For most of the last year I have been explaining that the public sector squeeze much commented on and debated has hardly started, whilst the private sector squeeze thanks to inflation and tax rises is tough. The latest figures support those forecasts. Over the last year public spending rose more than 5% in cash terms, was up in real terms, and made a positive contribution to GDP growth. Meanwhile, 5% RPI inflation against 2.5% income growth with increases in VAT, Income Tax and National Insurance have squeezed private consumption. The latest figures show signs of predictable slowdown in the economy and even a growing headwind for the previously successful manufacturing sector.
In 2009 I called o n the MPC/Bank of England to raise interest rates to head off the entirely predictable inflation, which hit us badly at the end of last year because the MPC could not see it coming and did not understand weak sterling was behind much of it. Last year I called for relaxation of the banking squeeze by the FSA and Bank to avoid the current slowdown. Again they did not seem to understand the threat. Today they need to wake up to the world slowdown likely to hit early next year. China, India and Brazil are all applying the brakes to their monetary systems. The US may slow next year as the tax breaks and quantitative easing drop out of the picture. The UK’s money supply is falling again already.
This week I have been mainly writing about ways they could stimulate private sector led growth. They boil down to more sensible banking regulation, less expensive regulation of general business, and more competitive tax rates. Centrica has confirmed it will not reopen Morecambe south for gas production owing to new taxes. It is a simple example of business locked out by tax. We will import the gas and lose the jobs in the UK as a result.
The UK needs faster growth. The banking regulators are hindering that. The big tax increase to pay for all the extra public spending still going through in cash terms is increasing the squeeze on the private sector. If the government truly wants private sector led growth it needs to relax the private sector squeeze to allow it to happen.
Tomorrow I will complete the growth suggestions by looking again at infrastructure and other major investment.