The US opts for more public sector austerity than the UK and grows faster

In the debate yesterday the main problem as always was getting people to look at the facts. Conventional wisdom has it that the US has  carried on spendign and borrowing on a large scale. This fiscal stimulus has promoted growth. Meanwhile according to the UK’s critics, the UK has cut too far too fast, resulting in practically no growth.

Let’s try looking at the official figures the governments publish. In fiscal year 2010 the US government, federal, state and local,  spent $5.94 trillion. In fiscal 2014 they plan to spend $6.3 trillion. That is an increase of just 6%. In the UK total public spending was £669 bn in 2009-10, and will be £720 billion this year, an increase of 7.6%. Current public spending rises by 12% over the same period.

These figures are not adjusted for inflation. If you look at the real changes, the US had a small fall whilst the UK had a real increase in current spending over that time period.

If you look at the all important question of whether public spending contributed to growth or to a decline in economic activity again the pattern is different. In the US in 11 of the last 13 quarters US public spending has made GDP growth less. In all but one quarter in the UK between Q4 2010 and Q4 2012 public spending has made a positive contribution to UK growth.

The gap between the two economies is getting larger, with the US now starting large cuts in federal spending after sustaining previous  levels. In the last quarter of 2012 US federal spending was cut by 14.8% and by 8.4% in the first quarter of 2013.

It is therefore interesting to see that the US has achieved a much better growth performance than the UK in recent years. It gives a lie to those who both argue the US has sustained higher real spending levels with higher growth in spending than the UK; to those who say the Uk has actually cut spending  overall; and to those who think cutting public spending by more  will automatically give the country doing it less  overall economic growth.

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74 Comments

  1. margaret brandreth-j
    Posted May 14, 2013 at 5:20 am | Permalink

    What is the population growth to necessitate extra public spending? There is a social side John and whilst I become angry that so many mouths have to be fed ,we have to remember that the US system has never been in line with our welfare state etc and therefore the comparison is not like for like.

    • Tad Davison
      Posted May 14, 2013 at 12:12 pm | Permalink

      Good point Margaret.

      Tad

    • frank salmon
      Posted May 14, 2013 at 11:30 pm | Permalink

      Margaret
      John is comparing like for like. The US, Canada and Sweden are so much more ruthless in public sector provision. We just throw money into the ring, and we end up with liberals in a complete mess.

  2. lifelogic
    Posted May 14, 2013 at 5:29 am | Permalink

    Indeed and it is clearly the case who could expect it not to be other than BBC think people. The USA also spend it more efficiently and sensibly than the UK, which is not hard given the way the UK waste money on religions, buying votes, propaganda, wind farms, the PIGIS, the EU, expensive energy by government dictat/religion and other absurd nonsenses.

    In addition the USA have better employment laws, fewer and better regulations, more land, cheaper property, economies of scale and far cheaper energy. Why would anyone invest in the UK in preference to the many other countries that are so much better run. Particularly a UK run by socialist ratter Cameron and to be followed by the even worse Ed Miliband, the voice of the state sector unions in 2015.

  3. Javelin
    Posted May 14, 2013 at 5:43 am | Permalink

    John just done a review of the papers comments section on line. It’s 6.45am. 99% of the comments are expressing disappointment, annoyance or anger at Cameron in the Daily Mail, The Sun, The Telegraph, The Express.

    These are your core voters. It looks like the party is in complete melt down. You need to point this out to the 1922.

    • lifelogic
      Posted May 14, 2013 at 9:06 am | Permalink

      “These are your core voters” – not according the Cameron/Clark types they are fruit cakes, closet racists and clowns who want to throw in the towel. But about 50% were probably Tories until they were betrayed by Major and the cast iron ratter. At this rate the Tories will be the third party very soon, certainly in the EU elections and shortly after in parliament.

    • Electro-Kevin
      Posted May 14, 2013 at 7:12 pm | Permalink

      Jamie Oliver is far more representative of jaded, Eurosceptic people than the ‘blue rinsers’, John Bulls and Col Blimps that Mr Cameron seems to imagine that we are.

  4. Leslie Singleton
    Posted May 14, 2013 at 6:00 am | Permalink

    These numbers are indeed interesting but, as it seems to me, show precious little correlation and even less causation. When one thinks of the effort that has been put in to Economics over the years we don’t really seem to know very much. I certainly don’t much any more if I ever did but has there (as I assume there must) ever been any kind of regression analysis of the relationship if any between spending and growth (one year later or whatever–a big question in itself) over much longer periods? Spending, the independent variable, and growth, the dependent, and all that stuff? Articles similar to yours today always seem to imply starting at ground zero whereas surely we know something by now?? Let’s face it the level of discussion (away from this site!) is usually puerile with no acknowledgement for instance of the difference between whether there have been cuts somewhere (of course there have) and whether there have been cuts overall (an entirely different question). It’s all a very poor show and that’s without touching on whether GDP figures mean much in the first place, and I am in the camp as you know which says they do not, certainly not sufficient to attract the attention they do and mighty decisions being based on them, apparently faute de mieux.

    • Jer
      Posted May 14, 2013 at 4:24 pm | Permalink

      Excellent point about GDP, and one I wholly agree.

      GDP is one way to measure the economy, but it is not itself the economy.

      If the government pays extra cash for exactly the same output, GDP goes up. Ed Balls can’t see it, but surely it should be obvious that something is broken in this model.

      If there were some way to measure government spending at value, rather than cost then things might be interesting.

      • Leslie Singleton
        Posted May 14, 2013 at 8:23 pm | Permalink

        Jer–Glad to have you aboard, Captain, and your point about “value” is bang on the nail. As I have pointed out before, the classic demolition of the way GDP works (or not) is ancient Egypt with a Pharaoh making the whole population build a pyramid. Is GDP zero or 100? I have always voted for zero. What “value” would it have??

    • Nina Andreeva
      Posted May 14, 2013 at 7:22 pm | Permalink

      Its the biggest load of cobblers to suggest that the American economy is “growing”. It cannot be the record number of families that are getting by on SNAP/food stamps. It cannot be for the record number of “discouraged workers’ who are simply not recorded as in the BLS unemployment statistics because they have given up on seeking work. While those who are lucky enough to have a full time job (because most of the jobs that are being created are part-time and come with few benefits) the BLS statistics show that fewer hours are being worked for a decreasing hourly wage. If American workers are not earning “good” money, where is the aggregate demand going to come from to maintain the “recovery”? To be blunt the “recovery” is a mirage created by money printing and JR if you had any belief in it you would be committing more of your FT portfolio to US stocks particularly smaller co’s

      • zorro
        Posted May 14, 2013 at 10:06 pm | Permalink

        Follow the money…literally….

        zorro

    • frank salmon
      Posted May 14, 2013 at 11:35 pm | Permalink

      Leslie
      come to my economics class. You need me and I need you. ‘This could be the begining of a great relationship.’
      You are wrong, of course.

      • Leslie Singleton
        Posted May 15, 2013 at 1:18 pm | Permalink

        frank–That’s what makes a horse race. The idea that GDP is meaningful and accurate enough such that changes as low as 0.1% should cause huge decisions to be taken I regard as incredible. And the fact that other nations use the same arbitrary conventions, because that’s all they are at best, doesn’t alter that one bit–indeed makes it worse if anything.

  5. Andyvan
    Posted May 14, 2013 at 6:47 am | Permalink

    The US budget will increase by”just 6%” in one year. Considering the immense fortune that the US squanders every year that is a vast increase. Admittedly they are printing money in even bigger quantities so the actual value of the currency is falling just as fast as the debt is rising but that can hardly be described as desirable or sustainable. If you want to give examples of how an economy is managed better than the UK then why not find a country where financial prudence and living within your means is still practiced. That obviously excludes virtually all western “democracies”, Japan, Australia etc. You really have to look at Asia or South America (excluding Argentina). In fact you have to look where ever the government is small and does not try and micromanage the economy. The smaller the government the less damage it can do.

  6. Mike Stallard
    Posted May 14, 2013 at 7:00 am | Permalink

    When this government was elected, the first thing it did was to point to the terrible legacy which Mr Brown left. The debt was enormous and the deficit was growing.

    The Labour party immediately started using lazy cliches – austerity, the cuts in public spending, the sacking of low paid public officials, the closing down of libraries and so on. In the event, nothing much has happened. The Debt continues to soar, when I last looked it was approaching 100% of GDP. We are right up there with Greece and Italy and Spain. The deficit has been slightly reduced – by about a quarter perhaps. But every hour we borrow much more.

    Why? Why? Why?

    We were all quite ready to make the sort of sacrifices we once made in 1946 and also in the 1970/80s. If only there had been some real leadership at the beginning. There was none.

    A very great deal of the money that went in taxes could have ended up being invested in industry. The artificially fixed low rates of interest could have led to a consumer boom. Even hand outs to the masses of unenthused people who were on the dole without real jobs or futures in the private sector. All this was all going on paying back the interest on the loans and feeding the voracious public sector.

    Can we just sit back and blame Greenpeace, Nick Clegg and the Civil Service again? I know – let us blame the wicked bankers!
    What a total failure of leadership!

    • Mike Wilson
      Posted May 14, 2013 at 10:47 am | Permalink

      You are right. In 2010 we all knew we were in a crisis and that Labour had left a monumental mess. That was the time for the ‘tough’ decisions we hear so much about. That was the time when real austerity in the public sector would have had to be accepted. But, instead, we’ve had 3 years of Labour parrots repeating ‘too far, too fast’ every time someone sticks a microphone in front of them. It is utterly surreal. We have had no cuts, yet most people think we’ve cut ‘too far, too fast’. It is bizarre and shows a complete lack of both leadership and ability to communicate.

      Now, the opportunity is gone. Already the next election is looming. This parliament has been wasted. The next one will be run by Labour and they can get on with the job of destroying the country.

      Note to Mr. Redwood – is anything I have written against electoral law?

    • A different Simon
      Posted May 14, 2013 at 4:14 pm | Permalink

      Mike ,

      The greens wouldn’t be playing up if we had a strong leader .

      This weak leadership could well end up causing (social unrest -ed)

      Nobody will reform public sector pensions and it is a disgrace that plebs have to guarantee them at zero risk to the recipients .

      The main problem however has been 20 years of financialisation of the world and in the case of the UK puffing of house prices so people can neither afford to buy nor rent accommodation .

      I’m sick of paying housing benefit to landlords yet politicians have done nothing to bring accommodation costs down .

      Not one politician is prepared to put the country before their personal vested interests by allowing the housing bubble to deflate .

    • uanime5
      Posted May 14, 2013 at 4:17 pm | Permalink

      Here are the debt to GDP ratio for 2012 for several countries:

      Canada: 84.1 %
      Cyprus: 80.9%
      France: 89.1
      Germany: 80.5%
      Greece: 161.3%
      Italy: 126.1%
      Japan: 218.9%
      Singapore: 106.5%
      Spain: 83.2%
      UK: 88.7%

      http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

      So while the UK has a comparable nation debt to Spain we’re nowhere near Italy or Greece.

      Also while the deficit now makes up a smaller part of total spending it has still increased in cash and real terms.

      • Mike Stallard
        Posted May 14, 2013 at 11:17 pm | Permalink

        OK, so I exaggerated a bit with Italy and Greece!
        Sorry about that.

        One of the really easy things to look up is this figure, which, as is to be expected, differs slightly from site to site.
        Here in Australia there is an enormous haroosh about the $24 billion dollar debt which has been allowed by the Labour government in their Budget. I won’t bandy figures: it is just too easy. But this represents a much healthier figure than the British.

      • Lindsay McDougall
        Posted May 15, 2013 at 1:18 pm | Permalink

        What you need to bear in mind is that 30% to 40% is a healthy percentage. That way, you can still service the interest on your debt at normal, rather than inflationary, interest rates.

  7. alan jutson
    Posted May 14, 2013 at 7:05 am | Permalink

    I am sure the reasons for US growth is rather more complex and complicated than a simple cut in Government spending, but as one of the measures which has to be undertaken to get finances back into line and on track, absolutely.

    Such a shame that our government insists that it is making cuts to help balance the books, when in actual fact spending is increasing, and so is our debt.

    • lifelogic
      Posted May 14, 2013 at 9:09 am | Permalink

      Yes they are more complex but if you have a 50% largely parasitic sector you find it hard to compete in the world. Cheap energy is the other main reason and better employment laws, regulations & general economies of scale.

  8. Phil
    Posted May 14, 2013 at 7:08 am | Permalink

    I am a worker simple Husband and father.
    I have work all my adult life, and even i can say if you take away the money then there is none to spend.
    Is this really that hard to see if we dont have the money to spend or survive then we borrow but only under the capability to repay. (well most of us)
    So if we stop giving money away and only place it where it can grow and offer a return would that not be more worthwhile.
    LAB borrowed but placed it all where they would see very little return if any. (Aid and free money for undeserving)
    CON trying not to borrow and cutting forcing no return, the money wont grow on trees.

    Maybe if DC removed his face from the unsightly place off the EU and US but cheeks he could see what was happening here.

    • Bob
      Posted May 14, 2013 at 10:45 am | Permalink

      @Phil
      Hear hear to that (especially the final paragraph).

  9. Nick
    Posted May 14, 2013 at 7:23 am | Permalink

    Let’s try looking at the official figures the governments publish. In fiscal year 2010 the US government, federal, state and local, spent $5.94 trillion. In fiscal 2014 they plan to spend $6.3 trillion.

    ===========

    Spending more money is austerity?

    That just shows how mad politicians have become. You’ve been stuck in an alternative universe where black is white and white is black.

    It’s just too much Lewis Carrol, or is it a kick back to the 1960’s drug cultures?

    Spending more money is not austerity!

  10. Brian Tomkinson
    Posted May 14, 2013 at 8:34 am | Permalink

    Your own leaders have promulgated the myth of cuts and austerity and Labour has gone along with it to appear to be offering something different.Your party won’t now say that there haven’t been overall spending cuts as they have spent three years telling us there have been and the same goes for the other two.

  11. Richard1
    Posted May 14, 2013 at 9:02 am | Permalink

    Very interesting. As ever the actual facts undermine the high spending left wing case. The US has c. 10% of GDP less public spending and c. 10% less tax / GDP than the UK. It also now has a real competitive advantage through cheap energy, whereas our government has been delaying and obfuscating the development of shale, and continuing to pour money into subsidies for useless green energy production. (I note the CEO of the chemicals group Ineos said this week that the UK is the most expensive of the 21 companies he manufactures in). The Conservatives need to get a grip on these issues, because in another 2 years when the election comes, such facts will be very clear to voters.

    • Richard1
      Posted May 14, 2013 at 2:05 pm | Permalink

      Apologies – correction above – the CEO I referred to said the UK has the highest energy costs of the 21 countries he manufactures in

    • uanime5
      Posted May 14, 2013 at 4:20 pm | Permalink

      The US also has less welfare and healthcare, and higher levels of homelessness as a result of their low taxes.

      • Richard1
        Posted May 14, 2013 at 5:11 pm | Permalink

        The US has greater prosperity at almost every level though with bigger differences. Medicare + medicade almost equals our healthcare spend. The welfare reforms enacted in the US in the 90s are one of the reasons for lower unemployment and more flexible labour markets. We should do the same thing here. There is nothing ‘fair’ about engineering welfare dependency as the Labour govt attempted to do in the UK.

        • uanime5
          Posted May 15, 2013 at 12:16 pm | Permalink

          Actually as a percentage of GDP the USA spends more on healthcare than the UK but their services are worse than the UK.

          What welfare reforms are you talking about? Food stamps? Not giving people welfare and forcing them to live on the street? Prison labour? I doubt any of those will reduce unemployment in the UK.

          Reply Their clinical outcomes in many areas are as good or better than the UK.

  12. stred
    Posted May 14, 2013 at 9:03 am | Permalink

    Talking of parallel universes, it seemed very strange that, in the UK, public expenditure on foreign police cars or daft stuff like public mood/happiness indexing counts as growth. Now you report that, in the US, public spending reduces growth. Do their statisticians count it differently?

    • Leslie Singleton
      Posted May 14, 2013 at 10:04 am | Permalink

      stred–(Plus please see my earlier effort) John has said, best I understood, something like “Growth is in the eyes of the beholder” and ANY spending counts as GDP. Of course sounds bonkers to me as it seems to you. He will no doubt put me right, if I have what he said wrong, of course. It is the enormous consequential decisions that are made in reliance on this nonsense that wind me up.

    • Life logic
      Posted May 14, 2013 at 2:31 pm | Permalink

      I had forgotten about the absurd happiness index how many millions wasted now how many real jobs destroyed by it so far?

      • zorro
        Posted May 14, 2013 at 10:14 pm | Permalink

        At least £8m (four times original estimate)…..so keep on smiling… 🙂 ……or not as the case may be…..

        zorro

  13. Ralph Musgrave
    Posted May 14, 2013 at 9:59 am | Permalink

    JR gives us a straw man argument: no responsible Keynsian has ever suggested that increased public spending promotes employment, growth, etc. What Keynsians DO CLAIM is that it’s the DEFICIT that promotes growth in a recession. E.g. if public spending is increased ALL ELSE EQUAL, then yes, that ought to promote growth.

    As to whether a deficit is best effected by cutting taxes or expanding public spending, some Keynsians argue that the former is better. But that’s a minor point. The essential point is that it’s the deficit that does the work, the public spending as such.

  14. Ralph Musgrave
    Posted May 14, 2013 at 10:11 am | Permalink

    The comment I did 5 minutes ago contained typos and errors. Sorry. I’ll try again:

    Contrary to JR’s claims, no responsible Keynsian has ever suggested that increased public spending promotes employment, growth, etc. What Keynsians DO CLAIM is that it’s the DEFICIT that promotes growth in a recession. E.g. if public spending is increased ALL ELSE EQUAL, then yes, that ought to promote growth.

    As to whether a deficit is best effected by cutting taxes or expanding public spending, some Keynsians argue that the former is better. But that’s a minor point. The essential point is that it’s the deficit that does the work, not public spending as such.

    • Edward2
      Posted May 16, 2013 at 10:24 am | Permalink

      Ralph I think Keynesian theory has been much misused and distorted by modern politicians.
      Keynes called for a balanced Government budget in the medium to long term.
      He advised that Governments should build up surpluses in the good times and use those surpluses to pump prime the private sector in the poorer times, aiming for full employment over the ups and downs of the trade cycle.
      He did not advocate huge State borrowings, long term annual deficits, nor large scale money printing, and he developed his views when the the size of the State was 30% not 50% of GDP

  15. Mike Wilson
    Posted May 14, 2013 at 10:49 am | Permalink

    How can you compare two such disparate economies? As others have pointed out – America has loads of land and sane house prices. We are all crammed in together like sardines with ludicrously high housing costs. They have massive natural resources … we don’t seem to want to use ours.

  16. Peter Davies
    Posted May 14, 2013 at 1:03 pm | Permalink

    Cheap energy must be an advantage to the USA which the EU does not have.

  17. behindthefrogs
    Posted May 14, 2013 at 1:13 pm | Permalink

    There is no big secret about why the USA is more successful on this front.

    Firstly more of their government spend actually takes place in the country rather than on imports and external services. It can be argued that the UK has to obey EU rules but a little closer attention to how countries like Germany handle these rules would show that it is just the incompetence of our civil servants.

    Secondly any dollar spent in the US will on average be respent more times before it returns to government coffers via the tax system, than a pound spent in the UK. One simple solution to this is to move the tax take to as late as possible in the business cycle. For example instead of reducing corporation tax reduce employers NI contributions. The other required solution of actually reducing the tax burden is more difficult to sell although reducing taxes like employees NI contributions cause a much lower cost to the government than might be expected. These reductions simply delay the tax take but at the same time reduce the need to pay benefits.

  18. REPay
    Posted May 14, 2013 at 1:45 pm | Permalink

    You are spot on. It is generally accepted wisdom that the US has not made cuts and the UK has made enormous cuts. I live in Manhattan and the federal government and the states have all started to economize. The states by law have to balance their budgets…This does not seem to suit the BBC/Labour Party view that all our problems are down to insufficient government stimulus – as though only the state could do that!!!

    It beggars belief that Ed Balls is not regularly attacked for all his dodgy off-balance sheet PFI deals (our Public Sector Enron) that ensures the state (health service, schools will be poor for decades, with massive interest payments and billions of unfunded pensions for the senior public sector. (personal attack on Mr Balls removed-ed)
    Whatever happened to the cap of 60k (or about 1.5million equivalent) for the public sector pension?

  19. Collamore
    Posted May 14, 2013 at 2:07 pm | Permalink

    John, use numbers that compare actual spending US versus actual spending UK. What you instead do here is throw in a US “plan to spend” 2014 figure. “Plan to spend” is based on government political forecasts that aren’t worth the paper they’re written on.
    Use hard numbers throughout.

  20. Martin
    Posted May 14, 2013 at 2:33 pm | Permalink

    Some of the US growth is due to exploiting shale gas instead of importing it from wherever.

    Both the UK and the rest of EU ought to look at this asap.

  21. Rods
    Posted May 14, 2013 at 2:50 pm | Permalink

    There are so many differences between the UK and US economies that just taking this one figure does not explain, why the US has had a much stronger economic recovery, but I agree with you it is sensible to ask the question?

    Here are a few reasons:
    1. US government spending is a lower percentage of GDP.
    2. US banks are much further through bad loan write offs and recapitalization than UK.
    3. Cheaper energy prices, especially gas.
    4. Much less envy of others with a positive ‘can-do’ attitude.
    5. Lighter business regulation.
    6. On average work 150 hours more per year than UK workers (source ILO).
    7. Neighbouring export countries not in a long recession / depression.
    8. Cheaper property and cost base.
    9. Better support through VCs for business start up funding.
    10. Much more entrepreneurial where running a business and making a profit is not considered a cardinal sin by many in society.
    11. Rich entrepreneurs and companies investing in new high risk, leading edge technologies like Tesla cars, space launch rockets, thorium nuclear reactors, IT technologies and systems plus many, many more areas. Most major new global companies are US based or Asian. Google, Facebook and Twitter to name three. Vodafone is the only UK company I can think of.

    • A different Simon
      Posted May 14, 2013 at 10:13 pm | Permalink

      Rod ,

      Look at shale gas .

      In America over a period of 35 years the public sector and private sector worked together to overcome all the challenges with this . The software to map propagation of fractures from microseismic data in near realtime (live-microseismic) was funded by the US Govt and required processing power which was not available until recently .

      Now here is the difference .

      In the UK and the Europe we seem to have filed shale in the “too difficult basket” .

      The main differences between the US and Europe are not geological or to do with population density . They are cultural .

      I hope that as well as importing US shale technology we can import some of the best aspects of US culture which have made it a success over there .

  22. Paul
    Posted May 14, 2013 at 3:03 pm | Permalink

    What happened to eliminating the structural deficit by 2015? Cameron and Osborne have failed, it’s as simple as that. Why? Because they have never had a proper job, never run their own business, were born with a silver spoon in their mouth and generally do not have any idea what they’re doing. I find it unbelievable that jobs in government do not require MPs to have had any experience in the related field. Most MPs with experience of and success in the real world are excluded from front-line politics. At the General Election in 2015 most people will vote for the party they trust most with the economy – if they have any sense it won’t be any of the failed big three parties.

  23. Acorn
    Posted May 14, 2013 at 3:18 pm | Permalink

    You have got to hand it to George Osborne, he is managing to keep the UK economy flat lining with an 8% of GDP budget deficit. The fundamental numbers are showing an increase in austerity will put us back into recession, with a latent increase in underemployment hours tempered a little, by a fall in productivity.

    It looks like the US will increase the austerity with the “sequester” to about 6.5% deficit (Congress has started to back pedal on some of the cuts and yes, sequester comes out of the same covert ops dictionary as extraordinary rendition). Both cases depend on the private sector dipping into their savings or, getting an even bigger loan, and spending more than they are reluctantly spending at the moment. Good luck in the UK with that one George.

    The Eurozone fiscal deficit is about 3.7% and should be nearer 10%. Down from 6.5 and heading for 2.9%, to be inside the Maastricht limit. So if you want to know how to destroy a single currency area with austerity, the Eurozone is the perfect example.

    As JR has put us under election rules a year early, do yourself a favour; cos, you are going to get sold a lot of pups in the next two years. Get a copy of Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems by Professor L. Randall Wray (7 Aug 2012). This will tell you why austerity is purely a form of punishment of the little people, by the elite people, in a sovereign fiat currency economy.

    PS. I know a few pensioners who will take your driving penalty points in exchange for two months board and lodging at one of Her Majesty’s soft cell lock ups. This will not affect your ability to get back into another government job within two years. 😉 .

    • Acorn
      Posted May 14, 2013 at 5:08 pm | Permalink

      The following may be a bit off the wall for all but two or three on this site. I have used mainly the WIKI words, cos I couldn’t do better.

      The Principal Ideas Of Functional Finance: (read: Abba P. Lerner, if you want to know more about Functional Finance).

      (1) Governments have to intervene; the economy is not self-regulating.
      The principal economic objective of the state should be to ensure a prosperous economy.

      (2) Money is a creature of the state; it has to be managed.

      (3) Fiscal policy should be directed in the light of its impact on the economy, and the budget should be managed accordingly, that is, ‘balance’ is not important in itself.

      (4) The amount and pace of government spending should be set in the light of the desired level of activity, taxes should be levied for their economic impact on aggregate demand in the whole economy, rather than to raise revenue.

      (5) Principles of ‘sound finance’ apply to individuals. They make sense for households and businesses, but do not apply to the governments of sovereign states, capable of issuing money and can never go broke in that money.

      Rules for Fiscal Policy. Lerner postulated that government’s fiscal policy should be governed by three rules:

      (1) The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.

      (2) By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.

      (3) If either of the first two rules conflicts with principles of ‘sound finance’ or of balancing the budget, or of limiting the national debt or deficit, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.

    • A different Simon
      Posted May 14, 2013 at 10:02 pm | Permalink

      “You have got to hand it to George Osborne, he is managing to keep the UK economy flat lining with an 8% of GDP budget deficit.”

      Seems to be clear that our economy in it’s current form cannot function at anything other than a big deficit . Taking George Osborne out would not change that .

      This is where we are now the expanding credit-merry-go-round has stopped .

      Where are the measures to keep the cost of accommodation , food and energy affordable ?

      Everything seems to be directed to trying to maintain house prices never mind it amounting to pushing on a piece of string .

      The social costs of trying to keep house prices at bubble levels are just too high .

  24. uanime5
    Posted May 14, 2013 at 3:22 pm | Permalink

    Let’s examine how much the USA federal Government has been spending since 2008.

    2008: Total tax revenues $2.7 trillion, spending $2.9 trillion.
    2009: Total tax revenues $2.105 trillion, spending $3.518 trillion.
    2010: Total tax revenues $2.168 trillion, spending $3.456 trillion.
    2011: Total tax revenues $2.303 trillion, spending $3.603 trillion.
    2012: Total tax revenues $2.449 trillion, spending $3.538 trillion.

    So if you ignore the huge 21.3% spending increase between 2008 and 2009 and only concentrate on spending between 2009 and 2012 then the US federal spending has increased spending by 0.57%. However if you use 2008 as your start point then US federal spending increased by 22% between 2008 and 2012. I believe the phrase is “lies, damn lies, and statistics”.

    John your attempts to convince people that the UK can cut spending because the USA is cutting their spending, while ignoring that the USA massive increased their spending between 2008 and 2009 isn’t fooling anyone.

    • Edward2
      Posted May 14, 2013 at 6:24 pm | Permalink

      But Uni, I think the point is made in the last two years of your statistics where spending by the USA Government has been cut and growth has now reappeared.
      It also shows improved tax revenues despite lower rates in those last two years.
      As you say its about how you interpret the figures

      • uanime5
        Posted May 15, 2013 at 12:28 pm | Permalink

        The only reason growth reappeared was because of a huge stimulus between 2008-2011, something most right wing commentators are doing their best to ignore because it doesn’t fit with their austerity argument.

        The only reason the US has started to cut their stimulus to a lower level is that growth has returned. If there hadn’t been growth they would have kept increasing this stimulus to kick-start the economy.

        Finally the figures I posted show that tax revenues still haven’t reached the 2008 levels.

    • Richard1
      Posted May 15, 2013 at 9:44 am | Permalink

      What is your source for this? The US official actual figures for 2008 and 2009 are:-

      Year Federal Govt (US$bn) Total Public (US$bn)
      2008 2,931 5,289
      2009 3,107 5,560

      It seems you have either made up your data or made a mistake. Perhaps you could reply and make a correction and apology & agree that the official stats make John Redwood’s point exactly?

  25. Robert K
    Posted May 14, 2013 at 4:52 pm | Permalink

    I went to the debate at the Sheldonian yesterday (thanks for the heads-up) and put myself in the position of Martin Wolf’s heart attack patient. Dr Dessai, Dr Wolf suggested, would have been disgusted by my past indulgence and would have pulled the plug on me, leaving my fate to chance. Dr Wolf’ remedy sounded a lot more pleasant. Not only would he have given me bypass surgery, he probably would have handed me a pack of fags and a bottle of claret to make me feel better. Dr Redwood sounds like he would have prescribed some anti-sclerotics and told me to eat some cold turkey if I wanted treatment to continue. I wasn’t sure whether he would have given me the bypass or not, but I suspect he is compassionate enough to do so.
    The problem, it seems to me, is that the Keysnian interventionist model does sound so reasonable. But the questions I was too timid to ask yesterday are these: at what point would Professor Skidelski draw the line? How big would he allow the state to become? Does he think the 47% of GDP that the state currently represents can be expanded without destroying private enterprise? How would the borrow-and-spend model differ from what went on under Brown?
    It seems to me that high-faluting macroeconomic theory was at least part of the Brownian problem and more of such can only make things worse.

    Reply Indeed – and why has so much deficit spending so far not delivered better results? Debt is just deferred tax so it is an attempt to bring forward consumption now at the expense of having to pay for it later. Unless the aim is to renege on the debt by inflation – or in Euroland by refusing to repay – in which case you end up with a worse crisis.

    • Richard1
      Posted May 15, 2013 at 9:46 am | Permalink

      Is a recording or transcript of the debate available?

      Reply: It is coming

  26. Jon
    Posted May 14, 2013 at 5:25 pm | Permalink

    With all that in mind it does seriously question the sanity of why we Nationalised the financial advice industry for 95% of the population.

    The taxpayer now funds the Money Advise Service which is unregulated, regulated advice would be too expensive which why it stopped for people at or below moderate earnings in the private sector.

    Despite the insanity of at all its not a clever prediction to say the year on year cost of this new Nationalised industry will rise. I dare there will be calls soon from the left to make the Government advice service regulated.

    That whole area has gone badly wrong and the authorities need to admit they have messed up over the last 20 plus years and gone in the wrong direction. Lets look to take it back into the private sector which means a serious look at regulation and RDR with its cash up front requirement. That means in part atleast allowing the factorisation of charges allowing a punter to spread the cost over years.

    • Chris S
      Posted May 15, 2013 at 4:32 pm | Permalink

      This a very accurate post :

      One of the prime reason that the average family has no savings or pension provision is because Gordon Brown destroyed the pensions industry and watched while the FSA regulated Independent Financial advice out of the price range of a large section of the population including many people on above-average earnings.

      This was done because of “misselling scandals” which were mostly none of the kind. They were, in fact a result of applying 20/20 hindsight to business done within the rules that applied at the time but conducted in a totally different financial climate.

      The result is that the only access to financial products most people have is via the banks who were the area of the retail market responsible for 90% of the misselling.

      Like a great many IFAs, I retired just before the new regime came in because at the age of 60 and after 40 years in the industry I was unwilling to take a whole new raft of exams just to carry on the business I have been successfully running for over 25 years.

      In the whole period of it’s existence the FSA failed or got wrong almost everything it attempted to do. The banking crisis was just part of the problem.

      Many of those in the industry felt unable to speak out for fear of being singled out for a heavy handed supervisory visit.

      Yet no lessons have been learned : the new advice regime is hamstrung by paperwork and regulation. I posted a piece about the absurdity of the Money Laundering regulations only a week or so ago.

      I could certainly not recommend that anyone go into the industry today. The chances of building a successful and profitable business are almost nil.

      • Jon
        Posted May 16, 2013 at 5:20 pm | Permalink

        Hi Chris, hope you are enjoying the retirement. Sadly you are right, its not gotten better and its hard to see industry do anything but contract further with all the noises currently going on from many politicians. It is so clearly wrong taking regulated advice out of the realms of even those on good incomes.

        The MAS is part funded y the taxpayer and part funded by levies on the industry by the regulator so advisers are part funding unregulated advice without a choice on the matter. If its okay for the government to give unregulated advice through a devolved organisation then surely it should be privatised. That would be admitting the and the regulators have got is all wrong.

        • Jon
          Posted May 16, 2013 at 5:24 pm | Permalink

          I won’t boor you with all the recent daft ideas from Ed Miliband but to give an idea one is to cap all funds at 1% and prevent fund managers from actively managing funds so only having trackers and removing much of the ability to sell shares in an underperforming company and buying elsewhere. A huge chunk of investment business and money would leave the UK.

  27. Leslie Singleton
    Posted May 14, 2013 at 6:03 pm | Permalink

    I have just read that Rifkind thinks that the Single Market is the biggest in the world. Well, it would be, wouldn’t it, given that it is the only one, in the sense that how many other sovereign economies on the edge of a larger neighbour – there are many – feel the need to join in a Single Market with that neighbour? I believe the answer to be none, and even if it weren’t we are special with our contacts around the world and because of the huge differences in just about everything between us and continental Europe. Why does not say Canada wish to give up its self rule and clamour to homogenise with America, with which it has few differences? Ask a Canadian and he will think you are mad.

  28. James Reade
    Posted May 14, 2013 at 7:47 pm | Permalink

    As usual:

    (1) Are your figures adjusted for cyclical position?

    (2) How do you know there is causality running from public spending cuts to economic growth? How do you know that it isn’t economic growth causing public spending to fall as benefit payments fall?

    • Leslie Singleton
      Posted May 14, 2013 at 8:38 pm | Permalink

      James–Let’s hear it for causality, as I touched on earlier. And also as touched on earlier it’s not just causality (or otherwise) because we also need to know (never much mention of this), even if there is causality, how long after the spending the growth is supposed to take place. Personally, and as a matter of judgement not statistical proof, I reckon spending money we don’t have isn’t going to help the dreaded “growth” on any basis.

  29. Lindsay McDougall
    Posted May 15, 2013 at 1:52 am | Permalink

    The US has done better on public expenditure for two main reasons (1) reduced expenditure on foreign wars and (2) cuts forced on the government by the Republican congress. In addition, the extraction of shale gas will deliver a boost to growth from cheap energy. President Obama is the luckiest man alive. Note, though, that US federal debt is scheduled to remain in excess of 100% of GDP for the immediately forseeable future.

  30. rick hamilton
    Posted May 15, 2013 at 2:24 am | Permalink

    All this agonising over the numbers seems to be the fundamental problem with the UK.

    While the Germans, Japanese, Americans and many others get on with developing future-focused high-tech industries and government does much to encourage them, in the UK the political argument seems to be only about how to spend taxpayers’ money.

    There seems to absolutely no attempt by government to work out how the country is going to earn its living in the 21st century. The Japanese government identified years ago nine areas in which they intended to be world leaders – nanotechnology, robotics, biocomputing, and so on – and their research budget to help industry is directed towards these a matter of national priority. Plus as a national frame of mind they love just to to make things well, and respect engineers and revere craftsmen just like the Germans, Swiss and others.

    When I read all the whingeing about HS2 I am utterly depressed. Japan has had HS trains for almost 50 years and is now building a 500kph maglev line from Tokyo to Nagoya. The UK invented the railway for heaven’s sake but apparently we no longer have the will to develop rail travel and can no longer make our own trains anyway.

    The UK was the first country in the world to operate a nuclear power station at Calder Hall in the 1950s but Blair ended our nuclear ambitions by allowing Westinghouse to be sold to Toshiba – and then went cap in hand to the French to beg them to help us with new nuclear plants ! Insane, ignorant and self-destructive. Toshiba is now negotiating to sell nuclear plants to the V4 countries (Poland, Hungary, Czech & Slovak), which the UK should have been doing.

    It is time we stopped allowing arts graduates with a primitive grasp of economics and no understanding of science or engineering to control the political narrative. We need to make advanced high-tech products to sell to the many countries who need them but have no chance of doing it themselves. Engineered products are largely made by machines now, and we should for example be making those machines and exporting them worldwide.

    The British are no good at mass production (too boring, too little attention to detail) unless controlled by foreigners, but damn good at high-end innovative and specialist engineering.

    And I definitely do not mean useless windmills and all the other eco-lunatic subsidised dead ends.

  31. Javelin
    Posted May 15, 2013 at 5:11 am | Permalink

    Indeed the economy doesn’t seem to be moving. I think Boris is onto something when he talks about a malaise. I think he is wrong to attribute it to sloth. It really should be attributed to fear of risk taking. This fear has come from children being Molly coddled by their parents and politicians who have encouraged saftey and uniformity.

    The human brain is driven by the amiglyda – the fear centre. If this is encouraged to have influence it will drag a person down for life. What we need are rebels to come up with ideas and greedy people to take risks with their money. Not very politically correct but that is what drove the industrial revolution.

    Reply I do not agree that our main problem is sloth, and do think the economy is now growing again.

  32. David Langley
    Posted May 15, 2013 at 7:54 am | Permalink

    The USA must be insane, look at the debt figures and calculate who owns the debt? China probably owns the USA, I read that China is trying to offload the debt, who would buy it? Is it worth anything? A pack of cards.

  33. David Langley
    Posted May 15, 2013 at 7:56 am | Permalink

    France is in recession, the second largest country in the Eurozone by contribution. Lets get out of this mess now before we commit to financial suicide. I know we are not in the Euro but we are in an organisation committed to ever closer union, we all know what that means. No thanks.

    • uanime5
      Posted May 15, 2013 at 12:39 pm | Permalink

      As long as the EU is the UK largest trading partner it doesn’t matter whether the UK is in the EU or not because if the EU collapses it will take the UK with it.

      • Edward2
        Posted May 16, 2013 at 10:15 am | Permalink

        What a strange “end of the world is nigh” prediction Uni.
        The UK’s trade with the EU is only a little more than our trade with the rest of the world and our trade with the rest of the world is growing more than trade with the EU.
        Oh and have you allowed for the Rotterdam Effect which adds between 5% and 10% onto the value of exports figures to the EU, just because they go through that port on route to the rest of the world.
        If properly adjusted for this statistical inaccuracy, the figures for our trade with the rest of the world would be greater than our trade with the EU.
        And don’t forget that the overwhelming volume of trade is internal trade inside the UK.
        So I think we may just about survive.

  • About John Redwood


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

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