The government’s whole financial strategy rests on growth. Deficit reduction is planned primarily through a surge in extra tax revenues, which grow as the economy grows. By 2014-15 the government forecasts £172 billion a year more from taxation than in the last Labour year.
This big increase in taxation is needed to pay for the increased total public spending, up by £73 billion a year over the same time period, and to cut the deficit substantially. Public spending cuts have been cuts in Labour’s planned increases, or cuts in certain programmes in order to fund larger increases in the government’s priorities that include overseas aid, the EU budget and assistance to Euroland.
Most commentators and politicians agree that growth is needed to help the UK out of the financial hole it is in. Growth reduces the need for spending cuts and tax rises. If growth does not move to above trend from next year and stays there for the following three years, there will be a shortfall in revenue and extra public spending.
Critics of the government say it has cut too far and too fast and jeopardises growth as a result. As the government plans to borrow an additional £485 billion over its planned five years, more than the total state debt just ten years ago, it is difficult to sustain the argument that it has been too tough. Given that public spending rises by a substantial cash amount, the argument is more one over what that money can buy. If the government enforces a fairly successful public sector pay freeze for a couple of years, and manages to buy things more cheaply as it has promised, the cash increase could even translate into a real increase in spending.
Promoting faster growth requires changes to banking, regulation and taxation. We will look at each of these in turn this week.
May 28, 2011
Promoting faster growth will take time and a sensible direction and vision from the government which is totally lacking.
One year has already gone any there is no sign of any positive moves beyond the Enterprise Investment tax relief increase and the only part removal of HIP packs.
The negatives have been huge: the no retirement of the over 65’s, the failure to increase IHT limits as promised, endless over regulation, nothing on employment regulation in the right direction, the counter productive 50+ 2% tax rate, the increases in stamp duty, restriction on pensions relief, tipping money down the PIGS and many other pointless drains, failure to do much positive with the NHS or education either. Above all the total failure to sort out bank lending to business.
So far the government strategy is clearly totally anti growth – it has been little better than abysmal. You might as well have Labour with at least the possibility of sensible government in four years. Rather than the prospect as now of 9 years of this socialist insanity.
May 28, 2011
“A better growth strategy”
What growth strategy is there after one wasted year?
May 28, 2011
In yet a further anti growth move government move HMRC are now being very unhelpful and aggressive with the payment support service for tax due. Moving very quickly to close down viable companies who cannot get bank finance in an illogical mincing machine fashion with no proper analysis.
Often leaving the state to pick up very much larger redundancy cost and unemployment cost and destroying good jobs in the process. With no net government benefit indeed quite the reverse. Just cutting their own throats and destroying the future tax base.
May 28, 2011
I’ve always been surprised how few UK-exported products are to be found on the continent, e.g. in the Netherlands. There must be other exports possible than financial services. Now that the pound sterling is so cheap, why aren’t shops on the continent full with UK products? Maybe an export stimulation program directed at the SME’s could help?
May 29, 2011
…. “why aren’t shops on the continent full with UK products”? The answer to that question is that the UK no longer actually manufactures anything that people of other countries would wish to buy.
May 29, 2011
That’s because we don’t actually make anything of consequence any more, let alone stuff people want to buy.
May 28, 2011
How do we get beyond half the country saying the cuts are dreadful and debt is not historically high, while people like you, Hannan and Carswell tell us spending and debt is huge and increasing?
You obviously haven’t convinced most in your own party that what you say is true as the Coalition is where most of the “cuts, cuts, cuts” message has come from. It shouldn’t be difficult to have a debate about public spending using a single set of facts, but it seems we have two sets.
Do you have private discussions with your colleagues where they say: “I agree old chap – we aren’t really cutting at all but I’m required to say we are”? Why are you a lone voice? Why do so few agree with you?
May 28, 2011
How can we possibly grow when the government has just passed a law restricting our carbon emissions when the rest of the world are doing the exact opposite?
The only growth on the horizon is the growth in the length of dole queues up and down the country.
June 1, 2011
Paul, and perhaps Mr. Redwood may notice this as well, there was an article just the other day in the Telegraph where Osborne was reported as calling for increased growth. This is in stark contrast to the excess of regulations and directives coming out almost every day. To say nothing of the insistance on low carbon projects, cutting CO2 emmissions, the closure of 40% of generating capacity in the next few years, no new power stations in build as yet and the ever faster increase in the cost of energy. So here we have a paradox, we are going for growth….but we are going to strangle anyone who tries with regulations, high taxation, high energy costs and a shortage of energy to boot. Will someone please tell me how these “educated” leaders of men can come up with this contradiction and keep a straight face.
May 28, 2011
A lot of critics might say the government has cut too far and too fast (mainly those that benefit from public spending) but in reality they have cut far too little and nowhere near fast enough. With the massive over regulation and taxation that the UK and Europe suffer from we stand no chance of having above trend growth in the near future or ever. Just look at Hong Kong since WW2. They have had government that spends extremely little and taxes the same leaving almost everything to private enterprise with the result that the population are far richer than here and the HK governments surplus is so enormous it’s going to give money back to taxpayers. Even the nominally communist Chinese authorities have had the sense to leave things be to a large extent and reap the benefits of an even more dynamic economy than their own. With our state directed Marxist like economy we have no chance of competing and will very soon suffer another economic crisis.
May 28, 2011
Is there a strategy for growth? I can’t see anything other than a strategy to spend more money, we haven’t got, and to increase tax and inflation – not much different from the discredited Labour government. There is plenty of extra to give away to Europe which wasn’t ring-fenced and overseas aid which was. We read of Downing Street makeovers costing £650,000, credit cards for civil servants nationally and locally which have been used to spend £millions on items which shouldn’t be paid for by taxpayers – it is too depressing to list all the wastage of which we are aware, which I should think is merely the tip of an enormous iceberg. After a year in office the government’s performance has been very disappointing. Osborne told us that the reduction of the deficit would be achieved by 80% cuts in spending and 20% increased taxation – was that just another politician being economical with the truth? If this so-called mythical plan for growth fails, which seems more than a strong probability, all the three main political parties will have demonstrated to the electorate that not one of them is fit to run a whelk stall.
May 28, 2011
If I heard correctly, in his Lancaster House garden speech, Mr Cameron claimed that the UK would cut the deficit “as a share of GDP”. This is playing with words and with fire. As you point out the coalition started out in a big financial hole and it is still digging – and furiously. He openly stated that he did not come into politics to cut public spending. In short he is going to go on digging the debt hole deeper and deeper. It is clear this policy is doomed to failure, a view confirmed by the last budget when the Chancellor failed to make to changes needed to spark a recovery and by Mr Cameron`s repeated determination to squander money he has not got on ventures that command limited support.
Before the last election his policy was “to share the proceeds of growth”. With no growth that idea is a bust, already confined to the dustbin by the extra £172 billion of taxes. As for deficit reduction we are now to be transported into a world of smoke and mirrors of the Prime Minister`s design. I do not buy it.
I applaud your efforts to blow away the smoke and to smash the mirrors. That said I do not believe you will get the policy changes needed to cut government spending, cut and reform taxes and to promote growth with the present political leadership.
May 28, 2011
It was always a silly and wildly optemistic strategy to assume growth would produce the increased revenues to make the government look like white knights, whilst they continued to spend money on their own pet projects.
Would my bank manager be happy for me to have a strategy to repay his loan that consisted of waiting for increases in my profits or, in my salary. You bet he would not
It serves them right that it will all inevitably backfire and they will be firmly kicked out of office at the next election. The alternative is grim, to say the least but it gives the Conservative party the opportunity to find its roots and elect a conservative, for a change.
Someone with passion and a clear understanding of how the economy works (which excludes all Keynesians) will need to be found or we will continue our downward spiral indefinitely
May 29, 2011
Keynes isn’t at fault for the state we are in so why muddy his name by associating him with people who only choose those parts of his prescription that suit their purposes and treated the rest with contempt ?
As you know Keynes advocated counter cyclical policies yet none of those people who claim to be Keynesians in the last govt made any effort to build up reserves during times of plenty .
If they had of followed all his prescriptions rather than just paying them lip service we would surely be in better shape than we are now .
May 31, 2011
Simon: “yet none of those people who claim to be Keynesians in the last govt made any effort to build up reserves during times of plenty”
Not so sure that is correct. Lots of people associated with the last government built up substantial reserves. One or two of them have been through the courts.
May 28, 2011
Shouldn’t effective cost reduction go hand in hand with expected growth? Why should people in the public sector work hard(er) to generate even more revenues that the public sector simply continues to waste even more?
We had 13 years of profligate overspending driving us all in to increasing debt by the last Labour government. I believe most conservatives expected a Conservative government would significantly and quickly reverse that situation. This has not happened yet and if the strategy is as you seem to be describing – hope to minimise cost increases and pray for growth while actually borrowing increasing amounts – then frankly I can’t see it ever happening. Compounding debt is not subtle, you have to deal with it effectively and hoping to be able to borrow and tax more in the future is simply not a solution.
May 28, 2011
I assume you mean “private sector” in the second line. The BBC on more or less Radio 4 put the higher remuneration of 43% in the state sector relative to private (including pensions) down to the private sector workers being like highly qualified doctors and the state sector like Tesco shop workers.
In my experience the reverse is far more often the case. Any many “qualifications” in the state sector are of rather dubious actual value. Often just qualification in how to do something the often illogical approved state sector way for this year fashion.
May 30, 2011
Well spotted – I did mean private sector.
May 28, 2011
To have a growth strategy, you have to find something to grow. The only thing we are good at growing is debt.
Our public sector owes the equivalent of 150% of our GDP. Our private sector, including households, owes 400% of our GDP. And the credit and mortgage fairy has flown away.
To cut a long post short, just read Tim Morgan. His summing up of the “Brown Bubble” is much better than I can do.
” … it would be by no means unreasonable to conclude that, short of almost unthinkably drastic restructuring, there may be no way out of Britain’s low-growth, high-debt trap.”
May 28, 2011
Mr. Redwood, Excluding your goodself I wonder how many MP’s and senior officials of government realise how much of British industry has been completely wiped out in the past 30 years. The expectation of growth from the private sector is almost a myth when considered against the total withdrawel of investment, machinery, skilled labour, basic working capital and above all perhaps the desire to build a successful business in an environment of overtaxed and over regulation Britain. Public sector waste continues unabated and one has to wonder if we will not now end up in the same even bigger mess that has become the US with all that means to its currency, jobs, inflation etc. etc. I am not holding my breath. Are you?
May 28, 2011
Any figure for growth in GDP which is below the rate of inflation indicates an economy in contraction.
The Government is failing because it is insufficiently single minded about deficit reduction and because the Labour Opposition is in the absurd position of fighting for less “Cuts” when expenditure is actually increasing. Opposition tactics are being allowed to compromise deficit reduction far too much.
An opposition which functioned in the national interest instead of union interest would be challenging the Government on climate change and energy policy, payments to Europe, Immigration, Crime, and an increasing failure to effectively tackle the deficit; more cuts are required not less.
It is manifestly obvious that our politicians are failing us, (in all parties) and that unless something changes we will be following Greece, Ireland, and Portugal.
I understand that there are MPs who share my concerns and frustrations; this criticism does not apply to everybody.
May 29, 2011
I don’t think the Labour opposition fighting for less cuts has anything to do with the failure to get a handled on public spending . I think it is entirely due to the Govt being insufficiently single minded .
That said they are clearly all reading from the same sheet .
What you describe has all the hallmarks of a tragedy ; it is both foreseeable and innevitable and I’m starting to think unavoidable .
May 28, 2011
“government’s priorities that include overseas aid, the EU budget and assistance to Euroland”
Forgotten something? Attacking countries on the shopping list held in the Pentagon and not forgetting where in the Middle East that shopping list appears to have originated? Does the USA intend to escalate its attacks on Pakistan? Would India decide to take advantage of such an event; how does that leave our troops in Afghanistan?
I believe the best way to ensure a successful financial outcome to this parliament is to remove Cameron who obviously has not the wits to understand the concept of the ‘British Interest’, Frankly, I found the fawning over the First Autocue quite nauseating. Do our politicians think they are in show business or what? Meanwhile the uncontrolled flood of immigrants in various categories proceeds, many of whom will not be cost effective and will merely add to the intolerable burden on the taxpayer.
May 28, 2011
“Promoting faster growth requires changes to banking, regulation and taxation.”
I am heartened to see this recognition. Now for the prescription and action plan.
I would like to see :
1. Repeal of the legal tender laws.
2. Flat tax
3. Enforce testable mark-to-market for all balance sheets within a reasonable time(not more than 3 months)
Implicit in those three proposals is a sea change in favour of free markets, small govt, entrepeneurship, transparency and access to viable loans.
May 29, 2011
Gary: “Implicit in those three proposals is a sea change in favour of free markets, small govt, entrepeneurship, transparency and access to viable loans.”
This is Camerons’ Tory party, none of the above figure in their planning at all.
May 29, 2011
Re marking to market , could the banks do it ? would they do it honestly ? and if they did would they be shown to be solvent ?
June 4, 2011
Surely the Banks did it, it was in Basel ll and sparked off the main crisis. It did not allow for the normal banking practices at that time and caused it’s own problems.
May 28, 2011
John could you please explain why we borrow money from China to give to India when India has space industries and is quite wealthy. I just don’t understand.
May 28, 2011
Totally agree with this another example is Pakistan, which can afford the seventh largest armed forces in the world, nuclear weapons and ballistic missiles, yet 40% of children there do not go to school. Here is an idea, stop spending money on nukes and armed forces if you can’t afford to educate and feed your population.
We are planning to increase aid to these clowns up to £446m per year by 2015. This may be intended to help starving children, but all it does is subsidize their military.
FFS John can nothing be done?
May 28, 2011
John if you accept that there is a strong correlation between electricity use and GNP and that Britain has one of the lowest uses of electricity per unit GNP then I think it is clear that government making electricity both expensive and scarce by subsidising windmills and preventing nuclear plants being built is bound to have an enormous effect on reducing/preventing growth.
Equally leveling the regulatory field and allowing us as much inexpensive power as there is a market for should, on its own, get us among the world growth leaders.
You may be planning to deal with this under the general heading of cutting regulation but, unless I am seriously wrong in this assesment, I suggest it is at least as important as most of these headings and should be dealt with under its own heading.
May 28, 2011
We seem content to have growth targets of virtually zero.
Anyone from an industry background knows that low targets never work because the error margins are small and any under shoot gives you a big failure.
At least when high ambitious targets are aimed for, any underperformance results in some remaining positive benefit.
Other nations are getting double figure growth levels year after year, so we would be slipping backwards relatively even if we achieved our modest targets.
We need a real change in national ambition and attitude.
We need to get the best brains together and set out a national plan to achieve 10% growth levels.
Every politician I listen to seems obsessed with spending whereas they need to focus their efforts on creating the wealth first.
Our host excepted of course.
May 28, 2011
If any economic and financial policies are to be considered sound they must also look to restoring the confidence of the consumer which will drive the recovery. Of those consumers the largest population of economically active taxpayers are those 11.2 million with £1.2 trillion of mortgage debt.
I am posting a link to the only rational analysis I can find on the effects of debt restructuring. It occurs to me that the banks and regulator should allow no face-value reduction of those who are in trouble paying their mortgage, now or in the future. Instead those who need to should be allowed to apply for an extension of the maturity date and a capping of the interest rate thereby allowing banks to hold the toxic mortgage debt at face value. The banks should also then be able to count this debt as core capital. This would restore consumer confidence among this key population while allowing the banks to plan with certainty so that they can make future loans with confidence.
May 28, 2011
It would really help if the government were to talk about spending in a way that resonanted with people. For example, how much we are borrowing per citizen, how much it grew under Labour before the crunch etc. Also the media plays along with the idea that the cuts are swingeing when they are not…this does give a continual sense of crisis which must dent confidence.
The real problem continues to be a lack of clear narrative. The PR continues to be useless as PR people tend to think only short term…the Tories need agood strategist. We cannot rely on Mr Cameron’s sure-footed oratorical skills to ensure Balls is not back spending us to ruin in four years time.
May 28, 2011
Balbino, one of my students, asked me to teach him business English. I told him straight (in Spanish natch) that I am a teacher not a businessman.
I do it, you see, because I am a professional.
But businessmen rely on money. They need to know that their business is ticking along making money. I know this because I have been,m in my time, a whizz at “Railroad Tycoon”.
It seems to me, from a lot of the posts you receive that, as ever, the bureaucrats and nosey parkers are sticking their paperwork in and extracting a lot of money at the same time.
It is very hard, you must know, running a railroad. With constant interference from numpties, it soon becomes impossible.
I do not think, for instance, that, say, Harriet Harman would be much good at making her first million dollars in Kenya like me.
Basing a “growth strategy” on the future seems to me to be daft. We need, as you so regularly remind us, a hands off, taxes down, loads of freedom to make money sort of approach. At the moment, we are living in a fools’ paradise.
May 28, 2011
Mr Cameron is at great risk of losing the good will of natural Tory supporters. He seems to be no Tory to me.
The quid pro quo for the austerity measures is that he does what he promised on the issues which scare people. In many cases these promises can be met through cuts and those would be cuts that the vast majority of people would enthusiastically applaud.
Not a bit of it.
Thus far he is out Blairing Blair on the Global stage. (The very last thing we wanted was someone who venerates Bob Geldoff.) He’s even worse on law and order. I believe – for all the protestations – that Kenneth Clarke represents his views accurately.
Your party is on the wrong track and is going to face annihilation.
Four bad PMs in a row. When will the nightmare end ???
May 28, 2011
I tend to agree Ken Clark, plump, over fed, complaisant, jovial, pro EU and often fast asleep. As they accelerate towards the precipice – he seems to be the perfect embodiment of the current conservative party.
May 29, 2011
“Mr Cameron is at great risk of losing the good will of natural Tory supporters. He seems to be no Tory to me.”
Long since gone – most of us we were very dubious about him through his opposition years and he has exceeded our expectations and is approaching disaster level.
May 28, 2011
I agree and think the focus is timely and appropriate.
I appreciate that Keynesian medicine is unpopular but surely there must be some worthy large capital expenditure projects that will provide appropriate financial returns?
May 28, 2011
This government and the UK state sector are incapable of organising anything Keynesian that would produce any real return. They are quite good at restricting road capacity, issuing penalty tickets, demanding licences, thinking of new taxes or licence fees or fining people for no good reason – but not very much else.
May 29, 2011
Undeniably mass producing nuclear plants, with little more regulatory parasitism than normal would certainly provide an enormous return. Whether that is Keynsian or Trotskite is arguable since Trotsky put together the plans that allowed the USSR to increase its electricity supply 23% annually for 10 years and thereby outproduce Germany during WW”.
Alleged modern followers of both Keynes and Trotsky are infinitely less progressive than either.
June 1, 2011
Alf , here are two to consider .
Dual stream reticulation replacing out single supply with potable and non-potable .
Rebuilding our run off drains to capture water rather than overwhelm sewerage plants causing them to release untreated sewerage into our rivers and ultimately onto our beaches .
Imagine the work that could create for small contractors . Granted a fair bit of disruption too .
June 2, 2011
Build some new generating capacity instead of windmills, the resources currently going into the latter would buy quite a lot. And we do need it, fast. Next winter is going to be dodgy with Germany starting to close nuclear capacity they will be buying everything France can spare and we will be left out in the cold.
May 28, 2011
John could you please explain why we borrow money from China to give to India when India has space industries and is quite wealthy. I just don’t understand. There must be a logic someware.
May 28, 2011
It would help considerably if David Cameron (with the backing of Nick Clegg) stopped giving away savings made from cutbacks to other countries. This angers not only myself but many other people! Does the Government not look at the anger this creates?
Cutbacks we have to endure, however it does not help when David Cameron rubs everyones nose in it by then “announcing” millions to be given away in a Lib Dem backed whim.
This Government has now lost my support.
The only ways it will regain it is to stand up to the EU, stop bailing out other EU nations and stop giving away Billions of OUR money in Foreign Aid at a time when we cannot afford to do so.
May 28, 2011
1.Whenever the BoE issues its inflation excuses it states that there is “excess capacity”, given we assume the truth in this statement then the constraints to growth need to be identified – if they cannot be identified top down then every possible act to free the market to find them needs to be followed.
2. One obvious problem is the misallocation of resources into residential property, the BoE though is supporting this econmic ball&chain. As the Oxford academic Farlow wrote in early 2005 (www.economics.ox.ac.uk/members/andrew.farlow/Farlow Housing and Consumption.pdf), “allowing house prices to revert to fundamentals, while it harms consumption, at least conceivably puts the economy back on a footing that emphasizes real economic activity over speculative housing activity”
3. Inflation above a 2 or 3% threshold is documented to have a negative effect on growth in European countries.
4a. Creating a lack of confidence in the GBP, will not give confidence to get money off balance sheets and into UK investment, even the thought of waiting for a government incentive programme promotes delay.
4b. But a lack of confidence in GBP will eventually causes savers to spend on anything tangible, those who know how to buy and hold (hide) gold obviously already have, once the lack of confidence grows futher it will be baked beans. Anything tangible will become a bubble and the lack of confidence will have caused hyperinflation – through velocity not supply of money – in consumables, productive investment won’t have occurred.
So 1-4 put some of the problem at emergency interest rates for a protracted duration – they need to go up a few % rapidly. Even if this causes a slight double dip, the seemingly academic experiment that has been followed by the BoE/MPC may need to end.
May 28, 2011
Mr Redwood, the tone of your piece suggests that you are most uneasy with the Government’s economic strategy but you take pains not to appear too critical. I hope you continue this: we badly need someone talking sense when all we seem to hear are the latest outpourings from St.Vince Cable.
I will summise that the Government’s economic policy relies on fantasy growth rates and creating a pretence that the ‘cuts’ are real and not simply a reduction on some planned spending increases dreamed up by some madman in the dieing days of the last Labour government. Probably someone Scottish.
I really think that your coleaugues are so used to ignoring any inconvenient factual truths that doesn’t fit in with their own fashionable world view and unquestioning believing any politically correct truths they are unable to take the actions needed. Osbourne et al. may think they can walk on water creating growth from nothing but they darn well can’t!
Unfortunatley for your readers we can more freely speak our minds.
David Cameron’s Conservative party must be the most useless, out of touch, economically illiterate, politically correct, cliquey, dishonest, Tory Government ever. That he has managed to trump John Major in this respect is quite an achievement.
The heir to Blair has continued the massive spending, mass immigration, pro EU policies of the Labour party..not because he hasn’t the means to change anything but because he has no fundamental disagrement with any of these issues. That is why this chancer is unfit to be the leader of the Conservative party.
May 29, 2011
Several blogs ago you promised a long analysis of interest rates and the BoE’s current policy. Are you still planning this?
May 29, 2011
Growth Strategy! What happens if extra runway capacity is needed in the South East ?
May 30, 2011
I entirely agree with all those comments that say we have no clear growth strategy. It would cost nothing to drastically reduce over-regulation, so that SMEs’ can grow – this is where new employment will be created. For example H&S continues to bedevil small businesses despite the talk. Employment protection should be wiped out in all its forms for the first two years from date of hire. Local councils must offer better and cheaper rentals and no business rates for the first year for any new business. Finally, the government should cut public sector salaries over £30,000 by 15% and use the money to reduce NIC for small business to nil for the first year for any new employee and at a rate of 50% for existing employees for all businesses employing 10 or less. Growth can only be funded by taking more out of the public sector where salaries are running at a rate of 30% more than comparables in the private sector. It really is time this is done, otherwise there will be no growth.