather than buying bad assets from Banks?

    This debate is useless as there is a Systemic fault with the whole financial structure.

    Banks profits are increasing – even though there is a “Financial Crisis”. Banks – although providing large Tax Revenues for the Government at the Front Door of the Treasury – are gaining in huge subsidies at the Back Door.

    http://www.independent.co.uk/news/business/news/banks-profits-soar-as-interest-rates-rise-2219850.html

    Monetary Reform should be discussed now – we should not wait for the next collapse. It seems wholely illogical that our Government (i.e. the British Taxpayer) is in huge debt, while the Large Banks are experiencing a Profit Bonanza.

    The License to Print Money (Credit) should be withdrawn from the Banking Sector (Keynes or no Keynes) and taken back – by force if necessary – by the elected Government and controlled by a politically independent MPC at the Bank of England. Interest Rates should not be set by the Bank of England as this gives false signals to the markets and Business. Malinvestment and Moral Hazzard have caused this Financial Crisis along with the dishonest system of Fractional Reserve Banking which demands a Lender of Last resort – the Tax Payers.

    We as a people should be fed up with certain groups being handed welfare subsidies which are then magically converted into profits where some of these subsidies are handed back to the Government as if they earnt them.

    Bankd Deposits should be split into Deposit Accounts (100% Reserve) and Investment Accounts (0% Reserve) – anyone putting money into an investment account should chose what they want their money invested in. If the investment goes bad – they lose their money. No more excuses of “protecting the public”. QE is nothing more than a free insurance scheme for Banks paid for by Tax Payers.

    Reply: They did not buy bad assets – they bought government debt with £199 billion of it, so in a roundabout way they paid for puboic spending with the newly minted money.

    • zorro
      Posted August 4, 2011 at 6:59 pm | Permalink

      John is absolutely right here, the correlation is quite clear. I don’t know how governments have got away with this so far, but it has been crystal clear that the real reason for QE has been to keep the government in business i.e. buying up government debt so the government can carry on wasting…er I mean spending money like a drunken sailor.

      That is why QE2 will come soon as there is no way that this government is capable of keeping the deficit under control. I would advise anyone to protect their wealth now before it is too late the way things are going!

      zorro

    • Caterpillar
      Posted August 4, 2011 at 9:39 pm | Permalink

      If there could be a roundabout way thayt Mr Posen’s recommended next print could reimburse savers for their lost 50 billion it might help consumption recover. (It is quite remarkable that the UK has devalued its currency in a race to the bottom attempt to increase exports seemingly without considering that this relies so much on the RoW. Has no one in the past Govt, current Govt or Bank of England ever undertaken any scenario analysis?)

  31. Conrad Jones (Cheam)
    Posted August 4, 2011 at 1:50 pm | Permalink

    Public Spending has to be cut inorder to maintain the subsidies that we’re all paying to the Banks:

    “The banking sector receives a subsidy of around £130billion a year, as a result of being allowed to use fractional reserve banking as their business model.”

    http://www.positivemoney.org.uk/power-democracy/

    “Banks have a complete monopoly on creating and allocating money in the economy. That means they get to decide what gets funded – and what doesn’t.”

    Effectively the Banks decide where the money goes – but at a price.

    “Under fractional reserve banking, the banks never have enough money to repay all their depositors (customers) at any one time. If all their account holders come to the bank on one day and ask for their money back, the bank will go bust, because it doesn’t have that money on hand. If there’s a run on the bank (everybody asks for their money on the same day, or in a short period of time) then pretty soon the bank will run out of money and be unable to pay the rest of its customers. As soon as this happens, and word spreads, it can trigger a mass panic, with everyone trying to get their money out of every other bank. To stop this happening, the government guarantees the money in your account, saying that if the bank goes bust, the government will reimburse YOU that money. This scheme is called ‘deposit insurance’, or specifically, the Financial Services Compensation Scheme. This deposit insurance actually acts as a subsidy to the banks. How much of a subsidy? The Bank of England estimates that this subsidy was worth £100bn in 2009 (see the largest bar and the left-hand side scale):”

    This basically means that as long as we put our money into a Bank large enough to be TOO-BIG-TO-FAIL, then the FSCS will give us our money if the Bank starts trading in risky ventures which go bad. The Bank effectively dumps all it’s toxic debt onto the poor ignorant taxpayer. Then they carry on as before with a clean ledger sheet. Because this is expensive, Austerity measures are enforced and things like Student Grants are abolished. Housing Benefit remains intact because it fuels the Housing Market and prevents the money supply from crashing if the Housing Bubble bursts.

    Banks are not what they appear to be – they are not highly profitable for the nation – they extract their profits FROM the Nation State.

    • zorro
      Posted August 4, 2011 at 7:06 pm | Permalink

      Politicians need to be brave and deal with banking system. Why are we paying interest to private banks on notes created from nothing. After all in the USA Lincoln, Garfield and Kennedy all tried to return the country back to government issued money as opposed to private bank creation of money, and it went well for them…..oh wait!

      zorro

  32. Conrad Jones (Cheam)
    Posted August 4, 2011 at 2:03 pm | Permalink

    Inflation is demanded of our monetary system as without it – we cannot maintain the interest payments on all our previous loans, and without Loans from the Banks, we have no money supply. Only 3% of our money supply is created by our Government, the other 97% is credit money – digitised in Deposit Acounts and requiring Interest Payments to keep it in the money supply.

    There will always be a role for a Banks – to extend cash loans to help kick start a Business Idea or Buy a House. But to have such an unstable system – with money supply which can dramatically shrink at the behest of the Banks, is providing a few private hands overwhelming power over the economy with free deposit insurance and a free License to Print Money.

    With long standing good Hospitals (such as Epsom General, Surrey) now under threat due lack of funds, how long until people wake up to the fact that our financial system breeds mis-use of money and promotes excessive debt – just inorder to maintain the money supply?

  33. Martin
    Posted August 4, 2011 at 2:33 pm | Permalink

    The last government’s e-borders database police state continues. It is justified by those who argue that spending a pot of gold is fine as it caught 200 criminals.(How many would have been caught anyway or were found not guilty is of course ignored)

    Damned expensive bobbies if you ask me.

    There is of course the centralised NHS database. Justified by similar logic – it might save a few folk when on holiday in the west country.

    Damned expensive medics if you ask me.

    Another piece of silly nonsense is e-petitions.

    The theme here is clear – we are a paranoid country(both left and right wings). Scrap that and you save a lot of cash.

    • Conrad Jones (Cheam)
      Posted August 4, 2011 at 6:43 pm | Permalink

      e-Petitions has an estimated cost of £1.3 million.

      The cost of bombing Libya is costing approximately £3.0 million PER DAY.
      http://www.independent.co.uk/news/world/africa/libya-costing-britain-3-million-a-day-2249628.html

      The current e-Petitions site is flaky and keeps saying:

      “Sorry, something went wrong”
      “Sorry if you’re experiencing problems accessing e-petitons. There is currently a much higher level of demand than we expected.”

      So in effect – we are paying £1.3 million for the above message.

  34. Posted August 4, 2011 at 5:43 pm | Permalink

    A Sedgwick is right ,there WILL be unrest unless a combination of all the ideas on this site is
    implemented,and especially Javelin’s comments,his comments send shivers up my spine as they should others.The coalition is no more and no less than Jack Spratt and his wife except that they were Equal in the relationship,whereas the conservatives have 307 and outnumber the libdems by 6 to 1,so the tail really is wagging the dog.After May 6 there was NO chance of libdem joining liebour as they had No working majority,IMHO the conservatives should have gone it alone and let the minority parties like those in Ulster know they would be responsible for causing an election if they caused a loss in a vote,they would not have dared,then silly fools like Uncle Halo Vince would not have had any influence.Also the electorate would have finally seen that a vote for libdem was a vote for liebour,and libdems would have lost at least 2 million voters on their right wing,who would have had the option of voting conservative or finding another place for their vote.

    • Conrad Jones (Cheam)
      Posted August 4, 2011 at 6:51 pm | Permalink

      I’m sure Dr Vince Cable means well, but what exactly does he do – apart from call American Politicians who are critical of raising the debt ceiling
      “Right Wing Nutters”?

      Surely the people who are raising the Debt Ceiling in the United States, without a proper debate on alternate measures, are “Left Wing Nutters” – aren’t they?

    • rose
      Posted August 4, 2011 at 8:46 pm | Permalink

      I still think the socialists and liberals could have formed a cohabitation with the other minor parties, and changed the electoral system so the conservatives would have been out for ever. They still want to do this, and the PM is right to prevent that happening at all costs.

  35. REPay
    Posted August 4, 2011 at 6:19 pm | Permalink

    Your oft made point about natural wastage to control costs is well made. I expect that this has not happened because the excellent redundancy packages are too attractive to the civil servants – yet another perk, bizarrelt for resigning or moving job funded by the taxpayer. I am afraid I have given up expecting anything that will really address country’s ills – in 2015 we will back to a kensyian fantasy land.

    August 2011 is starting to feel like September 2008…

  36. John Galt
    Posted August 4, 2011 at 8:23 pm | Permalink

    John,
    Actually today is the first time I’ve been drawn to comment on your blog, its good reading and confirms my believe that your one of the few people that should have governed this country.
    Alas the time for that was a decade ago, in reality if we are honest we know we are in the death rattle stage as a country.
    The medicine required is academic, no one is going to implement it and any attempt to straighten out this mess called the UK is doomed by the burden of the last 50years of socialist liberal bureaucracy/theocracy.It would require sorting out overburdening and over officious government, dismantling the sacred cow of the NHS, getting out of Europe, re-examining the law and its corruption, resetting the entire education system and then just then just you may be able to save England.
    And that can, nor could ever happen in the present climate, it would take either a Cromwell or a Henry v111 moment and I suspect that the fabric of our country is too far gone for that to happen. While I continue to applaud the few who would vainly struggle on, its from the side lines now.

  37. Mr Leslie Smith
    Posted August 4, 2011 at 8:56 pm | Permalink

    The biggest component of cost of the vast majority of businesses in Britain, particularly service businesses, ( The Civil Service being one) is Head Count. Head Count monthly costs, plus the costs of cutting that Head Count ( eg: Redundancy and Payoffs)

    Acorn above, gave you some superb facts Jon….

    The May 2011 Average Public Sector wage cost was ; £470 pounds per week or 52 times £470 equates to some £24,440 salary per annum. ( Average Wage Public Sector)

    He then states the Public Sector Payroll Number at some 6,162 Million workers.

    You could run the British Empire at its height with less than that number. Thus if you take a strategic five year plan:- to CUT the real numbers of paid Civil Servants, ( inc Quangoes and Consultantants) to a ceiling level of 5,000,000 workers in the future as a firm policy ceiling, not to be breached. The amount of simple wage costs savings, never mind all the added hidden extras and unfunded pensons, would be a staggering £284 BILLION per year….

    The reason this is not attempted is that the Government are terrifed of the major Unions, those being UNITE ( the Public Sector major Union) and the toughest Union of them all; the British Medical Association ( for NHS Doctors and Consultants).. These two huge and powerful Unions have more influence on Government Policy than the Murdoch Empire ever had.

    Try it in Parliament Mr Redwood? The Public demand that the State should not need to ever employ more than 5 Million people, with a total population of 60 Million people. Compare our bloated State Head Count to say Germany maybe?
    This is where you are bleeding cash as a Government, week by week and month by month – ALL on borrowed money of course.

    • uanime5
      Posted August 7, 2011 at 12:34 pm | Permalink

      So you plan to save money by making 1 million people unemployed.

  38. Alison Granger
    Posted August 4, 2011 at 10:25 pm | Permalink

    Going by the action on the markets lately investors are worrying that spending is still increasing in cash terms, and may prove difficult to finance.
    Had to happen sooner or later and this may be the time when events overtake politicians and reality really bites. Maybe the cuts will be forced and much larger than expected. Or maybe the government will get the printing presses going again and really finish off the currency in an inflation orgy. Exciting stuff.

  39. Electro-Kevin
    Posted August 4, 2011 at 11:53 pm | Permalink

    Life expectancy is to reach 100 years soon.

    Lads are unable to get car insurance (£4k per year) therefore they are limited on finding work to pay off their £50k student debts. Buying a house ? Forget it – what with chicken sheds priced so far above the depleted wages on offer, or the no-wage internships which are in vogue (Flybe ‘apprenticeships’ as an example. Four years without pay.)

    So what of their pension arrangements when they finally do get paid properly and have a few pence left over after all the tax that is going to be demanded of them ?

    Sorry. But the State is either going to have to get bigger and bigger to cover pensioners or it’s going to collapse. The latter I think.

  40. Winston Smith
    Posted August 5, 2011 at 12:35 pm | Permalink

    Remember the hype surrounding the abolition of the Audit Commission? Less publicised was the news that their demise was delayed for another year. Then it was extended to 2014. They are now embarking on a recruitment campaign for 2012.

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
    Published and promoted by Thomas Puddy for John Redwood, both of 30 Rose Street Wokingham RG40 1XU
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