The government is busily printing money through the Bank of England on a colossal scale. As a result the Stock market has been rising strongly. The combination of money printing in the US and UK, and the actions taken to stimulate money in China, are leading to sharp increases in commodity prices, which we feel again at the petrol pumps.
It is not yet easing the problems facing local businesses. It is still difficult getting a loan for business purposes, and new mortgages are in short supply. Whilst the Bank of England’s interest rate remains very low, actual rates if you want to borrow are altogether a different matter. There are some signs that the violent de stocking by business in the first two quarters of the year is coming to an end, but that does not yet mean there is going to a resumption of “normal” business conditions similar to those before the Credit Crunch.
I fear we are in for a long slog of sorting out too much borrowing in the private sector first. Then we need to turn our attention to the huge debts being built up in all our names by the government. In the two years 2008-2010 the government will borrow more than they inherited as the total public debt in 1997! Taxpayers have to pay interest on all that borrowing, and one day have to pay it all back. It means as a country we will have to run with a much higher savings rate, and therefore with much less spending, than we have been used to.
The government says it needs to carry on spending and borrowing to save us from a worse recession. It is difficult to see how we could have a much worse a recession. The truth is if the government spends too much in the public sector the best it can do is to delay the painful adjustment, if it prints the money. If it borrows it, it means that those lending the money to the government to spend can no longer spend it for themselves. In those conditions it may not be reflationary at all.
I do hope the government and the pundits are right in saying the worst is now behind us. It is true that the rate of decline should now ease, and the comparisons will soon start looking better because we will be comparing with dire periods of declining activity. However, most seem to agree that unfortunately there is more unemployment to come. Wages and earnings remain under pressure. This all points to reduced demand, which makes business conditions more difficult.
Everyone apart from some Ministers understand that public spending has to brought under control soon. Those of us who want to see action taken have been clear that we see no need to sack teachers, nurses, doctors and other important service providers. What we want to see is the elimination of waste and undesirable expenditures.
Labour in opposition rightly campaigned against two types of public spending they claimed not to like. One was debt interest. It makes it even more ironic that they are now presiding over the biggest ever increase in debt the state has seen. The other was what they called the costs of “economic failure”, the benefit bills for those out of work.
In government they allowed the numbers of working age people without a job to exceed 5 million even before the recession hit. It is too many people to leave without work, and a large cost to taxpayers. A new government needs to put welfare reform at the top of its agenda, as Bill Clinton did successfully after his election as President. Cutting benefit spending by getting more people into work would be a popular cut.
We also need to tackle the large costs of public sector pensions. We need to tell any new recruits to the public service that they are not eligible for the generous deals that used to be on offer. We need to negotiate a new deal with existing members of public sector schemes for their future contributions. That should include the MPs scheme, where consultations are already underway to cut the costs of the benefits under the scheme.
August 30, 2009
Don’t forget the state pension and state second pension is the biggest bill of the lot.
Here is the solution for all state pensions.
1. Stop accruing any more debts.
2. State employee pensions move to funded from now on.
3. For state pensions. The government offers a guarnatee. We will as a society top up anyone who doesn’t save enough to get 5K a year indexed linked income in retirement.
4. The condition for the guarantee, is that you have to save 10% of your income for your working life.
5. The top up is once off at retirement.
Now initially, lets say someone has 29/30 years for a full state pension. That 1/30th of a state pension currently would cost 5000 pounds to buy. Most would not get this from 10% of their income in the last year. So they would get a top up. However, given that over time the 10% benefits from compound interest, they will quite likely have accumulated enough to get at least 5K. They get no help.
Over the long term, average wages, NI going to a fund equates to 20K pa in retirement rather than 5K. People will be better off.
Money invested will also result in investment in UK industries. No FX risk being the main point. Good for the economy too
Nick
August 30, 2009
We think that Nick is onto something here with the £5k minimum and top up facility
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We’d like to see a one-off PENSION EQUALIASATION mechanism which would in effect put the excesses of public pensions, over a defined maximum level of say £50,000pa, into a communal pot so the poorest can be brought up to a minimum level.
We’d also like to see ALL private and public pension contributions paid into a government-guaranteed vehicle controlled by the Bank of England. Neither government nor private companies could get their hands on the cash flow accruing from pensions thereafter.
In a tightly controlled environment the funds could then be used for UK investment in the way Nick envisages.
August 31, 2009
In a tightly controlled environment the funds could then be used for UK investment in the way Nick envisages.
Strongly against. What you will have is people like Mandleson directing that people’s pensions get used to bail out failing industries.
Make it completely free as to where the funds go. They will end up where needed. If the UK economy isn’t big enough to support the pensions people are prepared to save for, then the funds need to go overseas to generate the income.
Pension Equalisation isn’t on either. It’s just taking money from those who have saved to those that haven’t.
Force everyone to save. Sounds un-libertarian, but its better being force to save for yourself, than being robbed to pay for someone who hasn’t.
If people are forced to save, its clear some will not have saved enough by the time they have retired. However, most people will have had good years, and some bad. That means that the good years, with compound interest, they are likely to have enough to cover the 5K guarantee. Remember that even post crash, a median worker retiring today would be on over 20K a year if their NI had gone into the FTSE. Over a 40 year period, its a low risk guarantee.
Where I do agree is over the principle of preventing governments getting their hands on pensions a la Brown’s tax raid. That’s pretty disasterous. If you take 20% of the income you reduce capital by 20%. I’m not sure the BoE approach is the correct one. Let me propose an alternative.
The pension system is set up and goes to a referenda. In the referenda is the clause that the system can only be changed by another referenda. The scheme is free of tax whilst accumulating. ie. Prevents politicians from raiding the schemes.
On any attempt to change the law, people have the option of withdrawing the fund in its entirity free of tax. ie. The government is tied in.
I don’t think I can emphasise enough the nature of stopping acruing more debts.
8 Trillion and rising when you only have an income of 0.5 trillion is madness, particularly when people need certain services such as health defense police…. That takes a huge wack out of the 0.5 trillion. Will people tolerate no services, but 50% taxation to pay for past debts? I doubt it.
Will the government allow people to take their tax and opt out of some services because private companies can provide the service cheaper? Take education. Give people their 5.5K per head spending back, and allow them to go private. Given they opt out means they should have to pay the long term pension costs of the state sector. The state can’t manage that. Neither can the public.
The sooner the break is made, the smaller the problem.
Nick