The budget judgement

When I asked the Chancellor yesterday in the House if there is some limit to how much the UK government can prudently borrow and print, he was reluctant to answer.

I pointed out that if we flex the state credit card too much, we could face another run on the pound, or a buyers strike on public debt, or need a trip to the IMF or some other international money lender.

I was giving him an opportuntiy to reassure us all that he was in control of the build up in public debt, and that he had worked out the maximum limit that was safe. I would have welcomed a number in his answer as well as some reassuring words.

Instead he decided to answer only half the question, the bit about how much he could safely print, and ignored the other half about how much he could safely borrow. He confirmed that the current printing programme was reasonable, without specifying if that was just the first £75 billion or the whole £150 billion. Treasury sources, I am told , don’t have a clue how much it will take.

I suspect, along with many other commentators and the markets, that debt is running well above the levels set out in the Autumn Statement. We should also remember that the Chancellor on that occasion persuaded most people that he was just borrowing £78 billion this year, when the figure hidden at the back of the FBR was twice that. Come the budget he will have to give us more plausible updated figures, revealing the true horrors of the position.

The Prime Minister we read is keen on yet another fiscal stimulus for the economy at Budget time. That’s code for printing and borrowing more. Yet even he has chosen some more careful words for his Guardian interview. Maybe the Chancellor is at last showing some independence and is trying to warn the PM that there do have to be limits to how much they can borrow.

It is mystifying to see people roundly condemn too much borrowing by the private sector in the past, only to do the same on an even larger scale in the public sector and think there is no price to pay.

Click here to read the exchange between John Redwood and Alistair Darling from Hansard.


  1. Ian Jones
    March 17, 2009

    I was amused to read the PM stating he had no intention of going back to “Big Government”!!! Does he really think people still believe whatever comes out of his mouth? We all know what he says is a cover for his true intentions and he no longer has Mr Bliar to keep the middle classes quiet.

    Expect the budget to be a blow out with big spending on welfare, jobs for the public sector as well as something big on social housing. If Obama can do it so can he.

    The only true signal will be the pound because the statistics office will be producing nothing but propaganda, we are at war after all.

  2. Mike Cunningham
    March 17, 2009

    Is Mr. Redwood convinced that, if the Tories are returned to power at the next election, they have plans in place to undo some of the damage caused by ten-odd years of Labour misrule?

    The damage includes the massive debt incurred on the public purse by P.F.I. spending. Would Mr. Redwood also care to comment upon the fact that P.F.I. was in fact introduced by the Tory Party?

    Reply: The Conservatives applied stricter value for money criteria. I remember turning down PFI projects for Wales and buying them with tax revenue or normal public borrowing instead, when the PFI sums made no sense. They were unusual in m our day. They have become an expensive way of life. Labour Ministers wanted them so badly they did a whole series of very bad deals We ned to stop that, and will doubtless have to work hard to recover some of the problems.

    1. Paul
      March 17, 2009

      Almost the first thing that Labour did when they got power was to set up a quango to allow PFI under almost any deal at all. There’s nothing wrong with PFI per se but it’s used to hide borrowing.

      As my other half is a nurse in one of the first of the big PFI deals, I know first hand of the effects of those deals in the front line ; staffing running at 50% or worse of required.

  3. Tony Makara
    March 17, 2009

    The government really must take its eye off May 2010 and give thought to the state of our currency in the post-recessionary era. If the government continues to use QE as a quick-fix, a fanciful short-cut to boost liquidity, it will have dire consequences for Sterling, making imports much more expensive, this will particularly hurt those on low or fixed incomes as 40% of food, including basics like milk and meat now comes from abroad.

    The longshot of this is that in the near future there will have to be a huge hike in interest rates to redress the balance, to counter inflation and to effectively bail Sterling out. The government must stop playing roulette with our currency. Policy now should be aimed at providing a stable economic framework for recovery. However that will be impossible if the purchasing power of our currency continues to be undermined by the circus-stunt economics of the chancellor and the MPC.

  4. alan jutson
    March 17, 2009

    Do you really think he will come clean on all of the figures at Budget time.

    I think should you get into Government (by no means certain) that you will find a huge black hole of unannounced debt, waiting for you.

    By the way, I see from the latest information here in Wokingham that the Government has reduced its percentage of the Revenue Support Grant again to this area.

    Average Council Support Grant for Councils appears to be 50pence for each pound spent.

    For Wokingham Borough Council its 20 pence for every pound spent.

    Clearly you are upsetting our masters in Government, or
    perhaps you are asking too many difficult questions, either way its costing us money, in having to make up the difference.

  5. oldrightie
    March 17, 2009

    Brown is still keen for an election in June. I suggest he is having printed more than bank note wallpaper. A huge giveaway budget, to be completely reversed when an election has been bought yet again. I would love to be wrong but I suggest plan B will be the Civil Contingency option in 2010. If he can’t have the rocking horse reins, so should no one have them.

    1. mikestallard
      March 17, 2009

      Sorry – ignorant old me – what is the Civil Contingency Option?

      1. APL
        March 17, 2009

        “what is the Civil Contingency Option?”

        The Labour party wanted a ‘legal’ method to wrest control of the country should it look like they might loose an election.

        They passed the Civil contingency act which among other things stipulates that any Tom, Dick or Harry in the cabinet might in undefined circumstances assume control of the country, just by saying ‘It’s my turn to play with the train set”.

        1. mikestallard
          March 17, 2009

          What with the surging government payroll, the “poor” getting handouts right and left, the tradition of voting Labour everywhere north of Stamford, the careful nursing of Labour boroughs, postal votes, dodgy counting methods as at Glenrothes, unfair electoral boundaries and the loyal media indoctrination by BBC and nearly all newspapers, I don’t think that Labour really need worry too much about the election.
          Thank you for explaining so promptly though!

    2. Steve Tierney
      March 17, 2009

      I have been saying exactly the same, Old Rightie. My opinion
      too is that there’s a secret plan for a June Election on the back
      of the G20, a massive money-printed giveaway budget and a
      whole lot of media spin.

  6. Denis Cooper
    March 17, 2009

    But there’s no longer any immediate need to worry about the possibility of “a buyers strike on public debt”, because there’s a big new player in the market, one which only buys and never sells, and which has pockets of (theoretically) infinite depth.

    Last week, the Bank of England spent £2 billion buying up gilts, and this week it’ll spend another £5 billion.

    This is all money which it has conjured up out of thin air, and it can carrying doing that for as long as the Chancellor wants, or at least until the markets take fright at the sheer volume of new money being created.

    There are some first signs of that fear developing, but so far it’s only a few voices. Eg: 87b1-0000779fd2ac.html

    “Beware the Bank of England’s monetary con trick”

    “At the start of this month, the gilts market appeared overwhelmed by the burgeoning demands of the UK government. Then the Bank of England sprang to the rescue, announcing that it would spend tens of billions of pounds acquiring government bonds.”

    “On Thursday March 5, the Bank of England said it would acquire up to £75bn of gilts over the following three months. A further £75bn of Bank purchases have been earmarked. Relative to the size of the British economy, these are vast sums. The combined figure is roughly three times the stock of notes and coins in circulation and twice the country’s monetary base. It is also equal to almost a third of the stock of outstanding gilts. Put another way, the Bank is set to finance the largest peacetime deficit in British history.”

    Because, of course, at same time as the Bank is buying existing gilts, the Treasury will continue to issue new gilts.

    Darling said something interesting yesterday:

    “Secondly, to support people and businesses, it was recognised that it is essential to restore bank lending. It was agreed that countries need to consider the full range of options available, including liquidity support, recapitalisation, and dealing with assets for which there is no market or whose value has fallen significantly.”

    But of course unlike the “toxic assets” held by the banks, gilts are NOT “assets for which there is no market”, in fact there’s a very liquid market.

    And if their value was falling it was because of an excess of supply over demand, and that has now been reversed by the intervention of the Bank of England.

    Only one MP picked Darling up on this – not George Osborne, of course, but Vince Cable, yet again:

    “Will the Chancellor follow up his comments on monetary easing and the joint approach to credit expansion? Why is it that in Britain, the Government and the Bank of England are following a pattern of buying up gilts, which drives down the yields on gilts and causes serious problems for pension funds and pensioners trapped in compulsory annuities, while in the United States, corporate bonds are being bought up? Why is there such a big divergence in how these two important countries are pursuing the same policy? Is there some reason for it, or has it just happened by accident?”

    I reckon that his last question may have been tongue in cheek, as he no doubt realises that the government is deliberately creating a false market in its own bonds, and he knows precisely why this is being done.

    1. Acorn
      March 17, 2009

      Denis, in the paragraph before the one you quote (G20 Speech); Darling states that his fiscal stimulus is the equivalent of 3.4 % of the economy. Assuming UK GDP is around £1400 billion, that amounts to £47.8 billion. I can’t reconcile this number with any data from other informed sources; it may be in the definition of “this year’s fiscal stimulus”. Any ideas JR?

      Reply: They make it all up, especially the numbers! I guess he is taking the VAT cut and spending increases he has announced as a stimulus, and adding in the cyclical growth in borrowing on top.

      1. Denis Cooper
        March 17, 2009

        I don’t say that this is necessarily anything to do with his 3.4% figure and your estimate of £47.8 billion, but in the first instance the Bank of England has been authorised to spend £50 billion of “Central Bank Money” on buying existing gilts, in the expectation that this money will migrate to the Treasury when it issues new gilts, and can then be spent by the government to stimulate the economy (allegedly). After that, there’s the option of spending another £50 billion of “Central Bank Money” for the same purpose. But after that, I presume that it would only need another letter from Darling to King to authorise a repeat performance.

        1. Ian Jones
          March 17, 2009

          It amazes me that so few of the mainstream press have picked up on this.

          A very dangerous game is being played just to try and make sure the economy recovers for an election. How long the recovery lasts when interest rates go through the roof is another matter.

    March 17, 2009

    As fans of the principles of the James Report of 2005 we were asked on this blog if we could locate a web link to the original report.
    This proved more difficult than we imagined with no acknowledgement let alone a reply from enquiries to Michael Howard’s office (Pull your socks up sir!) or Lord James’ (you too your Lordship!)

    However the indefatigable Mark Wallace of the Taxpayers Alliance & Channel 4 have co-operated on a new report which claims to show how nearly £60bn of our money can be saved.
    The author is William Norton,a key contributor to the James Report itself, and last night’s Dispatches programme can be viewed via the TPA website.

    Naturally, readers of JR’s blog will be far from surprised that this huge sum is out there to be saved!

    March 17, 2009

    The Norton Report reveals that:

    • The official figure of 498,960 full time equivalent staff in the civil service obscures the true extent of the state bureaucracy, which has soared through the boom in quangos and other bodies. In March 2007 there were roughly 2 million people employed by government departments or quangos, excluding frontline staff.
    • Adjusting for various Government attempts to fudge the figures, there were 1,814 public bodies operating in England or on a UK scale in 1998. On a like-for-like basis, by 2007 this total had risen to 2,247.
    • The James Review, carried out before the last election, identified £34.9 billion of structural waste in government that could be eliminated. Taking into account the growth in public spending since 2005, a serious waste-cutting Government today could save £57.6 billion annually – £2,277 per family.
    • The Government is set to borrow more, on official figures adjusted for RPI inflation, than was borrowed in World War II, World War I or the Napoleonic Wars.

    The full report can be read on the TPA website.

  9. Paul Danon
    March 17, 2009

    There’s something worryingly Churchillian about Mr Redwood’s warnings from the political wilderness. The government (and to some extent the opposition-leadership) would appease the enemy, while intelligence brought by informants to the prophet at his country-house show a grimmer picture than is portrayed to the public. The question is, does Mr Redwood have an outrageous, dragon-covered red dressing-gown in which he smokes cigars and drinks brandy in bed with a budgerigar on his head?

    Reply: No such thing.

  10. Acorn
    March 17, 2009

    In yesterdays debate our poor Chancellor was looking a bit shell shocked. I think he needs a long lie down in a dark room. Can you not appeal to the Speaker when a minister refuses to answer a question? Mark Prisk MP was impressive yesterday, cool; smooth delivery at a pace the layman could follow.

    BTW. In my macroeconomic studies, the intelligent ones across the pond told me, “… the repo market is seizing up and the system depends on the repo market for short cash …”.

    This was last October when Darling was saving the banking industry from imminent collapse. The BoE balance sheet did balloon to just under £300 billion on the 22nd October with reverse repo and “other” assets. The explanation I was given by the intelligent ones was unreadable without a glossary of terms; but I found the following which I recommend for your edification. It appears the repo market remains gridlocked and markets are worrying that some Central Bank balance sheets may not be as sound as we think they are.

    This brings us back to JR’s question to the Chancellor yesterday, see his third paragraph above.

    For a definition of repo (seller/borrower) and reverse repo (buyer/lender); have a look at the following under R for “Repurchase Agreement”.

  11. Paul
    March 17, 2009

    The reward for the Chancellor’s independence will be the sack. Gordon will stick some ignorant buffoon in there and tell him what to do (what I suspect he planned for Darling).

    I am actually frightened of the extent our ….. PM will go to keep power. I can see him borrowing shedloads and trashing the economy in a desperate attempt to maintain power by blatant bribes.

    1. mikestallard
      March 17, 2009

      …or her what to do…..

  12. jt
    March 17, 2009

    Repeating mistakes ~
    RBS pay £50bn for ABN AMRO stake ~ now worth c£30bn
    Govt pay £37.5bn for stakes in RBS & HBOS ~ now worth c£1bn ?

    And no government word on the reckless actions of the governement !?

  13. mikestallard
    March 17, 2009

    The total expenditure by the government used to be between 6 and 7 billion pounds per year. According to this very blog, we are up for a risk of several trillions if you count the banks.
    (On Thai TV, there was an amusing little item on the News about the RBS, Sathorn Street, Bangkok, just by where I was staying. I think the joke was that they were all wearing Northern Rock T Shirts, but as it was in Thai, I couldn’t understand it. Either way, we taxpayers are underwriting the humour).
    By obscuring the figures and just releasing part of them at a time, a deliberately wrong impression is being created.
    A mere £25 billion is the likely annual shortfall in taxes, according to the Daily Mail yesterday, for instance. If only….
    The problem, as in “1984”, is that you simply cease to believe anything the government says.
    That is bad enough.
    What is truly scary, though, is that the people who run the country – Mr and Mrs Balls, the Prime Minister and his other advisors at No 10 – seem to believe their own cooked books.
    So how can they hope to put matters straight if they do not properly understand the situation?

  14. Blank Xavier
    March 17, 2009

    JR wrote:
    > Yet even he has chosen some more careful words for his
    > Guardian interview.

    Reminds me of Lyndon Johnson. In the end, he couldn’t speak outside of military bases without intense heckling.

  15. Matthew Reynolds
    March 17, 2009

    When VAT is poised to return to 17.5% I would raise it to 22.5% instead and force all QUANGO’s to cut their budgets by 15%.

    QUANGO’s would either have to cut their spending by 15% overall or risk being hived off to the private sector , merged or axed. That would save £15 billion in 2010-11 and along with the VAT hike generating £25 billion you could cut the budget deficit by £40 billion in one go. The threat of a VAT hike in January 2010 might get people spending more in 2009 to avoid buying big items after the sales tax had increased. To offset any extra unemployment that might result from higher consumption taxation and government job cuts you could reduce economic inactivity by merging Job Seekers Allowance & Incapacity Benefit into one payment designed to facilitate less long-term joblessness.

    Rather than punishing wealth creating risk takers with this demented envy driven 45% tax band you could find the £2 billion by axing the ever pointless RDA’s instead. It is mad to give the aviation industry a £9 billion p/a subsidy by not taxing their fuel at the same rate as road fuel – why not align taxation on airline fuel with road fuel taxation ? The £9 billion raised could fund ending stamp duties on both share & property deals thus giving the housing market and FTSE a shot in the arm when we need them to recover for the sake of the UK’s wider economy. This might moderate aircraft usage thus helping limit CO2 levels.

    The NI hike can be avoided by ending the New Deal ( saving £3.4 billion ) and by cutting down on civil service over-employment saving £600 million as part of a long-term plan to freeze civil service recruitment. It is crazy to subsidize corporate debt through the tax system since that has helped cause this mess. I would end all corporate tax breaks entirely and replace them with one single flat rate business tax allowance for companies who annually reinvest at least a third of their pre-tax profits into their business every year. Simpler taxes and more investment could certainly help an economic recovery.

    IT schemes in the NHS that do not work & ID Cards can be axed to fund more for the reserves and bank shares can be sold off to fund adding more to the reserves as well. What does not make sense is for a center-left government to spend £2.5 billion p/a on tax credits for the rich ( who do not need them ) when they could be ending basic rate tax on savings income instead . A higher savings ratio means that the banks have more capital to lend thus helping to defrost the credit market as well.

    The annoying thing with this government is that with the right policies the UK could do better than it is. A long-term policy to get more jobs & prosperity into the UK via higher investment and productivity could be a pledge to cut corporate taxes to one 10% rate within ten years. We could make a start on that by with-holding our EU contributions until the accounts are signed off and instead of wasting money on that anti-democratic body we could just make the UK better off by lowering business taxes every year. By the time they have rooted out corruption we could have funded year on year cuts in businesses taxes thus getting them to an economically attractive 10% rate.

    Capital Gains Tax needs to be axed as it is anti-wealth creation levy that is too complex. Rather gains could be taxed as income for the first two years and then be tax free thereafter just to encourage longer-term investment and discourage too much tax dodging. Cuts in wasteful spending on Whitehall consultants to pay for that would move money from the Brown created Client State ( a drag on growth) to the entrepreneurs who are our economic future – this should be a shot in the arm for our economy.

    These measures would help key sectors in our economy whose recovery from this malaise would be most desirable. This batch of ideas would also reduce public borrowing thus cutting the bills for future generations while putting an economic upswing on a secure footing and thus boosting economic confidence. Investors would love a pro-enterprise tax policy , less public borrowing and more in the reserves.

    This would avoid the run on the £ and other problems that John Redwood alludes to. I always prefer being able to offer positive ( albeit detailed ) solutions to problems and it is very good that this blog offers us all the opportunity to have our say.

  16. Steve Cox
    March 18, 2009

    The main factor determining the success or otherwise of QE will be whether or not the UK banks, who should eventually end up one way or another with the bulk of the newly printed money, decide to lend it out (as is hoped), or simply to sit on it. The government and BoE can take simple measures to ensure that the second option is not attractive for the banks. They can only afford to sit on large amounts of money which will have been deposited with them by the various sellers of gilts at the weekly auctions when interest rates are effectively zero, as they are now. If the base rate were to be raised quickly to a reasonable level, say 5%, then the banks would be forced to lend the new money in order to be able to pay interest to the institutions who had deposited it with them. Since effective interest rates for industry and many personal customers have not been reduced in line with the base rate, increasing the base rate to a sensible level once more would probably have very little effect on the broader economy (a few people with tracker mortgages would no doubt squeal in pain). Significant amounts of interest income would once again flow into the hands of savers and pensioners who would be more likely to spend it in the high street than the feckless borrowers who simply use the benefits of lower mortgage costs to reduce their other forms of borrowing, on credit cards, for example. The pound would recover, which would reduce inflationary pressures – I do not for one second believe that there is a risk of anything other than a short, oil price-induced period of negative RPI indices. The collapsed pound has, on all evidence to date, failed to stimulate British manufacturing industry. This is hardly surprising when the entire world is suffering from similar problems of recession, falling demand, and a lack of credit. Who has the need, or indeed the credit lines available, to buy all those lovely, competitively-priced British goods now? Put simply, nobody. It seems that the central banks and treasuries of the world have just one single brain between them, and so they all act like lemmings or sheep at the first sign of a crisis. Well here’s a chance for the BoE to do something ‘out of the box’ and try to ensure that not only does QE have the best chance possible of working, but also provides a welcome stimulus (far better than the tiny and ineffective reduction in VAT) to the broader economy. Come on, Mervyn and the MPC, put your thinking caps on and let’s get interest rates back up where they should be.

    1. Denis Cooper
      March 18, 2009

      I readily admit that I don’t understand this.

      According to media reports, today the Bank of England will hold another reverse auction to buy existing gilts.

      If Barclays is a seller, then presumably the sales proceeds could be credited to its account at the Bank, or to any other account which it specifies; but even if it’s initially credited to Barclays’ account at the Bank, Barclays could immediately transfer it on, and it could pass through any of the numerous accounts around the world that Barclays has directly or indirectly established for practical or tax avoidance purposes.

      However the Bank says that it would prefer to buy from pension funds and insurance companies, and presumably in those cases there wouldn’t even be the possibility of initially crediting the sales proceeds to accounts held at the Bank?

      In any case there seems to be no guarantee that any of the £2 billion will find its way into the personal bank account of somebody in this country who wants to buy a house, so that it can be passed through to the personal bank account of the vendor, or alternatively find its way into the company account of a business in this country which is wondering how it will be able to pay its employees next month.

      On other hand, it is certain that other large sums of money will be taken from the accounts of various private sector financial bodies and deposited in the government’s account at the Bank as a result of the Treasury’s next auction to sell new gilts, which I believe will take place tomorrow, and the great majority of that money will then be passed on to the personal accounts of public sector employees and the company accounts of private sector contractors to the public sector.

      Meanwhile, the credit-worthiness of many of those private sector financial bodies will remain in doubt because of their largely unknown holdings of other assets, “assets for which there is no market or whose value has fallen significantly”, to use Darling’s words, and his response is not to remove those “toxic assets” from the system, but instead to insure them at massive risk to the taxpayer.

  17. ManicBeancounter
    March 18, 2009

    A great question to ask Mr Redwood, and an important one.
    I am not surprised the Chancellor avoided the answer, because it is uncomfortable.
    Prof Tim Congdon, in his book “The Debt Threat” stated that an an insustainable debt is one that grows faster than the rate of nominal GDP. I tried running some numbers last night. The only scenarios I could see for this not happening are a combination of:-
    1. A strong and early recovery (like that forecast in the Pre-Budget statement). Not likely then. Now the recession looks to be long and drawn out.
    2. Sustained real cuts in public expenditure over a number of years AND large tax rises. In other words, reversing any fiscal stimulus and more.
    3. Sustained near-zero interest rates to minimise the debt servicing requirements.
    4. A sustained period of inflation, to devalue the debt relative to
    national income.

    Cuts in public expenditure are out, and huge tax rises before an election (except on alcohol & tobacco – to save lives – & petrol – to save the planet) would result in Labour becoming the third party. They would also depress the economy still further. The interest rates will have to rise to keep cash flowing in. So inflation it is then. Has Mr Osborne aquainted himself will the IMF yet? I could lend him a large bowl to take with him.

  18. Stuart Fairney
    March 19, 2009

    Numbers become hard to comprehend beyond a certain level so is the following correct?

    Wikipedia tells me the cost of Black Wednesday was £3.4B to the UK treasury and the cost of our guarantee alone to Northern Rock was £26B. Fellow contributors tell me that our £37B purchase of RBS is now worth £1B and your blog says Alistair is printing at least £75B in cash.

    Total costs of these three events is £137B, which is the equivalent of having a ‘Black Wednesday’ event, every day, for 40 days straight!

    Reply: Sounds about right.

Comments are closed.