Expect endless economic idiocy in the commentary this week. We will be told that slow growth is the result of the “cuts”. Most will fail to remind us that public spending was up 5.3% last year (more than inflation), and is forecast to rise 3.8% this year (more than forecast inflation). Most will fail to remind us that so far this year public borrowing is as high as last year, at very high levels. How much more borrowing do these people think the UK public sector could get away with? Have they learnt nothing from Greece, Portugal and Ireland? Don’t they understand borrowing is just deferred taxation?
Slow growth is the result of weak banks, low rates of money and credit growth, high inflation and high taxes. If the public sector spends more, the private sector is made to spend less to pay for the public sector by tax rises. That squeezes consumers more , leading to further falls in real incomes.
As often reported on this site, the last year has been the tale of two sectors. The private sector has been squeezed to help pay for the public sector. Labour and Coalition tax increases have raised Income Tax, National Insurance, Oil taxes, bank taxes , CGT and VAT. The public sector so far overall has had extra spending power. Many commentators have muddled up which sector is being squeezed. The public sector has to live with much lower rates of cash spending growth in the second half of this Parliament, according to the plans. Most of the debates about “cuts” have been about future cuts. The rest is down to decisions about which areas get larger rises than average and which get falls to help pay for the increases elsewhere.
What could the government do to speed growth? As said here many times, mend the banks, cut tax rates on earning and enterprise to raise more revenue, deregulate, and invest (using private capital) in energy and transport improvements.
July 25, 2011
Beacuase every single government minister and politician acts principally in the interests of …himself.
July 25, 2011
No every one just the majority.
July 25, 2011
You were right on the ” economic idiocy” reading the reports in the times of Vince Cable’s understanding of the economics today.
July 25, 2011
And the EU.
July 25, 2011
Your post states the fact that many of us on this site, and yourself have known for the past few years, with disposable income dropping for many, just exactly where do reporters, the goverment, and the opposition, expect growth to come from.
The more you raise taxes, the less we can spend ourselves, and the less incentive there is for those who are working to try and keep ahead of the game.
With the very basics of life costing more and more each week (food, utility bills, transport costs etc) courtesy partly of government policy, family finances are going down fast. So expect it to get worse as more and more private businesses cut their cloth according to their income, in an attempt to remain in business at all.
July 25, 2011
I suppose if you are a minister and some scrumptious lady/public schoolboy comes to see you and asks very sweetly for some money for her/his pet project – saving bunnies in Thailand? – it is very hard to resist. Then there are the tough Union men and women, with legal aid, who threaten. Then there are large organisations who take you out for a week-end on their company yacht. Then there is the EU. Then there is all the back slapping at conferences where you want to be more generous than everyone else.
It must be very hard to say no, especially when you have just lost the support of the media. Especially when the Civil Servant, permanently at your elbow, is urging you to expand the Department by spending more and more money.
Meanwhile Joe Public – you and me – pay up with no chance of electing anyone with the generosity to see that it is we who pay for junketing.
July 25, 2011
The private sector has been squeezed to help pay for the public sector ?
Does the banking industry not classify as ‘private’ sector ? I thought that was the bottomless pit into which all of our money has gone.
£14b in bonuses this year ?
July 25, 2011
UK slow growth “despite” rising public spending and high borrowing surely you mean “because” rather than despite.
As you say what is needed is to – “mend the banks, cut tax rates on earning and enterprise to raise more revenue, deregulate, and invest (using private capital) in energy and transport improvements.” I would just add abandon the green, over priced energy religion agenda, stop PIGIS bail outs halve the size of the state sector and get out of the EU – as none of this is possible without doing this. But then clearly non is remotely likely anyway with Cameron-Heath/Clegg in charge.
July 25, 2011
Again this song of unregulated regulation allowing private companies and individuals to do what they like as long as is within the ‘regulations’. It is like the banking crisis never happened. A race to the bottom, cutting incomes for everyone, but with a new spin to make it acceptable.
July 27, 2011
No surer way to the bottom than a big state, big taxes and huge over regulation thus ensuring no business can compete. Mine is the ladder up your “vision” clearly the race to the bottom and the exits.
The bank crisis was due to poor regulation by government. The use of a sledgehammer to miss a nut you might say. We need little but good regulation not parasitic job creation regulation.
July 27, 2011
No ladder up cutting benefits when there is no work. To imagine your fantasy will create enough jobs is just that.
July 28, 2011
People will find and make work if they are allowed and encouraged to. Work is not something available or not available -people will create jobs for themselves and other if they have too.
But not if the state pays them not to and regulates/taxes against work as now.
July 25, 2011
“Despite” rising public spending and high borrowing?
How about “Because of”?
July 25, 2011
Forget about the govt trying to “fix” banks, or provide energy, or anything else.
Govt, that never saw the bubble , and never saw the crash and that expected growth in this post credit bubble crash, has no qualifications to take any part in any planning of the economy.
Get govt out of the way. The banks should be allowed to fail. Don’t let the govt use our money to support failed businesses or fight illegal wars. Go to a Hong Kong system. 15% top tax, abolish tariffs. Have a self defense force. That means a border defence force, not an expeditionary “defence” force.
Get rid of the central bank, they have been wrong for at least 10 years, they spawned the largest credit bubble in history. They demonstrably don’t know what they are doing. Let housing bubble burst, trying to levitate it or increase it is sucking in valuable capital, away from production.
Get a sound money system that issues credit in response to productive growth, not that issues credit in response to banks’ quest for risk-free profits. That means, make the issuer of credit themselves suffer the consequences if the debt goes bad. The risk must also be assumed by the issuer, it will keep them honest. The market ceases to function when failed businesses are not allowed to fail.
July 25, 2011
One way to help growth would be for the Government to issue a money tree to every household in the realm. We could then plant them in our back gardens and help ourselves when we need some cash. Isn’t that what Mervyn and his pals are going to do?
1. Tax cuts (especially for the low paid);
2. VAT cut to 10% or less;
3. Immediate and significant curbs on immigration to help IDS’s plans to get people back to work;
4. An emergency Repeal Act (you name it – it needs cutting) and bonfire of the quangos;
5. A referendum on EU membership.
Now that lot would need some real leadership. I’ll just get my coat…
July 26, 2011
Don’t forget increasing minimum wage to 60% of the mean wage. That’ll ensure that the public have more money to spend.
July 25, 2011
And the reason for this further public sector spending is ………? Has anybody explained that. Strange as you would have thought that this might be seen as a plus point to beat Labour unless of course the government has not yet got its hands on the levers of power.
As they say in Texas – “all talk and no cattle” or in the UK “all talk and more borrowing”
July 25, 2011
The coalition`s (and Labour party) energy policy is misguided and is part of the problem. The Carbon Plan should be dumped and the Climate Change Act should be repealed. Unless these changes occur, you should not expect any sane business to invest in the UK regardless of the other measures you identify in your final paragraph.
July 25, 2011
I see that Saint Vince is already calling for another round of money printing. It’s kind of ironic really, given the close correlation between Western money printing and global commodity prices, that a left-winger like him should effectively be demanding that we screw some of the poorest people in the world even harder than we already have. Just like the OESI, Saint Vince’s moral compass appears to have completely lost its bearings.
July 25, 2011
Yes, but how bad would it have been if Mr Brown hadn’t printed £200bn? Surely it’s so much easier to push a printer button than do all this difficult tax-reduction and spending cuts stuff?
July 25, 2011
I recently had a chat with some LA building inspectors who have been holding my project up for months for very theoretical reasons which are of little practical use- but, unfortunately, law. As professionals they are actually better at their job than some private consultants. They have little choice but to comply with ridiculous guidelines and could be sued if anything went wrong. They were very worried about the ‘cuts’.
The new £200k+ CEO is employing expensive management consultants. The first move has been to move secretarial staff to the public/council interfacing department, where you have to go and wait twice as long to see an official if a meeting or delivery is necessary.
The professional staff, costing much more per hour, now have to do their own secretarial work. As usual, the ‘paperless office’.. isn’t. The officers doing the real work are now facing redundancy. This will save money from one taxpayers pot but the greater redundancy costs will be from a quietly forgotten pot.
This type of reorganisation will cause maximum publicity for the anti-cuts brigade. The BBC, with their huge bloated self- justified payroll, will preach at us with their 80% monopoly. And the majority of the voters will fall for it, especially if they are receiving state salaries and contracts. The public employees doing a useful job will be the ones who lose their jobs, while the bunglers will be protected by unfair contracts when they are rumbled an sacked.
Meanwhile, any attempt to remove the idiotic regulation that wastes the time of officers and, what are comically called, ‘clients’ is resisted and put aside.
July 25, 2011
Quite typical of reorganisations everywhere in the state sector. Top down EU/government regulations and controls everywhere with no real understanding of the industry at the coal face are destroying businesses all over the place.
July 26, 2011
Could also apply to bankers understanding of the financial industry and many of the so called ‘private’ utility and transport billing companies which in reality is what they are, but not true because they understand perfectly. It’s like your boss telling you the company is chaotic and it’s the way it is. They are always working on it. It is in fact how the job is run and part of the plan to make profits for and provide a lifestyle for a small insider group within the company, The rest get legal minimum, with the argument that without them they would get nothing. All within the regulations though. Legal and above board as they say. Within the rules of the MCC. We do pay some of it back in taxes… Toodle pip old chap. Like the Soviet Union never happened…
July 25, 2011
Tim Worstal had an interesting post on how the adoption of the “Washigton Consensus” on how 3rd world economies should be encouraged to run has been followed by them growing at an average, now, of 6%.
The “Consensus” says:
1 – Fiscal policy discipline;
2 – Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
3 – Tax reform – broadening the tax base and adopting moderate marginal tax rates;
4 – Interest rates that are market determined and positive (but moderate) in real terms;
5 – Competitive exchange rates;
6 – Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
7 – Liberalization of inward foreign direct investment;
8 – Privatization of state enterprises;
9 – Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;
10 – Legal security for property rights.
—————-
All of these look like classic liberalism. Perhaps if the developed countries tried following their own advice….
Note that the developed countries gannual growth rates have consistently fallem from an average of 3.8% in 1958 to 1.8% . This is the reverse of the trend over the previous 10,000.
July 25, 2011
Apologies for this intrusion. John. But could you do something about HMRC insisting on all inquirers using 0845 numbers which means, in my case, a charge of at least £2 because my telecoms supplier charges 10p a minute and HMRC takes at least 15 minutes to answer the phone.
I notice its press office uses 0207/0208 numbers as does it helpline for “high net worth individuals”.
July 25, 2011
Michael
You will have also noticed that The Revenue Services no longer include a pre stamped/franked envelope for you to reply to them.
You now have to pay all postage when filling in forms and use a large envelope (must not fold their forms) and thus pay the higher price for postage.
Perhaps this does not seem much, but when you have to fill in monthly returns (construction monthly return) or be fined, and Vat returns on a quarterly basis, then it does add up.
Yes well aware you can do it all online if you have the confidence that the system works and is secure, but unfortunately no receipt is issued to prove you have done it.
July 25, 2011
Where is the squeeze in the private sector being felt? Inflation in respect of the essential raw materials of life, food, fuel etc, the cost of public sector pension commitments are increasing rapidly; that in relation to imported manufactures, clothing, gizmos is declining.
Those involved in the importation and distribution of manufactured goods are having to reduce their sometimes extortionate margins to compete for the now less available discretionary spend. The result is declining viability and profitability in those sectors leading to lower tax to the Exchequer. At some point when their is no more fat to trim, it will become necessary to bear down on the discretionary costs of government since there will be no other mechanism for reducing the financial burdens inflicted upon us.
July 25, 2011
The most depressing aspect of this is that you have been predicting this for years…and not even your own party listens! Dire circumstances call for action and straight-talking. I am concerned that this government seems to struggle with either.
July 25, 2011
Isn’t it amazing, everybody can see trouble brewing and the reasons…….except for those in power, the toy “cabinet”. What would it take to make reallity dawn, are they really so stupid?
July 25, 2011
My recent experience with local government over planning permission for a conservatory (for which there can hardly be any planning objections as most of the properties locally have one) seems to indicate to me that the main objective of those employed in the Planning Department is to keep themselves employed, rather than to assist or expedite the planning process. They even make a charge (£78 plus VAT) to have a chat with someone for a few minutes to ascertain what might or might not be permissible, because this is a non-statutory activity. As I imagine that most people, (like myself) will not avail themselves of this overpriced offer, it gives them a chance to reject the plans on some technicality, thus proving their absolute indispensability.
I can imagine similar difficulties being made by all government departments. As soon as anyone wants to do anything they manage to find some rules to stop it. No government is going to manage to cut red tape, because those involved have a vested interest in keeping it
July 25, 2011
What do the growth in GDP figures really tell us? Are they really accurate or a fudge? It seems to me that the government wants to see growth in GDP so it can collect more tax and presumably more people will be employed and there will be a lower cost of unemployment, in order to reduce the budget deficit. If the government borrows more money (because they have none) in order to further increase public spending (which, incidentally, they are doing but saying they are cutting it) this may come through as an increase in GDP. However, what will be the benefit with regard to deficit reduction? Similarly when Balls asks for a reduction in VAT back to 17.5% he says it will cost £13billion p.a., which is the extra currently collected, so what is the benefit in terms of deficit reduction? Cable wants the so-called independent Bank of England to print more money and create more inflation? In short, does any senior politician have a real solution to our deficit reduction problem? My simple answer is for the government to spend much less and to allow people to keep more of their own money to spend as they see fit.
July 25, 2011
The Coalition pledge to help manufacturing has only so far seen a promise to cut employment and other regulations, so there you have it, a cut in workers rights and health and safety whilst toying with the idea of cutting benefits to help pay for the tax cut for those on over 150k The lack of comments on this site of the train builders job losses to Europe are conspicuous in their absence.
July 26, 2011
You’ve very neatly summed up the Government’s plans. But what can you expect when they only ask those on over 150k what they want.
I have no faith in the government and am lobbying for EU legislation that will provide greater workers’ rights to prevent the Government from sacrificing their workforce to ensure big businesses make big profits.
July 25, 2011
It really is depressing, by now we should be seeing the first fruits of a new wave of conservatism, cutting taxes and freeing people to get the job done. Instead growth is sluggish, and some might say the chancellor is slow witted. Clearly we need both cuts to expenditure and taxation, one without the other is a recipe for disaster. Of course we are not an economy in isolation, the US is also a basket case right now. I cannot (for once) agree with the hardballing of the republicans. There has to be some give and take, or we will all suffer. For now the world holds its breath as yet again the Americans shows us all why democracy is such a very bad idea.
July 25, 2011
This is a dear John letter.
Dear John,
If public spending is rising, why so many public sector job cuts?
Yours confused.
Reply: THere are not that many net job cuts, and there are large areas of publlic spending experiencing substantial increases.
July 26, 2011
John stop worrying Ed Milliband and the BBC found a money tree in the basement of the Bank of England. None of us will have to work again. Hurrah.
July 26, 2011
I seem to recall at the time being told that the Royal wedding would be worth “a billion pounds” to the economy with ‘all the tourists’ etc
Now it seems George thinks it cost the economy. Er, which is it?
July 27, 2011
Stuart
Reminds me of the Wilson era.
Balance of payments deficit caused by us purchasing a jumbo jet during that month.
All sorts of excuses, but when you revert to these trivial costs as excuses, you know we are in real trouble.
July 26, 2011
There are some public expenditures that should be cut. I’ve complied a list of them.
The £13 billion to overseas aid.
The £650 million to educate the children of Pakistan.
The £100 million given the Libyan rebels.
The £1 billion war with Libya.
The £20 billion (approx) for the privatisation of the NHS.
Also can you do something about ATOS as it’s costing £30million in appeals by the disabled.
July 28, 2011
Completely agree with this comment.
As part of the overseas “Aid” you might like to clarify, that part of this is sent to India – who – coincidentily, is purchasing Weapons from BAe Systems. India – who also has Nuclear Weapons and a Space Program – and we’re giving THEM “Aid”?
I’ve got nothing against India or the Indian People, but shouldn’t this “Aid” be sent in the other direction – we don’t have a Space Program – and we could use one.
Also, there are some question as to what has happened to “Aid” sent to Afghanistan. I believe that only about 20% of this aid has reached the people it was intended for. Where’s the rest gone?
July 27, 2011
Dear John,
Why not try to persuade the government to abandon this fetish for “GDP growth”? I isn’t hard to see that the last government was quite willing to overpay on the misguided assumption that they were stimulating the economy. The outcome was over payment for defence contracts: ($1bn per plane for Airbus A330-200 aircraft that cost the private sector $200 million), rampant NHS “inflation” (i.e. soaring pay for doctors), ridiculous levels of pay in local government, BBC quangos, sickness benefits for 1.1 million who were fit for work.
Effectively more than 10% of the economy was being paid for with borrowed money and by rights should not have happened. Cutting back drastically on spending will cut the headline GDP number, but that is not a bad thing if it means that public sector payments are set at realistic values.
July 28, 2011
Mr Redwood,
Your comment:
“Slow growth is the result of weak banks, low rates of money and credit growth”
I must admit I do not understand this statement and would appreciate some help with clarifying it. My first thought is “credit growth” = “debt growth”, and “debt growth” = “interest payment growth”. This Credit Growth seems to help Banks more than the Economy – but seeing as the Banks will not allow money into the system without taking their interest payments, are we not forced into continual growth inorder to meet the interest payments?
From my basic knowledge of economics, I understood that GDP is calculated from the following formula:
GDP = C + I + G + (Ex – Im)
GDP = private consumption + gross investment + government spending + (exports − imports)
private consumption = The Final purchase of goods and services by individuals constitutes consumption.
gross investment = It includes replacement purchases plus net additions to capital assets plus investments in inventories.
government spending = government final consumption expenditure, government gross capital formation and transfers of money, such as social security payments.
Exports = to ship the goods and services out of the port of a country
Imports = to bring in the goods and services into the port of a country
The formula for GDP seems NOT to take into account DEBT. Is it possible that GDP could appear to increase through increased Government Spending and Private Consumption of Goods and Services paid for through increasing our DEBT level ?
I know that there is a case to be made for Government subsidising it’s National Industries (which France and Germnany have successfully done) and that some say that this deficit spending is just rolled over anyway. But… is there not also a case to be argued that the value calculated by the Gross Domestic Product (GDP) value is illusionary and distorted as it implies that we have produced something when we have just purchased goods and services from another Country and – perhaps; borrowed the money to do it?
Back to you original comment: are you saying that inorder to sustain Growth in the Economy, one factor that is needed is an increase in the “Money” supply? If so, would that have meant that Zimbabwe would have shown staggering large GDP Growth as a result i the astronomical increase in it’s Money Supply?
Can Growth be accomplished without an increase in the credit supply? Or should growth be as a result of an increase of the debt free money supply brought into the Country via Export sales?
If Governments were regulating and creating more of the money supply and preventing the Banks from creating Credit, would the economy and Government debt be drastically improved as a result?
It would be a great achievement if we could dismantle or greatly reduce, such institutions as the Debt Mangement Office (DMO) – one of Gordon Brown’s favourite institutions. Before we do that, we would first have to dismantle the Welfare Fund for Bank Bail Outs.
Reply: You do need a level of money growth at least in line with real growth in the economy, and do need credit available for capital investment, busienss development etc in the private sector. Of course you need to avoid too much debt, but you also need to avoid too little credit to finance productive activity.
July 30, 2011
Mr Redwood,
Thank you for your response.
From the GDP equation above – what I was trying to say is that; it appears that Growth can occur simply through Government Spending and Consumer spending – is this really a true gauge of prosperity – the ability to borrow and spend? It does not appear to measure actual productive output?
Reply: Yes, growth can occur through consumption and borrowing. If, however, a country borrows and consumes too much and produces too little, it usually enters an economic crisis which then damages GDP.