Why the UK economy is not growing as fast as the Office of Budget Responsibility forecast

 

This site has drawn attention to fundamental problems with the UK economy as a result of the Credit Crunch and the huge increases in state borrowing in recent years.

The first is the broken banks. The authorities are relying on huge money printing operations. This money can only subsidise the public sector. The failure to sort out the state owned banks, and the decision to shift to much tougher bank capital requirements at the wrong point in the cycle mean the private sector is starved of cash for recovery.

The second is the  squeeze was placed for the first two years of the Coalition government on the private sector rather than the public sector. The government decided to bring the deficit down by large tax increases. It carried on with most of  the big tax rises of the outgoing government on incomes and employment, and imposed new ones of its own on capital gains, energy and consumption.  Energy prices also shot up as the full effects of the previous government’s  devaluation hit consumers. This resulted in a fall in living standards, cutting private sector demand when extra demand was needed to boost growth.

So what should the government do now? To fuel its much needed private sector led recovery it needs to change both these approaches. I have set out in detail how it can revamp the banks in its ownership, creating several strongly financed competitive domestic banks that could start to finance recovery. They could provide the money for new roads, broadband, water supply schemes, homes and all the other items the economy needs.

The Budget also needs to tackle the squeeze on incomes. That requires income tax cuts at all levels of income. It requires putting capital gains tax to a lower  level which will stimulate more business activity and increase the revenue it raises.  It means having a policy of affordable energy. Some of the tax changes wikll be self financing as they boost the growth rate. Some will need to be offset by spending reductions. Let’s start by cutting overseas aid to countries like India, and by demanding a better financial deal with the EU.

Meanwhile, we still need our productivity revolution in the public sector. Where are the new approaches to public service delivery? We do not need cuts to teachers or nurses. We do need new employee led service provision, more contracting out, more concentration on providing better value. And we still need to stop doing some things the government cannot resist doing.

112 Comments

  1. Adam5x5
    February 16, 2012

    Again you hit the nail on the head.

    Three simple imperatives for the government to solve the problems.

    1. tax less
    2. spend less
    3. do less

    Though an argument that you might want to think about regarding public spending (I’ll use the NHS as an example).

    Sooner or later public spending will become unaffordable.
    Due to Baumol’s cost disease, inflation in the NHS is currently at 11%. Considering normal inflation is 5%, the proportion of money spent on the eNHS will grow until the NHS budget consumes 100% of government spending. reform has to happen.

    I’ll try to find the source where I read those numbers, but it’ll be this afternoon.

    1. Electro-Kevin
      February 16, 2012

      There is also the issue of welfare funding.

      The recovery (the new jobs) would not come until well after the tax cuts so how are welfare and the NHS to be paid for in the meantime ?

      I’m not saying it shouldn’t be done but it must be doubley difficult for a government with two liberal PMs in it. It would necessitate shock reforms in the public sector.

      1. Adam5x5
        February 16, 2012

        Shock reforms are precisely what’s needed.

        The tax cuts would not result in a shortfall in funding if the NHS & welfare are reformed at the same time.

        NHS – more competition, state funded, privately supplied a la france. Get rid of useless & expensive things like alternative therapies, homeopathy, etc – use only proven medicine (double blind) medicine. Also cut the administrative burden &no. of managers.

        Welfare – welfare should be a safet net for if someone falls on hard times, losing job etc – not a passport to luxury for those who can’t be bothered to work.

        If something isn’t done soon, the burden on the productive sector of the economy will become too onerous. After all, why bother working if you’re just going to lose it all in tax?

        1. Electro-Kevin
          February 17, 2012

          I’m merely explaining why a liberal PM may not be inclined to cut tax.

          If we had a Conservative one we wouldn’t be having this conversation.

          1. Adam5x5
            February 17, 2012

            What we need is a classically liberal (or Gladstonian Liberal if you prefer like I do) government.

            I was just showing that it would be possible to meet the bills and cut tax & spending at the same time.

            Apologies if it seemed like I was having a go.

    2. A.Sedgwick
      February 16, 2012

      Apart from the NHS there are several other financial and social time bombs that will go off in the next decade or so – EU collapse, UK population dramatic increase, public sector pensions cost, private sector unable/unwilling to keep funding public sector, unsupportable national debt without more monopoly money and chronic devaluation, serious and continuing fall in standard of living for many.

  2. Zorro
    February 16, 2012

    In a nutshell, yes. Of course, the Coalition will see this as spoiling tactics/leadership challenge because they have been doing the exact opposite of what is needed. Rewarding the feckless and punishing savers. The latter are the ones which fund real money investment, not the bogus QE state financing/bank balancing act…aka rewarding failure, zombie resurrection job currently in place. A necessary tactic but only because they don’t have the cojones to do what is necessary.

    The level of vision/competence in government is damning. They get D- but only because ‘Jonah’ Brown was E-.

    Zorro

  3. Edward.
    February 16, 2012

    Some very good thinking here John, what worries me though is that the comment presupposes two things:

    1. that we have a chancellor who knows what he is about,
    2. that we have a government who actually gives a damn.

    On the above points, the jury will remain, out.

    I can see no hope of anything changing in the next three years, Cameron is happy to coast along.
    However, the imminent collapse of the Eurozone periphery and the consequent knock on effects may jerk him back to reality. Because, there will be some very hard choices to make and it will affect us all, causing a very fundamental rethink of all government expenditure and policies.

    Finally, Britain will never restore its fortunes, until we see some rational coherence on energy policy.
    We have the necessary technological know-how, to remedy our ramshackle power generating plant and infrastructure and we could start today. China understands very well the need for cheap power – until our gormless green blinkered numpties in the executive appreciate this salient fact, we are stuffed.

  4. Robert K
    February 16, 2012

    Is no-one in government listening to these arguments? How can a Conservative-led government have allowed the continuation of the profligacy of the disastrous Brown years? Cameron and Osborne were alleged to be free marketeers. What a joke.

    1. Bob
      February 16, 2012

      Douglas Carswell coined the term “Continuity Brownism”, which I thought summed up the George Osbrownes performance very well.

      • Same spend and borrow
      • Same reliance on monetary stimulus
      • Same print-more-money-and-pray experiment
      • Same high taxes
      • Same bailout-and-borrow
      • Same lack of supply-side reform
      • Same lack of growth

      http://www.talkcarswell.com/show.aspx?id=2255

      James Delingpole enumerated David Cameron’s achievements so far as follows:

      He has prolonged the economic crisis, impoverished savers, encouraged the profligate and further enriched the rich with the kind of Quantitative Easing programme which would make Paul Krugman positively enormous in his trousers.

      He has urged quotas for women in the boardroom, apparently in the belief that the State has either the knowledge or the right to decide how business conducts its affairs.

      He has presided over a massive wind-farm building programme which, besides destroying the British countryside and enriching his father-in-law, is causing energy bills to soar to the point where old people are dying of hypothermia.

      He has surrendered at almost every turn to the Carthaginian terms offered to Britain by the European Socialist Superstate.

      He has proved himself incapable of expelling the Islamist hate-preacher Abu Qatada.

      And then this morning I heard on radio 4 that the govt were considering dropping the idea of “penalising” any graduate wishing to accelerate repayment of their tuition fees!
      Why would you punish them for settling early? Surely it should be encouraged?

      All things considered, this does not appear to be conservative led coalition, in fact Bob Crow and Barry Chuckle could probably do a better job

      1. Disaffected
        February 16, 2012

        It could not be worse than this lot. They Gordon Brown look good. Especially pension robbing.

      2. uanime5
        February 16, 2012

        Originally they were planning to penalise graduates for repaying their tuition fees back early because the rich would quickly pay off all these fees, while the poor would spend 30 years losing a percentage of their salary to a debt that they were unlikely to ever pay off.

        The net result of this policy will be that university becomes the preserve of the wealthy, while the poor shun UK universities to avoid 30 years of debt.

        1. Bob
          February 17, 2012

          uanime5
          I really don’t think it’s governments place to penalise people for being successful or better off, and you can’t choose your parents.

          This kind of discrimination taken to the full extent, would result in banning all except the poor from university in the name of “fairness”, or maybe even taking all of the wealth from the better off to reduce them to rags (..wait a minute!!…).

        2. Disaffected
          February 17, 2012

          Rubbish. The poor do not have to pay tuition fees. The squeezed middle will be the only ones unable to afford university. This will be the preserve for the rich, poor and EU only. The squeezed middle will be squeezed out. Socialist/communism idealism for you.

        3. APL
          February 17, 2012

          uanime5: “because the rich would quickly pay off all these fees,”

          god give me strength! ‘The Rich’ shouldn’t qualify for student loans.

          But I rather suspect your definition of ‘rich’ and mine are poles apart.

      3. lifelogic
        February 17, 2012

        Indeed you and Delingpole have it spot on. It looks like the pension robbing is to continue with the loss of higher rate tax relief if the Libdems have their way. This, in effect, virtually limits private pensions to about a £600K pot as it is not really worth saving more at 20% relief, just to pay 40% tax on it later. The bloated state sector pensions would not be affected much as they do not have to contribute very much anyway.

        1. A.Sedgwick
          February 17, 2012

          My advice to those receiving 20% tax relief is to save as little as possible in your pension fund and put other longterm savings where you can better control the capital. The case really is 40% or 0% for everyone.

          1. APL
            February 17, 2012

            A.Sedgwick: “My advice to those receiving 20% tax relief is to save as little as possible in your pension fund”

            Ahh, pension fund. That savings vehicle designed to make the pension companies very rich and pay the pensioner a pittance.

            I rather think someone starting out now, would be better served by buying an ISA each year and reviewing and where appropriate moving the ISA each year where appropriate.

            Come to that, a ‘Pension ISA’ wouldn’t be a bad idea, pay in and the government pays in an amount in proportion to your tax rate up to the limit of the ISA.

            Withdraw money before you retire and the withdrawal is penalized at your prevailing tax rate.

            If you want to simplify and promote long term saving, that seems to be an easy way to encourage people to build up a large tax exempt savings pool for retirement.

          2. lifelogic
            February 17, 2012

            Enterprise investment scheme and the Seed E.I.S. are the only tax sensible investments. The trouble is finding on honest provider to invest in. Perhaps best to set up your own with a few mates.

  5. lifelogic
    February 16, 2012

    Indeed they have squeezed the wealth producing sector and continued to bloat the state sector. Banks need sorting out to get competition & lending going RBS/Lloyds in particular, allow business people to use their pension funds in the business, allow the new seed EIS tax scheme to give some guaranteed returns to investors.

    Cut the state sector in half and stop doing pointless or damaging things, reduce tax rates, allow business to fire people cheaply and stop inconveniencing them at every step and get some cheap energy. Get rid of the anti business sentiment in government people like Cable and many others. Give a positive business smaller government message and direction for once.

    1. lifelogic
      February 16, 2012

      I see today that they are now advertising loans at 1700%+ APR on national television. Surely it is time to limit the top rates lenders may charge to something like 30%. No one can really benefit from loans at these kind of rates they are just creating misery for the already desperate.

      1. lifelogic
        February 16, 2012

        Surely illegal loan sharks are cheaper than this?

      2. StevenL
        February 16, 2012

        This, and pawn broking seems to have taken over from scrap gold buying as the latest legal ‘get rich quick off the naive and desperate’ schemes.

      3. Bazman
        February 16, 2012

        Many of the people who borrow from these legal loan sharks are also being preyed on by unscrupulous employers paying poverty wages with the sack be held over them everyday. Or landlords ripping off their tenants. Why are you so against this but not the other?

        1. lifelogic
          February 17, 2012

          At a time when property value have declined in most areas and interest margins/fees from banks are very high and rents, both commercial and residential are stagnant or have declined, most landlords are are loosing money on their investments. Not ripping off tenants at all, if they do try to tenants just leave.

          1. Electro-Kevin
            February 17, 2012

            Property and rents are still too high in price.

            Employers are able to keep wages lower because of imported labour.

            Taxpayers subsidise those employers by paying dole money and extra public service costs to enable them to ignore British workers.

            British workers not good enough ? In many cases I agree. That is largely due to government disincentives from cradle-to-grave.

      4. Adam5x5
        February 16, 2012

        Those high interest rates are a result of the way the APR is calculated. The fact the loan is a short term deal artificially inflates the APR.

        Lets say you want to borrow $100 for two weeks.

        Assume an admin cost of $15, just to set up the loan including admin overheads, staff etc.
        Say that you also have to cover defaults, which I believe are around 5% (not certain, but it’s around this).
        Assume for the sake of simplicity that all loans are two week, $100 loans, with 100 loans made every 2 weeks.

        To cover defaults, each other person has to be charged $5.26 ($500/95)

        Now before the lender even makes a profit, the rate is already 20.26% because of fees just to break even.

        But because of the way APR is calculated, this fee is applied however many times the period is in a year. So for this (admittedly oversimplified) example, that’s 26 incidences of fee.

        Which gives 26 * 20.26 = 526.76% APR.

        That’s before the lender makes ANY profit. Say they want to make 10% profit (which is only $10 per loan), the numbers give a 786.76% APR.

        As you can see, the numbers get very large very quickly.

        Just something to bear in mind when looking at these “expensive” loans…

        1. davidb
          February 17, 2012

          I see the validity of your argument, but like so much of commerce the real money is made by people not making the repayment in full and the credit revolving. If a lender’s fee for arrangement or admin were a separately charged item I can see the only argument against German style usuary laws being simply that regulation is anathema. I have heard advertising recently encouraging people to take these high interest vehicles as a means of financing things like holidays. The morals of the lenders should be questioned here. After all, neither a borrower nor a lender be was drummed into me at sunday school.

        2. lifelogic
          February 17, 2012

          Yes but that 700%+ is what the borrower is actually paying – he is clearly better off without the loan every time unless he buy a winning lottery ticket with it which is rather unlikely or fails to repay.

          1. Bazman
            February 18, 2012

            The clue is in your own post. They are desperate and often on the edge of being on the street sometimes by their own stupidity and quite often by circumstances.
            What many on this site do not realise is the grinding everyday poverty that many live in. Some times an escape even for a short time is necessary often leading to more debt.

    2. lifelogic
      February 16, 2012

      Good to see they have abandoned early repayment charges for student loans only the absurd Libdems could have ever thought these charges were a good idea. The main problem is people not repaying particularly other EU students.

      I see also that payments to “service companies” in the, appallingly run, NHS are somewhat rife as a tax avoidance method for the state sector. These people are hugely over paid and pensioned and not even efficient. It is an absurd outrage for government to pay in this underhand way.

      1. Disaffected
        February 16, 2012

        The Uk provides free university education to EU students in Scotland and there is not the capacity to chase debts from other EU students around Europe who have taken student loans on the back of the UK taxpayer. Good idea to help our competitors in this dire financial climate- complete idiocy.

      2. uanime5
        February 16, 2012

        I’m surprised you’re objecting as the state sector is just copying what the private sector does. Either it’s right for both to avoid taxes or it’s wrong for both to evade taxes.

        1. lifelogic
          February 17, 2012

          No, the state sector is already over paid and over pensioned hugely relative to the private sector. The private sector cannot thus compete in world terms as a result. Colluding in the state sector to allow people to dodge taxes just puts up the net cost of the bloated state sector even further. Killing the private sector cash cow on which it feed.

          In the private sector legally avoiding taxes is often the only way to compete at all and for the business to survive. Your competitors will be doing it anyway or are are in rather more enlightened tax regimes.

        2. Disaffected
          February 17, 2012

          Socialist drivel, once more.

    3. Disaffected
      February 16, 2012

      You are, once again, correct. However, you forget that Osborne and Cameron already know this but have chosen a socialist EU course. For example, the price of diesel for the UK is the 5th cheapest in the EU but the most expensive of the 27 countries after tax is added. How does this help industry and Cameron’s claim that every thing is being done to help the economy? He acts in contrast in so many ways that his claims are no longer credible and only the stupid would believe him.

      The socialist coalition are robbing our pensions, worse than Gordon Brown, because they do not have the courage to make spending cuts, cut back EU spending, overseas aid, public sector spending, mass immigration, legal aid to terrorists, HRA, compensation claims for criminals etc etc. They prefer to make huge cuts to the military rather than cut the number of trolls in the MoD who have so badly overspent and agreed stupid contracts.

    4. uanime5
      February 16, 2012

      Interestingly Adam Smith divided jobs into two types, productive labour and unproductive labour. Productive labour included jobs that produced wealth such as farmers, artisans, and merchants. By contrast unproductive labour did not produce wealth and included the Government, Courts, the army and navy, menial servants, opera singers, and comedians. Odd that you only complain about how the state sector destroys wealth but always ignore how the entertainment industry destroys the wealth of companies. Imagine how much Coca Cola would save if they didn’t waste money sponsoring football teams propping up TV channels.

      Also making it easier to fire people will make the situation worse not better, as people will be more likely to save their money in case they’re suddenly fired than spend it in the economy.

      1. Adam5x5
        February 17, 2012

        Save or spend – it doesn’t really matter.

        If you spend it goes into the economy.

        If you save it goes to the banks which, thanks to fractional reserve banking, will then use it to invest in… the economy.

  6. Antisthenes
    February 16, 2012

    If you want growth that requires fundamental changes some of which are happening in the NHS, welfare and education though perhaps not deep enough or fast enough. This is just scratching the surface there is so much more that needs doing. In the past recessions eventually passed and growth returned however on this occasion there is every reason to believe that that is not going to happen this time. You have fallen into the trap of believing a tweak here and a twist there will fix the problem it will not because there are now different factors at work. Previously competition from developing countries was not as ferocious as it is now. Sovereign deficits and debts were not at the staggering levels they are now if you don’t count the period after WWII. The banks were not as weak and had more robust balance sheets. The levels of taxes and the weight of regulations were not so onerous. Society was not as broken and attitudes were better and democracy was not so eroded. Labour had not done as much irreversible damage as it has done after it’s recent period in office. The electorate, the left and vested interest are resisting reforms and change that are so badly needed. If you weigh up the forces working against recovery then only one conclusion can be arrived at is that the conditions are not in place for a recovery to happen.

  7. John Fitzgerald
    February 16, 2012

    John, I believe I am correct in saying the majority of the viewers of you blog would agree with the points you explore here. All things you are saying have been said many times before, by both yourself and many other commentators on this blog.

    John we understand but the message does not seem to reaching number 10. As I have said before I hope that Dave is being forced on his present course by the left leaning bunch of “Wooly” Lib Dems who are in the cabinet. I would be more than happy if he proved me correct!

  8. alan jutson
    February 16, 2012

    What I believe in effect you are saying John, is exactly what you said right at the very start of this Governments term of office, and which many on this site have also reqested.

    Cut government spending by reducing wastage, cut taxes (Increase personal tax allowance), cut public sector employment by allowing natural wasteage (although this will now be less people, and will be slower, as we have no fixed retirement age).
    Cut overseas aid, and stop the green taxation nonesense.
    Stop printing money and devaluing by stealth.

    In short we have wasted two years, as our debt is still rising.

    Hence the now triple A threat.

  9. frank salmon
    February 16, 2012

    Governments cannot create growth. They can only create the conditionss for growth. Beware subsidised industries. These are not businesses as they don’t make profits and they don’t generate tax revenue. A policy of reducing subsidies will go a long way to ending the economic malaise. of the UK, Europe, USA….

    1. lifelogic
      February 16, 2012

      Exactly subsidies kill growth by growing pointless things at the expense and over taxing of worthwhile things.

      Endless subsidies for – trains, public transport, green energy, electric cars, wind, wave, tidal, social housing, the feckless, even education & medicine get rid apart from a tiny safety net.

      1. Bazman
        February 16, 2012

        Then you would be in the situation faced by millions of Americans.

        1. lifelogic
          February 17, 2012

          Well they are about 30% richer by gdp per capita (purchasing power parity).

          1. Bazman
            February 18, 2012

            Million of Americans live in poverty with no medical care. Europeans quite rightly would not tolerate this.

      2. uanime5
        February 16, 2012

        If you reduce the subsidies on public transport people won’t be able to afford to use it. This will prevent many people from working because they won’t be able to go where the jobs are.

  10. Brian Tomkinson
    February 16, 2012

    All good advice but, as so often, it will be ignored.

  11. James Reade
    February 16, 2012

    “The last government’s devaluation”? (1) it was a depreciation – the last government, nor this one, nor any since yours in 1990-1992, has operated a fixed exchange rate system. (2) I thought a devaluation was exactly what we needed to restore our competition? So why use the term so politically and pejoratively? I don’t get this inconsistency.

    Then, the continued insistence that it’s a private sector squeeze and not a public one. Do you repeat this line when talking to your constituents, when they talk about job losses and other associated impacts? I was talking just yesterday to a economics consultancy firm which has managed to restructure itself away from government contracts – if there was no public sector squeeze, would it have had to have done that? Or do you think the person I was talking to was just lying?

    Then, the supposed impact of debt on growth. I assume you’ve been to Carmen Reinhart’s website, downloaded her data on debt levels and GDP growth over hundreds of countries and hundreds of years, and run your analysis to come to the conclusion that debt levels have an adverse impact on growth? I assume you took into account those post-war years when UK debt was over 200% of GDP, and noticed that the economy grew? Just one example of many.

    Have you used methods sufficiently technical that they allow you to establish causality from debt to growth, and not vice versa? As in, low or negative growth leads to higher levels of debt (that’s a fact), yet periods of great growth lead to debt falling, yet why are we jumping to conclusions about the impact of debt on growth?

    And further, why does QE only impact the public sector? The mechanism by which it is supposed to work does not specifically target the public sector. Please explain why.

    And finally, since this is already long enough, I’m highly, highly intrigued that the economic cycle matters for regulating banks, yet it doesn’t for the government’s budget balance? Yet it doesn’t for embarking on an austerity squeeze? Please do explain again.

    And I do apologise if this criticism isn’t intelligent enough for you John.

    Reply: We are discussing the structural rather than the cyclical deficit. The official figures show the public sector has added to growth since May 2010 whilst private consumtion has been squeezed – etc etc

  12. Andy Man
    February 16, 2012

    Come on, the idea of budget responsibility in Britain, the EU or US is laughable. The present system is only continuing because of money printing, financial fraud and propaganda by governments. The day has long past where politicians feel the need to live within their means, or rather OUR means. Instead they steal money using loans, QE and inflation just to keep the music playing. Banks are the way the pseudo money gets dispersed and governments have to make sure they appear solvent and act submissive. That’s why market forces haven’t been allowed to destroy the incompetent and corrupt major banks. Once you start privatizing them and expecting them to file something approaching accurate accounts the game is over.

    1. lifelogic
      February 16, 2012

      Pretty much accurate.

  13. Mike Stallard
    February 16, 2012

    There seems to be a death wish at the moment in my country.
    I have jut been walking down the centre of Singapore where the cars have been taxed out of existence so the buses and trains and taxis take the strain, where whole sections of the island agreeing devoted to public housing which is regularly maintained. WHere people help you in the street and there are not beggars land no busking, and where people out of work have to depend on their own families.
    it is also a place where I have to write on this blessed iPad.

  14. Steve Cox
    February 16, 2012

    If you believe Francis Maude’s comments in the newspapers this morning, then all of your wishes and more have already been achieved, from shrinking the civil service to its smallest size since the war to creating a cost-conscious environment like a well-run private business. If you missed it, here’s the link:

    http://www.telegraph.co.uk/news/politics/9085401/Francis-Maude-Civil-Service-at-its-smallest-since-war.html

    Hmm. Now why am I just a tad sceptical about these claims? Any comments, John?

    1. lifelogic
      February 16, 2012

      I assume this has been achieve by no longer calling many lot of the state sector “civil servants” not a bad idea since many are neither civil nor provide any useful service.

      This is rather similar to the claims of huge increases in “University” students mainly achieved by the ruse of changing the names of the many polytechnics to the Joe Blogs University of Bognor Regis East or similar.

    2. Rebecca Hanson
      February 16, 2012

      Because they came from Francis Maude

  15. lojolondon
    February 16, 2012

    There has been no change in the situation. That is why Moody’s are considering downgrading us.

    Taxes unchanged since Labour
    Printing money – more than Labour did
    Government spending is up since Labour

    If you keep doing what you are doing you will keep getting the results you are getting.

  16. oldtimer
    February 16, 2012

    I agree with your proposals and would add the elimination of subsidies for renewable energy schemes, the feed in tariff charges on consumers and the carbon tax. The heavy industrial energy users are, mostly, located where unemployment is high and state spending relative to tax raised is high. Lower cost energy is essential to retain those industries which have not yet already made the decision to quit the UK. Lower cost energy would also be a boost to every family in the land – except, of course, those growing fat on subsidies.

    The chances of this happening? About zero on the past performance of this Coalition.

    1. uanime5
      February 16, 2012

      “The heavy industrial energy users are, mostly, located where unemployment is high and state spending relative to tax raised is high. Lower cost energy is essential to retain those industries which have not yet already made the decision to quit the UK.”

      This is because when the factories started using more machines, which increased the amount of energy they needed, they fired most of their employees; resulting in high unemployment. So tax revenue fell and more people needed welfare.

      Low cost energy will just make it cheaper to run the machines but is unlikely to result in more jobs being created.

      1. oldtimer
        February 17, 2012

        So how do you account for the recent closure of the aluminium smelter in the North of England and the threats to chemical plants in the north east?

      2. Disaffected
        February 17, 2012

        Rubbish.

      3. lifelogic
        February 18, 2012

        Rubbish indeed.

  17. Gary
    February 16, 2012

    The biggest cause of the contraction in the economy was the prior credit bubble reaching unsustainable levels and it collapsing under its own weight after the economy became debt saturated.

    More credit cannot solve the problem. We need restructuring, tax cuts , massive govt cuts, decentralizing, red tape cuts and trade liberalization, honest money eg Real Bills paid in gold
    (http://www.goldstandardinstitute.net/2010/06/what-is-a-real-bill/) ,
    and dismantle the central bank underwritten fractional reserve system.

    1. sm
      February 16, 2012

      http://www.debtdeflation.com/blogs/2012/02/08/keen-talk-google-2012-dont-trust-an-economist/

      Some good suggestions in there and more.
      1) QE for the public to pay down private debt.
      2) Limits on leverage for house purchase (rent yield ratio)
      3) recognition of credit money & fractional reserve banking limitations and banks ability to blow self fulfilling bubbles and hence his modelling of the debt dynamic.

  18. Paul Danon
    February 16, 2012

    From all the caterwauling, you’d be forgiven for thinking that the squeeze has been on the public sector. Tax cuts are crucial and even the Fabian society can support them because they help the poor. They’re quick to implement and can have instant effect. The allow real cash (inasfar as our money is still real at all) to stay with real people, many of whom spend and/or save and, thus, stimulate trade. Silly railways take for ever to build and help just a few.

  19. waramess
    February 16, 2012

    Like all good socialists and panicking Conservatives, the reaction is to address the problem rather than the cause of the problem. This is how we got into the mess and this is why we are likely to stay in the mess for a long time to come.

    No point at all giving the elite advice; they can’t accept that others might know better and should they ever do so they would not know who “others” might be. Other than that they have no time to waste on “causes” they want headlines.

    Shame and all that but nothing has changed much over the years.

  20. AlexW
    February 16, 2012

    I don’t think breaking up Lloyds and RBS halfway through their restructuring is a good idea, given the scale of the deleveraging they are attempting.

    For example, I think RBS said that since nationalisation they’d reduced their balance sheet by £600bn at a loss of £38bn, this loss was offset by operating revenues and disposals worth £36bn (from memory..). RBS will need strong revenues from its main business lines to help pay for the rest of the cleanup: the alternative, a carveup of operating entities and a balance sheet firesale in the pits of the credit cycle is an option that will destroy shareholder value. Having put our money down we have no better alternative at present than to let Hester play our hand as best he can.

    That said, your goal of a more competitive retail and corporate banking market is entirely laudable – just highly unlikely to happen when we have low growth, high capital requirements, daft regulation, high taxation and political leaders who hiss at bankers.

    1. outsider
      February 16, 2012

      You are right. I cannot help feeling that Mr Redwood is expressing here the frustration that he and so many of us feel rather than coming up with really practical suggestions for the next 2-3 years. We would most probably be in a better place if Mr Redwood had been in charge of cutting public spending. But, desirable though it may be, I cannot see agreed cuts in EU levies and unwanted aid providing the sort of money needed for worthwhile immediate tax cuts. In reality, the government now has few levers to promote private sector growth apart from getting out of the way and trying to promote stability and confidence rather than uncertainty and disruption.

      Reply: I also prpposed a way of managing the public sector from the beginning which would have delivered more for less.

  21. ian wragg
    February 16, 2012

    The economy will never grow at it’s potential whilst we are saddled with the EU and ever increasing masses of regulation and costs.
    My company is having boilers manufactured in Poland because its much cheaper and none of the exhaustive H & S nonesense.
    Our energy policies are exporting jobs overseas because we are uncompetitive. This is so Cameroon et al can boast of being the greenest government ever. (cabage looking – me thinks). The sooner these clowns are out of office the better.

    1. lifelogic
      February 16, 2012

      To be replaced, alas, by even worse clowns.

    2. Bazman
      February 16, 2012

      Exhaustive H&S nonsense and boilers. Not two things you would want to hear in the same sentence…

    3. uanime5
      February 16, 2012

      You do realise that the Polish boilers will have to conform to UK H & S or you can’t use them in this country.

      1. Bazman
        February 18, 2012

        I think he means his company can avoid some H&S during their manufacture.

  22. Disaffected
    February 16, 2012

    John,

    You are, once again, correct. However, you forget that Osborne and Cameron already know this but have chosen a socialist EU course. For example, the price of diesel for the UK is the 5th cheapest in the EU but the most expensive of the 27 countries after tax is added. How does this help industry and Cameron’s claim that every thing is being done to help the economy? He acts in contrast in so many ways that his claims are no longer credible and only the stupid would believe him. He appears to have taken a Clegg tablet of discredited insincerity.

    The socialist coalition are robbing our pensions, worse than Gordon Brown, because they do not have the courage to make spending cuts, cut back EU spending, overseas aid, public sector spending, mass immigration, legal aid to terrorists, HRA, compensation claims for criminals etc etc. They prefer to make huge cuts to the military rather than cut the number of trolls in the MoD who have so badly overspent and agreed stupid contracts.

    The coalition’s tactic is to convince the public through specious argument on the one hand and act in contrast on the other hoping we will not notice. For example, that we all live longer is the reason to increase the pension age, embattle private against public sector workers about pensions and all sorts of deceit to convince people. But all along knowing that it intended to have more QE that would rob the prudent, savers and pensioners of the money they had worked and invested for their old age. Mass immigration continues to the land of the free. It is easier to steal from the prudent than to make welfare cuts etc. Bash the private company CEO’s, increase tax from them rather than cut public sector CEO pay which has grown far too high and not befitting because of the inefficient organisations they run. Still no in road on cutting the quangos even though there is no improvement in the services they are supervising on the public’s behalf. Cameron is letting socialist MR Cable employ a tzar to impose more socialist ideas on university entrance and payment. Our education system is already in a race to the bottom of the world league tables. Undoubtedly this will help no end. I thought red tape and quangos were being cut back not increased? Clearly Cameron is discredited once more.

    Look at the disaster unfolding in Europe and the cruel treatment of Greece. Mr Oborne wrote a very article in the DT today- I suggest everyone read it. It sets out quite clearly what the socialist Liberals are doing and are prepared to do to society and ordinary people to fulfil their fanatical EU dream. It must stop. The UK must not play any part in it.
    Wake up Tory MPs, Cameron needs to go. Force a general election before its too late.

  23. David John Wilson
    February 16, 2012

    Rather than playing around with capital gains tax, the same money should be invested in reducing employers NI contributions. This should not only have the same effect of reducing employer’s costs but also help with the unemployment problem. It should be concentrated on those age groups with the highest unemployment rates in particular the under 25s

  24. James Matthews
    February 16, 2012

    Initially I missed the word “forecast” on the headline. It still seemed unremarkable.

  25. Gideon Mack
    February 16, 2012

    I’d always understood that large scale public works (bridges/museums/hospitals) were the cornerstone to kick starting the economy post recession – clearly not?

  26. figurewizard
    February 16, 2012

    As far as banks lending or not to the private sector is concerned, while we hear a lot about ‘missed targets’, especially in respect of project Merlin, no one has yet come up with any explanation other than the banks appear to be dragging their feet.

    For example what are the criteria for a yes or a no and are the operating cash flows, present and forecast of the applicants taken into account? If this is the case it can be argued that the banks are basing their decisions on a prudent and businesslike basis . If not does Merlin make it a requirement that they do so?

    1. Mark
      February 16, 2012

      The problem is that the banks aren’t being allowed to cut their mortgage lending, and since they have to cut lending to reduce gearing, guess where that happens?

      1. Mark
        February 16, 2012

        P.S> I’m talking about the stock of lending – i.e. the total amount loaned out, not the flow of new loans, which can be boosted by cancelling old ones.

      2. figurewizard
        February 17, 2012

        In which case Merlin is nothing more than a PR exercise?

  27. derek spence
    February 16, 2012

    I read recently that we pay £43B a year on interest on debt of over £1T-rising at £10b/month. Around 30% of the new debt we take on is purely to pay interest on the old debt. Then we pay interest on the new debt. Interest on interest. Ref Moneyweek Merryn Somerset Webb 3/2/12 Truly scary imo. Cutting the money to India is only one small step. I believe we get £8B from the EU with an outgoing of £13B. That is “churning” and we lose a huge amount on the bureaucracy. Best Wishes

  28. crowbait
    February 16, 2012

    According to conservative home all decisions are being taken by two alleged conservatives,Cameron and Osbourne,and two liberals, Clegg and Alexander.So much for cabinet government.I thought the makeup of the house was 300 and odd conservatives and 50 odd liberals. So how come decisions are being made by 2 and 2. Of course it explains why so many euro leftist policies are coming into force such as the latest Cable choice of Les Ebdon from Luton Tech.,as well as no action on the eu,immigration, lowering taxes etc. Always enjoy your blog John.

    1. uanime5
      February 16, 2012

      Decisions are made by 2 and 2 because without Lib Dem support these policies will be defeated in Parliament because the Conservatives don’t have a majority.

      1. Disaffected
        February 17, 2012

        Call an election and let us see how the Lib Dems get on.

  29. Martyn
    February 16, 2012

    If I were able to do so, I would insist that a list of every single quango and all other agencies and the like that are fully or partially funded by the taxpayer be drawn up. Each would have to state their purpose, what value they add to the economy and what salaries are paid. I would then appoint a team of experienced business leaders to scrutinise the list and decide which of the quangos etc reperesent poor or nil value for money. And then disband them, regardless of the numbers of people put out of work, who would then have to seek worthwhile employment eleswhere in the real world.

    1. uanime5
      February 16, 2012

      How would we ensure these business leaders didn’t shut down quangos because their business will make a lot of money performing the tasks these quangos used to do?

      1. Disaffected
        February 17, 2012

        Rubbish. Most decent business have their own R and D department tailored for their area of work. This really is socialist Lib Dem wonk.

    2. David John Wilson
      February 16, 2012

      The problem is that most quangos spemd far too much defining and redefining their purpose and very little time actually doing anything

  30. stred
    February 16, 2012

    As far as I understand the position regarding money supply for the expansion, the banks are having to reduce their traditional money creation exercise, which was always considered possible, because they could always call in the loan and sell the assets. Now they fear that the assets are not going to hold value so they prefer to lend to the State.

    This money supply is reduced, so HMG thinks it will be convenient to take over the money creation role by printing it to buy back its own IOUs. Then the banks receive this cash and are supposed to lend it to business to get the economy going. But they don’t and instead lend it back the they government, for secure interest, perhaps inflation linked. Then the government spends the money borrowed in large quantities on administration and consultants, social services, foriegn wars and aid, windmills made abroad that don’t work, speed warning signs, foreign language translation leaflets, etc etc…And private enterprise can go elsewhere.

    And, amazingly, the credit rating agencies give the UK credit for reducing the borrowing by this method.

  31. Phil Richmond
    February 16, 2012

    Unfortunately we needed two Conservatives in No.10 & No.11 to sort the problem out. What we have is a curious cross-breed between Liberal/Green & Europhile technocrat.
    Nothing will change until Cameron is removed.

  32. Richard
    February 16, 2012

    The Bank of England already has the answer to the no growth / low growth problem and it is QE.
    So much less troublesome for Politicians than all those beastly cuts, causing riots, marches, strikes and unpopularity.
    They just carry on creating money out of thin air to pay for all the costs of the public sector and use the resulting inflation to reduce the value of our debt pile at the same time.
    Its a win win situation.
    As long as our lenders don’t catch on and keep the lending going we can just carry on as we are for ever and ever, spending much more than we earn.

  33. uanime5
    February 16, 2012

    John there are two major problems regarding a private sector led recovery that the Government is not addressing.

    The first is that companies are trying to suppress wages as much as possible, for example Tescos was offering a night shift job that paid JSA + expenses. Until work pays more than being on benefits people will continue to live on benefits.

    http://www.telegraph.co.uk/finance/jobs/9086133/Tesco-moves-to-calm-Twitter-jobs-row.html

    The second is that the Government has decided that the best way to create jobs is to use Workfare to force people to work for free, so employers have no long have any incentive to even create minimum wage jobs. Unless growth results in at least an increase in minimum wage jobs welfare costs will continue to rise.

    1. Bazman
      February 16, 2012

      I see many jobs in my trade with pay advertised sometimes as low as 1p per annum. They say it is a misprint, but I suspect that 1p includes travel and dig money.

    2. Tedgo
      February 16, 2012

      I not a Guardian person but,

      http://www.guardian.co.uk/society/2012/feb/16/disabled-unpaid-work-benefit-cuts

      Seems disgusting if its true.

    3. Winston Smith
      February 16, 2012

      You forgot to mention the major factor in all this; namely, mass immigration. There is an endless supply of cheap labour from Eastern Europe and ex-European colonies through the EU, and from Asia and Africa via student, marriage and all the other scams. Wages for unskilled jobs are directly related to the supply of labour, which is why they are suppressed and why the benefits bill is just going to keep on rising. What a mess.

    4. Adam5x5
      February 16, 2012

      The minimum wage should be abolished or at least reduced.

      It has now got so high that it effectively prices people out of the employment market.

      If your labour is not worth 6 quid per hour, then a legal minimum wage of such will mean that you won’t be gainfully employed.

      If we abandon it, people will find work – albeit not well paid (which is merely reaping what they sow for being proud of not doing well at school).

      This would of course have to be accompanied by tax breaks to make it feasible.

      1. Bazman
        February 18, 2012

        If a job cannot pay six quid an hour then it is not viable and almost every job would be taken by foreigners living five to a room/car. No British would live like this. Do you think they should?

  34. forthurst
    February 16, 2012

    “And we still need to stop doing some things the government cannot resist doing.”

    Secretary of State for Defence:

    Defence? So why are our troops being put at risk furthering the ravenings of neocons for rearranging the ME? Furthermore, why are and have been our forces operating in the ME outside the surveillence of parliament.

    Secretary of State for the Home Department; and Minister for Women and Equalities:

    Women and Equalities? Cultural Marxist claptrap designed to hamper the economy and add costs to business. The Home Office should focus on keeping out of our country and deporting people who are not welcomed by the English.

    Secretary of State for Business, Innovation and Skills:

    We would be better off without this department entirely. It appears it is promoting the appointment of a Professor at the University of Bogstandardshire to tell proper universities to provide access to undergradates who are not properly qualified because they have been educated entirely according to the standard set by the Dept of Education. This is social engineering; ‘innovation and skills’ implies numerate science based engineering. Perhaps the department believes that its policy of importing third world trained engineers is an appropriate alternative.

    Secretary of State for Energy and Climate Change:

    THis department is doing its utmost to transfer British businesses abroad by deliberately overloading them with costs which make them uneconomic. It is also presiding over a catastrophic shortfall in dependable electricity supply in the future whilst blocking the development of indigenous energy supplies. It should be abolished and its legitimate functions transfered to the National Grid and Environment.

    Secretary of State for Education:

    This department is entirely responsible for the decline in educational standards over decades, the destruction of grammar schools and the replacement of rigorous academic exams set by proper universities by those which are appropriate for no segment of the school population. This department should be abolished together with ‘degrees’ in ‘education’ which are concerned with grooming students to groom their pupils with Cultural Maxist claptrap. Exam setting should revert to universities and the guilds of skilled crafts. Local people should be able to requisition an education for their children without interference from the government.

    Secretary of State for Communities and Local Government:

    Communities? You mean printing council documents in umpteen non-indigenous languages etc? Chop it.

    Secretary of State for International Development:

    Spraying taxpayers money on ungrateful Indians. Chop it.

    1. forthurst
      February 16, 2012

      The PM clearly is getting very poor policy advice through the
      Cabinet Office. Would would give us more ‘happiness’ would be for the PM to take advice from patriotic Englishmen and not those with other loyalties.

  35. Rebecca Hanson
    February 16, 2012

    “the squeeze was placed for the first two years of the Coalition government on the private sector rather than the public sector. The government decided to bring the deficit down by large tax increases.”

    In the past squeezes have been done by increasing income tax for all – public and private sector.

    This time that wasn’t done – instead the public sector saw 10% job cuts and wages were frozen for 3 years and capped at 1% increase for two despite 5% inflation.

    The evidence does not fit your claim John.

    You say you want all income taxed. Does that mean you want to completely get rid of the personal income tax free allowance?

    1. Winston Smith
      February 16, 2012

      Public Sector Employment:

      2011 Q3 = 6.0m

      2000 Q3 = 5.5m

      So, its still 10% higher than 11 years ago. Interestingly, the figures show Labour continued to create more State jobs after the recession, adding 300k to the public payroll from 2008 to 2010, when it peaked at 6.3m. Note, these figures do not include the State owned, bailed out banks.

      Source: ONS.

      1. Rebecca Hanson
        February 17, 2012

        Thanks for the clear info Winston Smith – always much appreciated.

    2. Rebecca Hanson
      February 16, 2012

      Thinking about this more raises further issues.

      I’m now in the private sector and don’t earn very much at present. Raising the tax threshold is a huge help to people like me and makes it much more likely I will be able to make a go of my business.

      You seem to be saying you want the tax threshold to be abolished. That would cripple people who are trying to get going alone – who are, in the main, in the private sector. It would also make it harder for people to get off benefits into any work.

      Explanations greatly received.

      1. davidb
        February 17, 2012

        If your business is limited you get a 10% tax band on a bit of your earnings which eases the pain. Ask your accountant.

  36. Barbara Stevens
    February 16, 2012

    I like your comments on stopping aid to India, but that does not go far enough. Why are we giving money away while we are in dire straights here? All aid should cease until we have our own house in order, and then only when countries are in bad need, and we match for example German aid. We have governments who think it is THEIR right to give our money away while cutting disabled and sick people here. That cannot be right. Secondly, the £55 million per year created from health tourists who should pay and don’t. Why are they given treatment without paying in the first place? We have to pay when we go abroad.
    There are lots of things a government can do to save money, but they just ignore those who state the facts. Paying taxes for for child benefit is OK, but we should be looking at the number of children we support not who gets the benefit. We are over populated, and the benefit as now become an addition to benefits and salary, thus having children as become a wage earner. Why do we pay women to have children? If you want a large family you should be able to support them, not rely on the state.
    Thirdly, this government as spoken of allowing less housing benefit if you have uninhabited rooms in your home. This will penalise the elderly who often have spare rooms within their homes. Why do the Conservatives even think about such things? I’m afraid if this continues my vote might go elsewhere, or not vote at all.

    1. Bob
      February 17, 2012

      “I’m afraid if this continues my vote might go elsewhere, or not vote at all.”

      Don’t be fooled by the BBC.
      You don’t have to vote for socialism (i.e. Lib, Lab or Tory), there are other choices and most of them publish their policies on their websites. Be brave and vote for change, because if we don’t change direction we’ll end up going where we’re heading (which is down the glugger).

  37. Martin
    February 16, 2012

    Sorry but you have missed out

    1) Continuing and increasing Air Passenger Duty. This costs the UK lots of jobs and money. The Netherlands is dumping their version of this stupid tax.

    2) Interfering in the private sector by stopping a private company BAA plc from building a third runway at Heathrow. Tax and NI from the construction work lost.

    1. David John Wilson
      February 16, 2012

      The sooner the UK drops air passenger duty and persuades the rest of the EU to do the same the better. It needs to be replaced by a fuel duty on aircraft fuel, thus making airlines use their planes more efficiently. They would soon stop flying empty planes all over the country just to retain airport slots.

    2. Winston Smith
      February 17, 2012

      2) BAA is a private company, but it can only build another runway by destroying a nearby village and using compulsory purchase of private land and property. The pollution, both noise and noxious, have a far reaching effect on millions of people. This is why it is an issue for Govt planning.

      Central planning for air transport is an absolute shambles and has wider issues for the economy. We have major provincial airports with 50% capacity and LHR at 100%. Why does a third of the population of the UK need to travel to London if they want to fly to popular long-haul destinations?

      The London centric political/cultural elite’s myopia is economically devestating for the rest of the Country.

  38. Peter Richmond
    February 16, 2012

    Mr Redwood,
    You say in your blog today ‘The authorities are relying on huge money printing operations. This money can only subsidise the public sector.”
    Can you explain simply why the money can only subsidise the public sector. I don’t quite understand why this should be so.

    Reply: Because it circulates as loans to the government at low rates. The banks are unable to on lend to the private sector owing to regulatory demands for them to hold more cash and capital.

  39. David Langley
    February 17, 2012

    Dear John, lots to comment on but I will just ask you how can banks lend more to sme,s etc if they have no credible business plan, are already stuffed with debt etc? As a credit manager in a previous life I only gave credit where it was due. IE credibility. By the way why don’t we lend the EU contribution rather than give it and set a good coupon. It would be an ideal first step to showing the EU project how uncompetitive their policies and MEPs and civil servants are. We are a net giver so should do alright as an interim step. If they are so confident in Brussels that they are good value for money lets find out?? There are no credit managers in Brussels.

  40. David Langley
    February 17, 2012

    John, a quick postscript, have you seen the latest Euro News? The UK is being told to stump up a financial correction to the CAP of over E29 million for weaknesses in our sanctioning systems, and other non compliance. Other countries are also being sanctioned to a total of E53 Million approx inc our huge lump. What is going on?

    Reply: Sounds like a money grab

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