More crunch is coming

There have been two types of government economic policy. One set of policies has tried to delay the inevitable adjustment to a world of lower borrowing. The other set is starting to cut living standards, as the government tries to stave off a worse financial crisis.

Money printing was designed to delay the adjustment of the public sector. Cheap money flowed to the government, so the public sector could carry on recruiting and paying generous wage and salary increases to many. Public budgets were padded,the range of benefits increased, and numerous temporary schemes deployed to seek to keep people off the lists of the unemployed for a few months. The VAT reduction, the car scrappage scheme and many others were time limited. Banks were propped up in the most expensive way imaginable, saddling taxpayers with huge debts and risks. They were lectured to lend money to the private sector, but their Regulator told them to rein in their lending to anyone other than the government.

Meanwhile, a large devaluation slashed all our living standards, making imports dearer. It was most visibile in the increases in petrol, heating oil, gas and diesel prices. It is fuelling the current rate of inflation, which is far faster than most private sector wage increases. Keeping money tight in the private sector drove more into bankruptcy and unleashed a wave of redundancies especially in manufacturing. Now we see the beginnings of the Labour squeeze on the public sector, with the cuts in university funding, and the announcement of zero wage increases for local government from April 2010.

With public spending representing around half the total economy, and with a government wishing to halve the deficit running at 12.5% of National Income, the prospective government squeeze will be a big cut in living standards unless they can generate some offsetting growth.

To do that they need to cut taxes on job creation, business and entrepreneurship. They need to make the UK the best place in Europe to make things and to run services. They need to strengthen competition policy to open up market opportunities, and deregulate to make it easier to set up and run a business. If they don’t, their target cuts will take a big bite out of average living standards. If they don’t cut public spending, markets could take an even bigger bite out of our living standards, as they are doing to Greece, and have done to Ireland.

I have been out and about speaking about the crisis over the last couple of days. I find it easiest to compare the national budget to a family budget. It’s the comparison that the government seems to fear most, as it is the most obvious. We all know that if we have overdone the credit card, have a big mortgage and lots of hire purchase, paying all the bills becomes difficult, and could become imposssible. You have to rein back on new spending and pay off some debt. It’s the same for a government. The bank manager is the financial markets. They will only put up with so much. The clock is ticking.


  1. David B
    February 13, 2010

    Election timing would have nothing to do with the governments decisions!

  2. Kevin Peat
    February 13, 2010

    If only you were Tory leader, Mr Redwood. I read these pages and can’t believe you’re from the same party.

    Indeed. Why do those favouring QE always treat macro economics differently to family economics ?

    I am so annoyed that those pointing out that the king had no clothes were ignored.

    1. waramess
      February 13, 2010

      The leadership is soft socialist. No suprise then that right wing policies are frowned upon.

      If they (the leadership) are not bought to heel quickly the rank and file will believe that soft socialism wins elections and then we will all have to find somewhere else to permenantly place our allegances.

      1. James Morrison
        February 13, 2010

        Just don't vote Conservative at the next election – nothing will "bring them to heel" quicker than a GE defeat, and then maybe we'll have a worthy opposition! God knows we haven't had one of them in the last 12 years!

  3. Brian Tomkinson
    February 13, 2010

    The mystery to me is that the markets have let Brown get away with his profligacy for so long. I see The Times today is predicting 20% VAT whichever government takes office after the election. When are they going to stop spending instead of increasing taxes? If the Conservatives can’t come up with something better we do face ruin. If they can’t why vote for them?

  4. Kay Tie
    February 13, 2010

    It's interesting that you use the phrase "hire purchase". This comes from the previous socialist era, where consumer credit was restricted by law and it was impossible for ordinary people to borrow. Hire purchase was an exploitation of this, whereby one "hired" a TV set for some period of time, made "rental" payments, and at the end of the period was given for free (or some token payment) the item.

  5. APL
    February 13, 2010

    JR: "It was most visibile in the increases in petrol, heating oil, gas and diesel prices."


    JR: "They need to make the UK the best place in Europe to make things and to run services."

    You see the obvious place to cut taxes would be the 95% excise and VAT on fuel. Fuel underpins all of the economic activity in the economy.

    I don't think I have heard you suggest that fuel duty should be reduced. I know you think we, who already have had our fuel use penalized by a 95% surcharge should now be more efficient. Frankly, I reject that!

    Cutting fuel duty could not be a Conservative policy though, because Cameron has been 'taken prisoner' by the Greenoids'. How sad the Tory party cannot propose tax cutting policies in one area that would boost the economy, because its leader is suffering from Stockholm syndrome.

  6. Javelin
    February 13, 2010

    I believe the 5th of March is the crunch date for fixed income futures. The top 5 market makers will turn over 20% in a few hours and trade 100s of billions of Government bonds. The traders will then take their positions for the next 3 months.

    New Labour will have to make public 15-20%+ cuts. I think 10% is too low. My chats with analysts put the figure at 100 billion over the next parliament. Not the 15 billion the Tories have mentioned.

    I don't think there will be a public crash like there was the ERM, the public simply don't understand the consequences of bond prices and Gordon Brown will sweep gilt forward prices under the carpets.

    Reply: Yes, it's £100 billion to halve the deficit which the government says needs doing. 10% for starters is around £70 billion.

  7. alan jutson
    February 13, 2010

    Agreed that the family budget comparison should be the easiest with which to compare government spending, as it has similar traits.

    You can put off the inevitable for some while by juggling things around, but if you do not cut your spending to suit your income, your credit score goes down the tubes and the baliffs will eventually come knocking.

    For Bailiffs read IMF.

  8. Nick
    February 13, 2010

    It's more that 12.5% of GDP. Its 14%. Even that's a spun figure.

    If I evalute my personal deficit, why should I include my neighbour's income?

    The real deficit is close to 30% of government income, and that is the size of cuts that are needed.

    The problem you face is how to pin the blame where it lies, with Labour, and how to get the political will to change it.

    It's actually easy.

    1. Doomsday book of all government debts as you've promised. For example, I've put in an FOI request for the size of civil service liabilties. That's being withheld because they were going to publish. That is not being delayed, I suspect until after the election because the figure is so damaging. 1.1-1.2 trillion.

    2. A tax, hypothecated to pay for it. It needs to be on payslips and show the cumulative figure. It needs a name and labour tax, small 'l' is a good choice.

    When people see thousands and tens of thousands going to pay for debts, they will want something done. They might lynch a few politicans, but in the process that will get the 10% cut in the numbers of MPs.

    What it will mean is no pay rises, pay cuts, and the majority will support it.


  9. JimF
    February 13, 2010

    I think the clock is ticking and we don't have the means to stop it.

    "They need to make the UK the best place in Europe to make things" This is a pipedream. To make this happen you'd need to:

    Create a highly skilled and trained workforce, but we don't even have an apprenticeship scheme equivalent to the practical and theoretical German "Dual" scheme

    Manufacturing needs space. But our commercial rents and rates are the highest in Europe, so we have a higher disincentive to start than anywhere else.

    Have access to finance and loan guarantees for start-ups better than those in Ireland, France and Switzerland

    Have access to skilled graduates from Universities. Yet our first-rate graduates from private schools, being denied places in top Universities in the class war, will be looking to start their tertiary education and careers elsewhere. Ireland, Germany and France won't worry about whether Joe has had a private education or not. Read Page 4 article in the Telegraph today "I worked hard for nothing"

    Have better access to a strong domestic customer base than Germany and France. No chance.

    I'm sorry to be negative but your aim is unrealistic. Of course there will be a mixed economy but I don't anticipate high volume high tech manufacturing being a part of it. I'm more convinced the UK's future is in

    1 A "spanner" low-cost manufacturing base predominantly for lower skilled males, and a "caring" but hollowed-out public sector predominantly employing lower/medium skilled females.
    2 A finance/trading/Banking sector, predominantly in London, employing the enterprising, clever, footloose and rich
    3 An "academic" "r and d" sector, both private and public, using our creative best and brightest in tandem with similar US Companies and institutions, and again world class. This sector is/would also attract the brightest academics and technicians from across Europe, but it won't be making things, only inventing and developing them.

    You might say Back to the Future.

  10. Lola
    February 13, 2010

    Every single time they get into power, every single bloody time they do this. The ultimate stupidity; keeping on doing the same thing even though you know it hasn't worked in the past every time you've tried it. What a bunch of wasters.

  11. A.Sedgwick
    February 13, 2010

    You are right as usual and I find it difficult to spend the time moaning how Cameron lacks the forsight to correct our plight and even downfall. The Euro project has started the beginning of its end, again many decried its survival from day one and the same goes for the EU (not EEC). The one may see off the other with some black fortune. Cameron has made many mistakes and in my mind totally lacks political strategy and tactics – two recent episodes of many: his poster and immigration show how tangential and off beam a politician he is. Regardless of all his dallying with umpteen insignificant and trendy (Notting Hill dinner party) ideas over his four years and most of us not having a clue what he is about he has one chance, in my view, to redeem himself and win the election – yes you have guessed it an in/out EU referendum. Nothing did more damage to his limited credibilty than his waffle explaining away his cast iron pledge. He hasn't grasped fully how much the electoral dice are loaded against the Conservatives, the client state will not forsake Brown, Scotland is a lost cause and needs political accommodation and he is dealing with a government and leaders, the like of which we may never have seen in this country for their ruthless deceit.
    The EU is a massive financial drain on this country, multiplies bureaucracy and costs, is removing our sovereignty and as with all socialism stifles economic growth and freedom. It is time for our politicians to get off the fence on Europe.

  12. Steve Tierney
    February 13, 2010

    Its amazing how many so-called economists pooh-pooh the idea that a family could be comparable to a national budget. After all, there are so many more factors, so much more going on – and a family can't print its own money (not without doing time, anyway.)

    But the fact is you actually can make perfectly good comparisons. Both have to make money in order to buy things. Both must have income to pay for expenditure.

    Its terrifying for economists, who revel in their complex calculations, velocities, capital analysis and entirely too clever for their own good technical terms to admit that actually – its fairly simple. What would they do for a living then?

  13. oldrightie
    February 13, 2010

    I am saddened to read that both Labour and Tory policy is a possible 20% increase in VAT. Yet more inflationary reduction of Government debt at the expense of the population. I suspect income tax will rise too but not be mentioned in any manifesto. There is just no appetite for the truth. The State needs to stop fighting wars, scrap the "world power" military and economic delusions and Trident like expense is no longer affordable. Wea re broke and politicians should start realising that growth in population is the next step to reducing demand and pressure. Less painful than that which wwe are heading for. Think outside the Parliamentary box filled with pretentious rubbish. A hung Parliament may be the saving of us.

    1. Stuart Fairney
      February 14, 2010

      Hmmm…. Two very socialist parties and a slightly socialist one squabbling behind closed doors is not the road to salvation.

    2. John C
      February 14, 2010

      " The State needs to stop fighting wars, scrap the “world power” military and economic delusions and Trident like expense is no longer affordable"

      I agree 100% oldrightie!

      Are we more safe than Germany or Sweden?

      They seem to do OK without being a permanent member of the security council of the UN.

      The sooner we give up this pretense that we are still a world power the better. If 50% of our military budget over the last 30 years were instead spent on tax incentives for businesses to start up in the UK I'm sure we'd have better living standards than we have now.

  14. Doppelganger
    February 13, 2010

    As usual more perfect sense from John Redwood. I wish I could say the same about David Cameron and the rest of the shadow cabinet.

  15. Bob
    February 13, 2010

    People often find that when paying credit card bills at the minimum payment level, the debt continues to increase.

    Sensible people would turn down the room thermostat, cancel the gym membership and Sky subscription and use the cost saving to pay down the debt.

    Are you listening Gordon? It's not rocket science!

    Since we don't have a Sky subscription, how about we suspend contributions to the EU until we can afford them? – or better still, cancel our membership.

  16. Steve Cox
    February 13, 2010

    Well, if anyone else is fed up with this lousy government's/BoE's/banks' treatment of savers, you can register a protest by voting on a No. 10 petition set-up by an independent group 'Save Our Savers'.

    Vote here:

    Without a serious change in our culture from excessive borrowing to saving, we will never recover from this mess. Interest rates of 0.1% or whatever do not encourage saving. I know you can get better if you tie up your money for 5 years, but surely that is just an indication of the banks' inflationary expectations?

    Help the people who had hoped to get a few quid from their nest egg, instead of having it stolen by Gordon Clown and Mervyn the Marionette, and sign this petition.

  17. Denis Cooper
    February 13, 2010

    The government is spending four pounds for every three pounds it gets in, and borrowing the fourth pound, and that can't continue.

    Surely most people will understand that you can't carry on spending £20,000 a year if your income is only £15,000 a year, plus you're already up to your eyeballs in debt?

    So why aren't the Tories explaining it in those simple terms?

  18. Philip
    February 13, 2010

    Speaking of cutting expenditure I am mystified as to the recent prediction that it will cost 6 million to police 646 mps expenses.
    Are you, as a noted economist, able to explain why a job that in the private industry would probably cost 1 Accountant a couple of secretaries and one off bespoke software comes anywhere near 6million pounds or am I being old fashoined?

  19. Dog Training Assistance
    February 13, 2010

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  21. JohnRS
    February 13, 2010

    When I read this column and see the descriptions of what is happening in the economy it seems very straightforward and understandable (e.g the comparison iwth household budget) even for somone like me who isnt a banker, accountant, analyst or economist or other so-called expert.

    So how is it that both of our illustrious leaders in Downing Street do not seem able to grasp the same basic facts that you describe – we've spent too much, we've borrowed too much, we've wasted too much…and now we have to stop and it's going to be quite unpleasant as we pay our bills and debts.

    The question keeps on coming up….are they thieves or rougues?

    1. John C
      February 14, 2010

      An alcoholic knows that he should really stop drinking, yet never seems to manage it and deludes himself that he will start tomorrow and is convinced that he can stop whenever he wants.

      Gordon Brown is that man and, instead of alcohol, his drug is tax and spend. When he finally hits his nadir on May 6th others will have to step in and fix the damage he has caused.

  22. mikestallard
    February 13, 2010

    The debt must be reduced. (Do you read Tamsin Lightwater in the Spectator, by the way?) What you say isn't just true: it is common sense.
    My question is this: you are a politician and live among politicians. Politicians, like their caviar and big dinners with waiters in 18th century uniform. So do Quangocats. So do Bureaucrats. So do the "jobs for the boys and girls" of the Regional EU Assemblies. Christian name terms and all that.
    You do not mix (well, you do, but a lot do not) with the likes of people like us who never get asked to things like that.
    So when the cuts come, we all know where the tax axe falls……..
    Will David Cameron have the sheer good manners and, yes, good manners and commitment, to cut back a little on the caviar munchers and let us off the hook? I don't men give us a lot more stuff. I just mean not cut nurses' pay, keep Police morale up and so on, while being UTTERLY NASTY to the caviar first class with whom he will live on a day to day basis?

  23. […] John Redwood MP » More crunch is coming tags: abluheron1-says, comparison, credit, current-rate, field-trash, find-it-easiest, […]

  24. Kevin Peat
    February 13, 2010

    In response to my own comment here "Why do those favouring QE always treat macro economics differently to family economics ?"

    I've been in conflab with a socialist friend of mine and he rightly states that families don't have the power to set interest rates, set the value of currency etc.

    1. APL
      February 14, 2010

      Kevin Peat: "he rightly states that families don’t have the power to set interest rates, set the value of currency etc."

      Neither do governments. Rather, neither do governments that deficit spend, which is pretty much all of todays governments – with the possible exception of the Chinese.

      Governments like to convey the perception that they control interest rates. But almost invariably the official rate actually follows the market.

      In any case, the Bank of England base rate is what? 1 – 2% I don't know exactly. But how long has it been since you were offered a loan at 4%?

      1. John C
        February 14, 2010

        The BoE base rate is currently 0.5% – so the differentials are worse than you thought.

    2. Max
      February 14, 2010


      Perhaps the answer to your friend is that neither does the government. While the bank of England may set an official rate at 0.5%, that has no bearing on actual market rates. You and I can't borrow at anywhere near that, and even the government is paying over 4%pa on gilts. Equally, the government has very little control over the value of its currency, which is almost entirely set by the market. I think in most major respects the analogy with household spending holds – no country can indefinately continue to borrow significantly more than it spends.

      As unpleasant as it is to think about this, the cost of government borrowing is on an unalterable upward trend. A point will come where interest payments on gilts take up such a high proportion of government revenue that other basic services cease. At this point, we will see the end of the government's two largest spending commitments: the welfare state and the NHS (in its current form, free at the point use), whichever party wins the next election. This is now a mathmatical certainty.

  25. emale
    February 13, 2010

    Mr Redwood, does anyone in the shadow cabinet listen to you? If so, how do you explain the nonsense they keep spouting?

  26. Alan
    February 14, 2010

    "I find it easiest to compare the national budget to a family budget."

    – you shouldn't. It is nothing like the family budget because the UK can print money to repay its debts. Don't try that at home.

  27. Mark
    February 14, 2010

    I'm not sure that oil prices really tell the tale of inflation caused by the falling pound. For one thing, so much of the price is taken up with duty and VAT (both of which are higher than 12 months ago), and the underlying dollar price has roughly doubled over a year ago. A clearer guide is the price for a standard SLR camera lens – a product that has been sold unchanged for many years, such as say a Nikon 50mm f/1.8 – which now costs about one third more than it did in 2008.

    That we are seeing cuts in education budgets is not a surprise – however it is alarming to see that the way in which cuts are being made seems to favour continuing sham degree courses over serious study, backed by excluding some of the most able pupils on the grounds that they had a good schooling. That is not the way to build the future of the country. It will encourage our most able to look elsewhere to complete their education – and probably to conduct their careers. I'm sure we can't afford David Willetts' promised 10,000 extra university places. We need to cut the spending – intelligently.

    Whilst on the subject of cuts, it is to be hoped that MPs will manage to rein in the planned spending on the new IPSA quango. I can think of no good reason why they should need any press officers at all – the head of the unit ought to be capable of any such contact needed. In a well designed system each MP's affairs shouldn't take more than an hour per month to handle – a staff of 4-5 would be generous.

    You concentrate on current spending and taxation. We need also to consider assets and yields. BT announced a pension gap of £9bn – doubtless inflated by the mark to market actuarial consequences of low interest rates, but with the threat that as interest rates return to a free market once QE ends, the value of bond portfolios will suffer and government borrowing will become more expensive. House prices too will come under renewed pressure as mortgages become more expensive and hard to obtain – especially once the £300bn house price prop funded by the BoE starts to be withdrawn. That will be the event that brings home the seriousness of our situation to voters – which is why Brown has sought to hide it from them by trying to inflate the house price bubble again. It did not make pleasant reading to hear that more young people had been conned into overpaying as first time buyers for a modest hovel simply on the basis that the Stamp Duty tax break was coming to an end.

    1. Mark
      February 14, 2010

      Does this touch some raw nerves?

  28. David Price
    February 14, 2010

    You make perfect sense comparing the national and family approach to budgets, keeping costs down and finding more effective ways to generate revenue are key in good times let alone bad. But do you think that Brown's government would ever relax their cold grip on commerce and individuals and reduce tax levels and regulation? Their general MO seems to be that the necessary cash can be got simply by squeezing the victim more.

    The question is what will the next government do, will they have the common sense and imagination to correct the situation along the lines you describe or will it still be down to the markets.

  29. Matthew Reynolds
    February 14, 2010

    Well if more credit crunch is en-route then there might be one positive side.One thing I find disgusting when I go shopping is to have all these credit cards pushed on.I go to shops for goods not for personal debt.That is one reason as to why people are over-borrowed it is because it was too easy to sign up to these plastic made menaces as you would be in attractive stores,lots of offers and easy plastic ways to pay.So people got lulled by irresponsible retailers making a packet out of pushing these store cards and credit cards on consumers who just thought that the debt fueled boom would never end.Shops made lots of money out of pushing easy credit and now are getting their just deserts as people spend less in the retail sector owing to the need to repay the debts incurred in the irresponsible decade that we have had.

    Store cards and credit cards pushed by retailers have ensnared too many people in excess debt to fund folk living beyond their means.This crisis is due to people spending more than they earn and the credit crunch could take a nasty turn if all these card providers panic and call in their tabs if money is really tight.

    My policy is to kill off my credit card that I got from a retailer and just have one credit card & a debit card from a reputable bank.I aim to carry on being in credit at the bank and to pay my credit card bill off monthly in full by direct debit.It is wise to keep things simple and to live within your means.Had government and the bankers/Square Mile done the same then the present grim situation could have been averted.Likewise you would have fewer people with debts that they cannot pay in full.

    We need more exports (via regulatory relief for small & medium sized manufacturers & more credit for them), a highly skilled & motivated workforce(less welfare dependency & more apprenticeships), energy security and a far better transport system.We need a credible inflation target, a more independent central bank and a streamlined & more effective system of financial regulation.Banks should hoard more cash in the boom years (i.e. less excess credit) and bank lending curbs need imposing to stop asset bubbles going too far.That means more credit in a recession to cushion the impact but equally money printing should be an option to stop deflation causing a depression.

    Oh and £120 billion in cuts in public spending & borrowing in the next Parliament are vital.That would stop the loss of the AAA rating leading to an interest rate surge and a depression as creditors demand more for their money and as a collapse in the £ sends prices soaring.

    The aim should be a balance of payments and a fiscal surplus as a hallmark of a sound economy.We should stop store cards getting out of hand- the kind of short term and shallow 'prosperity' that leads to national & personal ruin is just a disgrace.The shops should be deterred from helping to cause this again.I got to stores for food etc – if I want debt via cards then that is what banks are for.Most economic progress in retail was based on a debt fueled illusion allowed by Brown as he collected the tax revenue to fund his politically motivated social engineering.But at the time I do not recall the people pushing these retail credit & store cards moaning at the time.

    Thank God we were not in the Euro as the ultra low interest rates would have made the debt & asset price situation even worse.Also we could cushion our economy in this crisis and we are not liable for Greek debts either.

    So while government/regulators,retailers with their plastic fetish and the bankers are to blame for this crisis at least Brown kept us out of the European Single Currency.

    Law of averages dictates that Gordon Brown had to get something right- at least it was a major thing like the survival of the £.

  30. Man in a Shed
    February 16, 2010

    I suspect the Greek crisis playing on the news is the reason for a start in an improvement in the news.

    We need to be ready to use the Irish as an example of what to do also.

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