Controlling the UK’s debts

 

           Thanks to the policies of the last government, the UK entered this decade as one of the most heavily borrowed countries of all. Private sector borrowings peaked at more than 200% of GDP. The company sector has cuts its debts a bit  in the last two years despite the lower levels of activity, and individuals have stopped their debts overall from going up any more. The public sector has debts of around 250% of GDP.

           The last government claimed UK public debt was under 70% of GDP, as they just quoted the figures for state borrowings through the issue of bonds. This debt is now around £1 trillion. On top of this there are the debts of the banks where taxpayers have a stake. This adds £1.4 trillion to the total. There are then the unfunded public sector pension liabilities of £1.3 trillion. The new government has set all this out, to give a more honest account of the UK balance sheet.

            Some say you should add in the future costs of the basic state retirement pension scheme. The government thinks this is balanced by future NI and Income tax revenues, and has always been a pay as you go scheme, so it has not chosen to do so. I have no disagreement with their approach, as you have to draw the line somewhere  about how many items of future public spending you capitalise, and how many you treat as a call on future income.  

            The government, the Opposition and most commentators agree that the current levels of UK debt are too high, and need to be controlled, and eventually brought down. The argument is not over whether to do this, but how, and at what pace.

           I think the government needs a strategy to tackle all three elements of the balance sheet weakness in the public sector. I think it needs to do it speedily, as the overall levels are far too high and far too risky for taxpayers. Cutting banking risk for taxpayers is to me an urgent priority. Governments are not well equipped to run banks. Taxpayers should not be standing behind the large position  risks run in say the RBS investment bank, and subsidising the large salaries they still pay as if they were a profit making privately financed operation. Yesterday’s decision to sell Northern Rock at a loss was a welcome first step.

          There is no point people tut tutting about losses on these holdings. The last government  was wrong to buy these stakes at the prices they paid. We were bound to lose money on them. Recognising  the loss is a necessary part of sorting them out and passing them on to owners who may be able to make them useful to our economy and turn a profit.Those profits can then be taxed.  That was why I at the time recommended controlled administration.

              I said they  should only support the few bits that really mattered, and let the shareholders and bondholders take the hit on the investment and overseas banks and other non bank businesses.  It was  a policy recommendation which prefigured what are now call living wills. I am glad the policy has been adopted for the future. It is just a very epxensive pity they didn’t do it last time. There is little point in extend and pretend, trying to believe that the assets are worth what you want them to be worth instead of worth what the market now values them at.

          Former Northern Rock shareholders feel badly treated. In the summer of 2007 I argued that the Bank of England and the government should have put more money into the wholesale markets. Had they done so I do not think Northern Rock would have gone bust . They put more than I suggested into the markets, but only after the troubles at the Rock. Timing is everything.  Northern Rock started with a liquidity problem which the authorities refused to help sort out. It became a more fundamental problem, as the shortage of money brought on a drop in property values, which damaged a mortgage based bank. It was all predictable and avoidable. Becuase it was not avoided, shareholders have to accept that their bank did go under and so they lost their money.

            The government is attempting to cut the unfunded costs of public sector pensions.  We might well return to that in more detail at a later date.

               Most of the attention is focused on the smallest of the three liabilities, the public debt proper. Labour is now arguing that the government will borrow £100 billion more than their original plan. I have made it clear for months that the government is bound to borrow more than the forecasts in June 2010. The government itself raised its estimate of the extra amount it would borrow over the five years by £34 billion in March 2011, so it’s not much of a surprise. The mainstream media ignored this change of forecast until this week, but are now taking it more seriously because Labour is highlighting it.

                     In previous pieces I have said I expect the government to forecast a further increase in the 5 year borrowing when they make their Autumn  Statement at the end of this month. I estimated that they will probably say they need to borrow extra  over the five year period, to allow for the slower growth they need to assume for this year and next. It is likely that the Bank of England’s lower forecast of growth, taking it down to 1% this year and1% next year, sets the tone for the official OBR forecast in the Autumn Statement. This compares with 1.7% and 2.5% in the March official forecast. Losing that amount of growth will lose more revenue on top of the £34 bn adjustment made in March. Labour has made claims that the extra  adjustment in this Autumn Statement to the official borrowing figure  will be much bigger than the March adjustment, which seems to me to be unlikely.  

                      The government has rightly said it intends to remove the structural deficit over the lifetime of this Parliament. It has reaffirmed that it will do this despite the falling growth forecast.It can do so and should do so. The total borrowings over the period will however, be higher than the 2010 plans, as the cyclical deficit will be higher. This is all very old news to readers of this blog, as we have reworked the figures before. It is also common ground between Labour and the government that the best answer to get the deficit down more quickly is faster growth.  The battle of the Autumn Statement will be about how you can do this.

                 In order to succeed in eliminating the structural deficit the government might be wise to have a freeze on current public spending for a period, instead of persisting with increases in cash spending. Over the last year,as most in the media refuse to acknowledge, real public spending increased, as the government’s own official figures for GDP make clear.  Today’s news that the MOD has been spending £25o million a year on consultancies to help it buy things show there is still plenty of low hanging fruit for it to cut out. What is true of the MOD which is being asked to make real cuts, will be even more true of depertments allowed to increase their spending.

 

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89 Comments

  1. Posted November 18, 2011 at 6:58 am | Permalink

    I would also include PFI in the debt calculation. The last Administration went overboard with off-books spending, and this should be brought out into the open. A very expensive, long term financial committment has been made, and just calling it something different does not mean it doesn’t count.

    It’s interesting that personal debt has stopped rising already – hardly a surprise that the general public is way ahead of Government in thought and deed. Our real-terms income is falling, but we have still managed to cut our collective cloth accordingly. It’s about time Mr Osborne learnt from this lead.

    Reply: The official figures of £2.4 tn for total public sector debt before pensions includes PFI/PPP

  2. Posted November 18, 2011 at 7:03 am | Permalink

    Thank you for a very clear summary of what you have been saying for some time now. Dividing it into three, like Caesar’s Gaul was neat!

    Why cannot the nationalised banks (including NRAM) be simply unloaded immediately as a matter of urgency? What with the secrecy of investments in Greece and France and Italy and Spain, it is a possibility that at least some of them are now very much in the red.

    We Taxpayers are simply broke and our national credit rating needs to be desperately protected too. I am afraid that the “what ifs” are so terrifying that I really do not want to consider them. A Scottish Genius nationalisation of, say, Barclays, would surely bring us to our knees?

    We aren’t going to be able to afford another bail-out if one of the nationalised banks goes under.

    • Posted November 18, 2011 at 11:42 am | Permalink

      Mike Stallard: “Why cannot the nationalised banks (including NRAM) be simply unloaded immediately as a matter of urgency?”

      How about this Mike.

      Because immediately they were off loaded, there would be a smoking black hole where they used to be.

      These formerly large banks are big players in the governments debt sales, lose them and the government loses a significant source of its funding capability.

      • Posted November 18, 2011 at 5:02 pm | Permalink

        Hey – wouldn’t it be fun to be able to see the real transactions and the real account books of the nationalised – and, perhaps, the other banks in UK!

        Where did the debt mountain go to? How many useless and potentially useless government bonds are in them, I wonder?

        Someone on this blog seems to know how much the Greek bonds scored in a couple of the biggest French Banks.

        Otherwise, nothing!

  3. Posted November 18, 2011 at 7:06 am | Permalink

    Talking of the MSM being ignorant of the facts I almost choked on my coffee yesterday reading Peter Oborne’s piece in The Telegraph (which, to be fair, is nothing unusal with Oborne). He was praising to high heaven some guy who’d written a pamphlet last week laying out that the governments deficit reduction plan was based on predicted high growth and not really spending cuts. He laid out how it was a pity no one had noticed this until now and that the government was now at risk of missing targets as it’s high growth predictions are being shown to be fanciful.

    If he read this site once in a while he could have learnt all this more than a year ago, as you say.

    Still, better late than never.

    Reply: Yes, I was surprised, as I have briefed him personally in the past, and he is one journalist who gets the point about the fact that the government has not cut overall current spending.

  4. Posted November 18, 2011 at 7:07 am | Permalink

    You say:- ” The government has rightly said it intends to remove the structual deficit over the lifetime of this Parliament. It has reaffirmed that it will do this despite the falling growth forecast.It can do so and should so so.”

    It will not make it the way it is going so far. Only 3.5 years left, it has done more to stifle growth than encourage it. The banks are still pulling cash back, development funding is almost unavailable at sensible rates.

    Also it insists on wasting cash on the PIGIS, HS2 “Green wash” and countless other nonsense and has done nothing on employment laws or the balance between working or not. It still has the 50% sign up saying please leave and do not come here – to the rich and successful.

    Above all it looks very likely that big government, cast rubber will lose the next election to Socialist Milliband and his string pullers in the state sector unions.

    What an uplifting vision.

    It was interesting on Question time that almost non of the audience or the panel seemed prepared to defend wind power now. The very few that ever do have not a clue about the engineering and economic realities. Even in Aberystwyth, Wales the penny seems to have dropped.

    • Posted November 18, 2011 at 11:02 am | Permalink

      Good to see Cameron launch the new large engineering prise – perhaps I am just a bit too cynical – having seen to much BBC – but I think it unlikely that it will will won by a white male, who are perhaps 90%+ of the engineering profession. Also it will doubtless be a development perhaps something to do with “green energy” or helping the third world. Not that there is anything wrong with helping the third world (I would abolish CAP tomorrow to do just that).

      Just that politics will I suspect over ride logic as usual.

      Cameron and the BBC might not like a photo-op with a male white engineer and his a new development in gas fracking extraction very much.

      • Posted November 18, 2011 at 11:25 am | Permalink

        One topic absent from the current public consultation being run by the Trust on the future of the BBC is ‘ENGINEERING”.

      • Posted November 18, 2011 at 11:34 am | Permalink

        Yep , it’s just going to be commandered by the politically correct brigade with a couple of Euro’s of EU funding to ensure they have to fly their flag :-

        – massive electric fans in the North Sea to drive the wind turbines

        – perpetual motion machines

        – a new contracteptive for immigrants (which doesn’t work)

      • Posted November 18, 2011 at 4:24 pm | Permalink

        It’s a Global prize awarded to up to three people so it’s trying to ape the Nobel; Rolls-Royce is not contributing unlike Tata because presumably it realises it will do absolutely nothing to promote interest in engineering in the UK.

        Engineering is a team effort about making things, and no doubt R-R would have contributed if it had been awarded to the most innovative product or process etc developed in the UK by British engineers.

  5. Posted November 18, 2011 at 7:16 am | Permalink

    As you said, we have discussed ad infinitum the inevitability of weak growth and its likely impact on tax revenues. It is the government’s achilles heel because it amplifies their weak growth strategy and will sink their claim to economic competence. You know that they will not reduce spending and will not reduce the deficit. If they do it spuriously by printing and a ‘cyclical deficit’, wavy Davy might as well change his name to Gordon and call it his ‘golden rule’ of his never ending economic cycle!

    I’m just totting up the figures…..so you estimate private debt at around 3 trillion and public debt at 3.7 trillion without including state pension funding. Is that correct? I agree that it is more sensible to balance out the pay as you go pension as neutral because it only matters if people stop contributing and then it really would be curtains!

    zorro

    Reply: Yes, total debt is around £6.7 tn

    • Posted November 18, 2011 at 12:03 pm | Permalink

      Presumably the 6.7 trillion is 10 to the power of 12 and not the larger version. If this is the case and the population of the UK is rising to 6.7 to the power of 7, then the debt will be £100,000 per head. Can this be really true?

      reply: Yes

      • Posted November 19, 2011 at 9:15 am | Permalink

        Say £200K per taxpayer on average earning of perhaps just £23K or so!

    • Posted November 18, 2011 at 12:35 pm | Permalink

      J.R. , Zorro ,

      Since 1980 , private sector pensions provision has fallen to the point where for most people there is no vocational pension and very little surplus money for their own saving and even less after the financial services industry have taken their charges .

      The money which should have been saved has been spent in large part on accomodation and to keep the factories in China from closing .

      Whichever way you look at it this is consumption which has been brought forward and will no longer be available for people during their old age .

      I don’t see that it in your figures so here is a back of a fag packet effort .

      Assume that one third of the populating will be in retirement and 80% of those will be private sector . IE 26.6% of the population of 65m will be private sector retirees (17m people) .
      Assume :-
      – 33% of private sector retirees will not require any financial assistance

      – 33% of private sector retirees will require an average £5,000 of financial assistance over and above the state pension .

      – 33% of private sector retirees basically own nothing , probably due to declaring themselves bankrupt to escape a lifetime of debt and will require an average of £10,000 assistance over and above the state pension .

      We end up with a shortfall of :-
      17m * 0.33 * £5,000 = £28b
      + 17m * 0.33 * £10,000 = £56b
      £84b per annum

      Using whatever discounted cash flow methods you like this is a lot of money . Looking at it in terms of the rate which the Govt can borrow at , inflation plus 0.5% , then the 84b corresponds to a principle of £16trillion .

      Obviously that is completely unsustainable and private sector workers HAVE to be compelled to save for old age (more than NEST) and the cost of living HAS to be brought down , especially accomodation costs .

      There is a lead time for a renewed policy of saving for old age to kick in so we are looking at around 30 years damage already having been done .

      Would you agree that the damage already done accounts for approx 30 * 84b = £2.5trillion of liabilities related to old age which are not accounted for in your figures ?

      If not what do you think the cummulative shortfall to date is in private sector provision for old age ?

      • Posted November 18, 2011 at 12:41 pm | Permalink

        “Looking at it in terms of the rate which the Govt can borrow at , inflation plus 0.5% , then the 84b corresponds to a principle of £16trillion .”

        I.E. ignoring inflation .

      • Posted November 18, 2011 at 5:56 pm | Permalink

        A different Simon,
        You state that ‘33% of private sector retirees will require an average £5,000 of financial assistance over and above the state pension ‘ and ‘ 33% of private sector retirees basically own nothing , probably due to declaring themselves bankrupt to escape a lifetime of debt and will require an average of £10,000 assistance over and above the state pension’

        What makes you think that the state is in some way obliged in these two instances to provide £5000 and £10000 above the state pension for these two thirds of private sector retirees?

        If you don’t save for a pension apart from your state contributions, you will have a frugal existence in your retirement years unless you do a part time job. That’s pretty well understood. So, I’m not so sure about your figures here.

        zorro

        • Posted November 19, 2011 at 10:33 am | Permalink

          Zorro ,

          I do wonder whether you are intentionally being obtuse .

          Which of the following statements are you not sure of ?
          – A civilised society IS obliged to look after it’s weakest rather than have them homeless and starving in the street .

          – People have to be housed , fed and clothed and that cost a lot more than the state pension which is soon to be £7,000 .

          – The money will have to come from somewhere and someone else ; ie benefits .

          It would be far better to have a proper solution in place like a state pension which payed out at the point at which means tested benefits cut in and thereby made means tested benefits redundant .

  6. Posted November 18, 2011 at 7:19 am | Permalink

    Do you still think inflation will be lower next year?……Like I said previously lots of lovely QE to follow in the coming years so that Gordon Cameron can fund public sector spending….

    Zorro

    Reply: Yes, inflation should fall in 2012.

    • Posted November 18, 2011 at 10:00 am | Permalink

      True , though it is the consensus view, which means it may not fall as fast as some expect?

      Reply: Probably – but it will fall thanks to the drop out of VAT rise, and probably less increase in fuel taxes

  7. Posted November 18, 2011 at 7:32 am | Permalink

    This government has shown no signs of being able to reduce the deficit let alone total debt. In this they are them same as most governments. Politicians live by promising more than they can deliver and can only give the appearance of competence by borrowing excessively. This leads to ever increasing debt until the currency collapses, an event that looks ever more likely as the weeks go by. A collapse is usually in the form of hyper inflation as central banks print money to cover government debt, which has and continues to happen. There is only one way to prevent this over spending and that is a gold standard with the external discipline it provides to currencies. Since a return to a gold standard is very unlikely because of the vested interests in debt creation the only likely outcome is collapse. Until that actually occurs we can look forward to the usual posturing then ever more draconian currency controls, taxes and repressive policing (see what is happening in the US). In truth we get the leaders we deserve. That must mean we really are useless.

    • Posted November 19, 2011 at 8:49 am | Permalink

      A gold standard has never stopped banking crises and panics. A more rational look at the banking system would leave the risk with depositors, who in turn would demand transparency from the bank about its loan book. It would lower the money multiplier and fractional lending, ensuring that the banks capital base backs its loans like any other business and thus there is no recourse to the taxpayer . If people wanted safety they would buy government bonds. Money is lent into existance, on the basis of good assets being funded. What we have seen is a decade of ponsei lending and house price inflation because houseprices are not in the cost of living index, the finance costs to buy them with is instead.

  8. Posted November 18, 2011 at 7:58 am | Permalink

    There was a good graphic on another blog posting about debt yesterday, which your readers may find useful. It is on the following link:

    http://www.acting-man.com/blog/media/2011/11/total-debt-to-gdp.jpg

    • Posted November 18, 2011 at 9:24 am | Permalink

      Excellent, I knew that we were world leaders in something….oh wait….

      Zorro

  9. Posted November 18, 2011 at 8:13 am | Permalink

    There’s an interesting thread through your recent posts John, and also underlying my responses, that I’m going to pick on.

    Yesterday your question was: How many laws/regulations do you need for a single market? Today, you criticise the last government for presiding over a massive increase in private debt, and also banking sector debt. Couple of things; first, if you don’t like how much private debt or debts banks accumulated, you’re suggesting some more regulation in this market (particularly the latter) is needed – I thought you wanted the minimum possible, to let the markets do their work? If there are grounds for intervention and more regulation, what are they in your mind (this is what I’ve been asking in a few threads recently)? Second, the trend of accumulating debts began firmly in the Tory administrations you were part of in the 1980s and 1990s (see http://dl.dropbox.com/u/6596845/British_debt.pdf).

    Then you say you advocated very loose monetary policy pre-Northern Rock as that would have helped them survive. But why do you want such heavy intervention in banks like this, heavy intervention that would save them from the fate due to them due to their bad management? I should say I’m also sceptical that the bank should have been bailed out – the deposits could have been protected without bailing the bank out. Would you not want to ensure that the bank executives responsible for the fiasco were cleared out, and if so, how would you have done it? You’ve mentioned previously you think regulation is necessary at some arbitrarily fixed level of reserves to liabilities ratio – presumably this is one regulation and intervention in markets you think is justified, and then in that case, why would it matter if it was decided at a pan-European level, instead of a British level? Do you think the Europeans would be unable to set the right level?

    Reply: I called for tougher regulation of cash and capital requirements in the mid 2000s to avoid the excess build up of debt. I have always supported and helped operate cash and capital controls for deposit taking institutions. I then called for early monetary easing when the authorities decided to lurch from too easy to too tight, in a way which was bound to bring down some banks. Look back at what I was saying in the summer of 2007 and you will see it all clearly predicted.

    • Posted November 18, 2011 at 11:43 am | Permalink

      That’s an additional regulation for a particular market, hence an additional law, that you’re proposing? What is it that makes the money markets particularly specific that you want to interfere with their “ultimate democracy”?

      I agree with you, we should have had easier money, and much sooner, instead of the preoccupation with 5% inflation in 2008, but the question remains: What would have happened to those at Northern Rock that created the mess? Don’t you think that protecting the deposits and letting the bank go to the wall would have been a better strategy? Sure, that would have created dislocation and unemployment, particularly in the North East, but then your liquidation strategy proposed in this post, of all sectors in the economy deleveraging at once, will do that on a nationwide scale.

      And another question is begged if you were after easy money then: Why was 5% inflation in 2008 ignorable, yet for you 5% inflation now is un-ignorable?

      reply: You do need to regulate deposit takers as they offer us the promise of our money back which may need supervision. Inflation in 2008 was clearly going to tumble – I had urged higher rates in 2005-6 to stop the inflaiton in the first place.

      • Posted November 18, 2011 at 12:54 pm | Permalink

        But inflation today is highly likely to tumble too yet you express grave concerns about it and rail against easy money now, as we tumble into another crisis. What’s different?

        Regulate all deposit takers? And why is getting money back any different to getting an item of equivalent value to the money we exchange with a company different? Why doesn’t the threat of a bad reputation do the trick, a la the free market and its democracy, with banks, yet it does with, say, food manufacturers?

        And finally, those executives at Northern Rock? Should they have been allowed to carry on?

    • Posted November 19, 2011 at 9:04 am | Permalink

      Elilot Spitzer explains the need for regulation well. he compares our system of traffic rules and regulations enforced and policed to ensure good traffic flow, and risk free driving, with the horrific chaos that would erupt if every individual decided to drive how he wanted. Aka free market rules, would eventually demand regulation.

      • Posted November 22, 2011 at 1:07 pm | Permalink

        That’s typical of the loss/risk aversion we all have – man, those free markets would be craaaazy! That isn’t the justification for intervention I’m looking for.

        If the govt didn’t bother creating rules for the road, eventually some level of social norms would emerge – the government generally doesn’t regulate how we walk along pavements yet we manage it just fine.

        The point about intervention is that you need principles to justify it on. The most pertinent in the case of financial markets is information – we aren’t particularly well informed, nor will we ever be – finance is a very hard to fathom area and even those that have numerous degrees in it are often caught out. Additionally, the incentives at stake (making a quick buck) mean that those without scruples will manipulate others out of their money due to this information problem.

  10. Posted November 18, 2011 at 8:14 am | Permalink

    The thought of Cameron as the modern day Chamberlain and you in the wilderness seems more stark with each day. I wonder if he will return from Berlin today clutching his piece of paper explaining how he has secured financial peace in our time. I certainly have no expectation that he will (or even try to) achieve any repatriation of powers from his masters in the EU.

    • Posted November 18, 2011 at 11:48 am | Permalink

      Plenty of Chamberlains (and Moseleys) amongst the current lot yet not not one Churchill or Attlee on the horizon .

      • Posted November 18, 2011 at 5:11 pm | Permalink

        Dan Hannan?
        Our host?
        Mr Helmer?

  11. Posted November 18, 2011 at 8:22 am | Permalink

    Disagree about the sale of Northern Rock – at this time.

    NR is a savings and mortgage and savings bank – very active in the buy to lets market.

    It isn’t a lender to business, not involved in financing working capital. That’s the preserve of the big banks.

    I take your point that the taxpayer should never have taken the reigns, but we are where we are.

    NR has stabilised and is eating no meat, why sell now?

    I liken it to managers (taxpayers) involves in a MBI, that was loss making, they stem the losses, sort out the balance sheet and get through to daylight, but that isn’t the time to sell.

    No Mr Osborne has sold a company where all the difficult decisions – and costs – have been taken and got rid of it at a loss. So it’s been handed to the buyer all gift wrapped with a big bow on it.

    Thanks Mr Osborne you’ve taken a needless big hit on NR – you’ve put up vat, income tax, and cgt – doesn’t seem much like a Conservative led government to me.

    Poor taxpayer

    Reply Nationalised industries usually lose money which destroys taxpayer value.

  12. Posted November 18, 2011 at 8:30 am | Permalink

    Meant take the reins!

  13. Posted November 18, 2011 at 8:31 am | Permalink

    JR: I’m not impressed by the argument that “The government, the Opposition and most commentators agree that the current levels of UK debt are too high…” Like anyone with a brain, I want to see ideas or a theory which shows what the OPTIMUM level of debt is.

    For example, given that we are currently paying a negative real rate of interest on our debt (i.e. we are profiting at the expense of our creditors), it is far from clear that out debt is too high.

    For some ideas on what the OPTIMUM level of debt is, see here:

    http://ralphanomics.blogspot.com/2011/09/whats-optimum-long-term-debt-to-gdp.html

    • Posted November 18, 2011 at 10:47 am | Permalink

      Creditors of course being ordinary savers like me and fixed income pensioners who become improverished through inflation.

    • Posted November 18, 2011 at 11:27 am | Permalink

      Ralph Musgrave: ” .. given that we are currently paying a negative real rate of interest on our debt ..”

      The important word there is ‘currently’, the market appreciation of the creditworthiness of the UK government might turn on a sixpence. A case in point; France is on the brink of loosing its AAA credit status, which would make its debt more expensive to finance and negatively impact the state finances.

      The UK government finances are at the moment only relatively healthy because almost all other European economies are riddled with syphilis. The government insists on frequenting the knocking shops.

      Sooner or later if the government doesn’t change its ways …

    • Posted November 18, 2011 at 12:32 pm | Permalink

      Where in your interest rate calculations do you factor in the central bank(s) flooding the system with cash as they monetize debt all along the yield curve ? How much impact do you think this has on keeping rates low ? When do the bond vigilantes step in and demand a higher rate to discount the inflation being produced from this scheme ? How much additional malinvestment is being produced, mostly by the govt, because all other sectors cannot get their hands on this fresh money ? What do you think the price of gold and silver is signalling light of this ? Can this go on forever ?

      Interest rates have been falling for 30 years. They are now nominally close to zero, and real rates are below zero. In the interest rate cycle, in any historical time frame, this cycle is already old. Konradieff made a strong case for a 60 year long rate cycle(trough-peak-trough). We are now 30 years from most recent peak to this trough. A betting man would say the odds are that there is only one way for rates to go , and a betting man would say , given those odds, borrowing now is sticking your neck out for the guillotine.

      Neo-classical economists, however, believe that at any point all you have to do to stimulate demand is to borrow more. A never ending borrowing spree to economic nirvana. They never read history. Debt does matter.

      • Posted November 18, 2011 at 12:50 pm | Permalink

        Bond market vigilantes are back. Or in other words, skittish bond investors trying to protect their capital are running from the bond markets :

        http://www.ft.com/cms/s/0/4baaa250-0c64-11e1-88c6-00144feabdc0.html#axzz1e3oZNLvN

        • Posted November 18, 2011 at 7:34 pm | Permalink

          Perhaps it would be better to let the posters debate the points I make, tear them down if necessary, instead of you blocking them.?

          It is becoming apparent that you like financial regulation, it seems that is seeping into a penchant for regulating comment.

  14. Posted November 18, 2011 at 8:37 am | Permalink

    Shame that the fastest growing industry fior the past 10 years has been all those related to increased debt.

    Both Government and personal.

    Perhaps the tide is now beginning to turn, and we will get back to more normal/acceptable levels, but unfortunately not without a lot of pain.

    • Posted November 18, 2011 at 8:48 am | Permalink

      John

      Just who decides to bring in consultants and when ?.

      Is it the Minister who is in charge of his/her Department, or is it the underlings, or the civil service.

      One is forced to ask, if consultants are required on such a regular basis and at such a huge cost, why do we need to employ so many people, with such little knowledge in the first place.

      Why do the Departments concerned lack such knowledge, that they cannot make a judgement or get advice “in house” from the more experienced staff.

      If a contract is about technical performance, then why not simply write the contract/place the order, based on the promised technical performance of the equipment .

      ie: Performance not met, payment held, as goods not fit for purpose.

      It seems so simple to me to rectify this waste.

      Reply: Civil servants hire them unless restrained by the Minister. I always followed a policy of requiring Ministerial approval for all consultants, and challeneged the department to do much more in house, when S of S.

      • Posted November 18, 2011 at 11:50 am | Permalink

        Once upon a time the MoD had lots of its own experts scattered around the various departments. They could buy in expertise and prototype manufacture from British industry as required, usually on a cost-plus contract basis. This was abandoned is an attempt to obtain better value for money with the introduction of competitive tendering coupled with a reduction of in-house development work. This required MoD staff to change their role, and to do so without appropriate consideration of their aptitude or knowledge.

        Competitive tendering can work well when, say, buying socks for the Army, but was never going to work when doing R&D and procurement of, say , aircraft carriers. The predicable result was British MoD contractors going out of business.

        So if you need to invite tenders for a large, complicated project and you do not have the resources in-house to write the invitation to tender document your only option is to buy in the expertise to write it for you. You then need to buy in more expertise to evaluate the bids. And so it goes on.

        There is much wrong with the MoD, but at least some of their difficulties are a consequence of bad policy by previous governments.

        • Posted November 18, 2011 at 2:47 pm | Permalink

          The bit you left out was how this means you have to have tens of thousands of civil servants to supervise it all, even when the consultants are doing the real jobs.

  15. Posted November 18, 2011 at 8:54 am | Permalink

    JR: “I have no disagreement with their approach, as you have to draw the line somewhere ”

    That is a very peculiar approach to take, where to draw the line is when you have identified all borrowing.

    If state pensions were a ‘pay as you go system’ then the state would not need to borrow to fund it, since the state borrows to fund its activities, surely it is hardly possible to exclude the state pension system just because the NI tax is notionally hypothicated.

    Reply: Yes NI more than pays the pension. There is however no fund – it is pay as you go

  16. Posted November 18, 2011 at 9:02 am | Permalink

    We’ve got a strange mixture of unfunded schemes and funded plans for public sector pensions. About half the OECD countries run on schemes and the other half on plans. One way of cutting the deficit would be to use the capital from the funded plans and turn them into schemes.

    This obviously creates some liabilities – in particular if it is done in areas of public employment which are not sustainable in the long term.

    Another problem occurs if a government comes along and suddenly decides to massively increase personal contributions at a time when people can’t afford those increases so they are forced out of the scheme so not only are they then not covered but the scheme can’t pay the pensions of the people who are currently retired. But no government would be sufficiently ignorant to do that would they?

    • Posted November 18, 2011 at 2:52 pm | Permalink

      oops – let’s rephrase that last paragraph for the sake of clarity.

      When the government counted up how much money it would save by suddenly substantially increasing public sector contributions did they deduct the huge costs which will be incurred by people dropping out of the shemes which are unfunded?

      Obviously some people will be forced to drop out of the scheme because they simply cannot afford the increases.

      The contributions from those people fund the pensions of people who are currently retired in real time.

      So obviously if people drop out the government will have to step in to fully fund their contributions to cover current costs. Any cost of this type have to be deducted from the savings the government expects to make – even if the government allows for none of the future costs associated with the people who cannot afford the increases having no personal pension provision.

      DID THE GOVERNMENT’S CALCULATED SAVINGS ALLOW FOR THIS OR DID STUPID PEOPLE IN WESTMINSTER JUST THINK EVERYONE CAN AFFORD SUDDEN EXTRA COSTS OF SEVERAL HUNDRED POUNDS A MONTH?

      Everything we’re being told indicates that this government is so out of touch they didn’t have the will or the intellect or the insight into the real world to think through these issues and answer questions coherently.

      Christmas shopping day everyone.

      • Posted November 19, 2011 at 9:39 am | Permalink

        Rebecca

        I understand your point about affordability, but please do remember that even with the new increased rates, the pension schemes you are highlighting are still far, far better than taking out a personal pension.

        In the case of self employment, 100% of contributions have to be made out of earnings, no employer contribution exists at all, and annuity rates are altered at a whim, so not even a defined rate of return on a pension pot is guaranteed.

        Many public sector pension holders seem to want no changes ever, no matter how long life expectancy, no matter what the market conditions, they should think themeselves fortunate, that existing contributions and conditions are being honoured to the date of any proposed change.

        Oh for such things in the real world.

        • Posted November 19, 2011 at 7:08 pm | Permalink

          Alan,

          I belong to a highly responsible union which has long recognised the reality of rising costs of pensions. We are a union which had never, in over a hundred years, been on strike and our exec. acted with our full support when they proactively worked to assess the state of the teacher pension fund and plan for rising costs.

          The scheme was fully valued and series of cuts were made with systematic future devaluations agreed which were designed to keep the scheme self sufficient. On top of that agreements were put in place to ensure that should the changes already agreed not prove to be sufficient to keep the TPS self funding further changes would be made. On the government’s side all that was agreed was that should further cuts be needed THE FIGURES WOULD BE PROVIDED.

          All this stuff about the pension schemes being in crisis is lies and spin. That they’re trying to do is to suddenly cut public sector pay by 3%. But they way in which they’re doing this is deeply wrong because it has many vert serious unintended serious consequences they are not accounting for and will not discuss.

          However great a pension scheme is, if you can’t cover your bills at the minute and you’re told it’s going to cost you several hundred pounds a month extra right now then you can’t afford it. So it’s not great because you can’t be part of it. It’s shocking. It’s demotivating. It was an agreed part of the package which is suddenly gone and the very least you would expect is that the government can talk coherently and intelligently about what it’s doing and why but they can’t.

          All this stuff about ‘the gilded public sector’ is obscene as well. You should get out there and listen to the speeches at on of the rallies on the 30. A big proportion of the public sector is on minimum wage or close to. One of the biggest unions said that their AVERAGE pension in combination with a full NI pension was just enough to bring people up to the poverty line.

          Yes there are people coming out of the public sector now with pensions which are too good because they were set up as a proportion of wages when wages were lower – but they are not the pensions which younger people are contributing to. These are nowhere near so generous.

          Yes there is a high government contribution but that’s done instead of wages to encourage people to be part of the scheme – so there are less people in poverty over pensionable age which is good for the country.

          Yes wages in the public sector had risen more than we could afford so everyone accepted a pay freeze which is hurting to allow them to devalue compared to the private sector.

          There are far, far better ways of getting the money out of the public sector than collapsing public sector pensions. Anyone in government who’s remotely interested in reality should feel free to get in touch for suggestions.

  17. Posted November 18, 2011 at 9:06 am | Permalink

    Before the 2010 election I advocated setting the spending in 2010-11 as a cash ceiling for the next following four years, but allowing departments to aggregate this over those five years so they could spend a bit more in 11-12, say, but they would have to claw it back in the later years.

    This would have amounted to around £100bn reduction over five years compared with Labour’s planned spending, but more importantly would have given civil servants a year’s notice of impending real-terms cuts and a five year window over which to plan them. It would also have allowed the new Government to deflect arguements about “cuts” for its first twelve months.

  18. Posted November 18, 2011 at 9:08 am | Permalink

    One ‘New’ bank hopefully with no material hidden bad debts which can constrain lending. Given its a fractional reserve banking system we have and the time of the cycle trying to load debt on the new bank would have counterproductive.

    Now where are the other new banks?

    If an industry is dependent on systemic support. should we not be monitoring the gross profitability before distributions and regulating distributions, dividends & salaries,bonuses. Austerity cannot just be for the little people.

    Like it or not dependent industries are effectively in the Public Sector.
    If they choose to move to 100% reserve banking and not ‘create money’ under special laws- fractional reserve banking – fair play leave them alone.

    Particularly if
    1) capital reserve requirements are met exceeded via new capital/profits
    2) the need for subsidy has gone
    3) sufficient competition exists to market regulate excess profits down.

    Investment banks need to put in a box all by themselves – no state bailouts – with strict borrowing limits.

    What progess has been made reducing the systemic weakness caused by CDS being used for ‘speculative purposes’ or possibly be construed as effectively a tool to leverage subsidies.

    I am sure someone benefited from the deal otherwise it would not have been done, but banking needs reform now – not in 1, 5 or 10 years – now. Othwerwise QE is dangerous and pointless.

    The government now needs to move on to bigger things!

    If private banks wont lend to governments- then governments have to make hard choices and justify them in ‘shock horror’ a manifesto promise/pledge and walk the talk. Obviously not Mr C and he has company for now.

  19. Posted November 18, 2011 at 9:15 am | Permalink

    The need to disengage the taxpayer from bank liabilities is a challenging task. What is your current view about the timing and method to achieve this? Is it to press on ahead with disengagement at full speed, regardless of the uncertainties created by EZ issues? Presumably you would wish to see this done in the lifetime of this Parliament?

    I agree that future public sector pension liabilities need to be identified. But I think it would help put them in context by calculating the net present value of those liabilities as well as their gross value. Presumably this could be done to the nearest £100 million without too much expense.

    The other side of the coin is the need for the coalition to adopt policies that actually help the private sector to survive, let alone grow, such as its wholly misguided and destructive energy policy. The closure of the Alcan plant is the latest example of the malign influence of that policy. It will not be the last.

    Reply: Yes, thjey need to press on and sort out RBS as soon as possible. It is a necessary part of recovery.

  20. Posted November 18, 2011 at 9:30 am | Permalink

    I am appalled by all the money that the MoD (and other Departments) spend on “Consultants”.
    When I joined the Civil Service as an engineer back in the late ’60s, there was a certain pride that if you needed expertise on any subject, you could find it within somewhere within the Civil Service, even if it was not in your particular ministry. Thus, when we build a civil radar station, we needed underground cables to connect parts of the site, so the Post Office, then a government department, was asked to advise us as they had expertise with underground telephone cables. No outside consultant advising a lucrative contract (etc etc), just a friendly discussion with somebody in another department at minimal cost.
    I suspect that it is now all “self protection”. If a project goes belly up, the senior civil servant in charge can say “well we took the best advice available, so you can hardly blame us”. It was getting that way when during my time, with a tendency to favour large companies, rather than often more innovative smaller companies, on the basis “If XXX, who are world leaders have had problems, what chance would we have stood with YYY who only have a few dozen employees” .

  21. Posted November 18, 2011 at 9:55 am | Permalink

    AH, the growth thing. Rather than debating which measure might work in increasing growth, and employment, every single possible measure should be tried. For instance, the ability to lose an employee within the first two years of employment without the risk of being chased to a tribunal; forget trying to pre-judge whether it will or won’t work, just do it, what’s the worst that can happen …… some (hopefully many) people that didn’t have jobs will have and some who were poor in their work won’t. Similarly, minimum wage rules; what’s the worst that can happen, people learning how to work at a lower rate than not having a better paid job.

    A three year suspension of the red tape that ‘might’ he holding business back, the tax cut that costs nothing, would be a great idea. What’s the worst that could happen? Exactly. And if the EU kicks up explain it is a temporary measure designed to boost growth, how cold they possibly argue with that!

    Let’s try it all, heaven knows it might even work.

    • Posted November 18, 2011 at 2:31 pm | Permalink

      Employees who can be fired for any reason will not show any loyalty to their employer.

      If minimum wage is too low people will choose to live on benefits, rather than work. It will also allow immigrants to undercut British workers, causing more unemployment.

      This ‘red tape’ is to ensure products are safe, so unless you want companies to be sued for making defective products it needs to stay.

      Bullying employees will not improve our economy.

    • Posted November 19, 2011 at 2:02 pm | Permalink

      You are assuming employers actually employ people directly. Many do not and use agencies, bogus self employment, umbrella companies and many other ways of employing people without any obligation to that person. They then laughably demand loyalty or employ a revolving door recruitment policy. Ram it.
      Without the minimum wage you would have huge swaths of immigrants working for a pound an hour. Do you think these jobs are some sort of intern work leading to a successful career? We should compete with these worthless jobs you propose and in order to make people compete cut their benefits? Would you work for less than six quid an hour? No for the likes of you huh? Middle aged, middle class men proposing ides they themselves would never entertain need taking down.
      I await your reply.

  22. Posted November 18, 2011 at 10:08 am | Permalink

    David Davis MP wrote a piece in the DT yesterday claiming the EU costs the UK £20 billion a year before rebate. There seems to be no definitive answer how much the UK contributes. The ONS and Government figures do not agree. Someone must know the answer. Also Davis is clear with his view that we should be out of the EU or at least in the outer group.

    In todays DT it is claimed Kaiser Merkel’s Foreign Office has a plan to stop a UK referendum. The article also suggests Germany wants to take over Europe by controlling wayward country’s budgets. Apart from the financial aspect why aren’t countries protesting against the lack of democracy? Are they scared?

    Reply: Yes, he argued for the proposal I first advanced here about a floating opt out. Well done DD

    • Posted November 18, 2011 at 1:38 pm | Permalink

      Your reply starts with, yes. What do you mean: yes they are scared? I think it is too late for a floating opt out. German ministers are saying the pound is dead, we will not be able to resist transaction tax etc. Their deriding talk about the UK should be calmed by a dignified withdrawal from the EU. Negotiation is not possible.

      It appears from the news conference that Cameron has agreed a transaction tax should take place but on a global footing. Already a concession in his stance before he had to give one. It also appears that they are unified in a stronger unified Europe!

      I hope the in out EU referendum gathers momentum and the UK leaves ASAP. Unless Tories come to their senses, and I cannot see this with Cameron, then UKIP is the answer. Farage spoke in a clear direct way about the unelected take over of Europe the other day that most people would want our PM to do.

      Reply: And how pray do you think we will get a referendum through the Commons, given the last vote on it? Mr Farage is irrelevant because he has no votes where it matters

      • Posted November 18, 2011 at 5:30 pm | Permalink

        I have trust in people like you to convince your colleagues that continuing to run over the cliff to follow the Germans like lemmings will not help them.

    • Posted November 18, 2011 at 2:32 pm | Permalink

      Well if the 17 Eurozone members enter into a new financial union we can easily move into an outer group of every country that doesn’t use the Euro.

  23. Posted November 18, 2011 at 10:17 am | Permalink

    Some say you should add in the future costs of the basic state retirement pension scheme. The government thinks this is balanced by future NI and Income tax revenues, and has always been a pay as you go scheme, so it has not chosen to do so. I have no disagreement with their approach, as you have to draw the line somewhere about how many items of future public spending you capitalise, and how many you treat as a call on future income.

    ================

    Well, the question is then what is capitalised and what isn’t.

    If we take the state pension, people have paid in, and I can ring up the DWP and get a statement as to how many years I’m entitled to. That’s a contract. That means it should appear on the books.

    The answer for the state pension, is 2,400 bn of liabilities.

    There are other lies when told about the state pension. For a company pension, if it has a surplus, it means its assets are greater than its liabilities.

    For the government, a surplus means its it taking more in NI than it is paying out in state pension. In other words, it is making a profit. Since the money isn’t invested, a surplus on income now, means a huge deficit in the future when the money falls due.

    That’s why it needs to be on the books.

    So what’s your excuse for not putting it on the books? Let me guess. The number is so large, that its an admission the UK is bust.

    Now, what about the other contracts?

    Nuclear decommissioning. You’re taking money up front. Why shouldn’t that appear?

    One the banks, the liabilities aren’t the same as the unfunded government mess. Most of the banks involved still have large assets. What matters is the net position. Just adding the liabilities on is just as nutty as omitting the state pension.

    Similarly with PFI. Part of PFI is capital, part is spending. The capital part should be put on the books.

    For other guarantees, what needs to be booked is expected losses netted with present value of any cashflows. So lets take the guarantee for BT’s pension fund. There are no fees paid. So the asset part is zero. What then needs to be booked is the BT pension fund deficit.

    Now for booking future tax receipts now. What you are saying is that the state can treat the citizens as assets. Give each citizen a value and record it in the accounts. At the same time the state can also record the breeding of its citizens, along with horses and cattle. Ah yes, it already does this, just as the slave owners of the past.

    The government has rightly said it intends to remove the structural deficit over the lifetime of this Parliament.

    Ah yes, onwards and upwards with the debts. At least you added the word structural, rather than lying like most politicians. Why not get rid of the entire deficit and pay down debts? Ah yes – its too big.

    It’s tipped. The growth of debt is larger than the capacity of the country to grow, because you have to tax to fund those debts causes a recession, which is now a vicious circle.

    It’s going all Greek.

    Reply: There is no secret about the fugures, which this government has made available. It is a matter of judgement which ones you use for which purpose. I have consitently included unfunded public sector pension liabilities, PFI,PPP and bank debts as well as state borrowings but have left out of the total debt figure the basic pension, which I think is more like benefit payments in the way it is financed. It was never a funded scheme, we all depend on the good will of some future Parliament and taxpayers to pay the bills.

  24. Posted November 18, 2011 at 10:32 am | Permalink

    Hmm controlling the ECB debts …

    Interesting article on ftaplhaville. It suggests that the ECB is stepping beyond its remit.

    Apparently the ECB can lend E20Bn a week (who gave them permission) and has been maxing out its credit card for a few months now. I guess its sitting on a quarter of trillion in Euro Gvmt bonds already.

    http://ftalphaville.ft.com/blog/2011/11/18/753581/something-for-the-bail-out-sceptics/

    However, Gary Jenkins at Evolution Securities has crunched some numbers and he reckons the bank is now sitting on up to €100bn of Italian debt alone. …

    Now, Frankfurter Allgemeneine Zeitung reckons the ECB has set an upper limit on bond purchases of €20bn a week. But as we pointed out earlier today, these interventions are starting to add up. …

    If the ECB bought the full €20bn for the next 52 weeks, for example, it would be sitting on €1,040bn of Eurozone debt.”

  25. Posted November 18, 2011 at 10:38 am | Permalink

    Or to put it another way. This happended on Friday … The ECB are effectively bailing out EZ Governments. e20billion a week is enough to keeping buying PIIGS bonds and get them off the hook. That’s e ONE trillion a year – which could in theory be raised without a national vote – and could cover all the PIIGS new bond rollover needs.

    http://www.bloomberg.com/news/2011-11-18/ecb-council-backs-27-billion-weekly-limit-on-bond-buying-faz-reports.html

    Can I ask a question John – is the UK Government liable if the bonds they purchase have a hair cut?

    Reply: The UK government is not buying Euro area bonds. Our shareholding in the ECB is tiny as we are not Euro members. The Greek voluntary agreement excluded governments who do own Greek bonds taking any hit. If the UK government or the Bank of E does buy bonds which default, then yes we take a loss like everyone else.

    • Posted November 18, 2011 at 11:51 am | Permalink

      Thank you for the links. In looking at them I came across another interesting link here:
      http://www.voxeu.org/index.php?q=node/7290

      The author, Professor Hans-Werner Sinn of the University of Munich, says that the ECB has been running the printing press to bail out Ireland, Portugal, Spain, Greece and now Italy. He says that Germany is outvoted on the ECB and that to counteract the ECB printing press the Bundesbank has turned its printing press into a shredding machine!

      He concludes:
      “The European parliaments have no control over this game, and as such Sarkozy’s defiant statement is more than an empty threat. The ECB Council is the true economic government of the Eurozone. As long as it retains its power, it can threaten the parliaments of the Eurozone with the printing press and enforce comprehensive rescue measures, up to and including a transfer union.”

      Is this why Sir Mervyn Kking came out so strongly in favour of the Bundesbank`s position the other day? It seems we are in murky waters about who does what and who controls what. Can you shed some light?

      Reply: it is clearly true that the ECB has made money available to banks on a alrge scale and has bought lots of bonds of so claled sovereigns. Ireland had to accept the package when the ECB said no more money for Irish banks.
      The more difficult question is has the ECB sterlised the money it has spent? I am trying to find out, but the sources are taking time to track down. I suspect not entirely.

      • Posted November 18, 2011 at 1:54 pm | Permalink

        Thanks

  26. Posted November 18, 2011 at 10:49 am | Permalink

    JR How can you reasonably support the sale of Northern Rock for a loss ? Did you yourself not hold the position, –in a posting some time ago, — that such holdings should be sold to the public (at the “right time” , –“right time” albeit being the critical words ) ala the privatisations you yourself promoted and implemented in the 80’s ?

    That would maybe have been better, raised more money, and also promoted the “Big Society”.

    Reply: The state sector has made a mess of buying, owning and running NR. we have to accept they have lost lots of money. Wishing will not bring it back. I don’t want to run the risk fo them losing us more.

    • Posted November 18, 2011 at 11:38 am | Permalink

      JR: ” .. we have to accept they have lost lots of money. ”

      UKFI have lost lots of money? The organization that was going to turn a profit.

      What is extraordinary is that you appear to have reached the conslusion reluctantly, when even before the banks were put on life support it was apparent they were worthless.

      If we (the UK) let the already bankrupt banks fail, we all know the names by now, where would the UK source its borrowing requirements?

      replyNo, not so. I always said we should not buy into them, and said they had lost lots of money.

  27. Posted November 18, 2011 at 11:17 am | Permalink

    The government is only reining in spending [well done] but not making real cuts and this is where we come to a parting of the ways. The government must demonstate it is on the ball, it does not seem to realise just what is coming. Two things to ponder and in order to deal with one, it must do the other; cut and insure.

    The government retrenchment must be emboldened, billions can be saved by all departments, procurement being an obvious area: in the NHS by way of example. Government contractors and ‘advisors’ the waste is unimaginable, reference the MOD and the small matter of £600 million ‘gone west’. Low hanging fruit – yes, lots and lots of it.
    There is an earthquake coming, it will commence in the EZ and it will cause a tsunami to hit these shores.
    We should be shoring the defences, recapitalisation of the banks – has it done the job? Not really, must be the answer, there are still billions of dodgy [read lunatic] credit default swaps bulging the books of our indebted banks and lots of exposure to soveriegn Eurozone [idiot] loans. I hope we have a plan, if we do, we should be making it grander and bigger.
    Retrenchment and growth.
    Immediately, the renewable energy boondoggles should be binned by Osborne, the waste of money is a scandal. We must not commit more money to foreign aid, and Osborne should scrap the tax credit scheme – a Bonkers Brown idea to bind everybody into the ‘client state’ he desired and coveted, then give it back in across the board counter regressive tax cuts – raise the minimum threshold.
    Business must be a priority, the onerous burdens of red tape [cut it now], employer national insurance, business rates, capital gains tax – all of it wants reducing in a big way – how does this lot expect the private sector to pick up the slack when they’re squeezed till the pips squeak?

    Supply side recovery, is the only way but first we must weather the coming storm.

  28. Posted November 18, 2011 at 1:26 pm | Permalink

    There is no point people tut tutting about losses on these holdings. The last government was wrong to buy these stakes at the prices they paid.
    ——
    The government did not purchase Northern Rock it stole it. The loss reported in the media relates to the extra capital that the government injected into the good bank to try and increase lending.

    Becuase it was not avoided, shareholders have to accept that their bank did go under and so they lost their money.
    ———
    NR did not go under and the shareholders money is sitting bold as brass at £1,700,000,000 on the balance sheet of Northern Rock Asset Management.

  29. Posted November 18, 2011 at 1:26 pm | Permalink

    There are also commitments on nuclear decommissioning, rail-maintenance and PFI.

    • Posted November 18, 2011 at 2:59 pm | Permalink

      Not to mention the government share of the estimated $76bn bill to decommission North Sea platforms. Under the PRT scheme, companies paid tax up front while fields were in production in exchange for being able to claim refunds when they have to remove the platforms. If you look at the detailed PRT receipts month by month, there are already months where the repayments exceed the revenues. Of course, government might renege the deal, but environmentalists might make them think twice about that, because the consequence would be bankrupt companies unable to afford to pay for decommissioning. Bear in mind that many platforms are now owned by small companies who specialise in squeezing the last drops out of fields – not by the oil majors who made the original investments. Although the majors have provided guarantees to cover against elements of small companies risk they do not extend to government reneging on its deals.

  30. Posted November 18, 2011 at 1:32 pm | Permalink

    JR I have to reply in turn to to your reply to my intial posting .

    1) You say that the state “Has made a mess , etc ”

    “The State ” is now run by (two )different political parties, but why have they got iit “right” (no pun intended ), by selling , —- now ?

    Why not have let the OBR or e.g. an independent actuary , decide the “right ” time ?

    2) What sort of message does this send to various audiences ? Including the markets ?

    This could be read as a vote of no future finanicial confidence in the future of the banking sector.

    3) Why not pursue a public sale or auction ? ala the 1980’s ? This would increase public participation , increase share ownership , etc. i.e. RE -mutualisation ? Raise more money ?

    4) Related to 3)…Richard Branson obviously thinks he can make a profit out of this, why should however the potential profit not be shared around , –“the share owning democracy ” you advocated and were involved in implementing in the 1980’s ?

    5) Why does it take a Labour supporter to advocate this !?

    Reply: They did invite bids. The Branson one was the only or best one. No-one wanted to run a mutual.The bank has a much better future with a new brand and new management than it woudl have had in the public sector. It will now trade as Virgin Money

    • Posted November 18, 2011 at 6:06 pm | Permalink

      It’s outrageous, how dare Richard Branson bid for this bank with the low motive of ‘making money’. I mean if he is successful at running the bank (unlike the state sector) he will produce profits which will be taxed and repay taxpayer’s investment and pay for services in the future.

      Disgraceful, far better to keep it in the state sector with subsidies and state liabilities losing money….that’ll solve our growth problems eh?.

      zorro

  31. Posted November 18, 2011 at 1:36 pm | Permalink

    It’s all very confusing to a simple mind like mine.

    The UK has an all-in debt level to GDP ratio that is probably one of the highest in the developed world and we have a current annual budget deficit to GDP ratio that is about the highest in Europe. And yet we can still apparently borrow /print more money at incredibly low interest rates.

    The PIGIs are being required by the EU to put through serious real cuts in public spending, slashing payroll with massive job losses and salary cuts (their deficits and debt levels are in some cases not as bad as the UK). Cameron and Osborne keep bleating on about how well regarded the UK economy is because of the “hard” measures taken to get our deficit (but not our debt) under control. Going along with the Cameron/Osborne line, the BBC, Miliband and most of the population (judging by audience response on programs such as Question Time) would have us believe that serious cuts are making lives a misery with the implication that we need much more spending not less.

    Back to my simple mind. With Govt spending this year of £700bn or so (50%-ish of GDP) and govt revenues of way under £600bn, the problem is clearly one of spending too much rather than taxing too little (especially since the deficit is about the same as the total raised from Income Tax). To get out of the mess, even with much better growth than we are likely to get for years, there needs to be significant real reductions in spending. I wonder why this its not happening and how long we can keep our AAA rating.

    Toodle pip

  32. Posted November 18, 2011 at 2:39 pm | Permalink

    “There are then the unfunded public sector pension liabilities of £1.3 trillion. ”

    How exactly are the public sector pension liabilities higher than GDP?

  33. Posted November 18, 2011 at 3:47 pm | Permalink

    As John describes this system it resembles nothing more or less to me than a ponzi scheme associates are always urging me to join.I can decline politely to the latter but when it comes to government it seems it is an offer we cannot refuse.In order to work it requires fresh infusions of blood,new people joining which in government terms would be unfunded tax payer infusions.Most of those ponzi schemes mentioned at the start go south collapsing upon their own internal contradictions but when it comes to government they just print more money and the next generation gets to pay.Ingenious -not. Why not advocate Capitalism and stop pretending that governments can run the economy.No more deficit spending.Seems simple enough or am I missing something?

  34. Posted November 18, 2011 at 4:00 pm | Permalink

    Why include total debt which is £5.5 trillion?

    Source: IEA, http://www.iea.org.uk/blog/true-level-of-uk-government-debt-exceeds-£5-trillion

  35. Posted November 18, 2011 at 4:29 pm | Permalink

    John, this is where you excel – there is no doubt you should be in the cabinet.

    I want to point out a figure that totally shocked me regarding the MOD – can you believe that there are more people in the MOD, pushing pens, then there are in the fighting forces – who also have their own admin groups?

    I firmly believe that if all the dreadful waste was cut out of the MOD that fighting jobs could easily be saved as well as better paid and better equipped, for less money.

    Reply: I agree about jobs in MODF -and in other parts of Whitehall.

    • Posted November 18, 2011 at 6:25 pm | Permalink

      I agree also – a lot of these administrative jobs are caused by excessive regulation complemented with social engineering. It is rampant throughout all government agencies. Yet what happens, do these jobs get cut or is it the front line which takes the hit?

      zorro

  36. Posted November 18, 2011 at 4:31 pm | Permalink

    To save us a lot of money I would suggest that we stop the dole.

    Why do we link benefits to unemployment?

    The fact that someone has or does not have a job should be immaterial to their entitlement to financial assistance. Dole is outdated, expensive to administer and can result in a great deal of fraud.

    • Posted November 18, 2011 at 6:26 pm | Permalink

      Are you suggesting a citizen’s income type arrangement or just advocating the complete stoppage of all benefits?

      zorro

      • Posted November 19, 2011 at 9:55 pm | Permalink

        Job Centres are duplicating work that can be done perfectly well in the private sector at no cost to taxpayers. Furthermore, job centres have recently been the victim of far too many scam jobs that clutter up their system.

        There is also an issue where job seekers apply for jobs they do not want in an effort to provide job-seeking proof to the job centre. This wastes everybody’s time.

        The benefits system can deal with people who have insufficient money; there is no need for the lack of a job to trigger benefits.

        Stop all benefits? No. We have a moral duty to help the destitute and the disabled. However for the able-bodied, I believe that the family should be given the chance and the responsibility to provide welfare before the state steps in. For that reason the threshold for state help for the non-disabled should be destitution and any state help should be as local as possible and from local budgets.

        The current system is not good for the jobless or the taxpayer. For example, we have too many youngsters living with their parents claiming dole money as pocket money. These youngsters never grow up.

    • Posted November 19, 2011 at 2:13 pm | Permalink

      A stoppage of all benefits including medical and housing? Starving children and people in rags on the street for reasons beyond their control. What would happen next Ken?
      Your silly anti BBC site is anonymous for some reason. Care to explain why? “Dae ye ken him?” as they say in Scotland.

  37. Posted November 18, 2011 at 4:51 pm | Permalink

    Not lot to complain about in this blog except to tut tut at the attitude to pensions. Mr Madoff would be quite happy to embrace your views as they correspond exactly to his.

    Your views on PFI liabilities would be saluted by most bankers who would be happy to put off balance sheet anything awkward. Most PFI contracts are a nonsense in the practical sense and whilst they might have a plethora of auditors behind them that does not change the proverbial pigs ear.

    The structural deficit will of course remain so long as nothing is done about spending and, nothing is being done about spending. So long as spending increases, as it is there will be no growth in the economy no matter how hard the government tries to spend on all sorts of things, from high speed trains to training programmes.

    No matter where they found all these strange , so called economic, ideas they are patently wrong and one has only to look at where it has got them over the past four years to see the evidence.

    No growth, notwithstanding the stupidly false figures they produce for GDP, means recession and likely as not,and, if they continue to fool themsdelves, depression in spades it will be.

    There is nothing so frustrating as being led by donkeys.

    Reply: Both I and more importantly the government regard the PFI/PPP as liabilities and have quantified them and put them on balance sheet. I am quite happy for you to also use a capitalised figure for the state pension, but there is an argument for also capitalising the revenues which will pay it as an offset.

  38. Posted November 18, 2011 at 5:04 pm | Permalink

    The private debt is easing due to the slow puncture in savers’ bank balances being used to buoy up property prices and mortgagors. A deceitful transfer of wealth orchestrated by the government and BoE.

    Northern Rock sails off to the Virgin Is leaving behind an accretion of toxic sludge for the government to clear up. If banks are to have living wills etc, why are they allowed to trade amongst themselves in securities which do not have a market quotation or price or where counterparties are unknown? What took place before the crash looks very much like a game of pass the parcel in respect of some derivatives and other products in which the country bumpkins got left with most of the junk. How can banks know their true position to report to the BoE or to be monitored by Risk managers or be in compliance of the law on trading whilst insolvent, if they can hold as ‘Assets’, items whose tradeable value cannot automatically be quantified via a market quotation? Furthermore, should not purchasers of financial products have statutary rights to far more information on the constitution of some of the products in which they deal?

  39. Posted November 18, 2011 at 6:17 pm | Permalink

    We were certainly bound to lose money on Northern Rock with George Osborne selling at such a time.

    He was notorious as Shadow Chancellor for promulgating three different policies on Northern Rock in one day. After that he was told not to do policies, just carp and try Nd drag Britain down. Hard to stop it seems …

    Branson spent some time sucking up to Labour hoping for the Lottery to run. Nix.

    He favoured Osborne’s firesale option when HMG bought the bank.

    Later he signed the letter backing Osborne’s NI conts rise vs Darlings, albeit that, as VAT went up and Osborne’s NI conts increase is litle different to Darling’s proposal apologies are due from the rich who signed that letter to we Brits.

    (Allegations against Bransonb without evidence left out-ed)
    But the biggest failure in thus sale isn’t even the timing and unnecessary loss, it is the lost opportunity for diversification of Britain’s banks. Let’s hope the Lib Dems don’t pretend thru favour mutualisation at the next election, but they will …

    Reply: I think the Rock rebranded as Virgin Money may be a good competitor on the High Street, which will be able to offer more loans to mroe businesses and people.

  40. Posted November 18, 2011 at 10:55 pm | Permalink

    John:
    This estimate of 250% GDP for total public debt is all very well, (and rather conservative compared to some estimates), but would you like to hazard a guess for the total debt of Germany, Italy and France, with their much bigger unfunded pension liabilities and state-owned banks ?
    Must put ours in the shade !

  41. Posted November 21, 2011 at 3:42 am | Permalink

    This whole business is very depresssing. These deficits are caused by governments spending too much, yet European governments – UK’s included – are highly reluctant to cut their expenditure. High growth is not a pre-requisite for cutting government expenditure, nor is it excusable to limit cuts to low hanging fruit.

  42. Posted November 23, 2011 at 11:48 pm | Permalink

    Mr Redwood,

    “Governments are not well equipped to run banks. Taxpayers should not be standing behind the large position risks run in say the RBS investment bank, and subsidising the large salaries they still pay as if they were a profit making privately financed operation. Yesterday’s decision to sell Northern Rock at a loss was a welcome first step.”

    Aptly put. I agree that Government’s are not well placed to manage any private Business. We should have more Banks – much more. That’s what free market competition is about.

    Do you think that Private Businesses are well equipped and correctly motivated to run our monetary system? Or should the Government control the quantity of money in the economy?

    Why is the Government allowing Private Banks to create 97% of our money which loses the tax payer billions of pounds that could be more efficiently directed to produce real wealth in the economy?

    It’s Business and Bailouts as usual unless the Government takes back the power to create the Nation’s Money. I have not heard a single valid argument against the PositiveMoney campaign. In fact most Politicians tend to avoid the subject as it may upset their campaign contributors, or they simply do not understand the concepts of Government created currency. Or they think that Banks do not create any additional money when lending to borrowers.

    What do you think Mr Redwood, shall we kick the can down the road for a few more months?

    Reply: I favour solving the underlying problems – delivering too little for too big a cost in the public sector, and banks that still have to sort out past problem loans. Of course the state has to regulate and control credit creating banks in a single currency scheme like the pound – I have always argued for the nationalsied Bank of England the government to accept its responsibility for doing that and to do it well. The problem is they did it very badly 2005-9.

    • Posted November 24, 2011 at 11:12 pm | Permalink

      Thank you for your reply.

      “Of course the state has to regulate and control credit creating banks in a single currency scheme like the pound ”

      I meant prevent Banks from creating credit money, thereby eliminating the need for regulating the Banks. If Banks lent money that was already in existence, they would have to regualte themselves as if they lent the money to a borrower who failed to pay the money back, they would suffer the loss, but the money would not be written off there ledger sheets as it is now. The money would still be in the econony lubricating the wheels of industry. The only people to suffer wouldbe the Bank – who lost their money, their investor and the borrower who would suffer the humiliation of bankruptcy.

      I am glad you favour solving the underlying problems. One way to solve that is to provide the Government with money created without interest payments, allowing them to spend this directly into the economy. What will eliminate the “waste” in Public sector spending (if I am understanding you correctly) is to lawfully prevent the Government from borrowing for the normal course of Government activity. You must be aware of the immense fraud being perpetrated by the Housing Benefit cheats who have most of their Housing rent paid for while unlawfully being employed and having all the usual luxuries associated with gainful employment. This fraud is tolerated mostly because it is a way of maintaining the Housing Market which is a key factor in maintaining our Debt Based Money System.

      The problem -Mr Redwood, IS the “credit creating Banks”. Banks that lent money created by the Government, would not be a problem. The MPC should control the money supply (through Government Policy) not the Private Banks. Have you had time yet to read the proposals from ‘PoisitveMoney’ ?
      your colleague Steve Baker MP, has and has spoken at two conferneces organised by ‘PositiveMoney’. It is merely an extension of the 1844 Bank Charter Act. The proposed Bill will solve many of the Problems of waste and instability you have discussed in your previous articles. It would be a good investment of your time to study them.

      http://www.positivemoney.org.uk/draft-legislation/

  • 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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