Stopping Labour’s stagflation

In the first week of the Coalition government, whilst their minds were elsewhere, Labour’s policy of devaluation and higher prices continued. Sterling fell against the dollar and other important currencies like the yen. The Coalition government reached agreements which included some increases in public spending which were specific, but has yet to spell out how much further and faster it plans to go in deficit reduction.

There are three main options to change course on inflation and devaluation. Most helpful would be an early statement of the new trajectory for deficit reduction whilst they work out the detailed spending plans. The bigger the cut in the deficit this year the better it will be for seeing off a falling pound and higher prices.

Secondly, they could announce they will not be resuming the Labour policy of money printing to provide cheap finance for a public sector spending led recovery. This policy clearly is not working and is unaffordable.

Thirdly, they could raise official interest rates to bring them more into line with private sector reality and borrowing costs.

I would recommend doing numbers one and two immediately.


  1. Quietzapple
    May 16, 2010

    I worried about the possibility of stagflation two years ago, hasn't happened.

    Inflation remains low, Growth over the past two quarters was fine, (not seen a final figure for Q1 yet) and manufacturing increased by 0.7% in Q1 – the biggest jump since 1994 we are told.

    Next year 2.3% growth is forecast. I doubt any Cons Govt has presided over anything like the 23% growth we enjoyed 1997 – 2007.

    Mr Cameron's call to Mr Darling and declaration that the public sector cuts will be reduced and delayed as necessary are appropriate.

    Reply: Under Conservatives manufacturing output expanded, under Labour since 1997 it fell. Output growth is sitll weak in this country and inflation too high.

  2. Javelin
    May 16, 2010

    I've posted on this site for months that I have a real worry that Brown had hidden debts.

    I have deep worries that the UK will replace Greece the sick man of Europe. Today the Tories confirmed my deepest worries that we will have an ERM moment in the markets.

    1. alan jutson
      May 16, 2010


      So did I.

      Now an Independent Audit is being carried out (Cameron on the Andrew Marr show this morning)

      Lets have the figures out in the open for us all to see, so the full state of Uk PLC is exposed to Labour voters.

      At the moment the markets are guessing, if the true figures are published with a sensible programme for correction, then the markets should welcome some honesty.

      1. david b
        May 16, 2010

        I suspect many of those Labour voters are too thick to get it.

  3. Javelin
    May 16, 2010

    Sorry forgot to add my number one goal would be to raise interest rates to prempt the markets attacking Gilts and Sterling before the off balance sheet debts become disclosed.

    The BOfE committee may be shown to be ridiculously unagile at raising rates. We all say staying out the Euro was good for the UK but when the markets move as fast as they did during the ERM and we are waiting for the BofE committe to meet in 4 weeks how doubly stupid will Brown look and how stupid will Osborne and Cable look having just published the off balance sheet figures then not have the means to raise interest rates.

    It's not rocket science.

  4. Ian Jones
    May 16, 2010

    Lets hope your opinions are listened to, current policy will simply result in a crash of sterling followed by huge inflation and then followed by serious rises in the interest rate.

    Unfortunately the Keynesians at the Bank of England still believe in their output gap theories and the politicians will be happy when inflation reduces the need for real cuts. The pain is simply being moved to the next generation.

  5. Ian B
    May 16, 2010

    Dear Mr Redwood,

    The following may seem rather selfish, because it is. But as somebody who trades on the internet, whose transactions are processed by others abroad, whose prices are in dollars and who receives those transaction fees (less the processing charge) in dollars, please could you do me a favour and crash sterling through the floor? It does wonders for my income, which isn't very high. Really it does.

    The lower sterling goes, the more sterlings I get. Frankly, the sooner we're carting our pound notes around in wheelbarrows, the better. I just get more and more wheelbarrow loads from abroad. It's the poor schmucks who trade domestically who lose out, but that's fine by me really. After thirteen years of Labour, I've lost all sympathy for my countrymen, since I am repeatedly told they are a "progressive consensus" now, and overwhelmingly of the Left. So, let them eat sterling (literally!) as far as I'm concerned.

    Seriously though, the more one trades internationally, the more one realises just how barmy floating currencies are. Peg them all to gold, or cowrie shells, or something, make the notes back into proper gold certificates, stop the Bank Of England running the printing presses (we don't need to print money to pay for world wars these days, do we?) and stop all this currency madness.

    Of course, then you'd have to abandon deliberate inflation to destroy poor people's savings, forcing them to invest in banks who spend it on cocaine and hookers, then forcing them to bail the banks out as well. And Keynes's General Theory would have to be flung in the Chancellor's wastebasket. And we'd end Labour Boom And Bust forever. What's not to love?

  6. Richard
    May 16, 2010

    Interest rates is a tricky one. It is absurd that our prime rates are the lowest in the world – does the UK really face lower inflationary pressure than e.g Switzerland or Japan? As you have pointed out many times, our base rate bears no relation to the real cost of borrowing (even for the Government, except for the short term). But it is a way of subsidising existing mortgages and banks' profits – which whilst a bad idea in the long run, perhaps postpones pain. Do you think the Government should continue with the quasi-independent BoE or go back to the old system of overt Government control of short-term interest rates?

    1. S Matthews
      May 16, 2010

      Does the UK really face lower inflationary pressure than Switzerland or Japan?
      Perhaps we will do, once the necessary cuts in spending occur.

  7. Ex Liverpool rioter
    May 16, 2010

    What would you do if you got into goverment & dicovered all of Gordon's off the balance sheet black holes?

    Would you:-

    A. Come clean, then watch the £ crash & burn?
    B. Keep them hidden & hope for the best?


    Reply: You have to come clean and propose remedies that start to reassure markets.

  8. JohnRS
    May 16, 2010

    I'm really concerned about Dem Tories stomach for real action on the economy, deficit, debt etc. I dont believe any of the new Treasury team really have it in them to do what's needed. We need truly conservative (not Conservative!) action on this.

    I'd like to see your suggestions implemented asap but I really don't think it'll happen.

    It's very worrying.

  9. Acorn
    May 16, 2010

    While in general agreement with the above, it is worth watching what is happening to Ireland. They are in danger of throwing the baby out with the bath water. A rapidly dropping GDP does nobody any favours. It does not improve your debt or deficit problem. Tax revenue goes down when GDP goes down.

    Cutting non-productive government spending is vital; but, the money saved has to be directed to the income generating bits of the private sector. Particular those bits that make things that foreigners want to buy from us.

    Two links that explain how "external debt" of a country is a major factor in market sentiment. Which is why they are worrying about PIIGS.

    The VoxEU link is not meant for an amateur audience.

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