Tax it, borrow it, print it – but carry on spending

 

          Western governments mainly know just one refrain. They say they  need to spend more, so they need increased  revenues. When the economy is doing well they want to spend more, so the public sector participates in the success and modernises to keep up with the private sector. When times are bad for the economy they want to spend more, as a counter cyclical boost, to cushion the downturn, to help people in trouble.

           Most advanced country  governments have done this for many decades post war. They have long since come to the conclusion that their spending aspirations far exceed people’s wish to pay taxes. Though they often say they can do it by taxing the rich more, they know in practice they can only afford the increases in spending if they tax everyone more. Most western governments have in consequence resorted to the idea of borrowing more instead.

              The US, the UK, the latin countries of Europe,and Japan built up large debt mountains in the good times prior to the Credit Crunch. As the self inflicted Crunch hit, they decided to spend even more money on bailing out damaged banks instead of demanding an orderly administration of the worst cases, where  bondholders as well as shareholders would  lose money, and professional counterparties would have been taught an expensive lesson. They then added to this extra borrowing yet more borrowing to provide a fiscal stimulus at a time of recession.

            The result of assuming all these liabilities has been to push some of these countries into a debt crisis, and to leave several others dangerously placed, awaiting the market’s verdict and pleasure.

               Most commentators now say these governments have to curb their appetite for debt. There remains an argument over how quickly and to what extent. In the UK there is even an argument over what is happening, as very few commentators can be bothered to read the figures, or have a vested interest in misrepresenting them.

              So now we are at a crossroads. In Euroland the markets are saying they are not prepared to go on lending at the rates some of the states want. They are also saying they do not trust banks that are  full of dodgy government bonds. Euroland’s immediate response is to demand higher taxes. There are plans for a financial transactions tax. There are demands that Greece, Italy and the rest learn how to collect much more tax from their citizens. There are attempts to close down or tax offshore centres.

              They are also having a row about how much more to borrow. The high borrowers think it would be a great idea for them to be able to borrow Euros in Eurobond form, where Germany and France were standing behind their borrowings. Although Germany says “No” to this, it is happening by the back door. The European central Bank is lending  to weak banks in weak countries, and will presumably raise money to do so on their joint account. The Stabilisation funds also represent the use of the common borrowing account to subsidise loans to the weak countries.

                In the end, if they wish to carry on with their dangerous and damaging experiment, they may overcome German resistance to simply  printing it. The ECB could carry on buying up sovereign bonds in the weaker countries to keep their interest rates down, printing money to do so. The ECB would then have come of age. It would be just like the Fed and the Bank of England. It would have discovered that elysian field, that place where governments can print money to spend. There would be no tax bill, no tricky interest bill, no need to roll over debt.

               Any business faced with the probelms these countries face would get on with task of cutting spending. This never seems to occur to governments. Alternatively they say they are doing it, yet the figures for cash spending keep on going up. They manage to combine clumsy cuts to services, with no progress in reducing the outgoings.

             There is just one small snag. Countries that have tried relying on the printing presses have usually ended up with very rapid inflation, a lack of trust in the currency and government, and collapse of the system. It would be wise not to overdo the printing, or to rely on it as the easy way out.

 

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75 Comments

  1. Patrick
    Posted September 20, 2011 at 6:17 am | Permalink

    The deficit funded welfare state model is dead. Time for politicians across the whole West to face up to it. We face ‘austerity’ not for 10 years but forever.

    Of course ‘austerity’ depends on your view of just how big government should be. If governments were to spend what they raise in tax and no more it would still be colossal sums of money getting spent.

    Our whole entitlements mindset is going to get wiped away by international competition.

    • lifelogic
      Posted September 20, 2011 at 8:04 am | Permalink

      As you say “Our whole entitlements mindset is going to get wiped away by international competition.” also by the EU’s free movement of people and other immigration. The current benefit system will have to be trimmed substantially.

      The level of government spending is at an “equilibrium” level where it can no longer be funded from borrowing and tax without it killing the productive sector – as it is already starting to do.

      A well run stable county (the maximum good for maximum numbers of people) should be run at way below this level of tax and waste (a level where more spending is prevented by sensible government tax and spending choices – not by an actual inability to borrow or tax more without killing the golden goose).

      Clearly the 2250 extra tax collectors to harass people and other government actions show that the chosen direction is to continue tax and waste to very the bitter end.

      I would suggest at about 20% of GDP in general is about optimum and unemployment level well below about 1/4% of the workforce. It should be run at about this level of spending for the simple reason that people in general spend their own money so much more efficiently and on better things than the state.

      It used to be quite amusing listening to the mad LibDems at conference time but now they are actually in power it is just depressing. I see from interviews yesterday that Cable still seems to harbour desires to join the Euro and will not rule it out. Also he does not think it helpful to revisit the history of his, or the Liberal’s, love affair with the EU and the EURO and to look at all the damage it inflicted across the EU.

      • Electro-Kevin
        Posted September 20, 2011 at 10:34 am | Permalink

        In fairness the Revenue needs more people. It’s been making some disasterous mistakes in recent years which have hurt a lot of people.

        Hopefully they’ll be bringing some retirees with experience back.

        • alan jutson
          Posted September 20, 2011 at 1:42 pm | Permalink

          Electro Kevin

          The present system is just too complicated.

          Why not just simplify the system so that everyone understands their liabilities, a simpler system requires fewer people to run it, so savngs at the same time.

          • David Hepburn
            Posted September 20, 2011 at 5:01 pm | Permalink

            Yes, a flat tax would suit well enough…

        • lifelogic
          Posted September 20, 2011 at 1:56 pm | Permalink

          About 90,000 is not enough for the few tax payers and with proper modern IT?

          Anyway nearly all the work is done (on pain of fines or imprisonment) and paid for by the tax payer or the employer, business, accountants anyway.

          A simpler system and 10,000 should more than suffice. The fewer there are the less of a mess they will probably make of the job and would be forced to simplify their absurd system.

          • Bazman
            Posted September 20, 2011 at 8:33 pm | Permalink

            As Vince Cable says. This childish fantasy that if somehow we lower the tax rates that all the tax dodgers with offshore bank accounts living in Monaco will come back and save us all from poverty and give us jobs. He could have added that the idiots also believe that we could compete on wages, living costs and health and safety costs with China and India if all other regulations and benefits were abolished too.

          • lifelogic
            Posted September 21, 2011 at 12:52 pm | Permalink

            We have to compete in the world market what is your alternative a magic money tree perhaps?

          • Bazman
            Posted September 22, 2011 at 4:08 pm | Permalink

            Compete on the same living standards? I’m out.

      • Bazman
        Posted September 20, 2011 at 8:40 pm | Permalink

        What would be cut back on if 20% did not cover the costs of the state? Roads, water, benefit, and health system? What? Do not repeat your silly fantasy that the private sector would cover everything with people earning enough to pay for all their needs, such as roads and medical services. I suspect many of your figures are what your rich acquaintances would find acceptable. They do not find any taxation acceptable.

        • lifelogic
          Posted September 21, 2011 at 12:57 pm | Permalink

          20% is plenty for law and order, defence, a good legal system, basic education & health with some contribution, roads, bins, basic services and a safety net for those in genuine need. Many countries manage on that and it will be 20% of a much bigger overall GDP pie anyway as we would have growth for a change.

          • Bazman
            Posted September 22, 2011 at 4:07 pm | Permalink

            Is it really and what do we spend the rest on. The BBC and absurd employment laws? I wonder how long it would take for law and order to breakdown when millions find their living standards health and housing take a dramatic and sudden drop to the street? Would yours?

    • Disaffected
      Posted September 20, 2011 at 4:50 pm | Permalink

      Spot on Mr Redwood. Now what can change this position??

    • Ralph Musgrave
      Posted September 20, 2011 at 8:09 pm | Permalink

      Why on Earth would a country with a big entitlements programme get swept away by competition (presumably from counties with lower entitlements programmes)? Some Scandinavian countries have for decades had much bigger entitlements programmes than the US (i.e. public spending forms a much bigger chunk of GDP than in the US). But those Scandinavian countries have managed to compete with the US – and with other “low entitlements” countries.

  2. Mike Stallard
    Posted September 20, 2011 at 7:05 am | Permalink

    Connect the rancid desire of the politicians for popularity by spending our money as if it were a gift to us, with the greed and laziness and sheer stupidity of us, the voters. And include me in this. I am an OAP and I get showered with unwanted gifts from the fuel allowance to unwanted flowers all over the market place where overtaxed shops stand empty.

    Politicians call it “democracy”. They give us unwanted stuff hoping to outbid the other crowd. They – and more important, we – have completely forgotten what government is really for: self defence, preserving the Queen’s Peace, maintaining our excellent traditions.

    Meanwhile, as you say, the real power is slipping away into Europe where they just get on with the “project” without any control of any sort.

    Bankruptcy, inflation, anarchy, poverty, hatred and rage are all greedily awaiting the outcome. And what rough beast, his hour come round at last, struggles toward Bethlehem to be born?

    Those are the forces which we are playing with in Europe (and America).

    • Tim
      Posted September 20, 2011 at 1:18 pm | Permalink

      I agree with the thrust of this article Mr Redwood. It strikes me that it is time to legislate so that politicians cannot borrow to massage their ego’s. They should only be able to spend what is raised in revenue except in an emergency and that should be given a limit and agreed by a vote in parliament. Politicians have proven that they cannot be trusted so binding legislation is required.
      I’m afraid it is time for root and branch reform in our public services, our membership of the EU, so that the state only provides what it must and the rest is up to the citizen. Welfare also needs significant reform so that it pays to work and benefits are time limited. How can it be right that there are 370,000 households where NO ONE has ever worked? We simply can no longer go on as we have been. We are broke and need radical action and our borders secured. However, we do not have the ability with our current crop of politicians to do what is needed. Please come back Mrs Thatcher or Norman Tebbit, real conviction politicians who understood national not personal interest. Very few of these left, present company excluded Mr Redwood, but you won’t stand!

      • David Hepburn
        Posted September 20, 2011 at 5:05 pm | Permalink

        Hear hear. I want you to be my MP. How do you fancy Kyle, Carrick & Doon Valley? Never heard of it? No, I thought not. I am an unfortunate constituent of the loathsome Sandra Osborne – no relationship, I believe to the Chancellor…

      • uanime5
        Posted September 20, 2011 at 7:06 pm | Permalink

        If you don’t want 370,000 households where no one works then create 370,000 jobs for them to work in. 2.5 million people are unemployed because there aren’t 2.5 million jobs available.

        • zorro
          Posted September 20, 2011 at 10:36 pm | Permalink

          Nonsense, you could have 10 million jobs and they would still be unemployed because we pay them to sit on their backsides and it’s far more profitable than working for a living!

          zorro

  3. Peter Campbell
    Posted September 20, 2011 at 7:45 am | Permalink

    So given your excellent summing up of the debt problem we face Mr Redwood why is your party, that leads the coalition, not doing anywhere enough to curb spending?
    So far we’ve had a few cosmetic announcements and tinkering at the edges of a vast volcano. Every day the volcano spews out more pointless debt and the lava edges closer and closer to us. Apparently our very expensively educated Prime Minister and Chancellor cannot see it or maybe they are just feathering their nests as much as possible before the whole country is covered by one gigantic volcano and they can jet off to a nice “strategically ” untaxed tax haven.

  4. waramess
    Posted September 20, 2011 at 7:53 am | Permalink

    Of course the best way to stop these countries from spending is to allow them to default; it will bring back a sense of reality when they have to balance the books.

    The FT says the government have a 12 billion black hole. This could be filled by closing down overseas aid.

    The largess of this government with taxpayers money and its desire to punch above its weight truly staggers.

    • Paul H
      Posted September 20, 2011 at 9:18 am | Permalink

      All about the ego of the man at the top, who is truly “the heir to Blair” in more ways than he probably believed himself – in this case by the desire to project himself as a world statesman by dispensing largesse.

      I’m actually supportive of overseas aid in principle – we are a relatively wealthy country. But I strongly object to the waste and corruption which results in aid going to countries that don’t actually need it and the sense that “poor people in rich countries giving to rich people in poor countries” is depressingly close to the truth and less trite than it appears.

      • Robert
        Posted September 20, 2011 at 2:00 pm | Permalink

        We are in massive debt! Asset rich in a way yes – it seems stupid to fund overseas aid out of debt!

      • David Hepburn
        Posted September 20, 2011 at 5:08 pm | Permalink

        I, too, am in favour of aid to the less well off. I am currently working as a procurement adviser -for a DfID project in Nepal. If we can get rid of the corruption, the aid will be well worthwhile.

        • Bazman
          Posted September 20, 2011 at 8:44 pm | Permalink

          They will not need a job as much if they get aid. Driving up labour costs and causing further poverty. The lazy one will just do nothing if they can live without working as most people are lazy dogs. Starvation is like a sharp stick in their backs.

  5. Javelin
    Posted September 20, 2011 at 8:21 am | Permalink

    As I have been posting for the past year now Itaky is the real problem and that Italians banks will trigger Eurogedden. Yesterday they were downgraded to A/A-1 by S&P with further negative outlooks. The problem with Italy is low growth from Momma and Pappa business that is loosing out to China (clothes and shoes), the lowest levels of tax collection in the Eu and a huge debt.

    I read only Haiti, Zimbabwe and Eritrea had lower growth rates. It’s growth is currently 0.1% and falling. The debt is huge. The growth is insignificant. The country is insolvent.

    It’s only a question of when a financial trigger will bring Italy down. The fact is hasn’t already fallen reflects the position if the triggers, not the fate of the economy.

    Greece and Germany are, from a catastrophic perspective, side shows. For Greece and Germany synthetic financial and political engineering can low finds to be transferred until fiscal union is achieved by stealth. Only yesterday I made a post about synthetic Eurobonds and when searched on google I found several professors of economics had already suggested them last week. Greece and Germany may titillate our desires for economic porn but Italy is the dark horse that will wreck the system.

    • A different Simon
      Posted September 20, 2011 at 9:40 am | Permalink

      It’s a real pity because Italy in the main make very quality gear .

      Their agricultural equipment is properly designed , not just copied from someone else , made of the right materials , properly heat treated and consequently expensive , safe to operate and will last .

      The current fetish for buying tat does not suit Italy .

    • Javelin
      Posted September 20, 2011 at 1:27 pm | Permalink

      Here they are – the next political step – Eurobonds but not Eurobonds.

      Call them “Eurobonds Lite” – and different to “Eurobonds Heavy” which required every country to guarantee every other country.

      http://www.voxeu.org/index.php?q=node/7001

      “A key advantage of these bonds is that there will be no built-in guarantees or bailouts by other countries.”

      So there we have it – not so much a “political cliff” to fall down but a “political step” to dance down. Another small step toward fiscal integration.

      THE BIG QUESTION IS WILL THE UK OFFER EuroBond Lite ?

      Another question is will they have any choice – the ECB could buy UK bonds on the secondary markets package them up as “EuroBond super-Lite” – and as if by magic the step got smaller. No tso much a political step but a political slide kindly arranged by the ECB for the leaders to slip down. The ECB may be issuing “EuroBond super-lite” soon. “So why is that mean Ms Merkel objecting to EuroBond-Heavy when EuroBond-Lite worked so well?” Don’t you love politics.

      • JimF
        Posted September 20, 2011 at 7:02 pm | Permalink

        If it’s so clever why didn’t our Mr Brown and Mr Balls think of it first?

    • Denis Cooper
      Posted September 20, 2011 at 3:23 pm | Permalink

      Did any of the professors of economics discuss whether their proposals could be deemed compatible with either:

      a) The EU treaties as presently in force, which are supposed to be law for the EU member states; or

      b) The EU treaties as they would be modified by the major EU treaty change agreed on March 25th?

    • Winston Smith
      Posted September 20, 2011 at 3:37 pm | Permalink

      I recommend reading ‘Gommorrah’ to understand the points made above about the erosion of the Italian garment and shoe industry, and the role played by the Neopolitan Mafia to facilite the transfer of the business to China.

  6. Amanda
    Posted September 20, 2011 at 8:41 am | Permalink

    Another excellent summary.

    Please can you do a post on how those of us who understand you cannot borrow your way out of debt might do to try and protect ouselves a little. !!

    Reply: Take investment advice on how to protect yourselves against inflation, money printing, depreciation, slow western growth and debt default. There are assets to buy that avoid these pitfalls.

    • Electro-Kevin
      Posted September 20, 2011 at 10:39 am | Permalink

      The Express seems to be pushing us towards Buy-to-Let:

      “House prices booming”

      “Pensions failing”

      “House prices booming”

      “Pensions failing”

      I wonder if someone on their editorial team has a portfolio.

      Is the UK housing market built on sand ?

    • Paul H
      Posted September 20, 2011 at 11:30 am | Permalink

      But surely the MPC’s remit is to maintain CPI inflation at 2%? And “Mervyn King is an honourable man”. So what is there to worry about here in the UK? 😉

      • Winston Smith
        Posted September 20, 2011 at 3:40 pm | Permalink

        Mervyn King’s pension fund has moved to index-linked investments over the last couple of years. He knows what’s happening.

        • zorro
          Posted September 20, 2011 at 10:38 pm | Permalink

          Index linked or the shiny stuff to be safe…..

          zorro

  7. Nick
    Posted September 20, 2011 at 8:53 am | Permalink

    You stated on this blog before the election that you would when in government publish the present values of the state pension, state second pension, civil service pension.

    Where are they?

    Ah yes, the debts that can’t be talked about.

    Reply:I stated that we needed to publish the deficits or unfunded liabilities of the public sector pensions – which this government has done.

  8. Nick
    Posted September 20, 2011 at 8:54 am | Permalink

    Greece and Germany are, from a catastrophic perspective, side shows.

    ===========

    In one respect yes. Greece is a minnow.

    However, if the collective EU might can’t solve Greece, you know they can’t solve the other PIIGS or even the UK mess (It’s just as big)

  9. Nick
    Posted September 20, 2011 at 8:56 am | Permalink

    So given your excellent summing up of the debt problem we face Mr Redwood why is your party, that leads the coalition, not doing anywhere enough to curb spending?

    Simple reasons.

    1. They are receipiants of that spending.
    2. They are worried about the feral underclass. They will riot
    3. They are really worried about the middle class. If the middle class goes on strike and refuses to pay the bill, its game over.

    The solution.

    1. Stop digging.
    2. Publish all the debts
    3. Send everyone a personal pro rata bill as to their share.

    3 is the critical one. What would your reaction be to a demand to pay 225,000 (plus interest) that the government has run up on in secret?

    • lifelogic
      Posted September 20, 2011 at 9:43 am | Permalink

      What would your reaction be to a demand to pay 225,000 (plus interest) that the government has run up on in secret?

      Most sensible people would I point out that whatever the state bought with this £225,000 was not wanted, not of merchantable quality nor ever actually delivered and then refuse to pay or perhaps just sell up and leave the country for a well managed alternative country.

      Also, as democratic control in the UK is so absurdly weak,,they had no real say in this expenditure and thus can have no responsibility to pay for it.

      Lender beware might be the lesson needed.

      • Electro-Kevin
        Posted September 20, 2011 at 10:43 am | Permalink

        Yup.

        I think that many skilled people will see that is the choice they are faced with in reality.

        ‘Wealth creators’ aren’t just the rich. As Felix Dennis points out in his book – the most innovative thinkers aren’t businessmen at all. “I am amazed that they work for me and not the other way around.” or to that effect, as best my memory serves me.

        • Electro-Kevin
          Posted September 20, 2011 at 10:46 am | Permalink

          The country would run reasonable well with those in the 40% bracket and no-one else.

          It wouldn’t run at all with just the underclass and the ‘wealth creators’ left in place.

          • Electro-Kevin
            Posted September 20, 2011 at 10:47 am | Permalink

            40% tax bracket that is.

  10. Amanda
    Posted September 20, 2011 at 9:01 am | Permalink

    I’ve just read this in the Wall Street Journal – the human cost of this ‘situation’. This is indeed economic war, and now it has it’s war dead too.

    http://online.wsj.com/article/SB10001424053111904199404576538261061694524.html?mod=europe_home#articleTabs%3Darticle

    • lifelogic
      Posted September 20, 2011 at 9:47 am | Permalink

      Indeed I see:

      Greek recorded suicides have roughly doubled since before the crisis to about six per 100,000 residents annually, according to the Greek health ministry and a charitable organization called Klimaka.

      What are the rates in Ireland and the UK due to Brown’s absurd credit binge and poor banking regulations I wonder?

  11. Brian Tomkinson
    Posted September 20, 2011 at 9:10 am | Permalink

    It was reported in the Telegraph yesterday that the BoE had admitted that the £2oo billion of QE had resulted in an increase in inflation of one and a half percentage points. The causal link to inflation is there if anyone doubts it, but already we hear out hapless Business secretary interfering in what is supposed to be an independent bank by encouraging further money printing. Most of the contributors to this blog know that spending should be tackled but unfortunately for us we have a bunch of spending junkies in charge who can’t kick the habit and want us to keep paying for it.

    • Mark
      Posted September 20, 2011 at 12:02 pm | Permalink

      It almost screamingly funny that the BoE analysis in the Quarterly Bulletin studiously avoids pointing out that QE was really simply unfunded government spending. In contorting itself to avoid this simple truth, it fails to follow the money and reach the appropriate conclusions. Waramess offered us a concise explanation the other day: QE allowed government to get best value for the extra currency, with those lowest down the food chain simply suffering the effects of the consequent inflation before their incomes adjust at all. It impoverishes us, just as did coin clipping in Roman times, or John Law’s money printing in France.

  12. alan jutson
    Posted September 20, 2011 at 9:23 am | Permalink

    John Major was right when he said we need to get back to basics, but he was applying it to the wrong subject.

    Governments for years have been spending too much in an attempt (successful so far) in bribing the electorate with their own (taxpayer) money and future debt.

    If a politician cannot convince you by his arguments without offering bribes, handouts, money, benefits and the like, they are simply not worth voting for.

    For too long the ethic of work, self provision and pride in being able to look after ones own family has been degraded.

    For too long the rewards for doing nothing, and being willing to live off of others has been promoted as being acceptable.

    Yes of course we need to look after those who genuinly cannot look after themselves, but for too long the cards have been stacked against those who have tried to do the right thing and provide for themselvs.

    Time has come for us to cut drasically the welfare state as it presently stands, we have been living in a fools gold world for the past 50 years, craving for things that we simply cannot afford, believing that somehow the magic word growth (growth of taxes) will pay for it all sometime in the future.

    I agree with lifelogic, 20% of GDP is about right for government spending, and the sooner we get there, the better.

    • uanime5
      Posted September 20, 2011 at 7:11 pm | Permalink

      The Conservatives plan to end this by using boundary changes to ensure a permanent Conservative Government. Thus they will not longer need to bribe or even appeal to the electorate in order to get elected.

      • Winston Smith
        Posted September 21, 2011 at 12:45 pm | Permalink

        You present a challenge to the blog. Does JR continue to publish your loony rants in the interests of free expression, but devalue the blog, or ban you and get accused of censorship, but raise the level of debate? Its a tough one.

  13. Susan
    Posted September 20, 2011 at 9:35 am | Permalink

    The flaw is there right at the beginning of your piece Mr. Redwood, Governments should not spend much more in boom times, in order to have the economy either in near balance or surplus should recession occur. This then gives the Government the ability to spend more in a recession to help support the economy. It is obvious that if the debt builds up in the times of plenty the Government is left with very few options to fight recession should it occur. The only real answer then, is to make cuts to try to pull the economy back into balance. Tax rises to cure the problem merely impede growth and stop people spending, which further pulls the economy down. This is especially true in a Country such as the UK which has high taxation both direct and stealth to start with. Even the much quoted Keynes understood this principle of not spending too much in the good times. Countries must learn to live within their means, otherwise the very thing Governments try to cure by extra spending occurs when recession comes, the disadvantaged are made more so. It had taken years to pull the UK economy back in order after the last Labour Government of the 70s. John Major finally left a good economy to the incoming Labour Government, it has once again been thrown away.

    The media in Britain is an absolute nightmare, the truth is never reported. I remember them telling the public that Gordon Brown was a genius, the best Chancellor the UK ever had, that with his guidance on the economy Britian was in safe hands. I used to think I was going mad to think differently. The same is now true with regard to exactly how much spending the Government is engaged in and how many cuts are being made or rather not being made. The media never bothers to find out if what they are reporting is actually true.

    The banks were not bailed out in the right way, I think the truth of this will come to light in the future, proving once again that the great Chancellor Brown was wrong. However, when the public blame the banks for all the UK economic problems, they need to remember it was the financial sector that kept the British economy afloat during the Labour years. There was no real growth apart from this one sector, should this then fail the rest would come tumbling down like a pack of cards. That was a mistake by Government, not banks, to rely on one sector to keep the economy alive.

    It is right to say indebted Countries are at a crossroads. If they continue to print money merely to pay off their debts and support more spending, the spiral down will continue.

    • davidb
      Posted September 20, 2011 at 10:07 pm | Permalink

      But politics intervenes. If party C runs the finances well to produce a surplus then gets voted out by party L, then the new lot can rack up a huge bill confident in the knowledge that they will not pick up either the financial or the political bill. There is nothing to be gained by politicians from running the books sensibly. We probably do need apolitical oversight and a statutory requirement for Governments to balance their budgets without borrowing.

      However, nothing is going to change. This time we aren’t even rearranging the deckchairs….

      • Susan
        Posted September 21, 2011 at 9:03 am | Permalink

        davidb

        Agreed, however I do not believe it is right to just blame politicians for this situation. The public are as much to blame by making it clear over the years that they will not vote for parties that are not prepared to spend the money to meet their expectations from the State. That this cannot be afforded does not seem of huge concern to the public who have a sense of entitlement.

        It seems to me that it is an almost impossible task to get the message over to the public that Government has no money of its own and that all money spent has to be earned by the Country before it is spent.

        Look at the last Labour Government, it was obvious to anyone with any sense that they were spending too much. The public continued to vote for them despite unpopular wars and a good deal of bad behaviour being added to the mix. Why did they do so, because they were enjoying all the cheap credit and benefits coming from the State. They were not concerned with the important issues, such as how all this money would be paid back, both private and Government or how much integrity the Government had.

        Of course some of the public did see the wood for the trees and worked hard and saved, yet these are the very people who are now being punished for this crisis which was not their fault. What sort of message does that send to the irresponsible.

        The blame culture in the UK needs to be adressed, Gordon Brown could not have spent the money if the public had not continuously voted him in. I never voted for Labour once during those years, having noted that despite other problems John Major had put the economy into a good position. I knew exactly what the Blair years would bring, due to the promises made. Without a good economy a Country is unable to function to the benefit of its people, this is something the British public need to learn.

  14. GJ Wyatt
    Posted September 20, 2011 at 9:55 am | Permalink

    The relentless upward ratcheting of public expenditure you so eloquently describe is known as “Wagner’s Law” (1863) and was thoroughly examined for the UK between 1891 and 1955 by Alan Peacock and Jack Wiseman (1961). It has since been confirmed for many countries, so perhaps it really is a “law” of societies in the sense that it is an observable regularity.

    People like public spending, especially if they think others are paying for it. So reining it in is politically awkward and governments under stress resort to the printing press to finance it. This inability to control public spending is a particular problem in democracies with weak coalition governments. It seems the UK falls into this category, unable to resist the siren voices of the Keynesian “spend yourself rich” brigade.

  15. stred
    Posted September 20, 2011 at 10:45 am | Permalink

    Another excellent piece.
    In Ireland and Greece, fonctionaire salaries and other publicly funded categories have been cut. In the UK this seems to be unthinkabe, except via inflation, but this affects private employees too.

    Having suffered at the hand of a planning and building control department over the last year, I can report that many of the employees providing this ‘service’ do not deserve jobs. I regret that I listened to advice and did not find a private inspector. The insistence on using structural engineers and their opposite number in the LA would have resulted in gross over specification, large cost increases and use of high energy materials where not necessary. Fortunately, I am a retired architect and know what is necssary and what is not. I have had to employ other engineers to prove that I was right. However, the project has so far been delayed by 7 months so far with ensuing costs, one of which is enforcing council tax on the property- to encourage us not to leave it empty. The stress has lead to a medical condition on my part. I am currently involving councillors, so that they can see what has gone on.

    I would suggest that Mr Pickles tells all LAs to privatise their BR department and let them experience the real world. No redundancy payments or tax them at 100%.

    Also, since Labour let expenses for councillors rip and took away the legal reponsibility to take proper care of ratepayers money, the waste has increased tremendously. Some councillors make five times as much in expenses as I earned as an architect. All but legitimate expenses should be cut immediately and legal responsibility returned.

  16. Rebecca Hanson
    Posted September 20, 2011 at 11:13 am | Permalink

    Time to reform our democratic systems so they do not so actively promote short term thinking?

    • Mark
      Posted September 20, 2011 at 7:17 pm | Permalink

      You mean bring back hereditary peers?

      • Rebecca Hanson
        Posted September 20, 2011 at 9:25 pm | Permalink

        LOL Mark. What in a seance?

        🙂

        No I had in mind more looking at our processes of consultation – how they can better utilise emerging technologies and the related human behaviour and all that.

        Interestingly the kind of systems for democracy I see emerging do not require traditional Western one person one vote democracy to operate effectively.

        Mass online discussion could help us select our leaders more effectively and could enhance the intelligence and quality of those we are able to select from.

  17. Winston Smith
    Posted September 20, 2011 at 12:34 pm | Permalink

    Latest £500m IT project failure revealed:

    http://www.telegraph.co.uk/news/politics/8774287/The-469-million-Whitehall-fiasco-of-FiReControl-goes-unpunished.html#dsq-content

    Notice the Coalition is spending another £84m to try to achieve the EU led political aims.

    This follows the £26bn highlighted nearly 2 yrs ago:

    http://www.v3.co.uk/v3-uk/news/2001612/labour-accused-wasting-gbp26bn-failed-it-projects

    Just to underline the absurdity of the political elite, the Chair of the PAC criticising the Labour Govt for wasting £bns of our money is none other than Margaret Hodge. This follows the sight of Keith Vaz chairing the phone hacking committee and lecturing others about corruption and dishonesty. Their own contemptuous, shameless hypocritical and arrogant posturing continues unabated.

    Reply: Mr Vaz has not been found guilty of any corruption or phone hacking.

    • Disaffected
      Posted September 20, 2011 at 5:28 pm | Permalink

      Mr Redwood your point about Mr Vaz is totally accepted and it is wrong to accuse or intimate wrong doing of anyone like this. Perhaps the point the blogger was trying to make, rather clumsily, is that there is not any true independent body that assures standards of MPs. The current system is discredited. It should be automatic that any suspicion of criminal wrong doing by any MP ought to be to referred to the police in the first instance for investigation before an independent body considers it for internal discipline. There were over 300 MPs who were overpaid or fiddled their expenses, it is difficult to understand why so few appeared before court and why so few were referred to the police. Moreover it demonstrated there was widespread corruption at the Westminster; MPs are meant to be pillars of society, act as role models as they create law for all of us and act for the weak in their community. How many MPs raised the abuse of expenses and fought to change the system? It is difficult to believe it was not widely known what was going on. Those who were innocent of wrong doing appeared to stand idly by and do nothing. On this premise it is difficult to watch MPs (generalisation) question the behaviour of others when they did not have the moral fortitude to speak up about what was going on at Westminster.

      Westminster needs to look at itself and raise the standard of behaviour amongst MPs otherwise I fear there will be a total loss of confidence in our parliamentary system. Unfortunately no political leader has taken adequate measures to address the public’s concerns following the expense scandal despite rhetoric to do so.

      The point of hypocrisy could equally be made about MPs pensions and second homes (to bolster their pension at taxpayers’ expense) when they are savaging the pensions of everyone else. MPs still receiving RPI instead of CPI when we are told the dire fiscal circumstance require it. You cogently point out on this blog the Government wastes money hand over fist, give it away and continues to spend when it does not have the money. Consistency of behaviour is required from our MPs.

      Reply The reason why more MPs have not been prosecuted is because they did not commit offences. They claimed items of spending they had incurred, and received payment under the rules of the scheme.The scheme allowed more or less anything used in a second home to be claimed. All now agree the scheme was too generous and too lax over what qualified. MPs were guilty collectively of allowing a generous scheme and not insisting on better supervision.Most were not claiming money when they had not made the purchase, forging invoices or other wise cheating. Any MP who did commit fraud or theft is liable to prosecution, but like all others in our country they are innocent until proved guilty, and there does have to be convincing evidence.

      • JimF
        Posted September 20, 2011 at 7:25 pm | Permalink

        It is easier for MPs to obey the rules when you make them yourself. Couldn’t a certain Labour ex-Minister for equality be prosecuted for attempting to cover-up the fraud which was committed by several MPs? Presumably not, because that person must have only had knowledge of possible fraud in a general way, rather than specific instances of it. Yet that person, and others, sought to gain joint and several advantage for the Labour Party and MPs in general by attempting to block the redaction of expenses claims. It’s all very grey area, twisty-turny wriggly stuff, isn’t it?

        Reply: the redaction was to protect family and addresses and credit card numbers I believe, not to withold relevant information about sums claiemd and their purpose.

    • zorro
      Posted September 20, 2011 at 11:00 pm | Permalink

      Writes in with some details of Mr Vaz’s history of registering interests and responding to enquiries by Standards and Privileges, which I do not have time to check out. I will post any official findings if you want to repeat it all.

    • Winston Smith
      Posted September 21, 2011 at 12:40 pm | Permalink

      Yes, JR, you are so right. Keith Vaz is a saint. How could anyone doubt his integrity? His record is freely available on the internet for all to read. How long do the political elite think they can continue in their self-denial bubble? (Feel free to omit the link, if you think it necessary.)

      Reply: I do not think
      Mr Vaz a saint, but I do not have the time or money to deal with libel actions against bloggers.

      • Winston Smith
        Posted September 21, 2011 at 4:25 pm | Permalink

        Fair enough. Thanks for giving us the opportunity to air our views to a wider audience

  18. Taff
    Posted September 20, 2011 at 1:44 pm | Permalink

    The biggest con that needs addressing is the continual use of the term deficit reduction. To the unenlightened that suggests that our debts are coming down – which sounds sensible. In reality as the informed know it is nothing of the sort but simply the rate at which our debt is going up will slowdown -but up it goes. This message needs to be rammed home.

  19. Bernard Otway
    Posted September 20, 2011 at 2:00 pm | Permalink

    Mike Stallard and others who are very pessimistic in their posts today are completely right,
    a BEAST is coming and it is NOT stoppable,it will NOT discriminate,the people who created this will find themselves with a CASTRO/GUEVERIAN solution,I don’t know whether my words will be allowed,but come what may BAD things are coming ,anyone who does not understand my Twin word C/G just read the history of what happened in the first few weeks
    after Castro had taken power in Cuba.Whatever it might be called there WILL be a cleansing
    of the stables because there will be a MESSAGE being sent out to STOP politicians and all the hangers on from trying this again.Society CANNOT afford hangers on,yes it can have a SAFETY NET but that is all,if 2500 years ago even though the worlds population was miniscule to today’s it would have been thought completely INSANE to pay people something/ANYTHING to do NOTHING,and as for paying women to have 6 children by 5 different fathers many of whom have NEVER worked and will NEVER work.As for the likes of greece to pay perfectly able people to RETIRE at 50,while the Govt collects hardly any tax
    I actually have NO WORDS.

    Reply: I do not agree that there will be revolution by force in the UK, and this site does not support such action.

  20. fAndrew
    Posted September 20, 2011 at 3:05 pm | Permalink

    John Redwood should read the Times Editorial today. This country is a tax haven for the super-rich, who buy up property, both in London and the country, at prices resident taxpayers cannot afford through off-shore companies that pay no capital gains tax. Vince Cable’s mansion tax is a very sensible idea. It should be pitched at rates for the most expensive houses that produce a decent amount of tax. The residents of Kensington/Chelsea may then find that their streets are not used so much for Formula 1 racing by foreigners showing off their Lamborghinis in the summer months. The economic argument is that we all benefit from having these rich people spend their money here. Well I say that they should pay for the freedoms their own countries lack and be taxed accordingly!

    • Taff
      Posted September 20, 2011 at 3:47 pm | Permalink

      Why not simply have a withholding tax on all property gains that are made by non domiciled people or trusts? Its what other countries do and set it at the CGT rate. That wouldn’t affect private residences.

    • Bazman
      Posted September 20, 2011 at 8:47 pm | Permalink

      What do you say to that one fantasists and apologists?

  21. forthurst
    Posted September 20, 2011 at 3:32 pm | Permalink

    The problem that we have is that ’emerging economies’, particularly China have been supplying the West with consumer goods at rock bottom prices whilst facilitating importers with potentially enormous markups and profits; instead of investing their income in their own countries, those emerging economies have invested in Western government bonds. The result of this is that governments have had access to very cheap credit which they have used to fund the unemployment of those who were sacked by companies eager to make higher profits from selling cheap imported goods whilst at the same time racking up Principal sums which are too large to repay.

    We now have economies which make very little apart from Germany, import most consumer goods, have enormous and growing bureaucracies which distribute the wealth borrowed from abroad together with that raised from the few people who are still actively engaged in the productive economy.

    This situation has been exacerbated by people such as Cable who find it amusing to (invite in migrants-ed) to put English IT professionals on the dole and on the taxpayers’ charge, to add to all those others who have been displaced onto the dole by third world (migrants-ed) and from Eastern Europe. Hence, the deliberate dumbing down of education and blocking of grammar schools by the same group of usual suspects who are desperate for English children not to be able to compete with their imported replacements since they want all professional jobs to be performed preferably by Indians, but failing that anyone not native. Much better for English children to make intimate contact with some of the racier elements from sunnier climes than qualify to become doctors, scientists or engineers.

  22. MajorFrustration
    Posted September 20, 2011 at 3:36 pm | Permalink

    We dont seem to have many historians in politics today – shame. Ok there is William Haigh and his interest in Pitt the younger where there might be some similarities with current financial events but todays issues do seem to have a ring of post WW1 and the pathway to 1929/32. I am not a complete follower of JMK but the following does have some leverage “Lenin was certainly right.There is no subtler,no surer means of overturning the exisitng basis of society than to debauch the currency”
    And there are still idiots around that want more QE – lead by donkies springs to mind.

  23. Martin C
    Posted September 20, 2011 at 4:44 pm | Permalink

    Cracking article. It should be delivered in a speech, where people can hear. The BBC will never broadcast it of course, but surely if there is to be a QE-2, it will be debated in the commons first?
    And you can add to your final paragraph, “… leading to a collapse of the system, followed by an authoritarian revolution, usually (though not invariably) right wing”. That should scare the right people, it is after all no more than a statement of the historical truth.

  24. James Clover
    Posted September 20, 2011 at 7:04 pm | Permalink

    We tend, with some justification, to blame politicians for the economic decline that is this generation’s lot, but we must also blame ourselves, or at least those people throughout the West who have failed to resist the blatant bribery that the Welfare State has increasingly offered.
    The “safety net” has increasingly become a series of entitlements- to maternity leave, child benefits, free bus travel, educational allowances for schoolchildren (unbelievable!), etc. etc. When these have become unaffordable, we have been happy to see the State borrowing, as we, the public, have borrowed to fund a lifestyle that we have not earned. We have allowed a huge proportion of the population to become dependent on a shrinking productive sector.
    And now the great historical decline has inevitably set in. We cannot compete with countries that have not the huge burden of uncontrolled Welfare States to support.
    Either the Welfare State must return to its basic safety net model (which we will never vote for- look at the shrieks at the present modest hardly-cuts) or we will collapse into a financial state of anarchy that will force it upon us. I suspect the latter will occur in a year or two.

  25. ITF Tory
    Posted September 20, 2011 at 8:11 pm | Permalink

    They printed money once, which makes it that much easier to do again. At least the first time they did it they had the (flimsy) excuse of warding off deflation. This time they don’t even have that. Printing money doesn’t lead to inflation – it IS inflation. And we all know the dangers of runaway inflation.

    • zorro
      Posted September 20, 2011 at 10:47 pm | Permalink

      There is a mega inflationary trend throughout the world with the massive money printing by the Fed, B of E, and the ECB (who will be printing on steroids soon). Inflation will be high for many years to come as this is the only practical way in which western governments think that they can shrink the debt.

      I predict there will be a QE2 very soon and QE 3 in 2012/13 (depending on how bad things get) in the UK.

      zorro

  • 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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