The Bank of England’s downgrade of UK growth prospects is not surprising, but leaves it at variance with the Treasury forecasts published in the last Budget. The Treasury forecast 0.8% growth in 2012, 2% in 2013, 2.7% in 2014 and 3% in 2015. This made a total of 8.7% for the four years.
Looking at the Bank’s fan chart, they have growth well down for each of those four years, with a total of around 5% and a peak level of around 2% not 3%. If the Bank is right and the Treasury have to lower their forecasts next time, that will mean a further addition to state borrowing levels, as the automatic stabilisers will mean less tax revenue and more benefit spending than the Treasury forecasts.
August 8, 2012
Not necessarily, spending in other areas could be cut to make up the difference.
Free word of advice to all: two absinthes at lunch is two too many, feeling kinda woozy
August 8, 2012
Do you get the impression norm kills himself with work whilst talking about cuts for the rest of us?
August 8, 2012
Still as long as people don’t pay their plumbers in cash all will be well.
About time for radical action. If you are going to increase state borrowing do it to slash taxes. Remove the shackles of Employers’ NI and much of Employment legislation and set the economy free.
The government is a ball and chain on the economy. It is dragging us down to our doom.
August 8, 2012
The forcast is actually larger than 8.7% as the calculation would include additional accumulated growth from the previous years. Still Mr Cameron tries to defend the £11 billion foreign aid budget today whilst English patients can’t get cancer drugs or heat their homes and the EU takes £50 million every day (£10 billion net every year!). So simple maths and patriotism would suggest where we could look to make savings! Not whilst Mr Cameron is in charge though.
Then there are the health, housing and education costs of the millions of foreign people in our Country without any meaningful reform to stop this after 2 and 1/4 years in office.
There is no change from Labour out here in the real world except more taxes and more EU regulation!
August 8, 2012
Indeed dragged below the water line by this, ever increasing, tax, borrow and tip down the drain socialist Cameron government (and expensive energy, gifts to the PIGIS and over regulation to boot).
Why would anyone sensible expect growth with such mad anti business policies in place?
August 8, 2012
Why do you think more people are going to work if they have fewer legal protections?
Also if it’s easier to fire people then people will spend less money in order to build up a cash reserve in case they’re suddenly fired and cannot find another job.
August 9, 2012
It might surprise you that there are some people out there who would like a job, irrespective of unnecessary, inflexible regulations. You need to look outside the socialist bubble.
August 9, 2012
Good point, but they still need some protection.
August 8, 2012
Well if you have such anti-business anti-growth policies in place what do you expect?
August 8, 2012
Such as safety and employment rights?
I have a local joiner coming round next week to do some small easy jobs. Easy for a joiner that is. I’ll let you know how he wishes to be paid.
August 8, 2012
Mr. Redwood, you describe the Bank’s truncated economic forecast and the inevitable rise in state-benefit expenditure – the consequence of crashing the economy in the name of debt reduction – as if your words were somehow apocalyptic ; yet both outcomes are, as they were two years ago, as predictable as the going down of the Sun.
That the debt left by Labour could not be sustained is beyond dispute, I hope ; ditto the deficit on current account. One has to wonder, however, at the feebleness of the mandarins at Treasury in their presumed failure to advise Mr. Heath and his inexperienced boys that paying off that debt would depend upon generating a surplus on current account and – most important – take longer to achieve than building up the debt had done in the first place.
Or are we to believe that they proffered such advice and Mr. Heath and his boys simply ignored them ?
ΠΞ
August 8, 2012
John, what is an ‘autmotic stabiliser’?
Automatic stabiliser is the decision to spend and borrow extra when unemployment goes up.
August 8, 2012
On the Guardian website, Sir Simon Jenkins urges the Liberal Democrats to force the Government to go for a policy of demand-led growth. You might have thought that a fiscal deficit of £120 billion, almost zero interest rates and injecting £400 billion of cash amounted to just that. I do not think that UK output per head will make much headway until we stop pretending that we are in a state of emergency and need to get back fast to where we were; until we understand that where we wre was unsustainable and our living standards have irrevocably dropped; admit that the economy is now in a state of normality, which is necessary to restore confidence, and grasp that to make living standards grow again at an acceptable pace we simply need to produce new and improved goods and services that people, particularly people abroad want to buy.
Still no sign of that. I read elsewhere that the Government’s brilliant new plan is to ease planning rules that it has already, according to its own spin, made much easier. This sounds like more QE from people who don’t have a clue about long-term industrial strategy ( and irrationally despise the concept anyway). To be honest, Mr Redwood, your own panacea of “more competition” is hardly better.
Reply: My suggestions extend beyond more competition. I will have another go at explaining tomorrow.
August 8, 2012
Thanks, Mr Redwood. I know you have many good ideas.
One basic issue is that all sides of the political spectrum favour new entrepreneurial start-ups, which gave us Tesco, M&S etc, yet either neglect or are hostile to our remaining big corporations, Big companies are the ones that will/will not deliver big investments and new product launches over the next decade.
Many of them were never tiny entrepreneurial start-ups ( eg BAT, BP, British Telecom, National Grid, RBS, Severn Trent) but big corporations are the lifeblood of the economy today. New firms, from a national point of view, are seeds sown, some of which will yield great crops 15-20 years hence.
Much of our industrial heartland was sold abroad by City funds (occasionally by government) over the past 25 years and cannot be expected to pioneer new products or developments here or to invest strongly in a slow-growing (for them foreign) economy, so we need to nurture and co-operate with what we have left. We do not need to love them, let alone ignore their faults, but we do need to back them.
August 8, 2012
So get rid of the automatic stabilizers, which include index linking of benefits.
August 8, 2012
As in attacking the poor which could lead to more economic problems as the poor tend to spend all their money on living? Not a problem I suspect you have Lindsay or have ever had? They are just supposed to accept this when often it is the fault past and present government economic policies they are in the financial position they are in. More simplistic nonsense from you and anyone else who thinks this. Ram it.
August 8, 2012
So you want to punish the poorest in society because of something that isn’t their fault? How will that fix the economy.
Don’t forget that a lot of people working in low paid jobs are on benefits and will be less willing to work if their benefits are cut.
August 9, 2012
Necessity is the mother of invention. I lost my job at the age of 63 and didn’t rest until I got new work.
August 9, 2012
Not everyone is you and me. What do you suggest? Move to a more third world system for those unable or unwilling to support themselves? Ain’t gonna work.
August 10, 2012
Nothing so drastic. Just end the index linking of public sector salaries, state pensions and state benefits until the annual deficit is back down to a manageable level. The annual public sector deficit is so high that nothing matters more than reducing it.
Remember, 11% of public expenditure is debt interest and that is money FLUSHED DOWN THE TOILET. If nothing is done about the annual public sector deficit, it won’t be too long before it reaches 20%. Feeling comfortable? You shouldn’t be.
August 10, 2012
How about the index linking of salaries to private companies only employed by the state and often pretty much owned as well as publicly justify their profits? Many privately owned companies need to increase their poverty wages and stop being subsidised by the state in the form of tax credits.
August 12, 2012
Poverty wages in relation to what standard? Why is it that you, Bazman, know what wages should be better than the labour market, which receives millions of inputs, both national and international, every single day of the week. As the saying goes, ram it.
August 13, 2012
Poverty wages are wages paid below that necessary to live on by companies making billions in profits. The recipients of these wages are often in receipt of benefits from the state. That is poverty wages. What makes you think large supermarkets pay wages related to the market rate? They set the rate.
August 9, 2012
How does caring for the low paid and the poor in our society equate with your support for mass immigration and importation of cheap labour?
August 9, 2012
I’ve never supported mass immigration or cheap labour, and have no idea why you’d think I do.
The best way to prevent immigrants undercutting the native population is to raise minimum wage so it becomes a living wage. This will prevent employers offering a way that only immigrants can live on.
August 10, 2012
After you got that, your next step would be slap import duty on products exported from countries that paid less than your arbitraily determined minimum wage. Back door protectionism.
August 13, 2012
We already have a minimum wage and after apocalyptic predictions of the consequences of this where made, no jobs where lost or businesses collapsed.
August 8, 2012
John
I have no idea who makes up these so called growth figures, and then hopes to rely upon them to calculate future tax revenues, public services and borrowing levels.
For Gods sake how many more times do I have to say it.
Spend only 80% of LAST YEARS tax revenue in any current year, and use the same percentage for each ongoing year, and its no problem.
Why? Because you are working with REAL FIGURES
Yes of course difficult, choices have to be made, but a simple priority list is the answer.
Thus list under each heading.
1. Absolutely necessary expenditure.
2. Preferred expenditure.
3. We would like type expenditure.
4. Wouldn’t it be nice if everything in the garden was rosy type of expenditure.
Chop off 4 completely.
Hack into 3.
Selective cuts into 2.
Leave 1.
Do not even think about raising taxes or printing more money, enough is enough as we have now over reached the limits of taxation demand.
We (The Government) have to live within our means, full stop.
Millions of us live within our means, and we prioritise expenditure to do so. Why should Governments be any different.
August 8, 2012
I agree with this. The Canadians did this several years ago and solved their Government overspending. I would have three measures:
1.What MUST the state provide?
2. What SHOULD the state provide?
3. What COULD the state provide?
Get rid of all the three’s. Most of the quangos, bean counters etc in the Home Office/Governement/Local authorities and other public services, diversity stuff, climate change/windmill departments, foreign aid, EU etc.
Critically examine the 2’s on the basis of state affordability. This would include some functions on the International Health Service. Systems to check eligibility for these services should be implemented immediately.
All the 1’s should be funded including our defence, certain health provision, education, time limited and means tested benefits. Winter fuel allowances should be increased for our poor pensioners and stopped for those who don’t need it. It isn’t rocket science and public spending should be limited to 25% of GDP not 50% as now.
August 8, 2012
Alan, spot on. However, basics like these are beyond the wit of PPE graduates at Oxbridge. Of course we would like to be charitable to give overseas aid, of course we would like to give the EU £19.2 billion before any money is spent here, of course we would like to bail out Greece who can not managed their own finances, loan to the Irish, of course we like to help those who are temporarily out of work or are genuinely unable to work etc. But if we do not have the money something needs to stop or be drastically cut. Necessary needs to be spent desirable needs to be cut until we are better off.
Canada cut 15% of public sector spending in the 1990s why can’t the UK??
August 8, 2012
Cameron looked stupid explaining on the radio why he gives £11 billion in overseas aid, but cannot afford to give cancer patients drugs to live in this country. Dave economics- the best education money could buy.
August 8, 2012
“Chop off 4 completely.
Hack into 3.
Selective cuts into 2.
Leave 1.”
Isn’t that what they are trying in Greece…
August 9, 2012
Jerry
The difference is that they now have no choice, they are being told what to do, with not input whatsoever.
The intelligent thing to do is act whilst you are still in control, before someone else takes control and does it for you.
When you have no money and cannot borrow any more, all of your bargaininig has gone down the tubes, along with the money you wasted.
The problem, the debts still remain.
August 9, 2012
Similar to how you figure mature product development budgets in the private sector where item 1’s are determined by standards compliance and ROI. Though we tended to be tasked with a 10% cut rather than 20%. The real fun is with the item 2’s.
If you have any claim to manage finances you simply have to prioritize expenditure to a sustainable budget and justify it all, not just any overspend.
Once the deficit is zero and debt is declining I suggest maintaining the 20% or whatever margin and put the surplus into a sovereign fund as insurance for any other necessary bailouts, state pensions etc.
August 8, 2012
Like many other silver surfers, I have a few pennies to invest. People like us just want to keep our money safe and hedge it against inflation. A good way to do this, of course, is to allow stockbrokers to invest it in industry and new start ups.
So are we being encouraged to do this with such very low investment rates?
August 8, 2012
Be like an Olympian, go for Gold, or even Silver…. 🙂
zorro
August 9, 2012
Zorro
The medals are fake, and only contain a very small percentage of the perceived minerals listed.
Thus we have contrived to devalue those as well.
But its the winning that counts, once an Olympic Champion, always an Olympic Champion.
You cannot put a value on that, other than possible future sponsorship and advertising rights of course.
August 9, 2012
True, I will not be an Olympic champion, I shall have to console myself with some gold sovereigns!
zorro
August 9, 2012
Aren’t the medals silver plus some gold or nothing or some copper?
August 8, 2012
Try the bookies.
August 8, 2012
The UK hasn’t really cut public spending see 5 myths about the UK economy http://www.libdemvoice.org/five-myths-about-the-uk-economy-28997.html
I guess in the end the UK will have to cut its public spending if we cannot achieve the growth figures government assumes. Real figures are always lower than government figures perhaps because government figures are required to be on the high side for political purposes?
I can’t imagine commercial lenders being happy with present interest rates if there is little or no growth over the next few years.
August 8, 2012
‘…Bank’ fan chart…’ as in FANtastical.
Frankly what do you expect from the second most failed unaccountable institution? (the fist is the failed FSA)
August 8, 2012
It is indeed as we discussed sone time ago on tbe blog – the reality that growth would be nowhere near expected…..and as a result borrowing/QE would expand. If 100 was the base, government forecasts were hoping to be at 114 by the end of Parliament. I had suggested potentially reaching 107, but even this looks wildly optimistic. We are talking big borrowing here (even with the extension on dealing with the deficit) and extended QE – probably North of 500 billion by 2015, unless they get serious.
zorro
August 8, 2012
This site should really deal with the balance of winners and losers from this insane printing of money. The interests and wellbeing of the indebted are being placed at a higher order than those who regarded saving cash as worthwhile.
Now businesses are being asked to make up more of the government’s shortfall by organising these NEST pension schemes-which are effectively a corporate Poll Tax waiting to happen. Should I really be responsible for running a national insurance replacement scheme for my employees, contributing 3% if they contribute 5%? Will our business be liable if their outcome at retirement (after a certain US bank has skimmed 2.1% a year in charges) isn’t what the government said it would be?
Why should we be involved in setting up this scheme on top of existing PAYE and NI deductions? Where did all the fuss over Stakeholder schemes end up? Time was wasted informing employees who then by and large decided they’d rather receive the money offered as taxed wages. I’m pretty certain the same will happen again.
August 8, 2012
John Moynihan on the future economic decline of the west at http://www.businessinsider.com/jon-moynihan-decline-of-the-west-2012-8#-1
shows the size of the problem the west faces.
August 8, 2012
Interesting. Clever man. The west is fat and bloated and the east is lean and hungry. Solutions?
Reorient government spending, reform the banks, tax properly, develop new technology, accept immediate cuts in living standards.
Being low paid or being reliant on benefits is hardly a vested interest any more than being able to be afford to be fat is.
The main problem it seems is the middle class social security system.
Told ya…
August 9, 2012
“The main problem it seems is the middle class social security system.”
The bloated public sector?
August 9, 2012
Jobs for chaps and gels in the public sector are the very foundation of the middle class social security system. Where else could they work for that money and not have to do much real work whist aspiring right wing views? Banking being the pinnacle of this hierarchy.
August 8, 2012
If somebody had any common sense at the Bank of England they would realise that the more they reduce interest rates the less money most of us have to spend. Not everyone has a mortgage, and as I understand it, they are not the majority. When they put UP interest rates we shall have some money to spend – it is not rocket science !!! Who are these idiots printing money to put up inflation so your borrowing diminishes without any thought for the people. If you think you can sort the economy out all by yourselves then go ahead and let’s see how well you do without the people.
August 8, 2012
The problem is they no longer remember what exactly causes growth and what exactly will cause it to cease.
Low interest rates caused massive mal-investments resulting in banks being unwilling to lend to each other and consequently to anyone else. As a result corporates reduced their investment plans and started to hoard cash which resulted in increased unemployment. Add this to the plight of the construction sector and a major impediment to growth becomes apparent.
The inability of the banks to lend, further exacerbated the recession by removing the ability of people to finance current spending with long term re-mortgaging facilities.
The unemployed have no option than to reduce consumption which will not help growth, energy policies that further reduce the capacity for consumption in the private sector and governments attempt to counter this with increased state spending further exacerbates the situation for they can only spend by reducing the amount available for investment and consumptiion in the productive sector.
So, we have a state that continues to spend and to increase taxes, we have interest rates set at a level to maintain house prices at a falsely high level, which will prevent a recovery in housebuilding, banks that are still unwilling to lend,which will encourage corporates to increase their holdings of cash and reduce overheads including labour, and exactly where do they think the growth is to come from?
Short of a massive new natural resource discovery there is no chance of a recovery in growth anytime soon so long as they continue with these mad mad policies, and any suggestion to the contrary is no more than whistling in the wind.
The entire system is in the hands of a Keynesian/Monetarist meltdown and unless and until this is acknowledged contraction and probably depression is the only option.
August 8, 2012
Have you had one of those sessions where the only winner of the original argument, was the local supermarket that purveyed the alcoholic beverage. The bullet points can be stated as follows. A sovereign government that issues its own currency can’t go broke in that currency. The government has to spend its currency first before the non-government – private households and businesses – users of that currency, can save it or spend it themselves. If the private sector is to increase its net financial worth including savings; and, the balance of payments with the rest of the world is negative – imports greater than exports – then the government has to run a budget deficit. I will stop there I’m knacked, read and absorb the following, it sums it up. http://monetaryrealism.com/treasury-and-the-central-bank-a-contingent-institutional-approach/ .
August 9, 2012
A very interesting post however the concept of a country borowing its own currency without risk is yet another example of a Ponzi Scheme, Acorn.
With a massive balance of payments deficit the UK depends on foreign investment for it’s ability to continue to guarantee convertability of the pound sterling.
Foreign investment is of course not all it seems and is often of a quite short tenor so, a nasty shock can make life pretty uncomfortable for the old lady and her endeavours to ensure importers can buy goods from overseas.
August 8, 2012
One benefit the Thatcher government had was that the election was after the IMF bailout and people witnessed the end result of the shambles.
On the one hand 2010 was positive in that it turned the ship away from that and what would have been a bailout and subsequent collapse of the euro which is what made Christine Legarde shudder.
On the other hand the absence of that reality has left a large section of the electorate still thinking that we can spend it like Beckham and preventing the medicine thats needed to be delivered. That means the sequel will be the more gory.
August 8, 2012
By the way on a separate note there was one thing about Danny Boyles openning ceremony that got my back up. Like the other hundreds of thousands I work in the City but am not a banker. His one passing visual of the City was some spivs guzzling champagne. What a damn insult that was to the rest of us in the City and an area that generates 20% of the economy of this country. If he thinks thats done by drinking champagne then why does his industry only contribute 0.1%.
August 8, 2012
George Osborne injecting QE (is putting the economy on drugs-ed).
August 8, 2012
John, your figures add up to 8.5 per cent. Remember 0.2 per cent means a lot to the government..! I seem to remember that cumulative growth estimations were higher in 2010, and have been revised a couple of times since that date. If you compare those 2010 whole term estimates for growth with what we are likely to get now, it’s quite a shocker…..substantially more borrowing or QE required I guess from the Coalition.
zorro
Rerply: I multiplied them, as the following year growth takes place on a larger economy.
August 8, 2012
Effective liquidity trap….pushing on a string.
zorro
August 9, 2012
OK, I thought that it was a bit low for compounded growth.
zorro
August 8, 2012
OT: Is this a criminal offence in our brave new world?
Parkinson’s disease sufferer, 54, held by police at Olympic cycling race ‘for not smiling’
Read more: http://www.dailymail.co.uk/news/article-2185494/Olympics-2012-Parkinsons-disease-sufferer-54-held-police-Olympic-cycling-race-smiling.html#ixzz22zWvB8iQ
August 9, 2012
Yes, of course! I saw that one as well. Suspicious because he wasn’t seemingly smiling or ‘enjoying’ the show……We are becoming East Germany.
zorro
August 8, 2012
Given how many years the treasury have had to lower their forecasts I’m not surprised.
The reduction in public sector jobs, wages declining in real terms due to inflation, and several schemes that make people work for less than minimum wage have all reduced the amount most people have to spend, thus reducing demand and growth. Perhaps it’s time to turn minimum wage into a living wage so that those working full time are no longer reliant on benefits.
August 9, 2012
How’s your money tree doing?
August 9, 2012
No so good; fortunately the Government can create billions whenever it wants. I believe they call this qualitative easing.
August 10, 2012
Quantative easing old boy. Basically the state paying its own deficit, ie the difference between what it has to spend and what it wants to spend, by buying its own debt. And not, as some parts of the media would have you believe, ‘pumping money into the economy’. The biggest problem is the refusal of the state to cut its cloth accordingly, they are passing thier debt onto us, how they think will lead to growth is beyond me. In fact it won’t will it, and never will. All I see is a continued decline in standards of living from now on.
August 8, 2012
Just looking at Newsnight and Paul Mason’s graph…….the vertical axis figures are not correct for GDP….He’s saying that 2008 figures should be reached in 2015, but graph says figure will be around 400 billion!……GDP is actually c.1.5 trillion pounds.
zorro
August 8, 2012
I was wondering if we still have a chancellor of the exchequer ??? Has he been murdered for utter incompetence or is he on permanent “gardening leave” ?????
August 8, 2012
Depressing but not a surprise
More reason to follow the paths that you’ve suggested …bank reform, less EU regulation and cheaper power to make the UK more competetive.
Time to be bold and let the Lib Dems hang on to the handlebars..its all to play for
August 9, 2012
Please tell me how we can stop the state borrowing? I do not borrow I tough it out if we have a need and cannot afford it. I have a roof over my head because I bought it when the sun was shining and I was fit and got off my Ar@e and worked. The government does not seem to care because the people who borrow are civil servants probably with a sinecure. Its us plebians that pick up the tab. Stop borrowing John and start living within our means. Its vastly demotivating to us all to see the borrowing figures rising which means the debt rising. I cannot stop you until its voting time, my fear is it will carry on with the next lot. Please do not start the old excuse we must fund the NHS etc, I could prune our budget remarkably just like I did my business when required.