Why has the UK fiscal stimulus not worked?


                 On Wednesday the BBC asked me their usual economic questions. Have the cuts been too deep and too fast? Are the cuts now leading to slowdown in  the economy?

                It is quite difficult dealing with this. People who presume to comment and question on their favourite subject of public spending should at least read the numbers and try to understand the facts. I explained yet again, patiently, that current public spending was boosted by  £37 billion in the first year of the Coalition government, and is going up again this year. In perfect neo-Keynsian or Labour mode, every penny of this additional spending will be borrowed. Even allowing for inflation, the first year saw a real increase in current spending. So should the second year, if the government imposes the pay freeze it is talking about.

              I do not dispute the economic slowdown. That is very clear from the numbers. The question the BBC should be asking, is why has there been such a slowdown when the government  has boosted spending, and is borrowing so much? The BBC interviewer politely implied I was talking nonsense about the figures, when he clearly had not read them himself. He could not handle the facts nor see they required a different question.

                 It is interesting to see how such a large fiscal stimulus achieves the opposite of what is planned. Last year the state borrowed an additional  10% of GDP for its own spending. This year very high levels of borrowing are continuing. The Chancellor’s second budget promised a larger fiscal stimulus than his first. Despite this – or because of it – growth has slowed right down.

                The reasons are simple to grasp. Every pound the state borrows to spend has to be taken from the private sector who lends it.The private sector can no longer spend that same pound.

                The private sector sees that the state cannot go on borrowing so massively for ever. Companies and individuals learn to expect tax increases to pay for the extra spending in the future. That damages confidence and puts them off spending and investing.

                    The extra spending has been  used in part by the state sector to fuel inflation. As public sector costs and wages  rise, so there is a further twist to the high inflation the UK suffers from. This helps cut private sector living standards and reduces discretionary money to spend.

                     So the fiscal stimulus, huge as it is, fails to deliver faster growth. It can become self defeating. The right response is not to increase the fiscal stimulus. If something does not work the first time, there is no reason to suppose it will work the second time if you do more of it.

                      The government are right to say they need to get the deficit down. They need to do much more  by increasing public sector efficiency and value for money. They also need to cut out quickly those parts of the public programmes that are less desirable or less essential.

                 The strategy always rested on private sector led growth. They need more of this, as we have been discussing in recent blogs. There was a large fall in public sector employment in the recent figures, but the state sector still employs more than 6 million people. The government needs to use natural wastage to cut numbers more. If the pay freeze disguises further pay rises, then fewer people can be afforded in the public sector.

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  1. Mr. Green
    Posted September 16, 2011 at 6:26 am | Permalink

    A few weeks ago I listened in amazement as Daniel Hannan (MEP), a guest on BBC Radio 5 Live, was treated with disbelief, scorn and veiled accusations of duplicity when he pointed out that Government spending had increased. You’re right, highly-paid BBC staff should at least find out the spending figures they are supposed to be commentating on before asking questions. But for some reason the BBC seems to have swallowed whole the Labour Party narrative that the ‘cuts’ are too fast, too deep etc. In reality the difference between Labour and Coalition spending plans is not great.

    I am ‘disappointed’ that such cuts as have been made have been to aircraft carriers and Harrier jump jets. This combination (and a British invention) would have been ideal in Libya, and the cost of the alternatives (Tornadoes, Typhoons) has been massive.

    Someone, somewhere must be happy that we’re now spending billions more on corrupt EU bureaucrats and ‘projects’ and on dodgy third world dictators. And quietly, out of sight, a British widow looks forward to freezing to death as she cannot afford to heat her house sufficiently. You can hear the congratulatory slurp of champagne and fillet steak being chomped down abroad by foreigners with the money takes off her.

    Whoever has will be given more, and he will have an abundance. Whoever does not have, even what he has will be taken from him.

    • lifelogic
      Posted September 16, 2011 at 7:05 am | Permalink

      The BBC correspondents seem rarely to be numerate (or in command of any facts). They work solely on an emotional level of “equality”, feeling of unfairness, basic envy, greed, the save the world green “sustainable” religion. These work on on TV with a few good pictures as a back drop – just like adverts – why bother getting the brain to engage when you can just use pull these basic emotion strings – as advertisers do to sell pointless cosmetics or similar to the gullible.

      • David Hepburn
        Posted September 16, 2011 at 2:50 pm | Permalink

        Yes, they should be working for the Sun – or the Daily Worker if it still exists…

      • Bazman
        Posted September 17, 2011 at 9:22 am | Permalink

        ‘They work solely on an emotional level’. ‘Pulling strings’? A bit rich coming from you with your priestly like beliefs in the hierarchy of the capitalist church, but I suppose your cushy job requires this?

    • Boudicca
      Posted September 16, 2011 at 7:37 am | Permalink

      “For some reason, the BBC seems to have swallowed hole the Labour Party narrative” ….. well, yes. The BBC acts as the media arm of the Labour Party, it is biased and continually pushes a left-wing agenda. Guests, such as Mssrs Redwood and Hannan, are invited to comment so that the BBC can claim independence and impartiality. But BBC interviewers inevitably start every line of question from a left-wing perspective on the assumption that the Labour Party and its policies are ‘the norm’ and right of centre opinions are extreme. Cameron had an opportunity to deal with BBC bias: he should have cut the BBC licence tax by 50% and made the BBC return to being a small public sector broadcaster, with the rest of its bloated ‘service’ sold off to the private sector.

      “Someone, somewhere must be happy that we’re now spending billions more on corrupt EU bureaucrats and ‘projects’ and on dodgy third world dictators”. That ‘someone’ is Mr Cameron, Mr Clegg and their respective parties, who are both all in favour of the EU. There is no point looking to Call Me Dave to change anything – he likes the status quo.

      • outsider
        Posted September 16, 2011 at 12:18 pm | Permalink

        Sorry but halving the licence fee would have no effect whatsoever on news bias. Talking heads is generally cheap television/radio. Drama, adventure series, natural history, orchestras, sport are expensive.

        • David Hepburn
          Posted September 16, 2011 at 2:52 pm | Permalink

          Hear, hear.

      • Bazman
        Posted September 17, 2011 at 9:24 am | Permalink

        When SKY and other news channels say the same thing how do you square it off?

        reply: I have not had the same questions from them, but if they do misunderstand the figures they too deserve criticism.

    • uanime5
      Posted September 16, 2011 at 4:34 pm | Permalink

      Given that the Government is always talking about “cuts” and how “we’re all in it together” it’s no surprise that most people think the cuts have already started. Things are going to be bad when the Government actually tries to implement their cuts.

  2. lifelogic
    Posted September 16, 2011 at 6:32 am | Permalink

    “They also need to cut out quickly those parts of the public programmes that are less desirable or less essential.”

    Indeed and the far more areas where the public programs and doing things that are pointless and frequently totally negative in their effects.

    The main problems are no confidence in Cameron’s sense of direction, too many parasitic activities in the state sector, poor regulation, expensive green energy and total lack of bank lending led by Natwest/RBS’s Helpful banking.

    • lifelogic
      Posted September 16, 2011 at 6:55 am | Permalink

      Having now read most of “Masters of Nothing” by the two MPs Matthew Hancock and Nadhim Zahawi and having seen Nadhim on Newsnight last night: I can only conclude that they like the BBC are, at the very least, completely deluded and now I understand the book title.

      They seem to agree that woman have different motivations, abilities and qualities (as is demonstrably true) but then advocate using a stick to force at least 30% in to boards of banks and similar. Clearly one cannot expect MP’s to tell the truth – you do not win many votes by pointing out that God and Father Christmas are rather unlikely to exist. We expect this drivel from the BBC but why on earth are these people in the Tory partly?

      How can they think that the choices made by men, women and banks should be overridden by MPs and the Law using a big stick and doubtless more tax payers money to inconvenience us.

      Clearly such a rule could only be a very clear legal discrimination against men, by its very nature, and also would restrict companies and handicap them from employing the best on merit.

      If there is a pool of hugely underpaid, willing female talent in banking then you can be sure the market would employ them and anyone who does will be at a great advantage over the other banks. Or perhaps one of these females could employ a few more of them and set up a bank with a 20%+ wage advantage over all her competitors – it should do rather well.

      Clearly we must also need a law to address the inequality in height and longevity between the two sexes – we already have the mad gender insurance laws on there way thank to Cameron.

      • Mark
        Posted September 16, 2011 at 10:30 am | Permalink

        I simply observe that we survived from the collapse of Overend, Gurney in 1866 until Northern Rock in 2007 without a run on a retail bank. Most of that time, the numbers of women in boardrooms were rather fewer than more recently. It is not a necessary condition for financial stability. Probity is, whatever the sex of those in charge, as is a proper principles based regulatory structure with suitable sanctions for transgressors – something we lost thanks to Brown.

    • Bazman
      Posted September 17, 2011 at 9:28 am | Permalink

      They also need to cut out quickly those parts of the public programmes that are less desirable or less essential.
      Indeed and the far more areas where the public programs and doing things that are pointless and frequently totally negative in their effects.
      What does this mean? It’s like saying “Never ever anything ever” Meaningless political speak that you hold against politicians and the broadcasters, but are quite happy to use yourself.

      reply: As a regular reader you will recall endless blogs explaining the cuts I would like them to make, spelt out in great detail.

      • Bazman
        Posted September 17, 2011 at 10:05 am | Permalink

        Was directed at Lifelogics comment John.

        • lifelogic
          Posted September 18, 2011 at 5:06 am | Permalink

          I too have given many examples of the cuts that I believe are needed and would agree with the ones JR has given too.

  3. Mike Stallard
    Posted September 16, 2011 at 7:01 am | Permalink

    When I was in debt to the tune of £2,000, I paid it off ASAP. When my (excellent) school went broke, it closed.
    What ordinary people cannot see is how the government is any different.

    If the government really meant to get us out of debt, it could. There are 200 civil servants, for example, as we speak, deciding whether or not our free (hoho!) school should be allowed to open in a year’s time. It is just a matter of handing out P45s – isn’t it?

    • lifelogic
      Posted September 16, 2011 at 8:13 am | Permalink

      Only 200? Surely they need much more than that to consider all the EU directives and multiple level legal considerations, planning, parking, health and safety, equality, social mix and many other issues. Also to fully coordinate and liaise between all the departments.

    • APL
      Posted September 16, 2011 at 8:23 am | Permalink

      Mike Stallard: “There are 200 civil servants, for example, as we speak, deciding whether or not our free (hoho!) school should be allowed to open in a year’s time.”

      People talk about regulatory burden, but I don’t think they really understand what a dead weight the public sector has become to those people with the ooomph to get up and do something.

      I do sympathize and long for the distant days when if someone wanted to set up a business, that person set up a business.

      The Civil service is little more than an enormous festering tumor on the economy.

      • Kenneth
        Posted September 16, 2011 at 11:42 am | Permalink

        I suppose the best we can hope for is a prolonged public sector general strike which will be a great way of reducing public spending…..though I somehow doubt it will happen.

  4. Boudicca
    Posted September 16, 2011 at 7:41 am | Permalink

    Mr Redwood.

    As Ed West wrote in The Daily Telegraph, the Conservative Party will never win the debate until it takes back the language. Mr Cameron hasn’t only capitulated on language, though, he has also capitulated on policy: there is virtually no difference between his brand of liberal-conservatism and Labour. Mrs Thatcher won by challenging the consensus of the time and changing public opinion; Mr Cameron didn’t even try to change the consensus.


    • oldtimer
      Posted September 16, 2011 at 8:48 am | Permalink

      Are you sure it is capitulation? Perhaps Cameron actually thinks and believes what he says and does. I think he does. The implication is clear. He is not a Conservative as you understand the word. Previously I have suggested here that he staged a successful coup in taking over the leadership of the Conservative party. That, I believe, is the real source of your frustration at the actions of the Coalition. It will only change if or when there is a counter coup. None seems likely in the short term. Things will have to get to get a lot worse than they are now before that happens. It is, I think, but a matter of time.

      • Mark
        Posted September 16, 2011 at 10:31 am | Permalink

        Is he a Lipservative?

        • Electro-Kevin
          Posted September 16, 2011 at 4:23 pm | Permalink

          “Is he a Lipservative ?” (Mark)

          I don’t know. But Ed West certainly seems to exhibit some passion in his writing. Perhaps he’s …

          … a romantic who’s pendantic about semantics.

          I know that I am.

          Those who control the language control the debate. Correction. Those who control the language KILL the debate.

    • forthurst
      Posted September 16, 2011 at 11:48 am | Permalink

      The present language of political discourse is ‘political correctness’, being the verbal manifestation of the Cultural Marxist conspiracy of the Frankfurt School to destroy Western Civilisation by induced self-immolation. If Cast Iron were serious about changing the political discourse, he would firstly remove all Thought crime laws from the statute book; then he would remove all laws relating to ‘inclusion’, not excluding that relating to women.

      Just in case, it might be deduced that I’m ‘sexist’ (pc basic vocabulary), here’s a clip of Elizabeth Warren examining Timothy Geithner at the Senate hearings into the disbursements of TARP funds:


  5. Peter Campbell
    Posted September 16, 2011 at 8:21 am | Permalink

    For a Conservative led coalition the fact that the BBC and other left wing media can be taken seriously when talking about non existent cuts is a huge failure of communication.
    For a Conservative led coalition the fact that there are no cuts to the massive public sector orgy is an even bigger failure.
    For a Conservative led coalition the fact that no progress has been made to halt the EU disease is tantamount to treason.
    Having said that it’s not really a surprise when the “Conservatives” are actually Lib Dems wearing blue ties.

    • Liz
      Posted September 16, 2011 at 1:47 pm | Permalink

      Absolutely right – the Conservatives are very bad at putting a consistent message across by repeating it over and over again. The message that public expenditure is still rising is little understood and when it is the government creates a rod for its own back by increasing overseas aid and so will lose the argument.
      The BBC still has plenty of slack to cut before it makes cuts in programmes: the website that is threatening the viablility of fleet street by printing what is essentially a newswpaper on line every day should be reduced only to material that relating diretly to programmes. This would give them fewer outlets for propogating their left wing message. A layer of management would have been taken out by a successful private firm before now. Do they really need news correspondents in every country in the world with modern communications available – other TV news outsets frequently out perform them in many instances with far fewer overseas staff. I am sure there are other ways they could cut costs, but like most of the public sector they prefer to reduce front line services – programming to make a point.

      • APL
        Posted September 16, 2011 at 4:55 pm | Permalink

        Liz: “the Conservatives are very bad at putting a consistent message across by repeating it over and over again.”

        While the Conservatives are lousy at putting over a point of view. They have needlessly hamstrung themselves by not doing anything about the BBC.

        In fact, eighteen months and what have the Tories done?

      • Bazman
        Posted September 17, 2011 at 9:43 am | Permalink

        We understand. This is the problem. Where should these cuts or scaling back as you call them take place. Tell us specifically. Or stop you middle class whining.I am sure wherever these reductions are, they will never effect you personally.
        Like SKY do you Liz and APL? Is that what you want. Another SKY? Or maybe a satellite standard of broadcasting? With mindless adverts for thing you can consume like food with old American TV, films, talk shows, porn and anything else that is cheap to produce. German local TV no less! I suspect that neither of you even watch much TV so another example of your spiteful middle England world view. The licence fee is a red herring.

        • A different Simon
          Posted September 17, 2011 at 11:05 am | Permalink

          Bazman ,

          Gordon Brown’s lot were incapable of collecting enough taxes to cover what they spend .

          That included collecting taxes on bank profits which subsequently turned out to have been revenue booked as profit before the losses .

          This lot are just as incapable of collecting the taxes to match their expenditure plans .

          Actually cutting is evidently very difficult to do .

          The BBC is a massive gravy train for the middle classes and a couple of ex-BBC employee known to me enjoy obscene pensions .

          Would you agree that if a Govt cannot raise the money it should not be able to spend it ?

  6. APL
    Posted September 16, 2011 at 8:39 am | Permalink

    JR: “Last year the state borrowed another 10% of GDP for its own spending.”

    That is an extra 10%

    Calculated on the overall government spending – which includes that already borrowed to spend?

    Reply: The state borrowed an extra 10% of GDP in order to sustain high spending – in other words more than 20% of total state spending was borrowed. Thsi was all new and additional borrowing.

  7. cronshd
    Posted September 16, 2011 at 8:44 am | Permalink

    John, I have a feeling that unless Scotland breaks away from the Union and we have an English Parliament (and thus a Conservative government) we will still be having these same kind of discussions in 10 years times: ie public spending continuing to increase year on year and ever more wasteful, bloated government.

    John – are there any alternatives to improve the situation that you can see?

    Reply: There are plenty of things to do to make the situation better, but it is a case of needing to mobilise opinion and persuade Ministers. Crises tend to generate changes of policy

    • lifelogic
      Posted September 16, 2011 at 8:57 am | Permalink

      To reply yes they could – but alas Ministers are far too busy making things worse with more employment regulations, daft gender insurance laws, silly EZ tax zones, stoking up inflation, 50% tax and promising “free at the point of use NHS will continue”, as will the poor schools and further embedding the UK in the EU disaster zone area.

      • oldtimer
        Posted September 16, 2011 at 12:11 pm | Permalink

        You forgot to mention The Great Wind Farm Swindle. This is the scam that rewards big landowners for “investment” in wind mills that pays them even if the wind does not blow or even if it blows the “wrong kind of wind” – ie if it blows too hard for the said wind mills. We taxpayers are the suckers that fund this. When will MPs wake up to this swindle and put a sto[ to it?

        • lifelogic
          Posted September 16, 2011 at 8:53 pm | Permalink

          Indeed much goes to Sam Cam Dad I understand (about £1000 a day I believe) and some to the Queen too from use the flow of the Thames. I am sure they both need the money more than the tax payers do.

          • Bazman
            Posted September 17, 2011 at 9:49 am | Permalink

            With lunch and wine in London at decent restaurant costing the thick end of two hundred quid and the the Thames belonging to the Queen. I do not understand your point?

      • Bazman
        Posted September 17, 2011 at 9:45 am | Permalink

        Not free at point of use? How will that work in reality in a non middle class way?

  8. Nick
    Posted September 16, 2011 at 9:10 am | Permalink

    There you go again, only telling half the story and lying to the public in the process.

    The only bit of growth that matters for the government’s fiscal position is taking more money from the public.

    It’s growth in taxation.

    When ever you hear a politician use the word ‘growth’ ask yourself if it is growth, or growth in the money they take from you. In this case is growth in the money they take from you.

    However, they want to give the impression that what they are doing is good for you. Hence they don’t tell you about the taxation bit.

    It’s called lying by omission.

    • Electro-Kevin
      Posted September 16, 2011 at 4:28 pm | Permalink

      Our country is in debt. Where do you expect the money to come from ?

      I must take issue with you calling John a liar.

  9. Richard
    Posted September 16, 2011 at 9:13 am | Permalink

    In todays Times there is an interesting pull out section on Gibraltar who have re modelled their economy very successfully over the last 10 years.

    Last year their economy grew 6.5%. They have a record number in employment, a Government surplus of £31 million and Government debt is just 23% of GDP.

    They started with reducing corporate tax rates found businesses then paid more tax into their economy and have recently also reduced personal taxes:-
    Zero up to £8,500 pa, 11% up to £15,000, 15% up to £20,000, 17% up to £25,000, 20% up to £40,000 with a max rate above this of 24.99%.
    And if I have undersood the atricle correctly a discount on the top rate if you earn over £300,000 pa.
    The old top rate was 50% and now thet are getting more revenues with much lower rates.

    Now I know Gibraltar is less complex economy that the UK with just £955 million GDP, but I wonder what would happen if we were bold enough to try the same policies?

  10. English Pensioner
    Posted September 16, 2011 at 9:36 am | Permalink

    When the government spends a pound, not only does the individual or the private sector not have that pound to spend, but the Government probably only gets 50p worth of value for the pound because of their administration costs.

    • lifelogic
      Posted September 16, 2011 at 10:02 pm | Permalink

      It is far worse than 50p for the £1. Firstly there is the costs of people modifying behaviour (in order to avoid the tax), then the costs of collection, then the costs of deciding what to do with it. Then they will probably decide to do nothing useful with it but perhaps to use it for propaganda to mislead the public perhaps in adverts, or through school or charities (with consequential costs of the public being mislead and thus behaving irrationally) or it will be used for some fashionable religion like high speed trains or trams, or the green religion, or it will go on MP’s expenses or office buildings, or on PIGS or EU fees, or more enforcement officers for something daft – where it will do yet more damage.

      Spending other people money on thing you (perhaps at best) “think” might be good for them perhaps 10p value per £1 of tax at best.

  11. Bob
    Posted September 16, 2011 at 9:43 am | Permalink

    Why doesn’t David Cameron tackle the BBC problem?
    They have become the media arm of the Labour Party; they even use Labour Party sound bites. Their demeanour when interviewing Labour politicians can be described as friendly consensus, but for Tories it’s aggressive/ adversarial.

    Why should I have to fund a political philosophy that I do not agree with?
    Let the unions and the Labour Party fund them if they want to.
    The licence fee revenue of over £3 billion p.a., massively exceeds Labour’s other fund raising scheme “the union modernisation carousel” scam, which was only a paltry £12 million!

    • BobE
      Posted September 16, 2011 at 3:18 pm | Permalink

      Im afraid David Cameron is just a nice man in a smart suit with nothing to say. He is the front man and it is unfortunate because the tories will be back in the wilderness after the next election.

      • lifelogic
        Posted September 16, 2011 at 10:14 pm | Permalink

        He is very good at saying nothing but MPs nearly always say only two thinks. Either it is so clearly true that there is no point in saying it or it is a straight black is white light.

        Such as “We want to see and integrated, coordinated, efficient well planned” perhaps transport system. I assume they think everyone else wants a disintegrated, uncoordinated, inefficient and unplanned one.

        Or the black is white “the purpose of speed cameras and parking fines is not to raise money but to blah, blah …….. ” or perhaps “if we come out of the ERM interest rates will have to rise further” from 15%? or “we will give a cast iron, triple lock guarantee on the EU ………. or we expect only a few thousand of East Europeans to come to work in the UK when they can.

  12. Susan
    Posted September 16, 2011 at 9:48 am | Permalink

    The rhetoric by the Labour Party, the BBC and other media, about cuts has been allowed to go on so long unchallenged that it is believed by a great deal of the public. The Coalition has no one but themselves to blame for this. It suited them in the beginning to allow the message that deep cuts to the public sector were necessary and would happen, to show that tax rises and other punitive measures put on the private sector were necessary. It was also a useful message to the World to show that they were a competent Government who would put Britain back on its feet. This has now come back to bite the Coalition. It has enabled the Labour Party and others to convince a lot of the public that it is these no existent cuts that are damaging the economy.

    No one voted in the Coalition to make the economy worse, but this is exactly what they have done. The public sector is sucking the life out of the private sector. The working publics income is being squeezed through taxation and higher prices, savers see their money reduce all the time. Inflation has been allowed to take a hold and the expection of more is leading to a lack of confidence in the UK economy. Companies and those who would invest in the UK will not do so when they believe the Government has lost control of the economy and has no real direction on the important issues. Especially when that Government continues to spend too much and supports a massive public sector which demands ever more taxation to keep it afloat.

    George Osbornes plan was always flawed because the UK already had many disadvantages which would not attract growth. A lack of a skilled work force too much regulation, bloated public sector and high taxation being just some of many. It needed bold action by Government to even stand a chance of attracting new business and investment to the UK and for those already here to expand. This has been sadly lacking.

    No Government can pursue what Labour call a fairness agenda when dealing with a debt ridden Country such as the UK is, yet this is exactly what the Coalition thinks it should do. There has to be pain to pull the economy back into balance. That action needs to be deep cuts to Government spending, lower taxation and cutting red tape.

    I am sure Mr. Cameron is a very nice man, but he is not the leader for the UK at this time. It needs a tough talking, down to earth person, who can connect with the public and tell them the true position and hard remedies needed to put the UK economy back on track.

    • Bob
      Posted September 16, 2011 at 6:33 pm | Permalink

      Someone like, say Margaret Thatcher?

  13. Alex
    Posted September 16, 2011 at 9:51 am | Permalink

    Well yes, BBC presenters are rabidly statist and not very bright; this isn’t news.
    The policy to ease into cuts was right, so I think the increases in spending that have happened so far were pretty much unavoidable. But now is the time to bring spending down again. Some of this can be done through a ruthless cut in the spending that actually cuts economic output, that is regulation. Every cut in regulation and bureaucracy saves the government money, saves the private sector money and boosts economic activity.
    Of course the 50% of red tape that comes from the EU we are pretty much stuck with.

    • uanime5
      Posted September 16, 2011 at 4:48 pm | Permalink

      So what regulations and bureaucracy do you want cut? The regulations that prevent women being fired for being pregnant, minimum wage, laws that prevent accidents, laws that require the workplace is safe, or laws that prevent corruption?

      Generally if you want something cut but don’t know what part you want cut it usually means you don’t understand what this thing does.

      • Mark
        Posted September 16, 2011 at 9:03 pm | Permalink

        The regulations that require that it all be documented and reported and inspected by quangocrats would be a start. Laws don’t prevent accidents or prevent corruption: they only impose penalties and requirements for costly bureaucracy including ineffectual training.

        A an example I recall the training and provisions that had to be made when the money laundering regulations came in: none of it would have identified the handlers of dubious funds that hovered round the edge of my industry, whereas plain common sense would tell you straight away who to avoid. Doing so was a simple moral decision, perhaps aided slightly by a realisation that to get involved could rapidly lead to unpleasant consequences from blackmail or worse. Of course, because the law was there and could be complied with, there were those who did not bother to look any further and failed to consult their moral compass. The net effect of the law was probably negative.

      • lifelogic
        Posted September 16, 2011 at 10:18 pm | Permalink

        The part that does more harm than good perhaps 90% of it.

  14. Brian Tomkinson
    Posted September 16, 2011 at 9:52 am | Permalink

    Thanks to your blog, contributors here have long realised the failure of this government to cut its own spending whilst happily cutting our spending power with higher taxes and rising inflation. What I find particularly irritating is the propaganda which has been swallowed by the media – particularly the BBC – and we are being told that this government is cutting too fast. With their duplicity, this government is giving fiscal rectitude a bad name.
    I also heard Mr Cameron say this week that Labour had doubled the national debt in 10 years. This was meant to be a criticism (quite correctly) but what he failed to say was that he plans to increase the debt he inherited by 50% in just 5 years which means that he is doing just the same but taking half of the time that it took Brown!

    • uanime5
      Posted September 16, 2011 at 4:51 pm | Permalink

      I know. It’s unfortunate that the BBC can’t be biased or they’d be able to point out the lies the Government tells. Though Sky does the same thing and I don’t know why.

    • Bob
      Posted September 16, 2011 at 6:46 pm | Permalink

      The BBC don’t “swallow” propaganda – they manufacture it.
      Three billion pounds worth per annum.

  15. Simon
    Posted September 16, 2011 at 10:22 am | Permalink

    The ‘fiscal stimulus’ we had a little while ago was intended to increase the supply of money by buying back bonds.

    Unfortunately it looks very much like the current low growth is not caused by lack of money, but lack of demand. Companies are not producing more, because nobody is willing to buy more. The public are worried about keeping their jobs, they not expecting pay rises any time soon, they have already borrowed as much as they are willing to do, and (even with the deeply sub-inflation interest on offer) are saving more.

    So what happened to all the money added to the system by the QE bond buy-back? It was used to buy more bonds and precious metals.

    For the private sector to increase growth, it needs customers willing to spend money. Traditionally, this is either the government spending (via printing money) on capital projects (roads, railways, housing, rather than civil servants), or in the longer, more painful, term the need to modernise and repair infrastructure and plant.

    The shorter path leads to a short term rise in inflation (which encourages spending), more employment (ditto), and a rise in real GDP. The longer path leads to stagnant GDP, unemployment, and slums.

    The path out of our current problems is going to be difficult, but it doesn’t need to be unpleasant.


    • uanime5
      Posted September 16, 2011 at 4:53 pm | Permalink

      Agreed. The Government has to convince people that their jobs are secure and encourage them to spend more money. Unfortunately their rhetoric about public sector job cuts means almost everyone in the public sector will be saving money in case they lose their job.

      The Government needs to provide jobs until the private sector can provide them.

      • lifelogic
        Posted September 16, 2011 at 10:22 pm | Permalink

        You say “The Government needs to provide jobs until the private sector can provide them.”

        The private sector can never provide them if the size of the state sector renders them uncompetitive as it clearly does now. Fire one in two state sector and private will grow for sure. You cannot put the tram before the horse.

        • Bazman
          Posted September 17, 2011 at 9:56 am | Permalink

          Private sector would never be able to pay wages high enough for the workforce to buy the services it needs or to provide the infrastructure required for progress. End of simplistic tram/horse fantasy. The simple English peasant living of the land happy with his lot is gone and no matter what is not coming back. Move to Russia if this is what you want. See how long you would last there.

  16. Caterpillar
    Posted September 16, 2011 at 10:29 am | Permalink

    So for a simpleton like myself may I just confirm the argument?

    (P1) there is massive QE/ZIRP stimulus
    (P2) there is large fiscal stimulus
    (P3) theory shows stimulus leads to growth
    (P4) empirical evidence shows no or small real terms growth

    Alternative conclusions:

    (a) (P1) and (P2) are wrong, the stimulus is not sufficeint (- is this the Plan B / Shadow Chancellor / Adam Posen conclusion?)
    (b) (P4) is wrong, there is more growth in the economy than is currently being measured (- was this the Andrew Sentance conclusion?)
    (c) (P3) should be rejected, stimulus does not always lead to growth (- the JR conclusion)

    The problem for the UK economy and democracy:

    Only (a) is given significant air and print time.

    The requirement:

    More MPs who conclude (c) could write a joint open letter to the Chancellor with the aim that the argument is covered in the political fallout.

    • uanime5
      Posted September 16, 2011 at 5:00 pm | Permalink

      Theory does not show anything as theories predict and evidence shows. Thus P3 should be either:

      (P3) theory predicts stimulus leads to growth

      (P3) past evidence shows stimulus leads to growth

      • lifelogic
        Posted September 16, 2011 at 10:24 pm | Permalink

        A sound and correct theory predicts very well indeed bad theories might not.

      • Caterpillar
        Posted September 17, 2011 at 12:42 am | Permalink


        I am quite happy to write (P3) as you suggest*;

        (P3) theory predicts stimulus leads to growth,

        The point remains the same, it seems that we have four premises that can not all hold, and the majority of air time is given over to assuming that (P1) & (P2) are incorrect, that is the growth measurements are correct and the theory is correct. Far less time is given over to the possibility that the theory can be rejected.

        [* Although I do appreciate your correction, in my extremely weak defence I would note that the casual phrases “economic theory shows”, “economic theory suggests” and similar are often used to mean “economic theory predicts”. AdditionallyI do accept that the use of “show” can also credit a transformative way of thinking, which is out of place here. ]

    • outsider
      Posted September 17, 2011 at 2:54 am | Permalink

      The latest academic study I have seen (from America, about America) concluded that a fiscal stimulus delivered well under a dollar for a dollar. It can be useful in extreme situations (eg 2009) but is otherwise counterproductive.

      • Bazman
        Posted September 17, 2011 at 10:01 am | Permalink

        A bit like tax cuts for the rich, though tax cuts to improve the life of the average person is a good thing. The stimulus should be spent on infrastructure improvements. This idea that you give money to people to spend on retail products such as a better phone, and relying on the wealthy to somehow give us a job is clearly false.

  17. Ralph Musgrave
    Posted September 16, 2011 at 10:34 am | Permalink

    John Redwood says “The reasons are simple to grasp. Every pound the state borrows to spend has to be taken from the private sector who lends it. The private sector can no longer spend that same pound.”

    That is a big over-simplification of the issue. What JR is saying is that, to put it in economics jargon, state borrowing wholly “crowds out” private sector spending. The consensus amongst economists is that SOME crowding out takes place, but very few economists think the crowding out is 100%.

    Personally I think that in view of the uncertainty as to the degree of crowding out, the “borrow and spend” policy is badly flawed. That is, it would be better to adopt a “print money and spend it” policy, which as Keynes pointed out, is a perfectly viable alternative to “borrow and spend”.

    JR then says “individuals learn to expect tax increases to pay for the extra spending in the future..”. I suggest that is totally unrealistic. Are we really to believe that the average family spends a hour a month with a calculator working out what government is currently borrowing, and what the tax implications are for thei family budget in two years time? The average household doesn’t have the faintest idea what the government is currently borrowing. I suggest each household’s spending is determined almost entirely what the household’s current wage packet brings in, and what the household thinks the wage packet will contain six months or a year down the road.

    • Mark
      Posted September 16, 2011 at 2:59 pm | Permalink

      Crowding out is best thought of in the first instance as the consequence of an accounting identity: every sector of the economy must have some form of finance for any deficit it runs, and any surplus it has must finance deficits elsewhere. The public sector can be financed in part by overseas borrowing, rather than exclusively by the private sector. However, if the overseas sector becomes a net seller of government debt then the burden of crowding out can be more than 100% of the deficit on the private sector – see my post below for some figures.

      Printing money instead of borrowing it is basically default (especially if there is no intent to finance it properly): if the private sector did it, there would be prosecutions for counterfeit. The suspicion becomes that the reason for not financing is that finance would not be forthcoming without a substantial interest rate hike – see Greece for the consequences.

      Pouring petrol onto the economy only works if the engine isn’t seized up: otherwise all that happens is that the stimulus leaks into imports and inflation, with nothing diverted to investment and growth. The evidence is clear that the economy needs fixing through deregulation and the culling of taxes that are set at economically damaging rates inter alia.

      • Ralph Musgrave
        Posted September 17, 2011 at 6:30 am | Permalink

        Mark, I don’t understand your argument about the foreign sector.

        Crowding out is the idea that when government borrows and spends, that supresses, at least to some extent the amount of private sector borrowing and spending. I agree that if the foreign sector sells debt, that means a cut in the value of Sterling, and a cut in UK living standards. This is all a bit complicated. I think we are into semantics here.

        Re your claim that the private sector would be prosecuted for creating money, the vast majority of money in circulation IS private sector created. “Positive Money” and the Money Reform Party put the figure at 97%. Personally I think it is nearer 90%. I am currently engaged in a campaign with Positive Money and others to have the private creation of money banned. That is, we want so called “full reserve” banking, rather than “fractional reserve”.

        I agree that “Pouring petrol onto the economy only works if the engine isn’t seized up”. Put another way, the $64K question is whether the economy has excess capacity, and thus whether extra demand will lead to growth or to inflation. I tend to agree with the Bank of England, i.e. that existing inflation is explained by temporary factors like the recent rise in world commodity prices, and hence that there is scope for more demand. But I’m not 100% sure I’m right.

        • Mark
          Posted September 17, 2011 at 11:45 am | Permalink

          There are no semantics: if you divide the economy into public, private and overseas sectors, then overall the deficits and surpluses must sum to zero – for every debtor there is a creditor. The private sector imports goods (as does the public sector, which also spends aid), all of which goes to the overseas sector, while exports generate revenue from the overseas sector. Government spends and doles out money in welfare to the private sector, which in turn pays taxes. Money is the counterpart to the flows of goods and services. If you squeeze one part of a balloon then another part expands in compensation.

          If government spends more than it takes in taxes then some combination of the private and overseas sectors must be the counterpart to that deficit. The only issue is how that is divided. Fortunately, we have figures that allow us to see that in 2010, over half the deficit was funded by foreigners, leaving under half to be funded by the private sector, so crowding out was not a severe problem. However, in Q1 2011 (when the government has a bumper tax collection) the deficit was £18bn, but the private sector had to supply not only those funds but an extra £8bn to buy the gilts being sold by foreigners.

          Net sales or purchases of gilts by foreigners are not a major driver of the exchange rate. Many of them choose to hedge in forward exchange rate markets, neutralising currency effects. QE on the other hand is effectively a declaration of intent to devalue the currency. Econometric studies show that the consequent inflation and currency depreciation takes a couple of years to work its way through the system: we are still suffering from the QE that continued until Q1 2010. This devaluation was entered into in the vain hope that it might boost export competitiveness, and deflate debt obligations.

          Devaluation isn’t helping the trade balance which has deteriorated from a deficit of £29.7bn in 2009 to £49bn in 2010 and £19.9bn in first half 2011 (seasonally, we import more for winter and Christmas, so the second half will be much worse). This shouldn’t be a surprise: we’re shutting down our own industries under green mantras and importing instead.

          So far as money creation is concerned it is important to distinguish between lending in the expectation it will be repaid, and printing. There is nothing wrong with fractional reserve banking in principle, so long as there are adequate penalties for default (see Martin Shubik’s analyses of fractional reserve banking). You may argue that subprime lending or lending to the government of Greece is not lending in the expectation that it will be repaid: that would be a good case to make. Such lending is tantamount to distributing money “by helicopter” as Ben Bernanke likes to think of it.

          I spent a number of years working in commodity markets, so I learned how they function and how that function has been changed by the invasion of banks into commodity trading to the point where they are now the dominant force. Commodities are now viewed as money substitutes by the wealthy – potentially offering a far better store of value than currencies that are being debauched. The quantities of money that have poured into those markets are gargantuan. Inflation in commodity prices is the direct consequence of the money printing particularly by the US Fed, where it is a very short trip via a Wall Street bank to the futures markets. Of course, there is also the risk of asset bubbles forming in commodities: we saw that e.g. in oil in 2008, where the price plunged from $147 to $35. You may be interested in this opinion:


          • Ralph Musgrave
            Posted September 20, 2011 at 5:01 am | Permalink

            Crowding out does not, as you suggest, have anything to do with the extent to which a deficit is funded by foreigners. The online financial dictionary says nothing about foreigners nor does my 3kg economics text book, Sloman’s “Economics”. In other words crowding out can occur in a closed economy.

            Re fractional reserve, my main objection to it, and the main objection put by Prof.R.A.Werner of Southampton University is that it promotes instability: it is pro-cyclical. Default has nothing to do with this. I.e. the instability can arise even if no one defaults. Milton Friedman also objected to fractional reserve on the same grounds and ditto Mervyn King.

            Thanks for the reference to London Banker. I read a few months ago about banks having their computers connected to stock exchange and other exchange computers with a few to front running their clients. Just confirms what we all know nowadays, which is that banks are essentially criminal organisations.

    • APL
      Posted September 16, 2011 at 5:08 pm | Permalink

      Ralph Musgrave: ” .. crowding out .. ”

      The effect is to make an area of commerce uneconomic for the private individual.

      When was the last time you saw a private funded library open to the public, for example?

      Come to that when did you last see a public library utilized to its optimum capacity? Which is another aspect of the same problem. The public body rarely gets the best return from the assets under its “care”.

      It might be that there isn’t demand for a lending library, in which case why does the middle class have the right to demand one is built staffed and maintained?

      Ralph Musgrave: “.. but very few economists think the crowding out is 100%.”

      Universities? There is so far as I recall only one privately funded university in the country. So on the face of it that seems to confirm your pet economists point, crowding out is unlikely to be 100%, in the case of University education in the UK it is 99.99999999%

      • Ralph Musgrave
        Posted September 17, 2011 at 6:35 am | Permalink

        APL, What you are saying, I think, is that the state can totally crowd out all private sector activity in SPECIFIC areas of the economy. I agree: it can.

        But we are not arguing about SPECIFIC areas here. We are discussing the economy as a whole. I.e. we are discussing macro-economics, not micro-economics – in particular “crowding out” in the sense that government borrowing and spending will at least to some extent supress private sector borrowing and spending.

        • APL
          Posted September 17, 2011 at 12:36 pm | Permalink

          Ralph Musgrave: “I agree: it can.”


          Ralph Musgrave: ” state borrowing wholly “crowds out” private sector spending. The consensus amongst economists is that SOME crowding out takes place, ”

          Well, I guess you are making the point that it is a matter of degree.

          Clearly, if the state taxed at 100% (granting the citizen) living expenses then there would be no private sector spending. (argumentum ad absurdum, for illustration)

          But another way of looking at it, the state borrows on behalf of the citizen, the state doesn’t pay back the borrowing, the citizen does in the form of higher taxes. Therefor more state borrowing leads to less individual spending because the state confiscates more of the citizens disposable income.

          Ralph Musgrave: “but very few economists think the crowding out is 100%.””

          Probably because long before the state gets to tax significant proportion of the population at 90% or more the fraction of the population that is mobile have left and the remainder are up in arms, the government finding itself fighting a tax rebellion.

          Ralph Musgrave: “That is, it would be better to adopt a “print money and spend it” policy, which as Keynes pointed out, is a perfectly viable alternative to “borrow and spend””

          I guess it boils down to the mechanism that limits the printing in the ‘print and spend regime. It it were politicians then we can see that there would effectively be no upper limit in a democracy, a result of the willingness of politicians to debase the currency to buy electoral advantage.

          In principle I agree there is no particular disadvantage to printing in an expanding economy but there would have to be some restraint on the process.

          For example, even in the relatively stable post war period, sterling has been devalued by about 90% – £1 buys you two packets of crisps whereas in my memory, you used to be able to buy one packet for 2 new pence -‘ back in the day’.

    • waramess
      Posted September 16, 2011 at 7:41 pm | Permalink

      @ Ralph, “…….it would be better to adopt a “print money and spend it policy,” you don’t really mean this do you? How many trillions might you think appropriate? I mean if we are to print the stuff we don’t really want to be talking billions, do we?

      Why not just forget the administrative chore of collecting taxes? After all we are just collecting what we have printed.

      Maybe, whilst we are about it we can let everyone print the stuff and get rid of their debts. And why on earth not? Let our companies print it as well in order that we become an economy with sound debt free businesses?

      Yes Ralph, exactly

      • Ralph Musgrave
        Posted September 17, 2011 at 6:37 am | Permalink

        Waramess, I do like the pseudonym.

        Re how many trillions do I propose printing, the answer is very definitely less than a trillion. The ideal amount would be whatever raises demand and reduces unemployment by as much as is possible without exacerbating inflation to an unacceptable degree. It is debatable as to how much extra demand the economy can take at the moment without seriously exacerbating inflation. But by hunch is that Adam Posen, member of the BoE Monetary Policy Committee is right, i.e. that the economy can take a bit more demand.

        • waramess
          Posted September 17, 2011 at 6:37 pm | Permalink

          Ralph, remember; desert island: survive on 10 pineapples at price 1 euro each government increase the monetary base by another 10 euros and pineapples need to rise in price to 2 euros (inflation)

          But here’s the rub: government used its newly created 10 euros to buy pineapples and the local population went hungry for a week. No increase in economic activity and the population suffer a weeks starvation.

          Printing money is not a zero sum game where there are no losers, it is a game where the government get good value for the newly printed currency at the expense of the people at the bottom of the pack who are not able to re-adjust their incomes quickly enough to avoid a real reduction in their incomes.

          Printing money that is not supported by an equal increase in domestic productivity will not encourage consumption it will depress it and in the end inflation will see to it that we are back where we started in a short time. Back where we started that is, except for the losers.

          Adam Posen I fear has read far too many books and not thought very deeply about the problem, not frankly that you need to.

          • Ralph Musgrave
            Posted September 19, 2011 at 1:34 pm | Permalink

            Re pineapples, I think everyone has worked out that if the money supply is doubled, then other things being equal, prices will eventually double. But things (as between a recession and more normal times) are not equal. For example the velocity of circulation of money in New York in 1931 was a third that of 1929. Assuming the same applied to the rest of the US, then had the US money supply been trebbled over that period, demand would have remained constant or at least more constant, and there would have been no recession or less of a recession.

            As to the current recession, there has been an unprecedented and astronomic increase in the US monetary base over the last three years (about $800bn up to about $2,600bn). Where is the hyperinflation? It’s nowhere to be seen. And the bond markets are not predicting excess inflation any time soon.

            Of course there are dangers in money supply increases: they need to be reversed once the recovery gets going, and the danger is that governments are too incompetent to reverse them.

  18. Mark
    Posted September 16, 2011 at 11:03 am | Permalink

    It isn’t true that every penny of borrowing comes from the private sector.

    According to the DMO, at the end of 2008 there were £200bn of gilts held by foreigners. At the end of 2009, that had risen to £224bn, and as the change of government took place – promising to control the deficit – it rose substantially reaching £309bn at the end of 2010, with the difference of £85bn funding more than half the deficit . The sting in the tail? In Q1 2011 (latest for which we have data), foreigners were net sellers of £8bn of gilts that did have to be borrowed from domestic sources as the credibility of that promise started to become more questionable.

    There could be no clearer illustration of the importance of maintaining credibility on deficit reduction to preventing crowding out becoming a major problem for real growth in the economy: if in addition to funding the deficit, we have to absorb a further gilt selloff by foreigners the impact could be very unpleasant.

    • Mike Stallard
      Posted September 16, 2011 at 4:30 pm | Permalink

      I am an historian myself, so I know what happens when you just print paper money to get out of financial difficulties. American War of 1812? French Revolutionary Assignats?
      I just cannot understand where the actual income to pay for the vast state apparatus comes from if not from earning it by selling things (including, of course, skills and so on).
      I can, however, realise that bonds are just IOUs which have to be paid for with interest until they eventually mature. They depend, too, on confidence. Imperial Russian bonds today are actually quite sought after on the internet because they were so beautifully printed before 1917.

      • Ralph Musgrave
        Posted September 17, 2011 at 6:39 am | Permalink

        Mike Stallard, Of course there are well known instances in history of ludicrously irresponsible money printing leading to hyperinflation: Weimar, Mugabwe, etc.

        But at the same time, expanding economies require an expanding money supply. So a finite amount of money printing is perfectly in order. Moreover, the consensus amongst economists is that inflation of about 2% is optimum (rather than 0%, minus 17%, or any other figure). That 2% inflation means a 2% annual reduction in the money supply in REAL terms, unless some money printing takes place to keep it topped up in NOMINAL terms.

        Plus, during this recession, there has been a catastrophic collapse in the amount of private sector produced money. If the state does not step with a bit of “print and spend” in these circumstances, the recession would be all the worse. It is precisely these gyrations in the stock of privately created money that has lead me and others to campaign for privately produced money to be banned. Google “Positive Money” for more details.

  19. Frank Salmon
    Posted September 16, 2011 at 11:40 am | Permalink

    The BBC always ask the wrong questions. Culling of wildlife becomes “Should animals be killed for sport?”. Introducing independent consultation into abortion demands becomes, “Should abortion be made more difficult”. Reductions in the public sector becomes, “Why should the public sector pay for the private sector”. Daily, the BBC asksthe wrong, politically loaded questions…..

    • Bob
      Posted September 16, 2011 at 6:55 pm | Permalink

      Otherwise known as “spin”.

    • wab
      Posted September 16, 2011 at 8:42 pm | Permalink

      Culling of wildlife is deemed a “sport” by the people who do it, and indeed that is the reason it exists. Yes, some people get a kick out of killing animals for sport. Why pretend otherwise?

      And the whole point of the “independent” consultation into abortion was indeed to make abortion more difficult. Anybody who believes otherwise does not understand the mentality of the anti-abortion brigade. Even the right-wing press (e.g. the Mail) understand this. You can hardly blame the BBC for calling a spade a spade.

      As for “Why should the public sector pay for the private sector”, has anyone even come close to suggesting this? Obvious it is the private sector which pays for the public sector, and everyone knows this. It’s called tax.

  20. sm
    Posted September 16, 2011 at 11:55 am | Permalink

    I fear the headwinds are just too strong.

    We need to accept the deflation of debt based assets will happen via allowing market clearing prices or somewhere close, or letting an stagflationary economic contraction take the strain. Good old boom and bust under fractional reserve banking.

    Too many things cannot be done quickly without breaking of the EU rules – unless of course those rules are broken by the EU itself?

    Not sure what credibility the US and its banking interests brings to the table here?

    • Mike Stallard
      Posted September 16, 2011 at 4:33 pm | Permalink

      “Too many things cannot be done quickly without breaking of the EU rules – unless of course those rules are broken by the EU itself?”

      And, rest assured, the EU rules are being very warmly gold plated against the winter by our magnificent army of Civil Servants (See this week’s Spectator).

  21. Anand
    Posted September 16, 2011 at 12:35 pm | Permalink


    If we are spending £120 million a day on debt interest, thats £44 Billion a eyar on Debt repayment (none of which is stimulus)

    Surely the key figures are Govt Spending MINUS all debt interest payments year on year.

    based on a fag packet calc, we roughly pay £5 billion of debt interest annually on deficit borrowing of 150Billion.

    So our deficit last year will cost is £5Billion extra debt interest payments this year. and so on.

    However, if we spent £37 Billion more this year than last, then the majority of that was well above and beyond the extra £5Billion in new debt interest, so yes we are still talking about a fiscal stimulus of £32 Billion in NOMINAL terms, but is this a real increase in real terms?

    If our govt spent approx £670 billion in 2010/2011, and inflation is running at 5.2%, it would take £34 Billion to break even in spending terms, so we have ZERO Fiscal Stimulus!!! We are effectively running FLAT in real spending terms. or as Gordon Brown would claim, a Zero% increase! lol

    There is NO Stimulus

    • Caterpillar
      Posted September 16, 2011 at 1:20 pm | Permalink

      Is this an argument that the inflation inducing QE/ZIRP stimulus has cancelled out the fiscal stimulus?

      Reply: No – it is an argument that so called fiscal stimuli may not b e very stimulating.

      • Caterpillar
        Posted September 17, 2011 at 12:19 am | Permalink

        In response to (presumably JR’s) reply to my reply to Anand; what I was questioning was if, as Anand indicates that in real terms there is no stimulus since spending increases have been cancelled by inflation, then since QE/ZIRP has added to inflation has it contributed to cancelling some fiscal stimulus. If inflation had been on target then Anand’s sum would be using 2% not 5.2%.

    • Mark
      Posted September 16, 2011 at 1:26 pm | Permalink

      About 70% of the income from coupons on gilts goes to domestic holders. That is money they are free to save or to spend, less any tax they have to pay on the income. Of course, under QE about 20% of the income goes to the BEAPF in respect of the £200bn of gilts they hold. Foreigners get the other 30% of the income: they were also getting about two thirds of all mortgage interest (on about £800bn of principal) until the BoE stepped in to replace large chunks of overseas wholesale borrowing with their bailout schemes.

      Gilts in issue now total £1,092bn (including inflation uplift of index linked gilts) according to the DMO.

    • Ben
      Posted September 16, 2011 at 1:39 pm | Permalink

      But by your own calculations no cuts too!

    • Robert
      Posted September 16, 2011 at 2:30 pm | Permalink

      Why should you inflation adjust?

  22. outsider
    Posted September 16, 2011 at 12:46 pm | Permalink

    Not sure that your premise is right. There was not much of a fiscal stimulus in the generally accepted sense of policy measures to raise demand, except for the ill-timed VAT cut and the genuinely useful car scrappage scheme, which are long gone.
    What we had was a pre-existing structural deficit of more than £50 billion a year plus automatic stabilisers plus bank refinancing, plus higher interest charges.

    As you have so often pointed out, the juggernaut of excessive public spending rolls on. In spite of a freeze for pay over £20,000, for instance, regular public sector pay is up 2.0% year on year and pay including bonuses up 2.4%. Every week, we are told of an extra £5 million, £25 million or £100 million new spending on the latest instant political priority.

    The simple good housekeeping slimming economies promised are just not happening: hence the focus on high-profile cuts in programmes.

    reply: It is the biggest fiscal stimulus I have ever seen – you are right that the priorities for all the spending may not be optimal.

  23. Ben
    Posted September 16, 2011 at 1:37 pm | Permalink

    This employee is not spending as he am trying to get ahead before his child benefit is taken away.

    I am suffering from inflation driven by those whose money is provided by the state (welfare and bankers) so my standard of living is going down yet I am still expected to pay tax so that my neighbours can have their housing paid for by the state.

    I am skint and I was walking home yesterday thinkng that if I left my wife all her bills (therefore those of our children too) would be picked up by the state, I could get myself a small bedsit close to where we are living at present and be quids in.

    All I really ask for is that my wife’s tax allowance is given to me in full, she does not claim any benefits (other than child benefit which is supposedly universal) but her allowance would make a huge difference to our spending power (40% of £7.5K) and so to the economy in general.

    The conservatives took it away, can I have it back please? If you need to make a few bankers and benefit claimants (from other countries possibly) a little uncomfortable to do this then so be it. Otherwise please leave the child benefit alone.

    • Susan
      Posted September 16, 2011 at 4:18 pm | Permalink


      A lot of single people and couples that have no children would suggest that a Government should not be paying child benefit to anyone. Those who are childless would say they already contribute far too much though taxation to couples with children for education needs and other services, that they themselves do not use.

      Furthermore in an over populated World is it right to encourage people to have children that the State has to pay a benefit for?

      • Londoner
        Posted September 16, 2011 at 10:00 pm | Permalink

        Here here.

        • Ben
          Posted September 19, 2011 at 1:51 pm | Permalink

          I don’t disagree with you Susan. however as my wife stays at home to look after said children to hopefully help them become useful contributors to society I think that asking me to pay 40% on her earnings allowance is a bit off. We are a team and so should be able to pool our resources.

          I am, not asking for the child benefit back (although if you would like a discussion about the way it is being implemented and administered I could talk long and hard) but I would like to not pay tax on her tax allowance given that our family doesn’t use it.

          I am not asking for a subsidy but in return I don’t ask to subsidise.

          Especially as most of the tax collected seems to go on social costs.

  24. Neil Craig
    Posted September 16, 2011 at 1:46 pm | Permalink

    Meanwhile they are promining hundreds of thousands of subsidised “Green” jobs in the sure and certain knowlwdge that that the effect of such programmes is to destroy around 3.7 jobs for every one “created”.

    If we can’t have a political party which believe in economic (or other freedom) why can we not have at least 1 committed to not worsening the recession?

    • APL
      Posted September 16, 2011 at 10:04 pm | Permalink

      Neil Craig: “why can we not have at least 1 committed to not worsening the recession?”

      John Redwood will tell you that sensible policies were tried under William Hague, Ian Duncan-Smith ad nausium and the British voter rejected those policies.

      So you see, in the words of the advertisement, ‘we deserve it’.

  25. Electro-Kevin
    Posted September 16, 2011 at 2:19 pm | Permalink

    You make perfect sense, Mr Redwood.

    I’ve often felt that the State has been expanded as a form of Keynsianism but without the infrastructure projects. (Is that a contradiction ?)

    It formed part of a false boom and has got us into a lot of trouble.

    People who are asking for it now should realise that they’ve been having it for the past 13 years.

  26. Mike Fowle
    Posted September 16, 2011 at 5:10 pm | Permalink

    Was this your Jack Nicholson moment with the BBC? “You want the truth? – you can’t handle the truth.” I have read that banks are unwilling to lend because they are still fearful of the amount of undisclosed toxic assets (sub prime etc.) that each is holding. It does seem to me that bailing them out, quantative easing and all the rest have not addressed the underlying problems, and things won’t get better until they are. Even if that means some banks folding and massive dislocation. Labour’s solution was – as always – to throw other people’s money at the problem.

  27. wab
    Posted September 16, 2011 at 9:02 pm | Permalink

    “Companies and individuals learn to expect tax increases to pay for the extra spending in the future. That damages confidence and puts them off spending and investing.”

    This is just plain wrong. I am not particularly expecting tax increases (should I be?), and I do not particularly mind if they come if the government puts the money to good use (which it has a poor track record in doing, we all agree).

    No, the real problem is not tax increases but threat of unemployment. That is what “damages confidence” more than anything else. Many people fear unemployment in the near future and so spend less, and the consequent reduction in demand (both here and abroad) is the real problem.

    Just sacking thousands of government workers for the sake of sacking government workers does not help. They will not magically be replaced with private sector workers.

    Mr Redwood (a public sector worker) does not face this issue because even in the unlikely event that he gets kicked out at the next election, he will receive a nice fat pension.

    What the government needs to do in the recession that we are facing is to spend money on productive rather than non-productive projects. Unfortunately there is no sign that the current government has any clue that this is the case. There is seemingly systemic failure in the cabinet, in the Treasury, in the Department of Energy, etc.

  28. Londoner
    Posted September 16, 2011 at 9:59 pm | Permalink

    Mr Redwood.

    Of course you are correct in your summation; as is the case on so many things. My question [rhetorical] is, “Why bother to comment to the BBC or even engage them?” You ought to consider the stance Sir Alex Ferguson adopted in the past and boycott interviews with them. [I wonder why he has also bothered to grace them with his presence again]

  29. zorro
    Posted September 16, 2011 at 10:20 pm | Permalink

    ‘The government needs to use natural wastage to cut numbers more.’


    1) They aren’t actively doing that
    2) The Government has brought in legislation that means people don’t have to retire. So, we can’t be sure that people will go at the end of their 40 years
    3) It is almost impossible (unless you don’t do anything else) to manage people out of these jobs in the public sector if they are poor performers
    4) They prefer to offer large voluntary exit payments to bribe people to leave in higher numbers more quickly so that superficially the senior management can look good and justify a bonus
    5) As a result of 4, they totally underestimate what staff numbers they really need to fulfill their public service objectives, and seem unable to innovate in order to restructure to deliver core services and cut out what no longer needs to be delivered.


  30. zorro
    Posted September 16, 2011 at 10:23 pm | Permalink

    John, I see that your fellow coalitionist Mr Cable wants to stimulate the economy a bit more with some QE and higher spending. I wonder if the Chancellor will listen to him rather than you?


    Reply: That is one of the issues being battled over.

  31. Bernard Otway
    Posted September 17, 2011 at 12:45 am | Permalink

    JR why don’t you make a point and terrorise these bbc interviewers for their ignorance,we are all waiting for these idiots to be taken down a peg or two million,I have looked at you tube
    excerpts of US interviewers actually harassing the likes of Geithner they are made to look
    so duplicitous it is embarrassing especially for them,I even saw one of a college student
    making leftie Michael Moore look a fool,and Ron Paul doing it to Hillary and many others.
    One questioner on last night’s question time [obviously he sailed under the usual bbc leftwing radar] in general commenting said something about the Euro debacle that really frightened and shocked the panel especially the Abbott woman,Quentin letts would have described her in his beautiful comic prose so that I would still be laughing now,this mans comment was a real AMBUSH.

  32. andrew
    Posted September 17, 2011 at 9:29 am | Permalink

    It is not enough to state simply that public expenditure is being cut or not cut. Some public expenditure is definitely being cut and to appear to deny that weakens the argument. What is not being adequately communicated by the government is what public expenditure is increasing. I don’t have that information, and would love to have the whole picture, who is benefiting and who losing from this process.

    reply: I never deny and usually add when time permits that there are cuts within the pattern of overall increases.These are all set out at great length in the government figures. So far the main hit is on defence, and the main increases are Overseas aid, health and schools budgets.

  • 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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