Don’t take your eyes off the rest of the world

The UK is looking inwards with the “debate” about public spending. Meanwhile events elsewhere may have a bigger impact on our economic future. On Tuesday China raised her interest rates, seeking to slow her inflation rate which is lower than than our RPI inflation. There were serious wobbles on Wall Street, as investors worried about the security of title to various packages of mortgages that have been sold around the markets and banks.

It was a timely reminder that a lot remains to be  fixed in the world economy. In the run up the G20 there has been a chase to the bottom, with various countries seeking a lower currency. The modern form of protectionism stalking the markets is the attempt to get a currency down or keep it down. The spat between the US and China over the relative value of the renminbi and the dollar is just the most important of a series of such arguments.

Real world interest rates make the Bank of England’s official rate look increasingly irrelevant to the private sector. The Monetary Policy Committee solemnly meets to settle the government’s rate of borrowing. You, I and UK companies cannot borrow at anything like the official rate, and even savers now get rather more than Base rate for their deposits. The Bank keeps the rate low to help the public finances. The US does the same, and adds in  there the prospect of printing more money just in case the markets don’t want to go on picking up all of the bill.

In the UK the government would be wise to accelerate the asset sales programme to cut the amount of borrowing, given the government’s wish to spend so  much more than it collects in taxes. There are limits to how long a country can hold interest rates artifically low in order to borrow more at low rates for government purposes. There are also prudent limits to how much a country should seek to devalue its currency through excess money creation. Do it too much and you import a lot of inflation.

This week’s figures for public borrowing showed a new record level for September, higher even than 2009.  The Spending Review showed the pressure of higher debt charges continuing to drive up total spending. Revenue from Income Tax was disappointing suggesting some of  the high earners have gone elsewhere.

The Channcellor’s economic strategy relies heavily on above trend growth for four years, delivering large increases in tax revenue.  The Spending plans bring the deficit down only because of this forecast buoyancy in tax receipts. We need to watch both sides of the account to see how well it is going.


  1. P H
    October 21, 2010

    I agree but another and perhaps quicker way to get borrowing down is to increase the numbers in work. This can be done best (and most quickly) by incentives to get the banks to revise their lending criteria for SME's. Changes in bank regulation to encourage this are urgently needed. Just sound prudent lending with often quite small loans to SME's at reasonable rates and fees would generate jobs quite quickly and profits for the banks and tax revenue and benefit savings.

    Many businesses have investment plans on hold just for lack of lending or the banks sucking back existing lending.

    Can you, the banks or anyone please explain why this is not happening. Rather than the banks spending money on adverts claiming, contrary to the evidence, that they are lending a little real lending might be a better investment for them and the country.

    A recent typical reply from a bank who have been helpful in the past "We have a blanket ban on that type of lending at present"

    1. JimF
      October 21, 2010

      Hmmm… maybe the banks won't lend to Companies who have to pay their workers much more to make things here than Far Eastern competitors. Maybe they can see lending in such circumstances will all end in tears. Maybe we should revise our minimum wage ideas as well as our benefit ideas if we really want to get people into work.
      And if property prices weren't so high then wages wouldn't have to be so high anyway….

  2. P H
    October 21, 2010

    Today I have two more pointless regulations to navigate.

    The deposit protection scheme, for a tenants deposits, about £90 and two hours wasted (to check which scheme is best and organise forms). In twenty years my tenants have never had a problem with deposits.

    Then an energy performance certificate to organise. This is where I have to pay £70 for some one with a "qualification" to come to my property and give me a form saying it is made of Brick and Tile built about 1930 has single glazing, roof insulation and a gas boiler about 10 years old. Just in case I had not noticed before. The certificates usually have many errors but this does not matter as no one ever asks to see them anyway. So another £70 and couple of hours to arrange times and access.

    Result higher rents, much wasted time, energy and travel for all involved , and lower profit and tax revenues.

    Please can we get rid of this nonsense.

    1. Iain Gill
      October 21, 2010

      yea your tenants are lucky they have a decent landlord

      in 25 years of renting i have been ripped of by landlords countless times, often attempting to or actually keeping the deposit for no reason

      the private rented sector is one part of the economy that needs more regulation and enforcement action, as much as anything because we need decent homes which support a mobile workforce which cannot buy because they move too often for work

      1. P H
        October 21, 2010

        Yes but they can take small claims legal action for the deposit, the landlord (unlike tenants in general) has a property and cannot disappear easily and the deposit protection scheme does not really make this much better as in the case of a dispute legal action still likely anyway.

      2. Alan Jutson
        October 21, 2010


        Agree with some of your points, but the Landlord also needs some protection against some Tenants who also rip off Ladlords.

        May I point out I am not a Landlord, but have seen some properties that have been absolutely wrecked by Tenants to the tune of many tens of thousands of pounds. The fact that you may know your property is being wrecked, but can do nothing about it for months (Court orders take that long to enforce) seems very, very wrong.

        Balance falls both ways.

        1. Stuart Fairney
          October 23, 2010

          Just had that very experience, tenants stopped paying, took seven months to lawfully evict, they now owe me many thousands of pounds, chances of recovery, close to nil despite my lawfuly obtained CCJ. Point is, tenants have every chance of recovering cash from Landlords via small claims, but the reverse is not often true since there are few assets to seize.

    2. JimF
      October 21, 2010

      I disagree with the first point. Liverpool University student, a close relative and first-time tenant, loses deposit because scally agent went bust with nearly £1000 of her deposit money? That's not as things should be. The responsibility was rightly passed back to the landlord, who should have ensured that the poor girl received a Cerificate for her deposit (the scally agent had of course run off with the money and hadn't bothered with the Cert).
      It's about the only thing Labour did that was any good.

  3. nick
    October 21, 2010

    The Channcellor’s economic strategy relies heavily on above trend growth for four years, delivering large increases in tax revenue


    No, it depends on raising the rate of taxation. Otherwise you wouldn't have put in place the increases. It also depends on fiscal drag by not increasing allowances.

    Fair? Not one iota inspite of it being repeated. The more you say something doesn't change the fact its a lie.

    It's not fair for the simple reason you are punishing people for something that was not their decision. It's just the same as randomly picking up 5 people and jailing them for a bank job.

    In this case you as politicians got us into this mess, and its you who should be paying. All of your pensions should be confiscated as a starter.

    No doubt you will say that's not fair. It was Labour politicians who caused the mess.

    However, that hasn't stopped you collectively punishing the middle class. Sauce for the goose is good for the gander too.

    Meanwhile the crooks in the Lords carry on. A slap on the wrist, pay back some cash, and you can carry on troughing. Note that not one iota of interest will be paid so the public loses and politicians gain.

    1. Robert K
      October 21, 2010

      quite right about the Lords. (Have to repay-ed) tens of thousands and you get suspended from "the best club in London" for 18 months. If you were a benefits cheat, that's how long you'd spend in prison, and quite right too.

  4. Johnny
    October 21, 2010

    The Banks are facing too many directions at the same time..

    The staff want to keep their lucrative "Banking Bonuses" but the banks are now forced into higher capital ratios. This means that they have less to lend and they seem very reluctant to lend anything to SME's

    This cannot continue yet apart from rhetoric, the Government sit on their hands.

    1. Robert K
      October 21, 2010

      The government should get out of the banking business, full stop. It should be up to the bank to decide whether the risk of making a loan is worthwhile. if they get it wrong, then they should be allowed to go bust. Given that the government has got itself into the banking business by taking controlling stakes in some of our leading banks it should use this opportunity to break them up and make a definitive statement that no bank is too big to fail. That will encourage prudent lending and an appropriate amount of credit availability.

  5. Richard1
    October 21, 2010

    It would be good to hear the first definitive data as to the effect of the 50% tax rate. It seems increasingly clear it will lead to an reduction, rather than an increase, in total tax receipts. If this is the case MPs need to ask the Government to justify this expenditure at a time when other areas are being reduced.

  6. Brian Tomkinson
    October 21, 2010

    The only external events the media are interested in are the demonstrations/riots in France. Many, particularly the BBC, seem to be trying to import the same kind of stupidity to the UK. Not only has the government failed to make sufficient cuts, all the briefings have given the media and the unions a free ride to attack them for doing what they aren't even dared to do. It is hard to see how we ever rid ourselves of this ever increasing debt. Perhaps events elsewhere will have some bigger impact on our economy’s future but I don't see one that is likely to be beneficial. Do you?

    1. Robert K
      October 21, 2010


  7. Acorn
    October 21, 2010

    PH; "Can you, the banks or anyone please explain why this is not happening."

    If you are reasonably good with numbers, it would be worth you having a look at RBS quarter two accounts for 2010, (6th Aug 2010) on the following link (slides). Look for the bits that have the word "impairment" in them.

    Looking at the last year end figures, you will see the impairments – dumping toxic and other assets and shrinking the balance sheet back to reality.

    1. P H
      October 21, 2010

      Yes but virtually all the banks even one without serious RBS type problems are turning away low risk and profitable business? With a huge loss of jobs and confidence being the result.

    October 21, 2010

    Most of the expenditure charts we’ve seen exlude EU expenditure and therefore the rate at which ours is rising or, ahem, falling. May we be enlightened of the 5-year forecast given the rumblings about the UK rebate, 6% or 60% increases?

    We blogged elsewhere yesterday about the potential relevance of the rumoured changes that Germany and France wish to see to the Lisbon Treaty and a hope that this could well give us a serious chance of revising our terms or of holding the in/out referendum that so many Brits want and believe a Conservative government owes the electorate.

    The view seems to be gathering pace in today’s papers and this would appear to be a challenge to Mr Hague in reviewing his priorities in his so far disappointing reign at the FO – and of course the Coalition’s at a time when the funds we waste in Europe are sorely needed.

    1. John Redwood
      October 21, 2010

      Bill Cash is organising a response to this Treaty negotiaiton proposal which I support.

  9. michael read
    October 21, 2010

    "Revenue from Income Tax was disappointing suggesting some of the high earners have gone elsewhere."

    How the hell do you get to this statement? Dallying on the Wokingham one-way I bet.

    1. Alan Jutson
      October 21, 2010


      I guess Tax revenue is down because earnings in many cases are down.

      Certainly many Self Employed and Small Business Owners here in Wokingham, myself included, have suffered major cuts in our income, so if National income is down, Tax Revenue will follow the same route.

      High tax rates also have a negative effect on working harder.

  10. Steve
    October 21, 2010


    Would they ever seize privately owned Gold,do you think? That's the trouble with a so-called freedom loving party supporting a central bank and fiat currency: Where are the bankers and politically connected types going to run when the poor revolt? It's wicked to keep people in poverty all their lives through 'the trick'.Time to get out Von Mises,Hayek and Rothbard and start telling the truth (and destroy Socialism forevermore) before it's all too late?

    1. Stuart Fairney
      October 23, 2010

      I believe FDR did just such a thing, and didn't the Argentine political elite seize private reserves of foreign currency in the 1990's.

      Thank god our politicians are trustworthy.

  11. simon
    October 21, 2010

    So the Govt caved in and didn't make the neccessary cuts .

    Now they want to cheat by flogging off the family silver to their mates at market bottom .

    A classic case of treating the symptoms rather than the cause .

  12. NickM
    October 21, 2010

    The Coalition could not have done worse by cutting the ring fenced departments and ring fencing those they have actually cut.

    For example the NHS: what are PCTs for? Why has our local hospital taken over an adjacent factory for offices when the hospital has worked well for 20 years without?

    DfID should be shut down completely. Will there be French style riots? – I don't think so, if people want to give to charity they can. Our contribution to the EU should be frozen – well what are they going to do about it, fine us? There's £10 billion combined savings immediately.

  13. Brigham
    October 21, 2010

    How could those moderated moderators on the benches opposite sit there and smirk during Osbourne's speech. They should have been at home paying penitence for treason, for nearly destroying our country.

  14. ferdinand
    October 21, 2010

    Keynes has caused enough trouble around the World since WWII but the results are so delayed people forget who caused it. Inflation and rising interest rates are inevitable with QE. The only saviour will be impressive growth but I wonder if there is any chance of that occurring.

  15. rose
    October 21, 2010

    Does the BBC home service know what a renminbi is?

  16. Lindsay McDougall
    October 21, 2010

    Revenue from Income Tax has been disappointing because all parties have scuppered it. Labour lowered the standard rate from 22p to 20p, and the coalition has raised the income threshold at which it is first paid. Talk about a predictable outcome.

  17. forthurst
    October 22, 2010

    I hope the Treasury is watching what is happening in the US viz a viz the latest developements in the ongoing mortgage fraud that precipitated the global banking colapse both in respect of actions by aggrieved banks to obtain redress from the crooks who packaged the defective mortgages and also the equally defective proceedings to foreclose on properties whose mortgages had been collateralised and allegedly are in defalt. Both developements could potentially affect the balance sheets of taxpayer owned and other UK banks.

  18. Mark
    October 22, 2010

    Those interested in the figures for tax take should look at table PSF3 on p.17 in the recent ONS release on the latest PSBR data (hidden by the fracas over Osborne's announcements), available here:

    The borrowing of £16.2bn for September is worrying, although hidden in the figures is a repayment or reduction of liabilities in respect of "financial interventions" of £0.6bn.

    Tax receipts peaked at £510.5bn in 2007/8, dropping to £495.4bn in 08/09, and £476bn in 09/10. It's plain that VAT and fuel duty are doing the heavy lifting on garnering extra revenues. Income tax receipts are barely changed on a year ago in recent months, despite the more savage regime.

  19. Mike Stallard
    October 22, 2010

    I am in Australia at the moment. Last time we came, there were a comfortable 2 dollars to every pound. Today, there is about one dollar to the pound (A$=63p) and we are floundering. There is parity with the US$.
    So much for QE.

    1. Alan Jutson
      October 22, 2010


      Friends of ours were in Australia a Couple of months ago, for three months (regular visitors for many years) they also had the same problem as yourself. Everything this year was far,far more expensive for them due to the strength of the Australian Dollar against Sterling.

      Reported for the first time that A$ was of greater value than US$

      Either the Aussies are doing something right or the US and ourselves are doing something wrong.!

  20. APL
    October 22, 2010

    JB: " serious wobbles on Wall Street "

    Ha! Is that what you call it?

    (Reference to site removed as link did not work)
    Then ask yourself at least two questions:

    1. How much of the securities the Bank of England bought up from the likes of NR, HBOS etc originated in the United States over the last five or six years?

    2. How can such alleged chronic pervasive (bad practise-ed) go unnoticed by the government regulators?

    3. Was the same thing going on in this country?

  21. adrian peirson
    October 22, 2010

    How come, we can bail out the banks but not productive industries and the people, I'd have let the banks fail and told everyone you bank debts, loans and credit card debts and morgages are now zeroed.

    People would suddenly have more wealth and begin spending, so stimulating the economy.

    New banks would spring up in their place.

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