Two Britains and public sector inflation

Interest rates are the price of borrowing money. When the private sector was borrowing too much, the Bank kept the price too low, encouraging many more people to pay too much for houses, and alowing businesses to pay too much for commodities and raw materials.

Then they decided to end the party, bringing down prices, damaging the banks, and disrupting trade and jobs.

Now the government is going to borrow too much. It looks as if the Bank is going to cut the price of money further, to allow the government to borrow more than it should – all the time the markets still allow them to do that.

Before the last round of interest rate cuts I suggested that the Monetary Policy Committee wrote to the Chancellor and said they would only cut rates if the government agreed to keep its borrowing under reasonable control. There was no letter, but the Bank and the government did start telling us they saw the need to have a clear pathway set out to return government borrowing to more normal levels, from the £157 billion bulge this year. The government also decided to talk about £78 billion borrowing this year – leaving out the money to buy bank shares and pay for the bank losses.

The proposed pathway back to sensible public sector borrowing still leaves us too much in debt. The Monetary Policy Committee should have another go behind the scenes to get the government to see sense. If it cannot, it needs to leave interest rates higher to allow for the government excess.

The problem is the Monetary Policy Committee is acting out of fear, folllowing several years of getting it comprehensively wrong. They failed to see either the inflation or the recession they triggered. Now they are likely to misread the government debt problem.

Huge amounts of liquidity are being built up. In the short term this will not be inflationary overall , as the broken banks are not passing it on to the private sector. It remains inflationary in the public sector, which lives in an unreal world compared to the rest of us. The money is being passed on within the state, allowing many quangos, departments of the government and some Councils to be overmanned, and paying many very high salaries over £100,000 to people taking little risk and in some cases making little useful contribution. The public sector still has huge advertising and consultancy budgets, still has a massive army of officials looking for new ways to check up on us and persecute us, and still churns out the forms, compliance manuals, consultation documents and bossy boots instructions as if nothing had changed.

We certainly have two Britains. The government has split the country into the hard working compliance ridden tax paying private sector, shivering without cash and awaiting the call of the well heeled state Inspector, and the overbearing, camera wielding, humourless, play by the increasing number of rules politically correct Inspector state where any amount of borrowed money can be channelled into more nonsense. This is why the state can afford to prosecute us for parking in the wrong place, for offering a client a glass of wine or for using the wrong words to describe people, festivals or religious observance with no sense of proportion.

There is a growing sense of injustice amongst all those who run businesses and try to make a contribution through the private sector, and growing sense of unfairness between the towns and districts where people mainly work in the private sector, and the ones where a majority now draw their income from tax and public borrowing.

In the longer term the danger is that the government will want to use the printing presses to sort out its huge debt, which will be inflationary when the banks are working again.


  1. Stuart Fairney
    December 1, 2008

    “This is why the state can afford to prosecute us for…offering a client a glass of wine”

    I missed this one, does anyone have the link?

    reply: Norwich Council – hairdressers offering clients an Xmas glass.

  2. Johnny Norfolk
    December 1, 2008

    Great piece John.
    We have been working ( or not) up to this for 10 years. When you are my age its not unfamiliar. It takes us back to pre Thather.

    It very sad that Labour have given away, and more, all that we worked for.

  3. Paul
    December 1, 2008

    I profoundly disagree.

    "and paying many very high salaries over £100,000 to people taking little risk and in some cases making little useful contribution. "

    because IME, they take no risk (it would appear the loathsome Haringey(official-ed) will be paid off) and make no useful contribution.

    Other than that, sums up exactly how I feel.

    Had someone like that round our way, a woman put in charge of Social Services Children's division. She was (not up to the job- stated in a much more dramatic way -ed). When the Council noticed (eventually) they first isolated her moving files around so she couldn't do any more damage, then paid her off ; enough, apparently, to buy a house in Tuscany (so I'm reliably informed).

  4. Bryan Davies
    December 2, 2008

    John – quite a lot to agree with. Would that your front bench grasp the nettle.

  5. Brian Tomkinson
    October 17, 2010

    JR: "In the longer term the danger is that the government will want to use the printing presses to sort out its huge debt, which will be inflationary when the banks are working again."

    This dreadful government will use the printing presses and inflation will go through the roof ruining everyone on fixed incomes. Can we be assured that a Conservative government would not adopt that approach to relieving the public debt?

    1. Brian Tomkinson
      December 1, 2008

      I take it that since you have not replied to say otherwise that your party too would resort to the printing press and all the horrors of inflation that holds for the future.

      Reply: I would be urging them not to. They also have stated they would spend less, which would be a good start.

  6. Tapestry
    October 17, 2010

    This year the bulge in borrowing?

    My take is otherwise. Business in the UK started to sink in September 2008. Until then demand had held up to a reasonable extent. Only then did unemployment really start rising.

    That means that government recession expenditure and falling revenues have only just started two months ago, and have, some estimate another 12 months to run, at least.

    Brown's deficit therefore has a long way to go before he can start hoping for it to start reducing again.

    In the 1981 recession, government fiscal deteriorated by 8% of GDP. If this one is as mild as that one, Brown still has negative GBP 120 billion to go before he hits rock bottom. That is assuming he doesn't need to rescue any other banks or institutions. If he slides by under GBP 250 billion deficit, he'll be doing well.

    reply: Yes, of course recession effects will get worse next year, but I am assuming he will not be spending so much on bank shares – then again, you can;t be sure even about that.

  7. mikestallard
    October 17, 2010

    By taking control of the Bank of England with the FSA and the MPC, this government have, as usual, taken away all the checks and balances which they got from Ken Clarke. They have used their power to give what used to be called "jobs for the boys" and they continue to do this, as you show so clearly above, even now.
    I had not realised that this would lead to inflation, I must admit, but of course it will – even if only because the productive people will be squeezed out, governmental income through taxes will fall and more and more money will have to be borrowed.
    At the moment, melt down is, (while still very possible if Labour gets re elected or cannot resist nationalising more and more banks), seeming to recede, while a deep Japanese type depression seems much more likely.

  8. A. Sedgwick
    October 17, 2010

    Excellent critique, it is about time you started writing David Cameron's speeches. In common with others I have been "blogging" for several years about the true extent of the economic disaster that is Gordon Brown.The worst is yet to come and there is a real chance that he will go down in history as the man who bankrupted the country. No doubt he will blame the American war of independence for our demise.

  9. Derek
    October 17, 2010

    I think it likely that central government will hang local governments out to dry when their cash inevitably runs out. The US federal govt did the same with New York and it took it a decade to dig itself out (and, in fairness, was eventually better for it). The crime has been by central govt allowing them to empire build in return for general election votes. It's the vulnerable who genuinely require frontline council services who'll ultimately pay the price.

  10. rugfish
    October 17, 2010

    Err….two areas concern me here.

    One: Public sector over-manning at management and admin levels, PR specialists, contract 'advisers' and 'educationalists', trainers and the like – including but not limited to "Common Purpose".

    Two: Public sector pensions which are a ) Gold Plated, b ) Unfair, c ) Unaffordable, d ) Not worthy of paying, and e ) Not all spent within our own economy especially given the 'early retirements' of many of these people who appear to either be leaving these shores or returning to their own country and no doubt finding further work whilst being propped up by the British taxpayers.

    There are indeed a few other concerns but those are the main one's I think about as I wouldn't like to lose focus by writing too big a list here of Labour's crass stupidity.

  11. figurewizard
    October 17, 2010

    Re. 'The huge amounts of liquidity being built up.' – The lack of inflationary pressure from this on the private sector may well be the case in the short term but as the performance of the pound on the international money markets shows, this term will be very short indeed. In addition given the dramatic fall in overseas earnings through the City of London, the appalling state of our balance of payments will be soon take centre stage. This is why George Osborne is going will be shown to have been absolutely correct in pointing out last week that: 'In the end all Labour governments run out of money'.

  12. APL
    October 17, 2010

    I see the US National Bureau of Economic Research has revised its position and announced that the United States has been in a recession for a year.

    This is not news for anyone who does not live in a sort of economic bubble, insulated from all the effects of the real world economy. I guess that would be Politicians.

  13. Stuart Fairney
    October 17, 2010

    Thanks for the response, there are obviously a lot of 'hairdressing maniacs' out there. Thank God for the council or one might find oneself enjoying a nice glass of wine whilst at the barber. Will the terror arrests will follow? (Mr Wolfgang, Iceland, someone who puts their bin out on the wrong day, someone who wants their kid to go to a decent school, Mr Green and now someone in possession of peroxide and scissors ~terrorists all!).

    Mercifully they didn't offer a mince pie because I reckon they would be in breach of the following regulations:

    ~ Planning, not authorised for the sale or distribution of food under the use classes order
    ~ Health & safety, no properly trained staff on hand to serve food with appropriate hygeine certificate
    ~ Improperly insured, not insured to offer food
    ~ Health & safety again, inadequate sanitary provisons for the sale of food
    ~ Improper taxation declarations, Shops selling or otherwise offering food are subject to different rentals levels and therefore business rates, they are thus tax evaders

    And I daren't even mention government edicts on salt consumption, processed food and transfats, five-a-day fruit and vegetables, obesity etc etc ad nauseum.

    Truly we need a bonfire of regulations and a culling of the useless state employees

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