How fast should the UK economy grow?

 

                 The Office of Budget responsibility and the Bank of England have been famous for getting their forecasts of growth and inflation wrong in recent years. They do so for a common reason.

                They both believe that the UK has a trend rate of growth similar to that before the 2007-8 financial crisis, of more than 2% per annum. They therefore believe that the current level of  output is well below what it should be – there are “missing years” since the crisis hit. As a result they conclude that the economy can be given extra demand through borrowing and printing money  without causing inflationary pressure. The OBR has also believed that there would be a “normal” cyclical recovery from the large downturn, to get the economy back to its “trend”.

              So far none of this has come true. Inflation has been obstinately high in the UK, hitting more than 5.2% on one occasion at a time when the Bank said it should be much closer to the 2% target owing to large unused capacity.  Growth is now forecast by the OBR to be only half the level this Parliament of its 2010 forecast, and that is still optimstic by the standards of  other forecasters.

             Two of the main points I argued in the Conservative Economic Policy Review published shortly before the crash were that the Uk reached an unsustainable level of activity based on excess borrowing in 2007, and that its future trend growth rate would be around 1% lower than the post war average. The big figure for future  trend growth would be 1, not 2.  I hope I was not too optimistic.

            The trend rate of growth is lower and is likely to remain lower for two important reasons. The first is demand and output was buoyed  up by a massive extension of credit in both the private and public sectors prior to 2008. The Central  Bank induced crunch makes sustaining the levels of private sector credit impossible, leading to a deflation in the private sector. Few want to return to the excesses of private sector lending and borrowing prior to 2008, though it would be good if a new generation could have access to mortgages and business finance on a sensible scale.

         All political parties agree there is a limit on how much extra debt the public sector should take on.  The outgoing government pledged to halve the deficit between 2010 and 2015. The incoming government first pledged to eliminate the structural deficit over this time period. Both have had to suggest delaying adjustment, but neither say the public sector can or should go on adding to its borrowing at recent rates.

         The second is government raised the proportion of the economy represented by public sector activity to a peak of 50%. The public sector in the UK has a very poor productivity record, so a larger public sector holds back growth which rests on productivity advances. In large parts of the public sector there was no productivity growth in the first decade of this century, whereas manufacturing as a sector has sustained a lively rate of productivity growth. When manufacturing only represents 10% of the economy this has limited impact on our general living standards.

          In subsequent posts I will examine what if anything can be done to raise demand in the economy. I will also look at the productivity issue. We can only get richer on average by working smarter and adopting productivity raising technology. How is it going to be done?

This entry was posted in Uncategorized. Bookmark the permalink. Both comments and trackbacks are currently closed.

102 Comments

  1. lifelogic
    Posted March 9, 2013 at 6:39 am | Permalink

    Agreed but as you say:- we can only get richer, on average, by working smarter and adopting productivity raising technology. How is it going to be done?

    Well it is very difficult with a hugely inefficient and over paid state sector at 50% of the economy and without any vision even to begin to address this from the top. Businesses might get more efficient but they can do little about the overheads of government pulling them below the water, nor the reluctant to lend and over expensive banks, nor the high energy caused by the AGW government religion. They will always be unable to compete with countries that do not have government handicapping them in this way. It is all about competitive advantages.

    A 50% and very inefficient state sector, very high taxes, high energy prices, daft employment laws, inefficient slow, uncertain and expensive legal system, dis-functional banking, poor education, second rate health care and endless mad regulations do not a competitive advantage make.

    Taxes at circa 40% IHT, CT 23%, IT 45%, Stamp duty up t0 15%, NI 23%, CGT 28% (even on non real gains) do not a competitive advantage make. Other than in the emigration and tax planning industries perhaps or the perhaps benefit tourism and legal aid industries which is not very helpful to the economy.

    • Timaction
      Posted March 9, 2013 at 11:54 am | Permalink

      Spending needs to come down dramatically. This is particularly with the EU budget, foreign aid and payments for the health, housing and education from mass migration. None of this can be achieved without us leaving the EU. Mr Cameron spun that the recent EU budget talks had concluded overall cuts when in fact our contribution increased by 6%. All other countries will receive special payments to compensate except the UK and Poland. Our leading politicians simply can’t and won’t negotiate a settlement in our favour as the EU runs rings around them. We don’t have to be in the EU to trade with it. It is all about political control and ever closer superstate union by stealth. We no longer trust the jam tomorrow promises of our current mainstream political elite to deliver on behalf of the indigenous population.

    • APL
      Posted March 9, 2013 at 12:14 pm | Permalink

      Lifelogic: “A 50% and very inefficient state sector ”

      It’s probably worse than that, likely 20% of the private sector exists to service the state sector, a sort of deadly embrace.

      • lifelogic
        Posted March 10, 2013 at 3:14 pm | Permalink

        Indeed a vast amount done in the private sector is done for no useful purpose at all, other than circumventing daft endless regulations, red tap, mad employment laws, the poor legal system, the PAYE system, Vat, gender neutral insurance and enforced “quality” drivel and the absurdly complex tax system in general. Perhaps about 20% I agree.

        The good news is there is a vast amount of fat to be axed if anyone in government ever had the courage to do it. About 50% of the state sector and perhaps 20% of the private sector. We could soon be up to Swiss levels of GDP per capita.

        • lifelogic
          Posted March 10, 2013 at 8:56 pm | Permalink

          “equality” drivel sorry.

    • uanime5
      Posted March 9, 2013 at 1:54 pm | Permalink

      The Government already tried cutting hundreds of thousands of jobs from the public sector to create millions of jobs in the private sector, and the result was that barely enough jobs were created for all the people who were made unemployed and many Government departments couldn’t function because they didn’t have enough staff. So reducing the public sector isn’t viable.

      Reply: Far more jobs have been created in the private sector than lost in the public since May 2010.

      • Jerry
        Posted March 10, 2013 at 7:52 am | Permalink

        @JR reply: It would be nice to see some (cited) figures for this, obviously if the public sector is not recruiting there are going to be more private sector recruitment, a mere 100 jobs will be “Far more jobs”…!

        Reply I will do a piece on this sometime. The government says private sector plus 1 million, public sector minus 400,000 from memory

        • zorro
          Posted March 10, 2013 at 9:12 am | Permalink

          John, it would be helpful to get an idea of the quality of jobs created I.e. part time, full time, low skilled, high skilled, high low, low pay in comparison to what jobs have been lost and any other concomitant economic effects.

          zorro

          • Jerry
            Posted March 10, 2013 at 7:38 pm | Permalink

            @Zorro: Indeed, also how many of these people are newly self employed but yet to file any meaningful tax return, thus there is no way of knowing if these people are simply “giving it a go” or these are realistic SE opportunities?

        • uanime5
          Posted March 10, 2013 at 3:51 pm | Permalink

          You’re in luck Jerry as the Guardian has posted a table of the jobs in he public/private sector between 1999 and 2012.

          In the second quarter of 2010 6,292,000 people worked in the public sector, 22,826,000 people worked in the private sector, and 29,118,000 were in employment. By the second quarter of 2012 5,664 ,000 people worked in the public sector, 23,896,000 people worked in the private sector, and 29,560,000 were in employment .

          So a reduction of 628,000 public sector jobs resulted in 1,070,000 private sector jobs, a difference of 442,000 jobs. However 196,000 public sector jobs were reclassifying as private sector jobs so they need to be discounted because no new jobs were created. Thus only 246,000 new jobs have been created.

          http://www.guardian.co.uk/politics/reality-check/2012/oct/10/conservative-conference-2012-davidcameron

          John if you’re going to do a piece on what effect firing thousands of people in the public sector had on the private sector make sure you don’t include private sector jobs created before this happened.

          Also don’t try to claim that reclassifying 196,000 public sector Further Education Corporations and Sixth Form College Corporations jobs as private sector jobs is a form of job creation. It didn’t result in any new jobs being created so it’s not job creation.

          http://www.guardian.co.uk/politics/reality-check/2012/oct/10/conservative-conference-2012-davidcameron

          Reply I agree the FE jobs have to be adjusted – but on both sides of the equation. You are wrong in your figures – it’s not just 246,000 private sector jobs created – it is 874,000 on your figures for new private sector jobs, against a loss of 432,000 public sector jobs.In other words twice as many jobs created in the private sector as lost in the public. Perhaps you might like to apologise now for your very misleading claims. The private sector job figures have risen further in the latest figures since your arbitrary cut off. From memory there are now 1m new jobs excluding those reclassified, as I estimated in my previous response.

          • Jerry
            Posted March 10, 2013 at 7:59 pm | Permalink

            @JR reply: How many ‘public’ jobs have been transferred to the private sector, has the Labour ‘fudge’ (reclassifying jobs in the state rescued banks from private to public) been reversed and if so these jobs should be treated like those in the FE sector, in fact any job that has merely moved from public to private should be disregarded, one out-one in equals no job created…

            Also, I hope that no one is counting the DWP “non-jobs”, those people who are on workfare -in effect- disguised as ‘training’ and are thus only earn the equivalent of their benefit payments but who have been classed as working by the DWP and removed from the unemployment figures?

      • lifelogic
        Posted March 10, 2013 at 3:19 pm | Permalink

        More jobs created than lost. Anyway the government has done almost nothing to help the private sector at all. They just mug it even more, rob their pensions, push up the energy costs with religion, force more equality, no retirement, bank bonus rules, more taxes and little real bank lending.

    • stred
      Posted March 9, 2013 at 3:00 pm | Permalink

      Well summed up. Last week S.Flowers and K.Barking were interviewed on R4 and said that the lower productivity in the UK, compared to the US was good, because it mean more jobs. With experts like this, we will soon be leading the world.

      Re. The article below about Drax being converted to wood burning , even F of E have pointed out that it is pointless. The Americans have decided that cutting down trees takes too long to replenish CO2 and are stopping subsidies. Only our politicians and civil servants don’t get it. The cost to bills will be enormous.

      This is now so serious that MPs who have a grasp need to resign and bring the issue to the attention of the electorate. Choosing between Bliarites is insignificant in comparison.

      • lifelogic
        Posted March 10, 2013 at 3:22 pm | Permalink

        Indeed the AGW religion has to go. But so many fools have staked their reputations on this nonsense – not least toy turbine in non windy Notting Hill Cameron. It is hard to see how they will climb back down the hill, without looking even more stupid than they do already.

  2. Peter Davies
    Posted March 9, 2013 at 6:53 am | Permalink

    Smart manufacturing with large levels of automation needs to increase for starters.

    • uanime5
      Posted March 9, 2013 at 1:55 pm | Permalink

      What will the Government do about the increased unemployment cause by people being replaced by automation?

      • Bazman
        Posted March 10, 2013 at 12:29 pm | Permalink

        This is the problem with automation, but you can’t be a Luddite uan. Automation in some ways creates jobs. Robot kept me in work for years. Automation is the only way forward. China and India might have cheap labour, but advanced countries have technology and no human can work faster than a robotic system. There will always be a cost play off between automation and getting a human to do the work and some things and tasks can never be automated. Welding is a good example of this being labour intensive and often heavily automated.

        • Edward2
          Posted March 10, 2013 at 8:30 pm | Permalink

          I have to say Baz I agree with every word you have said.
          Tho’ it may come as a bit of a shock to both of us!

      • lifelogic
        Posted March 10, 2013 at 9:02 pm | Permalink

        The idea the greater efficiency using automation cost jobs is nonsense. If you make more socks with fewer staff you sell more socks as they can be cheaper or you branch out into other areas you can not compete in. The overall effect is more jobs not fewer.

        • Bazman
          Posted March 11, 2013 at 9:21 pm | Permalink

          It costs jobs to less skilled, academic or just clever people an inescapable fact. The job is not just magically replaced as you would so wish. This is the problem with advanced economies. No job and not being able to be a peasant living off the land.

  3. Mike Stallard
    Posted March 9, 2013 at 7:25 am | Permalink

    I do hope these figures are right: We are actually paying around £55 billion pounds a year on the debt at the moment and the deficit is rising rapidly. (The Welfare bill is only £200!) The Chancellor is actually increasing the debt as fast, if not faster, than Gordon Brown did.
    I would love to see the true figures of the number of people still living off the State – I thought is was somewhere round 50%? This, of course, includes everybody – including me (an OAP). Of course it includes all those Civil Servants too.
    With the economy flatlining, the only way to support all this extravagance is tax, tax, tax.

    What we need is for someone to come forward and deal with this problem. It will certainly not be the Labour Party!

    • Ralph Musgrave
      Posted March 9, 2013 at 2:55 pm | Permalink

      The £55bn figure is rendered a nonsense of one does the accounting in REAL or “inflation adjusted” terms. The real rate of interest on UK government debt is zero, or even slightly negative. I.e. the UK government effectively pays no interest to its creditors – at a stretch you can even argue that it makes a profit out of its creditors.

  4. Mick Anderson
    Posted March 9, 2013 at 7:31 am | Permalink

    Before considering how much growth is desirable, it would be better to consider what is actually included in the growth figures. A big part of the problem is that Government spending is part of the calculation, which means that the figures “improve” if they are more wasteful. JR has commented in the past that this is for consistancy in calculations between different countries, but for me that’s not a good reason to rely on this method.

    Growth only really comes from the private sector, which is reduced by increased Government “activity”. This reduction is either because of increased regulation (the Government “doing” something”) or increased tax take.

    If the concentration were purely on the private sector, there would be less incentive for the Government to waste so much money “stimulating” (massaging) the wrong results.

    As for the amount of (private sector) growth that I think is desirable, I would say that zero growth per populus is probably the correct amount. As people age, they should climb their own career ladder for personal improvement, with youth filling in behind them. Personal and National growth are not the same thing, no matter how much Mr Cameron would like us to believe it.

    Nationally. as long as the zero growth is matched by zero inflation, it doesn’t matter that we have effectively zero interest rates for savers because their savings are not being eroded by effective devaluation.

    So, my answer to our patient hosts question has to be that the minimum target for National growth should exactly shadow any growth (or fall!) in the population, as long as the figures are not besmirched by Government ambition. Some hope….

    • Leslie Singleton
      Posted March 9, 2013 at 10:14 am | Permalink

      Mick–Agree with a lot of yours, and especially agree that using a wrong methodology just for consistency or because there is nothing better is odd to say the least–that’s assuming one wants meaningful sensible answers.

      The reductio I remember from my days studying this stuff is that of a country where everything is done by the public sector (on the orders of, would you believe, a Pharaoh) and the whole population (and that is pretty much what it would take) is forced to build a pyramid. Does this country have a GDP of 100 or zero?. To me to include the pyramid in GDP would be certifiable but that is what we would do. Of course this is Keynes and his holes again. Pyramids and holes might or might not be a good thing (perhaps to keep morale up) but as for including them in GDP (as useful production)–No way.

      Another thing is that despite all the hot air to the contrary there is no “trend” in GDP, other than historically, and no reason whatsoever to believe that GDP (sensibly measured) will increase (or not go down). Predicting growth is simply impossible and trying to do so or to kid ourselves we can somehow force it to happen (especially with such a malcontented population) is the main reason we are where we are. It’s the same story with even the largest companies. Like it or lump it there comes a time when their growth, at one time seemingly unstoppable, starts to decline and the company starts to fail. Nothing fails like failure. We have to learn not to rely on growth. IMHO TINA.

  5. David Thompson
    Posted March 9, 2013 at 7:36 am | Permalink

    At last the truth is out.
    I think you a spot on with your analysis.
    There is no quick fix to our situation and going to take a long time to turn around.
    Education and skills improvement are the only way forward, but that does not mean building schools it means improving the teaching and the expectations. We risk being left behind unless we act.

    • uanime5
      Posted March 9, 2013 at 1:58 pm | Permalink

      Well higher salaries for teachers is likely to attract better quality candidates and smaller class sizes will improve teaching quality. Don’t expect either to be implemented as they cost money, so expect politicians to just rewrite the curriculum and create a new type of qualification.

      • lifelogic
        Posted March 10, 2013 at 3:27 pm | Permalink

        I have 44 in my primary class It was fine so long as you have good teacher, children of a similar level and some discipline, but they no long do have much discipline in many schools.

      • Leslie Singleton
        Posted March 11, 2013 at 12:35 pm | Permalink

        unanime–Teacher quality went down with the demise of elitism and the victory of the perfectly idiotic mentality (actually “mental” might be just the word) that said that selection by ability is wrong in schools but correct in every other sphere. I cannot prove it but I would bet a cheap bottle of wine that whole bunches of the best teachers left when grammar schools were (in the case of my school) razed to the ground. The very name “Comprehensive” must have put off thousands. And I understand there are those who would prevent streaming–who would want to teach in such an environment, never mind the impossibly of any kind of discipline? The very first words spoken to me before I even stepped foot in my school (I was on a Terrace forbidden to younger boys) were, “You boy, I’ll have you flogged”. Your prattle about paying more, especially right now, couldn’t have been more wrong.

    • outsider
      Posted March 9, 2013 at 5:07 pm | Permalink

      Yes, David Thompson, today’s analysis by Mr Redwood is outstanding. But it is not really a secret. It is just that this truth is politically unpalatable. Vote-seekers naturally prefer to tell us what they think we want to hear and hope that the truth can be magicked away, not least because they have no idea how to address the underlying issues, which in any case would take far longer than the electoral cycle and confrontational politics allows. Understandably, each party also suffers under the illusion that it needs to win power before any progress can be made.

    • Max Dunbar
      Posted March 9, 2013 at 10:36 pm | Permalink

      Education in schools will not improve in any meaningful way as long as there are (very left wing people-ed) running the teaching unions and heading the education establishment. These people are the problem and they refuse to countenance criticism or change.
      It is virtually impossible to sack a teacher. (Some?-ed) teachers in Scotland not only cannot teach but also sound ignorant and uneducated. This is now acceptable within the teaching profession because raising standards of speech would be unthinkable and suggest elitism or snobbery. It would also be deemed to be an attack on the proletariat. Pupils are not corrected for using incorrect and ungrammatical English such as the term “yooz” instead of “you”. In fact, teachers and even those aspiring to the post of head-teacher use this ignorant and inferior way of speaking.

      • lifelogic
        Posted March 10, 2013 at 3:29 pm | Permalink

        Not easy to sack anyone a bad doctor, nurse, teacher or anyone else in the UK change the law for goodness sake it would save many lives.

  6. David Hope
    Posted March 9, 2013 at 7:42 am | Permalink

    On the subject if productivity gains I’d also suggest inflation is even worse than we imagine much if the time. The natural effect of technology (and to be fair cheap labour in emerging markets) is to bring down prices. As is the contraction if credit and the money supply. Therefore, the fact inflation is and has been so high for ages is remarkable.

    As for the OBR, I suspect they are not helped by a heavy use of econometrics which is pretty much useless when things aren’t working in a predictable linear way

    • Big John
      Posted March 9, 2013 at 2:20 pm | Permalink

      > I’d also suggest inflation is even worse than we imagine much if the time.

      The problem is essentials have gone up higher than inflation, but productivity gains on non-essentials keeps the rate down.

      From Dr Tim Morgan’s blog :-
      http://tullettprebonresearch.com/2013/02/20/the-big-squeeze-retail-the-economy-and-the-surging-cost-of-essentials/

      “CPI inflation may have risen by 17% since 2007, but the costs of a string of essential purchases have risen much more markedly. Comparing 2012 with 2007, we have seen sharp increases in the costs of vehicle tax and insurance (+88%), petrol (+56%), electricity and gas (+46%), bus and rail fares (+32%), food (+30%) and water charges (+24%). These and other unavoidable expenses have risen by much more than CPI (+17%), let alone nominal wages (+10%). Households, it seems, are being squeezed between the Scylla of stagnant incomes and the Charybdis of escalating essentials.”

    • outsider
      Posted March 9, 2013 at 4:56 pm | Permalink

      Dear David Hope,
      I do not know the Treasury economic model but have examined the BoE one and found that it was badly flawed: eg the assumed trend growth rate is far too high and rises in oil/commodity prices are generally assumed to be temporary.

      • Leslie Singleton
        Posted March 12, 2013 at 11:46 am | Permalink

        Outsider–I can readily believe that “the assumed trend growth rate is far too high”. I have mused here in the past many times that there is no reason to assume positive growth at all (If it happens, fine) and certainly not till the morale of the people improves and we stop weighing ourselves down both financially and psychologically by the EU.

  7. Jerry
    Posted March 9, 2013 at 8:04 am | Permalink

    The Office of Budget responsibility and the Bank of England have been famous for getting their forecasts of growth and inflation wrong in recent years.

    …and the government isn’t.

    Sorry but this is like shooting the messenger because he brings bad news from the front line, the government created the OBR and it is government departments that supply the OBR with the data to work with, doubt has already been cast on just how independant the OBR actually is and this latest omnishambles is unlikely to do anything for the doubters, also even if the data (for 2006/7/8/9) was wrong all this data was also available to Mr Osborne – thus, surely, it is not just the OBR who has got it horribly wrong.

    They do so for a common reason.

    Not wanting to sound to much like Ed Balls but, because ‘TINA’ is as out dated as it was in the 1980s perhaps? The last Tory boom years were after TINA in the early to mid 1990s…

    • sjb
      Posted March 9, 2013 at 3:11 pm | Permalink

      How independent is the OBR? Judge for yourself here

    • outsider
      Posted March 9, 2013 at 4:44 pm | Permalink

      Dear Jerry,
      It does not really matter who got their forecasts wrong. This is not a blame game. The important issue addressed by Mr Redwood is why? Can you accept Mr Redwood’s thesis that the UK’s trend growth rate is nothing like as high as the 2.8 per cent assumed for policy purposes in the 2000s ?

      If not, I suggest that you look at the Treasury papers underlying the higher trend assumptions. They are essentially employment issues: the lower rate of sustainable unemployment brought by “conquering” inflation, the higher labour participation rate (which will be hard to raise much more) and immigration.

      But trend growth is really governed by changes in productivity brought about by innovation and development of resources introduced by private investment in variety. Our economy-wide record here has generally been poor, disguised for a while by the development of North Sea oil and gas and later by importation of capital to finance domestic credit. These phases are over.

      The importance of the BoE and OBR/Treasury getting their forecasts wrong is that policy was and is based on the false assumption that our previous exceptional growth was normal. So policy does not address the underlying issue.

      • Jerry
        Posted March 10, 2013 at 8:13 am | Permalink

        @outsider: “It does not really matter who got their forecasts wrong. This is not a blame game.

        Totally agree and I though I had made that point, obviously not! 🙁

        Unfortunately though the tone of both the Tory party (and the two blogs by JR) on this issue do have a touch of the blame game about it because everyone is running rings around the media and anyone else listening trying to ‘defend’ Mr Osborne – even though in this instance it would have been better to have just let it ride, the comments by Dr Budd have grown legs not because of the original comments but because of the activity since!

  8. Gary
    Posted March 9, 2013 at 8:15 am | Permalink

    If printing money was all you needed to stimulate demand and grow the economy, there would never be another economic crisis and zimbabwe would be the richest country on earth.

    Really, these people are bloody idiots. They have wrecked the country and stolen our futures and when this charade truly collapses and the people seek justice, I look forward to the small solice of these dolts being led away to jail for gross negligence.

    • Nina Andreeva
      Posted March 9, 2013 at 10:20 am | Permalink

      Yes they may be dressed up to look all sane and sensible now for the voters. However as we saw with Huhne and his photo from a “sit in ” at Oxford in the 70’s we can really ask ourselves have these people ever had a grip on reality? Though Dave says we are not allowed to question them about what they got up to before they entered politics, I wonder why?

      http://news.bbc.co.uk/1/hi/uk_politics/6352273.stm

      • Bazman
        Posted March 10, 2013 at 12:38 pm | Permalink

        The problem is Nina that the past is past and for most people even politicians they do not need to be judged on what they did as teenagers and having what they said at that age held against them. In many ways they have little control over their own lives at this point. (Did a given politician-ed) smoke a split when he was younger? Hardly worth a mention. Dammed if he did dammed if he didn’t. In small occasional doses I would say it helped politician thinking.

        Replky This site does not approve of law breaking.

    • Vanessa
      Posted March 9, 2013 at 5:06 pm | Permalink

      I should like to see them strung up on lamp posts so we can all see the criminals people voted for. Let them rot there as a constant reminder of our collective folly.

  9. alan jutson
    Posted March 9, 2013 at 8:25 am | Permalink

    Had made a long post but forgot to fill in my name (my fault, forgetting the new log in system)
    Post now lost as I cannot get back to it, bloody frustrating.

    No time to repost.

    Why no simple retrack ?

    • lifelogic
      Posted March 10, 2013 at 6:58 am | Permalink

      I use back button in Chrome and do not lose the post and can just put the name and email in again.

      • alan jutson
        Posted March 10, 2013 at 7:48 am | Permalink

        Lifelogic

        Thanks, but no a clue what you are talking about.

        I just used the back button on the keyboard, and it does not work.

        • alan jutson
          Posted March 10, 2013 at 8:13 am | Permalink

          Oops

          Shoulds have said clicked on back button on top left of screen

  10. A.Sedgwick
    Posted March 9, 2013 at 8:36 am | Permalink

    http://www.dailymail.co.uk/news/article-2290444/Madness-How-pay-billions-electricity-bills-Britains-biggest-power-station-switch-coal-wood-chips–wont-help-planet-jot.html

    Reading this I don’t think you need to worry, soon growth will be a thing of the past. The primary objective will be controlling our decline and civil unrest as most are cold and hungry.

  11. Andyvan
    Posted March 9, 2013 at 9:41 am | Permalink

    Something could certainly be done to raise demand in the economy. Do away with state control and theft in every part of our life. remove the interfering, the nannying and realise that state control does not work ever. Eliminate whole areas of taxation and watch demand grow when people actually get to keep their own money and spend it on things that they need and want instead of funding mindless bureaucracy.

  12. Alan Wheatley
    Posted March 9, 2013 at 9:55 am | Permalink

    I wholeheartedly agree that “We can only get richer on average by working smarter…”.

    • Alan Wheatley
      Posted March 9, 2013 at 10:14 am | Permalink

      Consideration of how to get richer on average needs to take account of the size of the population. Growth figures should be adjusted for the size of the population in the same way that adjustments allow for inflation.

      There seems to be a widespread belief that simply because the UK has benefitted from some immigration in the past more of the same is an inherently good thing: but this is folly.

  13. oldtimer
    Posted March 9, 2013 at 9:58 am | Permalink

    Clearly the assumptions made by the OBR were false. But should we be surprised by this? Here are three reasons why not.

    I understand that aggregate UK debt (government plus corporate plus consumer) is about 4 x GDP. This is unsustainable and needs to come down. That fact alone means, at best, a flat lining economy for several years to come.

    Then, as many point out, high taxation is a barrier and/or disincentive for new investment and risk taking. That fact inhibits growth.

    Then there is the fact that the world beyond the UK has moved on in the past five years – world markets, the balance of buying power and technology have changed significantly since 2007-8. To appreciate the extent of this change, look at the evolution of automotive technology in this period. Those companies that were able to adapt have survived and some even have prospered – fortunately for us all JLR seems to be one of them (helped by the ability to write off historic tax losses against recent profits). Others stuck with the wrong products in the wrong markets are in (difficulties-ed), such as Renault, Peugeot and Opel facing the prospect of painful readjustment.

    The automotive industry message is clear. What counted as usable capacity in 2007-8 does not necessarily count as usable capacity in 2013. I have no doubt that it applies to most other industries as well. This is the fundamental flaw in the OBR assumption. Sustaining usable capacity requires a willingness to take the risks inherent in adapting to market and technological change. That in turn requires an economic and tax environment that rewards – not penalises – risk taking. What the UK government in fact offers is the opposite – higher and higher energy costs, rising to penal levels, and a hostile tax regime (selecting just corporation tax for special treatment does not and will not provide the solution).

  14. Nina Andreeva
    Posted March 9, 2013 at 10:13 am | Permalink

    Its pretty much a waste of time now. Its a bit like offering dietary advice to a 30 stone woman, who like the UK with its debts, will not do anything about the fat that is killing her. Her vital organs are nearly finished and she also has the misfortune of her doctors still feeding her 10,000 calories a day. A wise person can only prepares themselves for when the patient finally gives up and ensure that they and their family avoid the maelstrom that follows

  15. Ben Kelly
    Posted March 9, 2013 at 10:15 am | Permalink

    Labour, the OBR and your government all assumed that the rising population would produce more and consume more hence the “good immigration” fable.

    Your correctly pointed out that our population growth had been fuelled by net consumers which will stall any growth. Growth should not be the be all and end all but the population must at least be able to sustain itself.

    Upskill the indigenous and make them work (unless they genuinely can not) and do not welcome anyone from outside our shores unless they are a tourist.

    • sjb
      Posted March 10, 2013 at 3:25 pm | Permalink

      But is it a fable, Ben?

      “[Comparing] the net fiscal contribution of A8[1] immigrants with that of individuals born in the UK, [we] find that in each fiscal year since enlargement in 2004, A8 immigrants made a positive contribution to public finance despite the fact that the UK has been running a budget deficit over the last years. This is because they have a higher labour force participation rate, pay proportionately more in indirect taxes, and make much lower use of benefits and public services.” [1] Central and Eastern European countries that became EU member states in May 2004

      • sjb
        Posted March 11, 2013 at 4:04 pm | Permalink

        I did provide a link but – for the third time – it has not survived moderation. Anyway, the quoted text can be found in the Centre for Research and Analysis of Migration, Discussion Paper No. 18/09.

  16. me
    Posted March 9, 2013 at 10:33 am | Permalink

    0% growth would be fine, just reduce the number of people.

  17. woolfiesmiff
    Posted March 9, 2013 at 11:02 am | Permalink

    John ( and others) I think you are being a bit pessimistic. I totally agree the current policies of the BoE , Treasury and government are all wrong. We need an end to QE, allow interest rates to rise and cut wasteful government spending….. but

    I’m a businessman ( 8 businesses ) and an investor in new start up businesses.

    We are at the beginning of a whole new paradigm. One bought about by technology but not wholly about technology. We are in an age where the short lived 20th century need to be big, to be a conglomerate , a multinational organisation based on size is now no longer the business edge it once was. We are entering a phase where small is beautiful . Solo, SOHO and micro business, collaborative projects and co working.

    This is one reason the job market is so buoyant and growing and why we are suffering skills shortages. So many more people are starting their own businesses, working for them selves ( the self employed average salary is nearly double the employed average )

    If you look at the Newspaper Industry nearly all are now losing money. Their business model is now outdated and wrong. Their costs exceed their potential advertising income. The future of media is small more specialised publications both on and offline. The same is true of commercial radio. Even the mighty pharmaceutical industries. In my area a giant pharma operation closed down, but so far more than 2 dozen small research companies of less than 10 staff each have already sprung up . We see similar moves in all other industries. The giant supermarket banks have failed spectacularly, we now produce far more, better quality cars from far smaller manufacturers. Of course that most massive of all institutions the EU is also a rampant failure. The UK’s manufacturing is now dominated by smaller more highly specialised and more valuable companies in advanced medical devices and scanners, laboratory equipment, mobile phone components and chip technology.

    So what can government do?

    1) Make it easy to strike out on your own ( scrap the ludicrous IR35)
    2) Provide early stage tax incentives for small start ups
    3) Scrap the absolutely awful UBR
    4) Actually implement the long touted cutting of red tape
    5) Cut taxes especially the anti job tax ENI

    Break up and sell off the state banks now. Make it far easier to start smaller more specialised regional banks and lenders.

    I truly believe that if the government stopped trying to manipulate markets, cleared up the mess of red tape and simplified tax and employment law and then got out of the way the we would take the brakes off of growth

    • oldtimer
      Posted March 10, 2013 at 9:30 am | Permalink

      Well said!

  18. waramess
    Posted March 9, 2013 at 11:05 am | Permalink

    With government consuming more than fifty percent of all production, trend growth is now a bit like looking into the rear view mirror when heading for a brick wall.

    Dynamics have now changed and, on a positive note, the prospect for growth is zero, as long as the government continues to grow.

    If the government continue to increase their share of production then the trend growth will inevitably be negative so, if our clown of a Prime Minister is still looking for growth in any form to get him out of this mess, I fear he will be mightily disappointed.

  19. Neil Craig
    Posted March 9, 2013 at 11:20 am | Permalink

    “uture trend growth rate would be around 1% lower than the post war average. The big figure for future trend growth would be 1, not 2”

    John I am going to disagree vigorously.

    The Chjinese growth rate is 10%, the world average 5%, the non-EU world average 6%.

    The ultimate driver of almost all growth is technological progress and basic science is progressing at a rate unprecedented in human history which is why human GDP is doing the same.

    The same economic laws apply here as elsewhere. Indeed since Britain “punches above our wieght” in science and technologt, indeed nobody but Switzerland has a better per capita record in science, we should actually find fast growth easier than others.

    The problem is purely and si8mply that our Luddite political parties (ie all but UKIP) actively prevent us developming new technology. Look at fracking, GM, nuclear, modular building.

    On top of that there is a virtually 1:1 correlationj between growth in energy use and in GDP in any free society. Our parties have deliberately reduced availability of energy and pushed up prices. 93% of every electricity bill is political parasitism. To some ecxtent the surprising thing is that our economy hasn’t shrunk more to match the shrinking in energy use.

    We could not only be out of recession in weeks, possibly days, if the political class wanted it, but we could achieve at least as high a growth rate as anywhere in the world (Singapore recently managed 14%, Guandong province in China managed 18% for years.

    Theoretically, if we did everything right (China is certainly not doing everything right) a growth rate of 23% is possible.

    • uanime5
      Posted March 10, 2013 at 4:07 pm | Permalink

      Given that non-EU countries such as Canada, the USA, and Australia aren’t growing at 6% it’s unlikely that the UK will grow at 6% by leaving the EU. Also growth rate of 23% is nothing more than wishful thinking.

      • Neil Craig
        Posted March 11, 2013 at 11:09 am | Permalink

        By definition an “average” contains samples that are lower as well as higher than average. Uan would be more persuasive if he could actually profuce a credible reason why we must always be inherently far below average.

        A little evidence would also have enhanced his assertion that we cannot be well above average.

  20. James Reade
    Posted March 9, 2013 at 11:24 am | Permalink

    “They both believe that the UK has a trend rate of growth similar to that before the 2007-8 financial crisis, of more than 2% per annum.”

    Do you know this, or is it just your belief? Can you link or refer to a point in any of their publications where they list their underlying assumptions regarding growth, and the kind of properties it follows?

    As I said yesterday (not checked if you responded), more likely is that both underestimated the fiscal multiplier meaning that the smaller deficit than would be commensurate at this stage of a recovery (including, for example, the recovery in the mid 1990s) hampered growth more than either institution predicted.

    Reply The OBR and the Treasury have set out their assumptions about trend growth and you should be well aware of them. They have argued in the range 2.5-2.75%. As I have set out before, the UK’s fiscal stance has been more expansionary this cycle in your terms than in any previous post war cycle, but it has not yielded growth. How much more do you want them to borrow? Why aren’t you worried about the confidence effects of saying to UK residents they will have to -pay a lot more tax in the future, which is what yet more borrowing will mean.

    • James Reade
      Posted March 12, 2013 at 7:02 am | Permalink

      No, John, it hasn’t. Again you’re wilfully ignoring the facts pointed out to you by, amongst others, Jonathan Portes.

      I guess you need it pointing out to you for the nth time – cyclically adjusted primary balance. Emphasis on the words “cyclically”, and “adjusted”. It shows how much the fiscal stance has contracted – Portes, Wren-Lewis, myself and many others persistently point this out to you, but you ignore us – like your leader does.

      This cycle has been much more contractionary than any before, including the one you were involved in, in 1992. I’ll happily show you the data, however my train leaves in 6 minutes.

      Once again, you are distorting reality to try and fit it in with what you would like it to be to support your political bias.

      Reply Nonsense. The cyclically adjusted deficit has been larger this cycle than in 1992. I have set out all the figures before. Our deficit is also much larger than most comparable western nations.

      • James Reade
        Posted March 12, 2013 at 11:54 am | Permalink

        http://www.imf.org/external/pubs/ft/fm/2011/02/app/FiscalMonitoring.html – specifically look at both cyclically adjusted balances.

        Would you look at that – the UK, right slap bang in the middle of all “advanced economies”. Where is your favourite country, the one that’s growing because it cut back its deficit (the US), in that ranking?

        So, is the UK really out of line? Does it really have a larger balance?

        John, yet again, the facts just do not support your position.

        Next: http://www.quandl.com/IMF-International-Monetary-Fund/GGSB_NPGDP_112-United-Kingdom-General-government-structural-balance-Percent-of-potential-GDP

        Note how since 2010, the structural balance (IMF-speak for cyclically adjusted balance) has shrunk from 10% to 5.4%?

        Of course, what’s really interesting from that link is that the structural deficit kept increasing until 1994 back in the early 1990s – well after GDP had begun its recovery. How do you explain that one, John?

        Reply Your first IMF source is September 2011 – the figures have changed quite a lot since then. Germany and Canada, two of the better performing advanced economies have much lower cyclically adjusted deficits.

        • James Reade
          Posted March 14, 2013 at 4:17 pm | Permalink

          How about http://www.imf.org/external/pubs/ft/fm/2012/02/app/FiscalMonitoring.html, then?

          The 2013 isn’t ready as yet, it seems, yet the 2012 data paints a similar picture – and do note in both cyclically adjusted cases how much worse the US balance is than the UK one.

          How does that fit into your narrative?

          • James Reade
            Posted March 16, 2013 at 10:38 am | Permalink

            Let me help you then – I appreciate you are busy.

            The US has a larger cyclically adjusted deficit, suggesting that contrary to your assertion that the US was growing due to cutting its deficit is false. The deficit fell because the position of the US in the economic cycle moved upwards, and hence once that effect was stripped out, the US deficit remained large, and became larger than the UK’s, given the parlous state of where we are in the economic cycle.

            Put simply, the data just do not support your position. Of course, you can start to talk conspiracy theories about who does the adjusting, but I think that’s essentially conceding the point.

            The point about 1992-3 vs 2010-11 is that austerity didn’t begin in earnest until well after the recovery had begun – why was that appropriate back then in a milder recession, but not appropriate now?

            (and please don’t give me the whole “there’s been no austerity” – the cyclically adjusted figures make it abundantly clear there has been)

            Reply: The US has cut public spending much more than the UK (adjusted for the cycle) and has grown faster. I suspect you are ignoring states’ spending and just looking at federal.

  21. They Work for Us
    Posted March 9, 2013 at 11:28 am | Permalink

    We are stuffed with a triple whammy.

    A large number of employable people for whom there are no jobs available.

    A large number of people who are unemployable because of their background, poor education and attitude. The manual jobs that they could carry out no longer exist in sufficient quantity even if they were willing to do them.

    An expectation of levels of welfare and unrealistic levels of living standards by the above that in the long term unfundable.

    Governments cannot stop spending because the truth will not set them free but make them unelectable by a populace that won’t/ can’t face reality.

    • alan jutson
      Posted March 10, 2013 at 8:09 am | Permalink

      They Work for Us

      Your post is the simple truth that few want to recognise.

      Thus politicians fear telling the truth (if they are aware of it) because its like turkeys voting for Christmas.

      Perhaps we have reached a stage where our kind of so called democracy where all have equal votes, is suffering from a terminal illness.

      Perhaps its our system that is in dire need of change.

    • uanime5
      Posted March 10, 2013 at 4:10 pm | Permalink

      So you admit the problem is a lack of jobs and claim that the solution is to punish the unemployed by cutting their welfare? It’s no wonder that’s unpopular.

  22. Acorn
    Posted March 9, 2013 at 11:44 am | Permalink

    Before you start JR on “raising demand in the economy”, I will assume you have accepted that our problem is demand side not supply side. This is somewhat different to your posts a year or so back. Also that QE does not solve a demand side problem, it just makes it easy for commercial banks to make super-normal profits speculating rather than lending and write off the toxic paper in their vaults at government expense.

    So before we start searching for something we can grow in this country, other than ever more whacky financial instruments to flog to dummies. Ninety percent of such have no public purpose and are purely for speculation and gaming markets for bankster bonuses; we need to understand the truth of how the system actually works and not the Horlicks you politicians want us to believe.

    I appeal to you to allow the following link titled, in case readers have to Google it, “L. Randall Wray’s Presentation at Lewis and Clark College” http://neweconomicperspectives.org/2013/03/l-randall-wrays-presentation-at-lewis-and-clark-college.html . You can follow the slides below the video.

    The UK does not have the fundamental dynamism that the US has. Nor do we have anyone who can explain to the little people, other than Martin Wolf at the FT, what it is all about. In fact, the UK elite don’t want us to understand it; not in their interest.

    Reply I think the UK has a supply side problem primarily

    • alan jutson
      Posted March 10, 2013 at 8:02 am | Permalink

      reply – reply

      Chicken and eggs again.

      The simple fact is that for an economy to work money has to circulate, if people do not have much disposable income then there is less in circulation.

      Given the government has decided to reduce the disp[osable income of everyone with more taxes at source, (INCOME TAX) and given that it has also increased taxes on spend (VAT), disposable income is down.
      In addition taxes on any investments held has also gone up (CAPITAL GAINS) so people do not sell for so called profit, but hold so that money is also locked away.

      With all this money the government has taken it tends to spend it inefficiently and on non productive items, and thus much is wasted.

      Let the people keep most of their own money, to spend as they wish, and business will increase and the economy will grow out of demand.

      The big myth is that the economy will always grow, and then to base government spending on that guesstimate, instead of basing it on a real and known historical income.

      In short the government is too big and needs to do less.

  23. margaret brandreth-j
    Posted March 9, 2013 at 11:45 am | Permalink

    When we deal in percentages it is not always as accurate as it should be or rather truly representitive of the whole picture. I was the ward sister of a small ward and my manager who was intending closing the ward to sell to the private sector made the excuse that I was not managing it adequately as 20 % of my staff took the time off as they did not like me. I only had 5 staff and the one who took the time off was genuinely ill. This is just one example of how percentages can be manipulated.

    If we are saying that only 10% growth from manufacturing has an negative effect on our economy ,what does it really represent and what facets of the public sector stimulate that growth by demanding supplies for that manufacturing.

  24. behindthefrogs
    Posted March 9, 2013 at 12:02 pm | Permalink

    The deficit problem will only be solved when the government adopts a tax regime that encourages home production instead of imports.
    The first step should be to reduce and if possible remove employers’ NI. This has the following advantages.
    1) Encourages higher employment.
    2) Reduces the cost of home production compared with imports.
    3) Improves the competiveness of exports
    4) Improves the cash flow particularly of small companies.
    5) It reduces the need for companies to find extra borrowing
    For the above reasons this should be preferable to reducing corporation tax as it has any advantages that corporation tax reduction produces. In fact it should be financed by increasing corporation tax.

  25. GJ Wyatt
    Posted March 9, 2013 at 12:18 pm | Permalink

    The trend rate of growth has been taken as a “given”, and most forecasts simply project the historical trend. They then assume the economy will either return to the trend path itself or at least track along in parallel with it, having shifted down to a a lower level. The first case would arise if the recession were purely due to lack of demand, as Mr Balls seems to think. The second case would arise because of “hysteresis” due to lost human or physical capital, and calls for supply side interventions which seems more in line with OBR/IMF analysis.
    But what you are questioning is any return to the historical growth path, and that needs an explanation of the historical trend. Economists usually invoke technological progress. This is quite plausible, and serious studies of productivity measurement do indeed suggest that advanced economies have experienced diminishing returns to scientific and technological inputs since the 1970s. Less advanced economies still have some way to go by catching up before hitting a slowdown near the technological frontier.
    If this is so, then the policy focus should shift away from trying to “get growth going” because that is just not in the gift of government policy. Rather we should look for policies that adapt realistically to the world as it is and not chase a chimera.

  26. Terry
    Posted March 9, 2013 at 12:21 pm | Permalink

    Financial forecasts are usually based on historical figures. Ironic that in accordance with FSA rules, each advisory statement given by a Financial Services provider is disclaimed by the words “Past performance is no guarantee for future results”.

    Perhaps the same declaration should be appended to each OBR statement, to protect themselves from criticism. As you point out, they have been as bad at forecasting as the BoE. Perhaps they use the same financial Disney World model in their calculations.

  27. Martin
    Posted March 9, 2013 at 12:55 pm | Permalink

    One growth industry in the UK has been fear.

    We now have a huge army of police, private security guards and vetting staff that we didn’t have when the UK was under threat of invasion in 1940 or V2 attack in late 1944.

    As a nation we have been sleep walking into a database surveillance state.

    Now if half the money spent on fear had been spent on making things …..

  28. alexmews
    Posted March 9, 2013 at 12:56 pm | Permalink

    I have just come back from the US. The big economic stories this week there was the bull market on the Dow, the fall in unemployment, and the impact of the failure to renew the sequestration in the first week of March leading to 85bn in federal spending cuts.

    NPR – hardly a right wing radio service – spoke in a matter-of-fact tone that in each of the last 31 consecutive months the federal government payroll had shrunk from the month before. And the employment news yesterday was presented as the private sector taking up the slack and creating jobs. The economy is growing and the Dow is at record highs.

    there is still a big hole to dig out of – and there are ‘lost years’ 2007-2012 there is no doubt.

    it still seems to me that the Coalition has a ‘fingers crossed’ approach to the economy while others are, painfully, taking the decisions needed to clear the decks and set up an environment where growth can once again happen.

  29. DrJohnGalan
    Posted March 9, 2013 at 12:58 pm | Permalink

    I think this article:

    http://tullettprebonresearch.com/2013/01/11/dont-they-get-it/

    shows the “Alice in Wonderland” approach of western governments in a few well-chosen graphs. In an earlier article (Google “Thinking the Unthinkable” “Tim Morgan”) the same author questions where the magical growth can actually come from. While businesses are shackled with endless regulation and where an entitlement culture pervades, the government is simply not brave enough to enable the necessary supply-side reforms to happen.

  30. uanime5
    Posted March 9, 2013 at 2:03 pm | Permalink

    The Office of Budget responsibility and the Bank of England have been famous for getting their forecasts of growth and inflation wrong in recent years.

    Something that the politicians didn’t criticise because the OBR was telling them what they wanted to hear (3-4% growth because of their policies).

    When manufacturing only represents 10% of the economy this has limited impact on our general living standards.

    That’s what happens when all political parties focus on protecting the financial industry rather than manufacturing.

    The public sector in the UK has a very poor productivity record, so a larger public sector holds back growth which rests on productivity advances.

    How exactly do you measure productivity in something like the police, fire fighters, or social workers? Also as the rules for the public sector are created by parliament aren’t they ultimately responsible for the poor productivity?

    We can only get richer on average by working smarter and adopting productivity raising technology.

    The problem with working smarter is that 50% of the population have below average intelligence, while the problem with productivity raising technology is that it reduces the number of jobs (which are usually manual labour performed by unskilled workers). So the downside is that both make large numbers of people unemployable, which will raise welfare costs.

    Reply New technology also creates millions of jobs – see the impact of the computer on US employment patterns

    • uanime5
      Posted March 10, 2013 at 4:18 pm | Permalink

      While new technologies can create jobs these jobs are initially only available to those with specialised training (there was a time when being able to use Microsoft Word was a specialist skill). So if the Government wants to encourage new technologies they will also need to offer training so that people can obtain the skills they need to work in these jobs.

      • Edward2
        Posted March 10, 2013 at 8:42 pm | Permalink

        You are absolutely correct Uni.
        Training is vital to give people new skills so they can get into new emegring industries.
        With the pace of change increasing, todays young people may need to re train several times in their lives.
        The State ought to encourage companies by giving tax breaks to those who send their staff on re-training or gave help to individuals who want go on courses to learn new skills.
        There is a problem for those who are unemployed in that they are always supposed to be “available for work”, so if they sign up for more than a few hours of training per week they may lose their benefits.
        But it may be the training which gets them a job and off benefits.
        It would be cost effective public spending.

      • David Price
        Posted March 11, 2013 at 7:23 am | Permalink

        You can get free courses on almost everything, you just have to get off your backside and look for it.

  31. Barry
    Posted March 9, 2013 at 2:26 pm | Permalink

    Those of us who have had the experience of privatising government operations are generally staggered by the gross public sector inefficiencies that have been commonplace for decades. Public sector departments often demonstrate their importance by measures such as headcount and budgets rather than output. They have used the term “cuts” as an implied threat to decrease output in order to avoid any reduction in the size and importance of their operation. The idea of efficiency is generally not understood and best avoided. As one senior public servant was heard to utter “efficiencies are the last thing we want to deliver because any success will result in more demands in the future”. Unlike industry there appears little (if any) incentive for public sector departments do deliver efficiencies.
    Public sector departments offer huge opportunities for efficiency improvements given the decades of cumulative efficiency avoidance. The problem of heads of departments’ failure to recognise the need to deliver efficiencies requires urgent attention. Just to be clear, all heads must deliver more for the same cost or less cost for the same output. Retention of employment at senior level is the incentive for the delivery of efficiencies. Those heads that leap to the cost cutting rhetoric without maintaining their output are candidates for replacement. These practices are well understood in industry and are essential to business survival. These practices are also normal in parts of the government sector that have been privatised. This rather begs the question of why it is necessary to privatise to gain efficiencies. The answer lies in the failures at the top including successive governments. So, make a change. Demand efficiencies reject cuts.

  32. ian wragg
    Posted March 9, 2013 at 2:26 pm | Permalink

    I just heard that your oppo Vince says the deficit should be reduced with tax rises only. Doesn’t he realise we are already on the cusp of maximum taxation when if increased there will be serious evasion.
    Are the Limp Dumbs seriously ill, stupid or on something.

  33. Richard1
    Posted March 9, 2013 at 2:26 pm | Permalink

    Much more needs to be done by the Conservative Party to communicate to the public the direct connection between too much borrowing and spending by Government, as ushered in by Labour, and reduced growth prospects (which in turn make getting rid of the deficit, let alone ‘paying down debt’ so hard). Not enough people get it yet. There are still far too many commentators and politicians, not all of them avowed leftists, who think if the Govt just borrows and spends a little bit more, such will be the pick-up in demand that all our problems will be cured.

  34. A different Simon
    Posted March 9, 2013 at 2:36 pm | Permalink

    Growth is no long term answer (though it is needed in the short term) .

    Indefinite growth of the aggregate is impossible , just like the myth that house prices can only go up .

    An economy which requires constant dynamic of growth is nothing but a ponzi scheme .

    It is incumbent upon politicians to come up with an economy which functions without growth in the aggregate .

    – Aggregate demand isn’t going to increase any time soon so lets concentrate on replacement of imports and our balance of payments .
    – Reduce the cost of living , specifically accommodation costs . The economic rent collectors are milking society too hard .

  35. Chris Rickard
    Posted March 9, 2013 at 3:09 pm | Permalink

    Poor productivity in the public sector has been an issue for years and all Gov’s have ducked trying to do anything about it. Given that UK productivity has seen a calamitous decline since the financial crash, improving productivity is key to getting the economy growing. Look at the amount of paperwork the NHS has to complete and the waste of valuable resource it consumes. Doctors who spend many years gaining valuable qualifications spend more time filling in paperwork the dealing with patients. Its the same for both GP’s & hospital doctors and it results in tragedies like mid-Staffs. You make the same point across the public sector particularly the police service. That’s before you look at the calamitous way in which some Gov depts are run and the lack of requisite skills they possess with no or inadequate training – MoD, which wastes billions and is the only Gov dept capable of making the NHS look like a well oiled machine; DWP, Home Office, Foreign Office, Education – its the same story. This Gov is a weak & divided government – too given to talk and sound bites than hard graft and results, but reform of the public services to reduce the bureaucracy & improve skills is they key to improving public sector productivity.

  36. nemesis
    Posted March 9, 2013 at 3:32 pm | Permalink

    Just get the Government out of people’s business and business will take care of itself.

  37. Dennis
    Posted March 9, 2013 at 5:28 pm | Permalink

    ” We can only get richer on average by working smarter and adopting productivity raising technology. How is it going to be done?”

    As Mr Redwood assumes there is plenty of freely available resources lying around for the taking to fuel this ‘getting richer’ without a single thought of what this means, why doesn’t he propose an easier path by advising us just to go down to our banks and ask for any amount of money we like without having a single thought about if there is any money actually in our accounts. No problem for Mr Redwood – the banks will just pay up and we will become richer. For how long?

  38. Rods
    Posted March 9, 2013 at 5:41 pm | Permalink

    Firstly the size of the manufacturing sector is not critical, what is critical is that the combined exports from the manufacturing and service sectors as a minimum give us a neutral or even better positive balance of payments. Whether we are exporting cars, TV programs, pop groups, computer software or legal, accounting, insurance or financial services does not matter, the fact they are all earning our keep in the world does, so we can afford to import the things that we can’t produce or can’t cost-effectively do like growing 50% of our food, producing enough oil and gas and low value added manufacturing etc.

    Despite flat line growth and depleted demand our balance of payments are getting worse. This is partly due to lower oil and gas production from the North Sea and I’m sure lower activity in the City.

    Banker bashing is still a very popular sport in the UK and they do need to be more tightly controlled so we don’t have a repeat of 2007. But it also needs to kept in prospective, we had one building society and two Scottish out of control banks, that caused the problems. But for the ill fated marriage of Llloyds TSB and BOS, 3 out of 4 of our major banks would have needed no Government intervention. People that would like to see the City of London disappear need to explain how we would replace one of the industries where we have a £40bn balance of payments surplus and pay £63bn in taxes every year. The last country that got rid of its vital foreign currency earning industry was Zimbabwe and we all know what happened to their currency as a result! If the EU get there way and the same happens here, then I’m sure a condition of a Troika intervention here will be us being forced to adopt a stable currency, the Euro by the back door!

    When you run a business trying to raise long term finance can become an all consuming activity in its own right, this has never been easy in the UK compared with other countries and has got more difficult since 2007. High taxes and high living costs make it much more difficult to self-finance either a start up or business expansion costs. This is always, when possible, a preferred route as you have full control over the situation.

    Getting rid of high net worth people through high taxes, as I know you know this, does not increase a countries wealth, the skills, hard work, drive and determination and having the money to create more wealth through new businesses and employment means when they off-shore so does this potential. High taxes, high business costs, ever more onerous business regulation, high energy costs and the uncertainty that there will even be a continuous supply of electricity over the next few years all add up to there being much better lower cost, lower tax, better places to do business than the UK.

    When running a business time management and inevitable long weeks at times are essential, with the biggest sufferers being your family. Why bother working an 80 hour week when you are essentially giving over 40 hours of that to the Government in tax, which they then largely waste, it is better to spend more quality time with your family! But even worse, high taxes and a high cost base, considerable increase your risk and decrease you personal post-tax returns on an investment when you are investing hard earned tax paid cash!

    As a software developer I have one business at the moment ticking over and two new businesses I want to develop and my solution is very easy, where there are much better places to do business than the UK. I’m in the process of emigrating to a lower cost base country with much lower taxes and thank goodness it is outside of the EU.

    I always promised myself that I would never live in a dictatorship and when you have 80% of new laws coming by Diktat from an un-elected (ex left wing-ed) President and his 27 person Politburo and staff, this is effectively what has happened. It will also fail, but with much economic damage on the way, in the same way as the USSR did where there are no democratic checks and balances as these 28 brains are meant to be all seeing and all wise compared to the 500 million brains they are controlling, the vast majority of whom know what is best for their personal circumstances and for their families and when left alone will get on with it.

    The 100,000 to 150,000 highly skilled UK citizens that emigrate from the UK every year must be of a concern where they go to better paid jobs in lower cost and tax countries with generally a better quality of life. How are they going to be replaced?

    I think that most taxes are now the wrong side of the Laffer curve, so as they are increased further, so the tax take will go down. The only realistic solution is lower public spending and I would be brutal here where public sector pay is generally 10 to 20% higher than the equivalent in the private sector with an across wage cut above a certain threshold and use the money saved to make substantial tax cuts, by raising the tax and NI thresholds. This would give all of the workforce a pay rise. This should kick start the economy, with increasing private sector growth and the velocity of money, but I do recognize there would be a risk of people just using the extra money to pay down debts, so it does not translate into growth, but I think with the fall in real wages since 2007 this is unlikely.

  39. Denis Cooper
    Posted March 9, 2013 at 5:55 pm | Permalink

    Going back to 2002 my understanding was that the long term trend growth rate of the UK economy was around 2.5% pa, and as you imply that had been running at least since the war, but I was also aware that Gordon Brown was pretending that under his superb management that historical trend growth rate had been increased to maybe 2.8% pa.

    I didn’t know then what basic characteristics of the British economy and British society had determined that through all the ups and downs over decades the long term trend growth rate should always be about 2.5% pa, and I still don’t know now, but at the time I doubted Brown’s claim that he had pushed it up and likewise I now doubt your gloomy prediction that in the future it will be lower.

    Perhaps you’re right that there have been fundamental changes which will reduce the long term trend growth rate in the future, that is to say for maybe the next half century, or perhaps you’re doing what Brown did and making an unwarranted extrapolation of the course of recent shorter term events.

    If nothing else, as on previous occasions in our history, just the fact that people like yourself are worrying and writing about our apparently poor economic prospects may have the effect of bringing about policy changes that will help to improve them.

  40. Neil Craig
    Posted March 9, 2013 at 6:37 pm | Permalink

    This from Newt Gingerich is worth reading. http://www.gingrichproductions.com/2013/03/overwhelming-reason-for-optimism/?utm_source=MadMimi&utm_medium=email&utm_content=Newt+and+Callista+Weekly+Recap&utm_campaign=20130309_m115408302_Newt+and+Callista+Weekly+Recap+030913+-+v1&utm_term=Read+more+here_3E_3E

    It shows 5 developments ” at least as important as the computer revolution of the past two decades”.

    If we can’t get a growth rate at least as good as China’s current one out of that it could only be because the Luddites in Westminster are actrively preventing it.

  41. frank
    Posted March 9, 2013 at 7:02 pm | Permalink

    Thanks John. May I just sumise that because savers outweigh debtors, it suits the government to allow the erosion of savings in order to bail out the debtors.
    There are some easy targets fot the UK to achieve an economic balance where growth is possible, but to a large extend the damage has already been done. Manufacture was 24% of the economy when those idiots Brown and Blair took over. You say it is 10% now. We have lost the means to save ourselves and have gone back to investing in banking.
    However, we could ‘end all subsidies’. We could ‘privatise NHS provision’, we could ‘break up monopolies’, ‘make energy pay’, and ‘rationalise the provision of welfare and housing’.
    On the supply side we will need to invest only in the education which yields greater economic growth – ie we need to CUT education expenditure overall. In our socialist education system we oversupply – and with great mediocrity.
    We need to insist on public sector productivity increases. We need to build roads and scrap railway projects. Most of all we need to move from a government and monopoly controlled economy (one which Hitler of 1932 would be proud of), to a libertarian and free market economy. You know, the kind of one that people died for in WWII.
    And more. We need to reduce our judicial system by 50% and leave the EU. John, at least contemplate making that move to free us from inevitable bankruptcy and serfdom….

  42. Terry
    Posted March 9, 2013 at 8:10 pm | Permalink

    Every increasing growth is always going to be a problem in the technological age.
    Better tech means less jobs for the workers because machines and software do the work better than humans.
    Apple Corp was, until recently the biggest company in the world (in terms of Market Capital) but they employ less than 100,000 as do Exon Mobil the current world champ. Walmart employed 2.2 million last year covering 10.700 stores in 27 different countries. But they are nowhere near as rich as the previous two.

    To put that into perspective, our biggest employer , the NHS, employs around 1 Million persons but does not raise any money, for anyone. It begs the question how is that the top 2 richest countries in the world, can manage on just 10% of the number of employees within the NHS? And that is the main reason why we shall not see any true growth within this country. Far too much of our income is spent on the public sector and so it will continue, until a proper leader gets a grip of the inefficiencies and waste within it. Government Spending must fall, alongside falling taxation. There is no alternative. We are told that the consumers are the drivers for nearly 70% of GDP. Therefore, I would have thought that the Government would have realised that if they want growth, they should provide those consumers with more spending power. But what do they do? Tax the workers more so they have less to spend. Great! It does not make sense to me.

    What on earth did they teach in lieu of maths and home economics, in those posh public schools they all went to? Trendy ideas and greenie ideals will not produce any growth for GB plc.

    • uanime5
      Posted March 10, 2013 at 4:29 pm | Permalink

      To put that into perspective, our biggest employer , the NHS, employs around 1 Million persons but does not raise any money, for anyone. It begs the question how is that the top 2 richest countries in the world, can manage on just 10% of the number of employees within the NHS?

      You’re not comparing like with like. The NHS requires more staff because they need to give higher levels of care to to patients then companies need to give to their clients. The NHS also provides more services.

  43. Max Dunbar
    Posted March 9, 2013 at 11:32 pm | Permalink

    How is it going to be done? It is not going to be done until there is such a catastrophe that change is forced upon us. The 2007/8 crash may be seen in hindsight as benign by comparison.
    Then civil unrest will ensue and political parties will polarise. Following this major upheaval we then stand a chance of sweeping away the rules, regulations and taxes that hinder creative enterprise in our country. Or it could go the other way and continue on the present path towards an even more restrictive and controlled bankrupt socialist state.
    Whatever the outcome I suspect that the experiences of those alive today will not prepare them for what lies ahead.

    • Terry
      Posted March 10, 2013 at 10:09 am | Permalink

      I see you are as pessimistic as I, Max. Some would say too ‘pessimistic’ but that is preferred to the false optimism that is promoted by our leaders both here and within the EU. When pessimism gives way to realism then perhaps our leaders will give way to those who can actually lead. I fear the next months will see the devastating start to a financial downwave that will dwarf that of 1929-1933.

  44. Lindsay McDougall
    Posted March 10, 2013 at 2:37 am | Permalink

    The long term growth rate of real GDP averaged 2.0% per annum between 1979 and 2009. That long term average includes the recessions, and so it should. Recessions are necessary corrections to irresponsible booms.

    We would expect the growth rate in a mature economy to be a bit less but surely 1% is too pessimistic. The near zero growth since the election can be put down to the need to deal with a record fiscal deficit, high levels of household debt and a badly damaged banking sector. A lot of pundits think that the economy is beginning to pick up. Maybe we can approach 2% by the time of the next election.

    We might let a little logic intrude:
    (1) If the public sector is poor at productivity gains, maybe we should have a smaller public sector. After all, public spending in 2001 was only 36% of GDP, so it’s not as if we have no experience. Was 2001 a time of grinding poverty, riots and looting etc?
    (2) If inflation doesn’t produce real GDP growth, we should act to reduce and eventually eliminate inflation. Pensioners would welcome this. Young adults anxious to get into home ownership would accept higher interest payments in exchange for smaller deposits and lower house prices.

  45. David Langley
    Posted March 10, 2013 at 11:46 am | Permalink

    Thinking years back the most important measure of growth seemed to be the “Balance of trade”. If we had a surplus like Micawber we were happy, a deficit we were unhappy. As our manufacturing fell away and our deficit months became the norm we entered into the start of GB bust. Trade figures became bad but always the government mentioned the “invisible earnings” made by finance in London Financial markets as recovering the dire export statistics.
    Now we have all the statistics we want but the fundamentals are what we need to know and they are dire. Borrow what you want eventually we will have to pay it back and we cannot. The blackmail by bankers and the connivance by governments have lead us to this. If we had given our builders and manufacturing companies big and small the support of QE >£320B instead of rebuilding banks balance sheets, pension funds support and boosting the big companies shares (Highest FTSE100 for ages). It is obvious that GB would have been booming not busting. Now we have inflation, high direct and indirect taxation which the government trumpets removing millions from tax. They dont say “Direct taxation” do they? we are still being killed by VAT, fuel duty and hundreds of other imposts dragging us down.
    By the way aid is still a bugbear and the recent announcement spoof about giving it to large companies to ensure proper targeting is obviously a joke.

  46. Jon
    Posted March 10, 2013 at 7:52 pm | Permalink

    In the lat 1990s there was acceptance and agreement that the post war boom had ended.

    Yes we saw Gordon Brown trying to offset that with credit but why are there people now in 2013 that still can’t accept that? We are in a new world with new fresh competitors, the growth rates of the past won’t be there. Trying to get that which the media and the opposition want will lead to more poverty in the end.

One Trackback

  • By Willa on April 6, 2013 at 5:28 pm

    Willa…

    How fast should the UK economy grow?…

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page