The latest figures show that consumer spending has held up reasonably well. As forecast here the savings rate is also on the rise, mainly owing to people borrowing less or repaying some debt. The public is learning to handle the new situation, by getting out of debt and by shopping around for the bargains and discounts.
Those with floating rate mortgages and other loans have the pleasure of deciding how to spend the extra money they can keep as interest rates disappear, as long as they keep their jobs. Those on savings income have to tighten their belts, as their needs are ignored.
The two parts of the economy we need to do better, business and exports, remain weak. The government sector continues to pre-empt resources, increasing the squeeze on companies through its taxes and regulations. We need a recovery based around increased business investment and a higher level of exports. So far we just have the favourable consumer impact from lower interest rates and the extra incomes of the growing army of public sector employees.
We learn today that Mr Darling may admit he needs to borrow a collosal £175 billion this year to pay for all the excess in his public spending figures and to feed the ever hungry nationalised banks. It would be good if he would start by admitting he borrowed more than £150 billion in the year to March 2009, and not the £78 billion he told us about in the Pre Budget Statement. We need an honest presentation of how bad the public finances are before we can start to clean them up.
We also learn he will be setting out some combination of higher taxes and lower spending to start to plug the gap in the Budget. The probem with higher tax rates is they can send business abroad and jobs overseas. In a highly competitive world you need to keep tax rates at a competitive level in order to maximise tax revenue. The UK is no longer very tax competitive and needs to be careful about any proposal for higher tax rates on individual and company income or gains.
What we need are some cuts in pbulic spending. Not from the 25% of public spending that goes on the salaries of nurses, teachers, doctors and other front line service providers, but cuts from the rest. What we need is a government that understands spending too much will cause problems raising the money, will crowd out the private sector, and will make bringing the balance of payments back into order more difficult.
You can’t solve a crisis brought on by borrowing too much by borrowing more. Government spending is not necessarily reflationary, as you need to take the money from the private sector to be able to spend it in the public sector.
April 16, 2009
The UK is quickly becoming addicted to very low interest rates. The situation in Japan was similar where any raising of interest rates above zero pushed the economy back into recession.
At least Japan spent the money on infrastructure projects and not just inflating the salaries of the public sector. For the lefties on here, pay rises are inflation and not investment since you get the same output as you started with!!!
April 16, 2009
And with that last sentence you demonstrate an understanding of the real world, as well as the reason the $1 trillion G20 package is a load of nonsense.
All the G20 meeting came up with was ‘we are going to take $1 trillion from the private sector then spend it as we see fit’, just at a time when the private sector needs to keep as much of its money as possible.
In good times, the private sector is bulging with money and it doesn’t matter so much if the government takes ever increasing chunks, as you can store up that money to fund to public sector services should tax revenues drop. When the times turn tough, the government needs to tighten its belt and let the private sector keep as much of its money as it can.
Just imagine if the government had been responsible and managed to bring the public purse into a large surplus. They could boost the economy by scrapping income tax for one year, a cost of around £150bn. If half of that had gone into savings accounts then job done, and no need for nationalisation.
April 16, 2009
The prudent always seem to have to pay for the profligate and reckless. Be it personal profligacy or state profligacy. This will never change under Labour. Will it under the Conservatives?
April 16, 2009
You cannot save unless you can live within your disposable income. Then there is saving as a float for unpredictables in your immediate arrangements, and beyond that saving as some form of investment for the future.
The UK is now in default, and the credit failure is being paid for out of people’s disposable incomes. Also, many have now realised that their personal situation has become much more unpredictable, and unlike in recent years, are seeking to build up a buffer or float.
As for savings as investment, just where is this sensible? With interest rates well down (catastrophically for some), talk of inflation, and for many prices rising effectively well beyond the official index levels, does it make any sense to save long term at all? So who is going to buy government bonds? Who is going to create savings accounts in financial institutions to enable them to lend? Who knows anything?
April 16, 2009
“So who is going to buy government bonds?”
Mainly the same investors who are selling government bonds back to the Bank of England.
http://www.bankofengland.co.uk/markets/apf/index.htm#giltresults
This Tuesday, another £3.0 billion of new money created by Bank and used to buy back previously issued gilts.
Plus yesterday, another £3.5 billion of new money created by the Bank and used to buy back previously issued gilts.
Total this week, £6.5 billion, to be added to the previous running total of £25.0 billion, = £31.5 billion of new money created and passed to gilts investors by buying back existing gilts.
Making it easier for said investors to buy new gilts issued by the Treasury’s Debt Management Office:
http://www.dmo.gov.uk/reportView.aspx?rptCode=D8D&rptName=44482118&reportpage=Press_New
Yesterday, £0.5 billion of new gilts sold, 1.62 times covered; today, £4.0 billion of new gilts sold, covered 2.11 times.
So like last week, the Bank is buying back previously issued gilts faster than the Treasury is issuing new gilts to fund the budget deficit.
Eventually this silly game must come to an end, but basically the Government has a novel funding mechanism which should see it through this year at least.
George Osborne has nothing to say about this “money-go-round”, even though it could just prevent him from becoming Chancellor …
April 16, 2009
I like the 25% line – that way the public know that the Tories are not going to cut front line spending and they can do the sums for themselves. Hey, we could cut 75%!!!
April 16, 2009
It’s going to be a messy Budget. I just hope that the Conservatives spend less time gloating than they do putting their own solutions forward.
April 16, 2009
Have you ever read an article by Anatole Kaletsky? He dresses up what seems an absurd argument in nice language. Is he a Labour stooge?
April 16, 2009
Low tax rates are important, but I also think politicians need to make a public case for business. I remember Mrs Thatcher talking publicly about the important role entrepreneurs have in the economy. These days I think this tends to get forgotten. Everyone can see the benefits of public services like health care, but people tend to forget that business earns the money which pays for them.
April 16, 2009
We know that under Labour government spending has increased by £200 billion beyond the rate of inflation & thus we know that cuts of that order are possible without ending any part of government that existed then. Tough on the spindoctors, quangoists & windfarm owners but it couldn’t happen to more deserving bunch of parasites.
April 16, 2009
One area where the Government could make massive savings is on all the measures intended to tackle global warming. Stop subsidies to wind farms, sack Zac Goldsmith. Global warming, mild as it was, was a phenomenon of the 20 th Century. This century will be one of global cooling, which has already begun. There has been no increase in global temperatures since 1998
April 16, 2009
guy
You are not alone in your thoughts, many International Scientists also share your view.
For the average person it is all very confusing, too hot its climate change, too cold its climate change, too wet its climate change, too dry its climate change, variation of weather its climate change.
One or more Scientist has put forward the argument that the worlds temperature variation has always been in operation over centuries, citing that in the 15th century it was in fact warmer than it is now.
As far as I am concerned the whole climate change topic has been hijacked by the Government, simply to increase Taxes and for no other reason.
The Tax raised is not spent on investigation or on research it just goes into the pot to be wasted by Government.
Many products, Solar power for one are simply not financially viable to many, they are expensive to install, they save little, and the life time of the product is about 20 years before they need replacing.
Yes I am for more efficient use of energy, and for reduction in waste, but only as long as it is cost effective.
The nonesense we have at the moment of transporting rubbish half way around the World to be sorted, is simply madness.
Today we hear that Gordon is going to offer a £5,000 subsidy to anyone who purchases an electric car with the argument that it is cheaper to run and less poluting.
Firstly it would be cheaper to run with no fuel duty tax on it (AT THE MOMENT) even an idiot can see that.
But how long before Gordon puts a Tax on electric fuel at car charging points ???????
Electricity has to be generated by some method or another, which produces toxic waste of one sort or another, so the more people drive electric cars, the more Power Stations we will need, so the more the pollution from this source.
Perhaps the next Government policy will be to encourage us all to walk everywhere, with tax breaks on shoe purchase and wet weather gear.
April 16, 2009
Sadly the disgustingly niaive acceptance from pretty much the whole MSM, that we can actually do something about any climate change (that has happened since the dawn of time) allows these politicians to get away with this nonsense.
Then you get the silly green MEP comparing people who fly (<2% of world’s carbon “footprint”) with murderers and you just have to shake your head in dismay at the sort of clowns deluded people will vote for.
April 16, 2009
Your point about tax competitiveness is important. Socialists & big-government collectivists are seeking to address this by trying to enable collusion between high-spending states to limit the ability of capital and labour to benefit from tax competition. There was an extraordinary (but revealing) article by Mario Monti, former EU competition commissioner, in the Financial Times on 6th April. Monti argued for collusion between states to suppress legal tax avoidance and hold tax rates up, to better enable states to finance excessive spending. Gordon Brown’s smoke-screen assault on ‘tax havens’ is part of the same thing.
April 16, 2009
I hope that the rest of the Conservative party starts to make the point on the need for significant public spending cuts as clearly and unequivocally as you do here. It is only a matter of time before the financial markets do so; something for which the rest of us will pay a heavy price once that happens.
April 16, 2009
I have just come over from Labour List where there is a debate going on about how to attract “the Young” to Labour.
Here are three suggestions for everyone interested in politics:
1. “We need a recovery based around increased business investment and a higher level of exports.” Reward people who actually increase the GDP. Now that the House of Lords is, apparently, a political reward centre, how about restricting new Lords to people who have actually done this instead of being loyal Labour Party supporters? How about some tax incentives for people who increase the GDP? How about some sort of slashing back of EU restrictions on business and the private sector? (Dream on…) that would promise Young People jobs and a future.
2. “Those with floating rate mortgages and other loans have the pleasure of deciding how to spend the extra money they can keep as interest rates disappear, as long as they keep their jobs. ” I do NOT refer here to widows and divorcees, but the young single mothers who never got married yet have children seem to be on the constant hunt for a man – almost any man will do! Why not encourage them to get and keep one by, for instance, a tax break for people who registered themselves as man and wife and stayed together for, say 10 years? Why not build a few/provide a few houses for people like that? Man and woman, permanently together for, say ten years? Or am I breaking the Liberal Taboo by even talking like this? Probably.
3. “What we need are some cuts in pbulic spending. Not from the 25% of public spending that goes on the salaries of nurses, teachers, doctors and other front line service providers, but cuts from the rest.” These 75% people are educated to be client state employees! So get schools together as Michael Gove brilliantly was doing before the crunch broke up the Conservative Party Conference and George Osborne had (generously) to rush off to see Gordon Brown to offer to cooperate with him in the crisis. Michael Gove needs a lot of support and bringing forward. The Universities, too, are desperately in need of reform by someone sensible. I wonder if there is anyone out there in the conservative ranks who could do it?
If you give young people hope, they will rally. Without hope, they will wilt and die. It is easy, really.
April 16, 2009
John
Reasons why many people are managing at the moment.
They are raiding their savings bit by bit.
Tax rises have not yet risen, but they will.
More will yet become unemployed. In the private sector it now is begining to strike very hard, and as people cut back, it will get worse.
In short, the longer this goes on the worse it will get for many who have not yet felt the real effects.
Gordon is right in only one respect, we need to encourage people to spend in order to get the economy moving, and money going around the system once more.
The problem is that people need to feel confident in the future to do this, and with this current lot in power its a lost cause.
To borrow further is simply not the right answer, as any sensible person knows.