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.