Debt, deficit and the Coalition.

 The Coalition came together to eliminate the structural deficit over the lifetime of this Parliament. The government tells us they have cut the deficit by one quarter so far, and intend to go further.

Mr Clegg now says he does not think it was right to cut capital spending so much at the beginning. This is a criticism of Labour as much as of the Coalition, as all the Coalition did was inherit Labour’s plans for large cuts in capital spending, reducing the cuts just a little. They reduced them further in subsequent budgets. I think Labour were right about this. In a previous blog I have described how cutting out “growth” spending on new capital facilities is one of the best and easiest ways of stopping public spending growth overall, as new capital items often lead to continued extra current spending in future years.

There is no particular magic about capital spending as opposed to current spending. It is all spending, and needs borrowing to pay for it. Capital spending does not have unique properties which bring the deficit down or create more economic growth whilst current spending increases the deficit and cuts growth. The only exception is capital spending on better technology and automation which replaces state employees and makes it cheaper to deliver a given service.

A few billion more capital spending in 2010-11 or 2011-12 would not have transformed the growth rate of the Uk economy. The Coalition did raise current public spending by 5.3% in its first year in cash terms, and overall spending by 3.7%. The Coalition has increased public spending in real terms since coming to office. The poor performance on growth compared to forecasts comes from declines in private sector output, especially in financial services, construction and banking , and in oil and gas. It does not come from reductions in the public sector.

This week’s figures do not make good reading. Between April and December 2012 the state borrowed an extra £106.5 billion, £7.2 billion more than the same period in 2011. There were two main reasons for the high borrowings. The first is a shortfall in tax receipts from Income and wealth taxes and company tax. The second is the large increase in public spending.

Taxes on income and wealth were £194 billion for the whole of 2012 compared to  £199.7 billion for 2011. As I have reported before, income tax on high earners has fallen sharply this decade with the higher 50% tax rate in place. Corporation Tax has also been weak.

Spending in December 2012 was 5.4% higher than spending in December 2011. According to CEBR, the economics consultancy, real public spending rose by 2.8% in 2012 compared to 2011.

I have long argued that the government’s strategy for cutting the deficit relied entirely on higher tax revenues, with real increases in public spending in the first three years. The latest figures reinforces this view of the government’s strategy. Their  problem is the high rates of tax allied to the poor rate of private sector growth are not delivering the extra tax revenues they forecast, so the borrowing is continuing at higher levels than planned. They need to get a stronger grip on the increases in spending, especially at a time of good progress in the private sector generating many more jobs.

I have also been asked to comment on Mr Cameron’s debt remarks. I assume he just made a mistake. I can assure my readers that he does know the difference between debt and deficit, and does know the debt is still rising.

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67 Comments

  1. Steve Cox
    Posted January 25, 2013 at 6:31 am | Permalink

    This is from the Guardian a few days ago:

    “At first glance the cumulative budget deficit for the financial year to date appears to have shown a decent improvement this year – £78.5bn versus £99.3bn for the same period in full year 2011/12,” he said. “However, this is purely down to the transfer of assets from the Royal Mail Pension Fund, which was absorbed by the state. It will get a further boost when the Treasury receives the interest the Bank of England had earned on its holdings of gilts bought for its quantitative easing programme. Strip these factors out and there is unlikely to be any underlying improvement in financial year 2012/2013 versus 2011/12.”

  2. Brian Taylor
    Posted January 25, 2013 at 6:39 am | Permalink

    Keep up the good work,it may get through let’s hope so!

  3. alan jutson
    Posted January 25, 2013 at 7:00 am | Permalink

    Shame you were not on Question time last night.

    None of the politicians had a clue as to how to really describe the deficit, debt, spending increases/cuts or even growth, and how they have interlinked with past and present decisions on taxes and benefits.

    Makes you wonder if they actually understand finance, economics, mathematics, or simple budgeting at all.

    One thing for sure, they do not have a clue about human nature.

    Give someone something for nothing, and they feel it has no value, and so simply ask for more and more.
    Constantly tax someone ever more for working, and they then see no point in working even harder.

    • bigneil
      Posted January 28, 2013 at 12:24 pm | Permalink

      i totally agree on the tax them more and they will think why bother – -a workmate lives on a nice new estate – he and his wife both have to work – with parents helping kids to and from school – to pay the bills or else he loses his house

      the DSS – or whatever name it is now – have put several families on the same estate – known shirkers and benefit spongers – who – as my mate drives off in atrocious weather on a saturday night to his 12 hour shift 24/7 job – wait at their windows and hold their cans of lager up to him.

      why work when you can live in a same quality house??

      also -in years to come -if my mate has to go in a care home – his house will have to be sold and the money used – -the shirkers are getting the house free and everything that follows – -the taxpayers are paying for everything -

      and the government will dish out even more free lives when homeless bulgarian and romanian families roll up and start squealing “human rights” – with a taxpayer funded lawyer at their side – we all know it will happen – but the government cannot stop it. – they only want it to stop for fear of losing the vote.

      result – our taxes will go up -surprise -and services cut again – its the only thing they know how to do

      we are heading on the way to becoming a 3rd world country – because that is the people we are “importing” and giving a free life to – -and the numbers will keep increasing till the lifeboat tips over and sinks.

      I hope I die before it does !!

  4. Nina Andreeva
    Posted January 25, 2013 at 7:26 am | Permalink

    Now that the Coalition has reduced the size of the army to less than half that of the US Marine Corps, please can you tell me why you are proceeding with more money for Trident? Its not an “independent” deterrent but simply an American franchise that you can buy into. I look forward to someone posting a credible scenario where it could be used against America’s wishes. In the meantime if you do not want the UK to become “Upper Volta with missiles” I would suggest the money was stopped for this expensive phallus which tries to show that John Bull is still at the top table of global politics.

    Reply: There is no need to replace the Trident missiles this Parliament, and so they are not spending money on doing so. They are doing preliminary work for submarine replacement.

  5. Mike Stallard
    Posted January 25, 2013 at 7:49 am | Permalink

    If you actually see the graph of the growth of public debt, then it is striking that for the first few years of Labour, it was kept at Ken Clarke levels. Then it gradually rose. Under Mr Brown it began to skyrocket and the current government has had absolutely no effect at all as the line of the graph rushed steeply up and over the trillion. It is still going.
    At the moment, the Coalition, for all its big words and tough austerity measures etc etc has had no effect at all. Public Spending is rushing upwards and out of control.
    Guido Fawkes blog has shown the dire stats – in a bright red graph!

    • uanime5
      Posted January 26, 2013 at 7:11 pm | Permalink

      Under Brown is skyrocketed because he had to bail out the banks after the 2008 financial crisis.

      • Edward
        Posted January 26, 2013 at 9:25 pm | Permalink

        Uni,
        At last a comment that defines why we are, where we are now.
        If only “save the world Gordon” had allowed the failing banks to go into administration and concentrated on supporting small depositors we would be in a very different situation today.
        His natural instinct was biased towards nationalisation, it was the way his mind works, especially as one of the failed banks was the Royal Bank of Scotland.
        There would have been several sound banks available at the time who would have taken over the failed banks and that would have saved us many billions.

  6. lifelogic
    Posted January 25, 2013 at 7:59 am | Permalink

    “The only exception is capital spending on better technology and automation which replaces state employees and makes it cheaper to deliver a given service.” The other capital spending that makes sense is redundancy pay for the countless number of the state sector who do nothing much of use or just inconveniences the private sector. Box junction camera operators and other parking muggers for example.

    Clegg’s idea of capital infrastruture investment is daft things like HS2, fake green house bling, car charging points, the absurd green deal, indoctrinating children at school with quack green scare “science” and littering the country with bat and bird killing turbines that generate a little intermittent electricity occasionally a twice the cost of what it is worth. Clearly things like HS2 are entirely negative on growth in the short term and even in the long term. Initially they inconvenience thousands and in the long terms they are worth about 1/5 of what they cost to build.

    Let get on with five runway Heathwick, a few roads, sort out the banks and release the private sector to do some real investments that will produce an actual return & quickly.

    • lifelogic
      Posted January 25, 2013 at 10:24 am | Permalink

      Other coalition and libdem ideas of “investment” are phasing traffic light to red for cars (the vast majority of the traffic) to red for 90% of the time. Putting in more and more islands, bus lanes and bike lanes. Introducing more and more regulation or buildings, health and safety, sill HS trains, licences, planning, equality, employment, energy production, industry, silly sports week stadia pretending that men and women are the same, live the same length of time length of time and drive with the same accident risk profile …………… all clearly designed to kill off real jobs, real growth and efficient mobility. These are religions not “investments” in any actual sense.

  7. James Reade
    Posted January 25, 2013 at 8:50 am | Permalink

    Yet again, the absence of a realistic counter factual on which to make your points.

    On the poor growth, you say “It does not come from reductions in the public sector”, based again on your reasoning that the public sector has grown because in a recession it has got larger.

    What is the counter factual? Have you re-run the economy with different growth paths for government spending to check out your hypothesis?

    Just because you say government spending increased (when it would be expected to since we’re in the midst of a depressed economic period) does not mean that therefore there was no austerity. How much would spending have grown without austerity? What would growth have been without austerity?

    The simple fact is that even if spending rose, it rose less than it would have without austerity, which does not mean you have some failsafe argument about why austerity was right. What it means is that there was still an impact of lower spending growth than usual in a severe economic downturn, and this will have impacted growth.

    Your counter factual is that spending would have actually decreased, but the proper counter factual is to compare to what would have happened without austerity – larger spending increases.

    It would have led to an economy with a composition you don’t particularly like, but there’s no evidence to suggest it would have led to an economy with worse growth performance than we’ve currently seen.

    • Edward
      Posted January 26, 2013 at 9:28 pm | Permalink

      Still borrowing over £150 billion this year on top of a huge debt.
      When is enough enough?

  8. Lord Blagger
    Posted January 25, 2013 at 9:21 am | Permalink

    The Coalition came together to eliminate the structural deficit over the lfietime of this Parliament.

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

    Nope. We keep being told that the deficit is to be eliminated. So why the weasel word ‘structural’?

    Ah yes, the plan isn’t to eliminate the deficit. It’s to cut it a bit, and claim that the rest is cyclical.

    At the same time, if you confuse people by saying things like ‘pay down the deficit’ then people think debt and deficit are the same.

    Equally, if you use the word debt, when it really means borrowing, people will think they will still get a state pension. After all, 5,300 bn hidden off the accounts there. GAAP? lets ignore it and come up with post modernist accounting.

    • Bob
      Posted January 25, 2013 at 2:07 pm | Permalink

      “I have also been asked to comment on Mr Cameron’s debt remarks. I assume he just made a mistake. I can assure my readers that he does know the difference between debt and deficit,”
       
      Mr Redwood,
      The words used were “we’re paying down Britain’s debts”.
       
      If he had meant to use the word “deficit” instead of “debt” he would have said “we are reducing the deficit”.
       
      You can pay down a debt, but not a deficit.

      (Reply He normally says paying down the deficit, not a phrase I would use myself.)
       
      Nice try, but no cigar.
       
      Anyway, I’m sure there are thousands of Tory supporters who don’t know the difference between a debt and a deficit, or jam today and jam tomorrow. The ones that do understand the are moving to UKIP.

      • Deborah
        Posted January 25, 2013 at 5:19 pm | Permalink

        ” I assume he just made a mistake. I can assure my readers that he does know the difference between debt and deficit,”

        This wasn’t just an impromptu TVinterview – it was a party political broadcast that had been pored over by tory advisers. The words will have been been checked and checked again.
        The “mistake” excuse is not credible.

  9. Andyvan
    Posted January 25, 2013 at 9:26 am | Permalink

    It could only be in the world of politics that a deficit is reduced by spending more money. It’s a strange parallel world where truth becomes distorted beyond recognition and lies are accepted as the new reality.
    Cameron lied about debt being paid down. The deficit is growing to a level where collapse is inevitable. It may come about by hyperinflation or a run on sterling or on banks but however it appears it will be a catastrophe. The truly amazing thing is that nobody is even seriously discussing the gigantic burden of debt that now exists both in Britain and most other industrialised nations. It can’t go on forever and what can’t go on forever will, at some time, stop. For likely scenarios of what happens then see- Roman Empire, Weimar Republic, Argentina, Zimbabwe and many other disasters.

    • Bazman
      Posted January 25, 2013 at 4:01 pm | Permalink

      You think that by cutting spending no company or individual is effected? If nobody went to your local pub and it closed would you be surprised? I bet you would!

  10. Brian Tomkinson
    Posted January 25, 2013 at 9:30 am | Permalink

    Where is all this extra spending going? We have discussed numerous times the duplicity of continuing to talk about spending cuts when the totals continue to increase. All the main parties in Parliament are complicit in this deceit. As I wrote yesterday, the government planned to increase the debt to £1.36 trillion by 2015 from £616.9 billion in the fiscal year 2009-2010. Today the debt is £1.118trillion and counting. I am sorry I don’t accept your excusing Cameron’s debt remarks as a mistake in the heat of the moment – he has said that too often as I have pointed out here numerous times, as has Osborne. No, it is a deliberate attempt to mislead. The danger is that the truth of the situation is being hidden but it cannot be hidden indefinitely. Come 2015, even Labour will gleefully accuse your party of having at least doubled the debt in 5 years and by an amount that even Brown couldn’t manage.

    • Bazman
      Posted January 25, 2013 at 3:56 pm | Permalink

      Where’s it all going? On the increased cost of less demand and the payment of benefits to those on reduced income due to unemployment or shorter part time working. The deficit will be affected by reducing tax credits for example and the loss of tax income due to less demand. You seem think that the unemployed and low paid do not spend anything.

  11. Winston Smith
    Posted January 25, 2013 at 9:44 am | Permalink

    Your loyalty to Cameron is admirable, yet misplaced (he won’t be rewarding you). It was not a “heat of the moment” mistake. It was a carefully prepared and scripted Party Political Broadcast! It supports my view that a) Downing Street and Party advisers are incompetent, b) the PM is a hollow PR face, and c) they have no qualms about lying to us.

    In 2009, Cameron said he and his Party had made mistakes in not recognising the scale of Govt debts and not berating the Labour Govt on the problem. He said:

    “there are other areas of economic policy where I look back now and think we would have done it differently if we had the time again………..For example, while we warned that it was wrong and complacent to claim that boom had been abolished … we based our plans on the hope that economic growth would continue.”

    Well, he just continued the same policies. He’s not in control.

  12. Leslie Singleton
    Posted January 25, 2013 at 9:50 am | Permalink

    We should get off the backs of employers, instead we overtax them, hideously over-regulate them and force them to do Government work (collecting tax, setting up pensions, worrying about maternity leave and “diversity” and how to let go poorly performing staff ) and, incredibly to me, we charge them the ill-conceived and ridiculous Employers’ NI for the privilege of being forced to do all this whereas logically the Government should be paying the employers not the other way round. Employers should be regarded as the good guys by everyone certainly including employees. So far from that, I assume you have seen the latest pension advert, which, completely evilly and inappropriately in my opinion, gratuitously slots in a comment along the lines of “and the good part is that your boss has to contribute too”. Personally I have no idea why employers should be burdened with having to do anything whatsoever to do with pensions–unless they want to of course. BTW I have never employed anybody and wouldn’t dream of doing so as things stand. Just imagine the beneficial effect on just about everybody and everything if we started to treat employers sensibly.

  13. Iain Gill
    Posted January 25, 2013 at 9:57 am | Permalink

    Andrew Neil did at least get Michael Portillo and Alan Johnson to discuss these issues on the TV last night highlighting the difference between debt and deficit pretty much as you have been highlighting. Portillo was also put on the spot about what Cameron is up to confusing debt and deficit but avoided the question. Sadly none of them appear to be in favour of starting to pay down the debt and cutting our cloth accordingly. The conservative on last nights question time tried giving the arguments that they were the only party in favour of paying down debt, it was pointed out to her that the government is still increasing borrowing, folk like her really need to get their story straight.

    Oh for some decent, competent, honest politicians…

    • Pleb
      Posted January 25, 2013 at 6:10 pm | Permalink

      “honest politicians” Oxymoron

  14. JimS
    Posted January 25, 2013 at 10:04 am | Permalink

    There is no particular magic about capital spending as opposed to current spending. It is all spending, and needs borrowing to pay for it.

    You are right. The whole PFI scam is predicated on the idea that capital spending can be ‘converted’ into current spending (and at what a cost!).

    The MOD plays the same game by moving internal work (current spending) out to contractors on the equipment budget (capital spending). This is a double lie as it pretends that the budget goes into front-line ‘hardware’ (seen as ‘good’) rather than base support (seen as ‘bad’). Arguably that makes no difference as, just like the borrowing needs to be paid for, the front-line will always need ‘back office’ support, particularly as systems get ever more complex. Just spin and deception that comes at an extra price.

  15. MajorFrustration
    Posted January 25, 2013 at 10:04 am | Permalink

    It really would help in ones understanding to be advised what the deficit was that this Government took over and what it is now. Why is this info so difficult to extract? As with all things political its going to come right after the next election.

  16. MickC
    Posted January 25, 2013 at 10:13 am | Permalink

    The long and the short of it is that Gideon has over-taxed, resulting in exceptionally poor growth.

    In actual fact, it is extremely unlikely that there has any real growth in the economy since Dave managed to become Prime Minister (just!-and against Gordon for heavens sake!).

    This lot don’t know what they are doing and by the time of the next election the mood for change, any change, will be colossal. Pretend promises about a referendum are unlikely to save Dave.

    Ditch him now for someone more competent.

  17. A different Simon
    Posted January 25, 2013 at 10:38 am | Permalink

    Quote John , “Capital spending does not have unique properties which bring the deficit down or create more economic growth whilst current spending increases the deficit and cuts growth. ”

    Borrowing for “capital spending” can be a self liquidating debt if it is a good investment .

    Even borrowing for “current spending” can be self liquidating in specific situations for example taking on state workers where there was a shortage which causes industry delays .

    Trouble is governments and politicians are generally not very good at investment and are tempted to use the money for pork barrel projects .

  18. A different Simon
    Posted January 25, 2013 at 10:56 am | Permalink

    Quote John “The only exception is capital spending on better technology and automation which replaces state employees and makes it cheaper to deliver a given service. “.

    If the cost of employing a particular state worker is only a little bit more than they need from benefits in order to be able to subsist then once hidden costs are taken into account there is no real saving in replacing them with a machine (or removing their position if it is a non-job) , only an imaginary one .

    When the hidden costs such as impact on the ex-workers children are taken into account it may even lead to a spectacularly negative saving .

    In the private sector management are hardly ever held accountable for losing good people because the MBA’s which have found their way into “management” see them as costs rather than assets . Hidden costs are almost never properly taken into account .

    The quicker the Government allows a quarter of a centuries worth of correction to take place the quicker things will start improving .

  19. oldtimer
    Posted January 25, 2013 at 11:00 am | Permalink

    I agree with your analysis of the public finances. Early on in the history of the coalition the IMF suggested that Osborne should ease up on taxation because his public pending regime would be unlikely to deliver growth. The smartest moves Osborne could make in the forthcoming budget would be to restore the Brown rates of 40% top rate of income tax and 18% CGT and to make a start on simplifying the tax code.

    High taxation is the ball and chain acting as a drag on the UK economy. Unfortunately such changes are is unlikely to happen because of the dead hand and bankrupt thinking of Clegg and his LibDem MPs.

    • uanime5
      Posted January 25, 2013 at 6:55 pm | Permalink

      CGT was increased to discourage people from setting up their own company and being paid in shares. Reducing it will just lead to a greater loss of tax revenues as the majority of people will be much better off by setting up their own company and paying themselves in shares.

      • A different Simon
        Posted January 26, 2013 at 2:25 am | Permalink

        Uanime5 ,

        That doesn’t sound right to me .

        There are two ways of being self employed :-
        - sole trader where one pays oneself income which is subject to income tax and national insurance .
        - as a limited company , where one would pay oneself partly an income which is subject to income tax and national insurance but can also pay a dividend on profits which I think is what you meant .

        The dividends are subject to dividend tax , not capital gains tax .

        If someone created a limited company and found someone else to buy it then they might realise a gain which would be liable to CGT .

        It’s not as easy as people might think to maintain self employed status . Thinly disguised employer-employee relationships would not qualify , unless they were for government departments .

        As a tax CGT is a complete balls up . Unnecessarily complicated especially when multiple currencies are involved .

        • uanime5
          Posted January 26, 2013 at 7:24 pm | Permalink

          When a person sets up a limited company and makes themselves a director they are not considered self-employed but a director in a company.

          After setting up their company they have another company hire them as a contractor and have their employer pay their salary to their company. Their company then pays them a salary equal to the personal allowance (about £8,000), which is too low to pay income tax or NI on. Their company pays them the rest of their salary in shares which are subject to CGT.

          So by setting up a company and becoming a contractor at another company they only pay CGT on their earnings, rather than income tax and NI.

          • Edward
            Posted January 26, 2013 at 9:34 pm | Permalink

            Im afraid Uni, you are not correct, it is not as simple as you say.
            You need to speak to a accountant and get some proper advice.
            You dont get paid in shares, in effect you get the proceeds of a dividend which is taxed.

  20. oldtimer
    Posted January 25, 2013 at 11:11 am | Permalink

    I see that Allister Heath posts a timely reminder that measures of stuff like growth are highly suspect. He points to research into the remarkable rewriting of economic history going back sixty years or more with significant changes in the measurement of GDP and inflation – rendering thousands of economic analyses redundant if, that is, the new measurements are to be believed. Curiously the same thing is happening to the global temperature record – the past is revised to make it look colder and, in consequence, the present to look warmer by comarison. I wonder why that is?

    • uanime5
      Posted January 25, 2013 at 6:58 pm | Permalink

      Could it be that the differences are due to more accurate measurements of past temperatures due to better technology.

  21. Wilko
    Posted January 25, 2013 at 11:28 am | Permalink

    Capital spending on technology & automation to cut wasted state employee costs may be money well-used. Better still would be cutting crazy systems. Offering a Non-licence benefit to the very few non-viewers of TV would be more efficient than charging & chasing payment from the near 100% of others.

    Car sharing would cut NHS costs & other waste. 100 drivers passing 100 others may have 10,000 impact risks. 50 drivers could have 75% fewer.

    Paying for a fence at the top of a hill is more efficient than paying for ambulances at the bottom. Many cost-efficient alternatives exist or are easily devised. The main obstacle is Govt inertia about doing something different from routine.

  22. margaret brandreth-j
    Posted January 25, 2013 at 11:29 am | Permalink

    Every one needs to admit these days that capital spending is closely interwoven with public spending in the health sector and from that standpoint it is now very apparent that needless spending on new hospitals , new equipment, new resource, bigger and better technology requires more tutoring , more staff to operate, more computer programmes to collect data, which is all very good for the town it represents . However a more conservative type of socialism recognises the worth in previous buildings being upgraded and existing staff upgraded and adding to their skills rather than more capital spending . Someone has to foot the bill and because public either plc or state ,or the private sector will have to foot the bill of expansion and the so called improvement. Shiny and new doesn’t always mean better.
    The private sector in the game will have to up their standards and competitively pulling down is not the way forward ,despite the buzz wording being competitive.
    A falsely reasoned argument may win in the courts , but it doesn’t convince the users of the worth of such a company.They need to listen and understand before they attempt to plagiarise. These whizz managers who spend a lot of time looking at PC’s waiting to jump on a problem to try and achieve credit , usually make a fool of themselves and costs the firm a lot of money .
    In 2010 GDP from Europe was the highest anywhere . I am not sure what it is now. I am therefore not surpised that companies outside the single market want a piece of the action.Free trade is better for the bigger companies as they can trample all over their competitors. What will free trade do to the defecit?

    • margaret brandreth-j
      Posted January 25, 2013 at 2:37 pm | Permalink

      Apologies for the ungrammatical sentence midway, I was working at the time of writing and called away to address a problem, but am sure as it is naive, childish ,unworthy language with spelling mistakes and not understandable.. most will get the drift.

  23. peter davies
    Posted January 25, 2013 at 11:32 am | Permalink

    Interesting – so increasing public spending does not lead to growth, what the left is advocating would not help one bit?

    I fear too many economists (like the climate change people) base their views far too much on opinion rather than fact. This could be put to bed as an argument if someone could build an all encompassing piece of software that maps out an economic model based on the components of that economy which you can use to feed in spending data and calculate likely output based on tax receipts, extra spending etc to form some sort of picture.

    • uanime5
      Posted January 25, 2013 at 7:03 pm | Permalink

      Such a model would have to take into account human behaviour as a result of these actions, so it would be difficult to construct and highly likely to be wrong.

      Also according to Keynes (an economist) increased public spending is beneficial during a recession as it maintains demand while companies are recovering.

      • Edward
        Posted January 27, 2013 at 11:21 pm | Permalink

        Keynes would be assuming that the Government had saved during the good times and then used these proceeds to “invest” in the lean years of the trade cycle.
        Your call for more borrowing when borrowings are at record levels are a perversion of Lord Keynes views.
        He also believed that savers had a value and that a fair level of interest on their savings was important to give savers an incentive for not consuming.
        Savings then allows investment to take place without extra borrowings or printing bogus money.

  24. matthu
    Posted January 25, 2013 at 11:40 am | Permalink

    JR says: “I have also been asked to comment on Mr Cameron’s debt remarks. I assume he just made a mistake in the heat of the moment.”

    But as Fraser Nelson points out in The Spectator,

    http://blogs.spectator.co.uk/fraser-nelson/2013/01/david-cameron-tells-porkies-about-britains-national-debt/

    “The Prime Minister has a greater duty than anyone. When he claimed debt was falling on an ITV sofa recently, you might have put it down to a slip of the tongue. But on a carefully-scripted party election broadcast?”

    and

    “His deputy, Nick Clegg, has previously boasted that his government is ‘wiping the slate clean of debt’. An utterly misleading analogy.”

    and

    “It is hard to avoid the conclusion that David Cameron and Nick Clegg have an agreed strategy: that it is not important to tell the truth about how much debt their government is saddling voters with. That a little deception is no bad thing.”

    So, no John – when this is evidently at least the third such slip up made by the government, I would tend not to be so charitable: David Cameron owes us an apology.

    [ Next thing he will be saying is that 3m jobs depend on us being members of the EU ... ]

    • Electro-Kevin
      Posted January 25, 2013 at 2:41 pm | Permalink

      I felt the same reservations.

      • Chris
        Posted January 25, 2013 at 6:26 pm | Permalink

        I too, Elctro-Kevin. This was a carefully prepared party political broadcast not some off the cuff remark (even then it should have been corrected by him). The script for the broadcast will have been gone over again and again prior to broadcast, and there will have been close vetting of the broadcast as it was going out. Cameron’s speciality is apparently PR. No, I fear this was no mistake. If it was, as Mr Redwood suggests, then those responsible for this clanger should have come clean immediately. Did they think they could leave it well alone, and the public would not notice? Besides that being the dishonest course of action, it also displays an arrogance in thinking the electorate and journalists are stupid and would not notice.

  25. Acorn
    Posted January 25, 2013 at 11:44 am | Permalink

    Oh dear JR, can’t agree. The neo-liberal economic model Osbo’ is following is the wrong one for the 99% even if it works very nicely for the 1%, particularly QE bankster backstops. I suspect he spends too much time talking to banksters; who are only ever going to proffer solutions that are good for banksters and ETF traders.

    Q4 GDP, just issued, looks bad, how much more evidence do you need. ONS says that Households and Non-financial corporations sectors are holding on to what income they are getting, no confidence. We have a negative foreign sector. The public sector has to fund these negatives with a positive, that is fiscal deficit spending by the Treasury, not monetary QE. I think Osbo is doing it ass-backwards.

    Have a look at http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product–preliminary-estimate/understanding—interpreting-the-q4-2012-gross-domestic-product-preliminary-estimate/index.html .

    Particularly Fig 2. You can see that Osbo’s first budget, two quarters later, knocked the economy off what would have been a normal post recession recovery. At the moment the deficit does not matter, you have to live with it. The Treasury has to spend new money into the economy, to soak up spare capacity, including spare labour hours, in the economy.

    Don’t worry about Triple A ratings, they are meaningless in sovereign economies that issue their own currencies. Ask US and France. The Central Bank of such economies can out gun any bond vigilantes any time it wants. The Treasury of such economies, do not have to borrow by issuing interest bearing debt, they choose to do it. It acts like corporate welfare benefits for pension funds and the like. It is better than holding cash if you are an exporting country selling us stuff, for which, you get paid in our currency, which may (has) devalue over time.

    And, to add insult to injury, I am stuck, for five years, in the waiting room of Doctor Referendum, to see if I need surgery to extract me from the EU. He have taken the piss out of me for over two years now; I fear for my other orifices.

  26. Neil Craig
    Posted January 25, 2013 at 12:26 pm | Permalink

    In essence there is no practical difference between Labour and the ConDems. All of them know they could end the recession in weeks, by adopting the free market policies UKIP promote, and all of them are resolutely opposed to doing so.

    • P O Taxpayer
      Posted January 25, 2013 at 4:29 pm | Permalink

      But in the Socialist EU State free market policies are not allowed! How can UKIP offer this whilst we are still in the EU? Even if UKIP have a very good day at the next General Election they are unlikely to win many seats. UKIP are a protest party like the LIB DEMS used to be before they showed their real colours as a bunch of loonies who lied there way to power. At best UKIP will become a mumbling bunch of backbenchers taking the place of the LIB DEMS in parliament.

      • Neil Craig
        Posted January 26, 2013 at 11:11 am | Permalink

        There may be realistic objections to UKIP policies, though I can’t say I have seen any serious ones from opponents, but decrying us because being in the EU is a bad thing seems strange.

  27. Lindsay McDougall
    Posted January 25, 2013 at 12:56 pm | Permalink

    The shortfall in income tax and corporation tax receipts was predictable given the reduction of income tax on low incomes, the reduction of the corporation tax rate and zero economic growth.

    We have to make the best of that. The task now is to ensure that the deficit in FYR 2013/14 is substantially less than in FYR 2012/13. Reductions in State current expenditure, selling of some state assets (RBS, Lloyds) and collection of some toll road revenue are called for. It is time to remove the red lines – foreign aid, health, the EU budget and foreign wars must all be subject to financial control.

    As for public sector capital expenditure, Labour more or less halved it in real terms, so let it recover a bit.

  28. Muddyman
    Posted January 25, 2013 at 1:34 pm | Permalink

    Oh what a wondrous web we weave when first we practice to deceive .

    • Deborah
      Posted January 25, 2013 at 5:31 pm | Permalink

      But they have practised quite a while, with no improvement to their style…

      Alexander Pope would have been most unimpressed by these blatant untruths.

  29. Barbara
    Posted January 25, 2013 at 1:35 pm | Permalink

    Clegg and Co, are the problem for this government; plus our never ending aliance with the EU. They too, are not facing their debt problems, and dragging the rest down with them. We do have more debt now than before and no growth. I would suggest devaluation is on the cards, perhaps Mr R you could explain to me and others if this took place what it would mean?

    Reply We had a big devaluation near the beginning of the crisis. It meant dearer imports, and meant exporters either made more profit or sold more.

  30. Bob
    Posted January 25, 2013 at 2:28 pm | Permalink

    Why would the government increase their foreign aid payments by £4 billion per year if they can’t even honour their own pension liabilities?

    • Deborah
      Posted January 25, 2013 at 5:33 pm | Permalink

      because their pensions are gold plated and safe….

  31. Antisthenes
    Posted January 25, 2013 at 3:03 pm | Permalink

    Debt, deficits, QE and bailouts are causing a serious mis-allocation of resources and mal-investments. A situation has now grown where all this loose money is staying within the financial sector where cheap credit is fuelling only investment in financial products; bonds, gilts and equities. Financial investment is now outstripping the investment in the real economy;products and services. If this was sustainable then we could all be rich for no effort but obviously it is not. At some point a price has to be paid as bubbles in the financial markets are going to burst. They will burst because they do not relate to reality as they are not bullish because the fundamentals are good but because the low credit loose money is driving them. Banks are in essence insolvent as their balance sheets are holding assets that are highly overvalued because the markets are not reflecting their true value. So when the correction comes and it will as QE is having less and less effect and of course cannot continue indefinitely and interest rates start to rise as they must when true values become apparent then not only will banks fail but whole countries. Coupled with this many countries are seeking desperately to devalue their currencies Japan having just entered the fray with some initial success however if everyone is intent on doing this and they are China included then the effect can only be harmful for everyone and can well lead to protectionism.

  32. michael mcgrath
    Posted January 25, 2013 at 3:16 pm | Permalink

    The original plan included, in the first two years or so of this administration, public sector pay would be frozen for two thirds of staff.

    At the same time, headcount would be reduced leading to an overall saving

    The result?…Freeze applied, 370000 jobs gone, total spend up by two percent.

    What am I missing?

    • uanime5
      Posted January 25, 2013 at 7:06 pm | Permalink

      Perhaps they removed a lot of low paying jobs and replaced them with a few higher paying jobs?

  33. Paul
    Posted January 25, 2013 at 5:33 pm | Permalink

    Fortunately David Cameron’s EU referendum pledge does not seem to have done him any favours – the first poll released suggests, if anything, people are less likely to vote for him. Are people finally realising this man has no principles, convictions or backbone? UKIP is here to stay and will see your leader out in 2015. Cameron and Osborne have no understanding of economics, business or the real world (because they’ve never been in it). The sad fact is that Miliband and Balls are more likely to get this economy moving than the Conservative leadership.

  34. Pleb
    Posted January 25, 2013 at 6:16 pm | Permalink

    Cap public sector pay to 75k
    Cap public sector pensions to 50K gross
    Include all councils in these caps.
    Make a law restricting all parking charges to 25p per hour in all locations.
    Scrap HS2
    Scrap Tridend. Dismantal the entire nuclear arsonal.
    Start to build decent councel housing.

  35. uanime5
    Posted January 25, 2013 at 7:07 pm | Permalink

    Capital spending can also reduce costs by replacing ineffective equipment with more effective equipment (such as replacing cars with more fuel efficient cars to reduce petrol costs).

    I suspect that the fall in income tax had been due to falling salaries, people working fewer hours, and public opposition to companies paying their directors huge bonuses.

    (words left out – wants you to read about anti global warmers -ed):

    http://www.independent.co.uk/environment/climate-change/exclusive-billionaires-secretly-fund-attacks-on-climate-science-8466312.html

  36. Chris Sheldrake
    Posted January 25, 2013 at 11:27 pm | Permalink

    The overall results in the economy over the lifetime of this government show in the most dramatic way possible that the situation left by Labour was even worse than was appreciated at the time of the election.

    I have no doubt that really determined efforts have been made to reduce the deficit and to cut current account spending, but every cut has a negative effect on growth. If this was not damaging enough, we have the Eurozone slowly imploding on our doorstep.

    I don’t pretend to have the answer but the one overwhelmingly important thing that the Chancellor and the MPC have to ensure is that interest rates remain at their current level until a significant level of growth is achieved and is sustainable.

    Only then will the general economy and families be in a position to absorb an increase in mortgage payments.

    Everything else has to be second to that requirement.

    Ed Balls and Co need to be ignored. They got us into this mess and their suggestions for increased spending would do nothing more than destroy our credibility with disasterous results.

    In the long run, the economies of Europe can only have a chance of being competitive if government spending is reduced to no more than 40% of GDP. Unfortunately I see no way that the peoples of Europe can be pursuaded to accept this.

    In addition, lunacies like the Working Time Directive have to be set aside : we are already sending more of our exports to countries outside the EU with whom we have to compete.

    They are not hampered by the restrictions imposed on businesses within the EU so the concept that current and future rules governing the single market can create a level playing field are simply laughable.

    • uanime5
      Posted January 26, 2013 at 7:29 pm | Permalink

      When Labour left office the economy was growing at 2%, two years later it is shrinking. This is the fault of the coalition, not Labour.

      Why exactly do you consider the Working Time Directive some form of lunacy? How is forcing employees to work more than 48 hours per week going to make the economy better?

      • Edward
        Posted January 27, 2013 at 11:23 pm | Permalink

        Considering Labour borowed spent and wasted record sums the 2% growth you boast about is a pathetically low return.

  37. Tony Houghton
    Posted January 26, 2013 at 12:06 pm | Permalink

    I have not had time to read all of the comments above, but perhaps for the benefit of a chap who has never been in business – 33 years as a navigator in the RAF – perhaps you could provide your definition of ‘dept’ and ‘deficit’, because it appears that many are switching their use of the two at various times. Also, as I commented on yesterday’s blog, it would help if the source of the figures quoted could be given so that we know what degree of confidence we can put on them.

    It appears to me that the Coalition are not being taken to task over their spending. They expect the ‘people’ to make cuts in their relatively small income compared with the Government’s Tax revenue and MPs, if you can believe recent articles in the Daily Telegraph, are even considering a £38k increase in their pay – very ‘we are all in this together’!!

    • R.T.G.
      Posted January 26, 2013 at 10:43 pm | Permalink

      http://www.guardian.co.uk/news/datablog/2010/oct/18/deficit-debt-government-borrowing-data

      and a loose analogy for you, Tony H.
      ……………………………………………..

      George is head of a family (although his husband says otherwise!) and he has, over a period of time, run up yet another overdraft which has now reached a high point of about £10,000. When he gets his net monthly salary of £2,000, it only drops back down by about £1900, and, because of the inexorable rise in the overdraft, it always gets to the point where George has to ask the Bank Manager nicely if he can regularise his finances by adding the overdraft amount to his existing loan.

      This has been going on for many years, but the Bank Manager remains content with this situation in view of George’s very secure job and because George manages to cover the quarterly interest payments without fail.

      The ‘interest only’ loan presently amounts to £100,000, which consists of a mixture of:
      previous overdrafts transferred to the loan,
      a garage extension to house his new bench and windmill making tools,
      expenditure on two new cars and
      paying for their poor neighbour’s ‘difficulties’ (the rather sensitive reason for which is only known to George, the Bank Manager and a few others who have been sworn to secrecy).

      He is allowed by the terms of the loan to make occasional capital repayments if he wants. Again, the Bank Manager is happy, because George does do this occasionally, even though he sometimes then comes back later with requests to top up the loan – for one seemingly good reason or another.

      Again, George always manages to cover his interest, even though he sometimes uses his overdraft facility to do so.

      At the moment, the total debt that George has varies between about £108,000 and £110,000 (and rising) depending on the day of the month.

      The Bank Manager is happy because he gets paid interest on the total borrowing (or debt), and George is happy because he knows that he can carry on like this for a long time without having to start paying back some of his borrowing, which would then result in a fall in his family’s standard of living. And George dreads this because he knows his husband can get quite physical when annoyed.

      The deficit of £100 that George has is the difference between his actual overdraft amount the day before he gets paid and the day after, which is £1900, less the amount which by which his overdraft should reduce when he has just been paid, which is £2000.

      The total debt is the whole of what George owes – his overdraft and his loan – and depends on how high his overdraft is at any time during the month.

      There is a frighteningly large difference between the size of his deficit and the amount of his debt, but George prefers to dwell on the amount of his deficit rather than the amount of his debt, because thinking about the latter keeps him awake at night.
      ……………………………………………………

      But, sometimes, George gets muddled and, when referring to his total borrowing (overdraft plus loan), calls it his “deficit”, and when referring to his overdraft, calls it his “debt”.

      When his friends saw him with his last new car, they ribbed him about the cost, but he went a bit quiet, and wouldn’t say whether he had purchased it with an increase in his loan or if he had come by some other money somehow.
      ………………………………………………………

      One day, the Bank Manager heard on the grapevine that George was, unexpectedly, going to be retired early and called him in; he could see that George’s income was likely to fall, even though he was lined up for quite a good pension.

      George vehemently denied that this was about to happen.

      It was difficult to know who was right until it happened – or didn’t – but the Bank Manager wasn’t taking any chances.

      George’s and the Bank Manager’s relationship went a bit frosty after that, because the Bank Manager felt a bit more at risk than he had before, and judged that higher interest rates would be more appropriate in future.

      George reminded him that the interest rate on his loan was fixed, but the Bank Manager said that he was calling in the whole of the £10,000 overdraft – which he was perfectly entitled to do – and that he would, this time, only agree to add it to a new increased loan of £110,000 (to replace the old one) and let George have a much smaller overdraft limit of £2000, if George would agree to pay a higher rate of loan interest as well as a higher rate of overdraft interest.
      ………………………………………………………

      The ending of this loose analogy will appear on another thread at another time, but, in the meantime, no children will have been born to George and his husband.

      We’ll never know how long they continued ‘trying for a baby’, but I can’t help feeling that their energies and resources would have been better spent elsewhere, despite their strong belief in adoption, cloning and other untested biological procedures.

      Perhaps we might wish George and his husband all the very best with exploring other possibilities in their lives, faced as they were with the (potentially winning) hand they were dealt, so that they use the human and financial resources they do have in a different, but more productive way.
      ………………………………………………………

  38. Derek Emery
    Posted January 27, 2013 at 6:11 pm | Permalink

    Coalition policy is to continue to ramp up public spending until the election when public debt/GDP ratio could be climbing towards 100%. Therefore it should be no real surprise that future growth in the UK will be low but politicians can be expected to be surprised by this.
    (refers to a website In have not checked-ed) This points out that fiscal consolidation does not work when an economy is not growing. Structural reforms are far more effective than short term measures. Debt reduction has to be slow for much of the West including the UK due to the combination of ageing demographics with the aftermath of the financial crisis.

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  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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