Slow medium or fast growth – the impact on borrowing


            The Budget book of June 2010 said UK GDP would rise from £1.4 trillion in 2009-10 to £1.8 trillion in 2014-15.  This includes 13% real growth, plus some inflation.

             Taxes would increase from £480 billion to £ 656 billion.

             Let’s leave out the inflation  and just concentrate on the real growth. If instead of 13% we have 10%, a medium growth result,  GDP would be around £50 billion lower in 2014-15 than planned. Tax revenues would be at least £20 bilion lower.

              Let us assume a slow growth result. If the UK economy now has a trend rate of say 1.4%( as we advised before and after the election in the Conservative economic policy review) that only yields 7.2% growth over five years. This would mean around £100 billion lower GDP by 2014-15 and around £40 billion less in tax revenues.

           It would be wise to run the UK public sector on the assumption that growth has been impaired by the excesses of the 2004-7 period and by the broken banking system. It is easy to spend more if you are too pessimistic, but much more difficult to spend less if you are too optimstic.

             The government is now looking at ways of accelerating growth. Tomorrow I will look at their list for consideration – small tax reductions or holidays for new businesses, deregulation, and more capital spending. Some of these ideas are helpful, but they will not b e on the scale needed. The new banks idea is capable of making a difference, as it addresses the shortage of cash for demand and investment in the private sector which lies behind the slow growth we currently see.

             If they create 3 new banks raising £5 billion of new capital each, they could lend say 5% of GDP over a period, as the banking multipliers worked through the economy, allowing for more modest multiples in a tougher regulatory environment.


  1. Mike Stallard
    September 13, 2011

    I like your idea of the new banks very much because I do not want my tiny little country to be engulfed by a tidal wave of debt like Iceland was. I listened carefully to the people shouting at each other (a pretty banker – what is the world coming to?) on Newsnight yesterday, but I must admit that I am right out of my depth here.

    I just wish that the government would unload all the banks. Politicians almost get stuff right most of the time. But that is just not good enough for the banking sector.

    1. lifelogic
      September 13, 2011

      Step one should be to stop (government owned) RBS/Natwest from calling back good existing loans as they are very damagingly doing all over the place.

      Special concessions just for certain areas and just new business are just unfair competition for the rest and cause pointless contrived arrangements.

      Concentrate on Employment Legislation and the absurd employment tribunal systems and no win no fee, over regulation, more bank funding to business, a rapid simple planning system, a smaller state by about 50%, forget absurd green energy subsidy to the Queen and Sam Cam’s Dad and the similar, get rid of 50% now and get out of the EU to free trade alone.

      Above all a positive direction of travel and vision. Cameron is doing the complete reverse in nearly all his actions at the moment – regardless of his meaningless words it is action that counts.

      1. a-tracy
        September 13, 2011

        I agree about special concessions just for new businesses you will simply sink longer lasting businesses that are trying to compete whilst paying the additional taxes you’ve implemented such as an extra 1% employer’s NI, SSP, holiday pay accrued whilst people are on long term sick leave, holiday pay whilst people are on maternity/paternity leave, sick pay for people who are also in receipt of their their state pension. Then we’ve got NEST to pay in addition to 13.8% employer’s NI next year whilst ours and our workers pensions are being moved out of their reach on a time scale not followed by those imposing this or the public sector.

        As for the banks, splitting the risks, I thought the costs of personal accounts were subsidised by the high street banks riskier business loans, I don’t think many people realised the downside risks on their nest eggs of this practise. Moving forward if we have to pay additional costs for our personal accounts for the security of having our savings secured by the government then you should be open about this. I’ve found the NatWest commercial arm very accommodating and encouraging, we pay overdraft fees, bank charges, arrangement fees. I believe private customers must better understand the real relationships with our banks and that once money is deposited it is theirs to spend however they choose and that’s why you get the majority of their services for low/no cost.

        At the end of the day the banks and bankers didn’t burn the money, someone hasn’t repaid loans, so who are the defaulters and what action has been taken against these private defaulters, corporate defaulters, bankrupts, whatever, do the banks recall the assets proffered against the loans in the first place?

      2. sm
        September 13, 2011

        Reduce employment legislation. Would you consider removing all employment rights for employees earning >£100,000 and limiting contractual liabilities to a maximum £100,000. Place protection where is it better needed.

        Some decisions would probably become more thoughtful and longer term.

        Could be very useful in say a Quango situation/Civil Service Scenario?

      3. outsider
        September 13, 2011

        I have heard of export-led growth, technology-led growth, investment-led growth, consumer-led growth and even debt-fuelled growth but bank-led growth is a new one on me.

  2. Peter Campbell
    September 13, 2011

    There is only one way the government can accelerate growth- get out of the way. No politician has ever created growth except in war or debt. They may claim to have done so but the successes they attempt to get credit for are despite them not because of them. No politically created program does anything except steal money from the productive to be redistributed for electoral gain. The problem the UK really faces is the belief that markets can be manipulated by politicians and bureaucrats to give perpetual growth and not create massive bubbles and distortions in the economy.

  3. Geoff not Hoons
    September 13, 2011

    Mr.Redwood, Do you mean completely new banks or those such as Metro, Handelsbanken (now over 100 branches in the UK) and possibly Virgin, or whoever gets Northern Rock, that are already in the UK market place? I ask as with the market dominance LLoyds, Barclays, HBOS, RBS have wont it take many many years for either the ‘start ups’ or other new to really make a difference? I hope I am wrong but my (old) instinct tells me otherwise.

    Reply: I am saying create 3 new banks out of the branches and assets of RB/NatWest/Coutts plus new capital

    1. zorro
      September 13, 2011

      ….and they are not allowed to park the money at B of E, investment banks please.


  4. Gary
    September 13, 2011

    Banks will not lend to business as long as there is QE. They will simply piggyback the QE trade. That is, as they say a “no brainer”. Why lend to failing businesses in a deleveraging slowdown, when you can hop on board a taxpayer funded , pre-announced (to the insiders), risk free, gilt trade ?

    What govt has to do is to somehow secure the depositors,if possible, and let the banks go, before they take us all down. The govt has to then stop deposit insurance and dismantle the central bank. New banks will spring up overnight, but without taxpayer insurance they will become Giro’s , or something similar. ie close to fully funded. They could not afford to leverage themselves fractionally on reserves. They could not afford to play the yield curve, instead they will have to make prudent loans to viable enterprises,in which they share the risk. That is how you will get lending into the economy.

    Savers would become very careful of the banks where they deposit savings. To attract savers the banks would have to demonstrate a very sound business.

    But, of course abolishing fractional reserve banking is taboo, because too many are feeding at the trough of the saver, the pensioner and the truly productive. It is a scandal.

    1. sm
      September 13, 2011

      Taboo almost like making observations on immigration,the EU and the disconnect between voters and not so aptly named ‘representatives’.

      Sarah Palin seems to be making a few good points.

    2. Mark
      September 14, 2011

      There is nothing intrinsically wrong with fractional reserve banking so long as banks (including the central bank/government) and their customers are honest. Absent honesty, there needs to be a suitable enforcement mechanism.

      Please see section 1.1 of this paper by Martin Shubik and D.P. Tsomocos:

      Shubik is a renowned mathematical economist perhaps best known for his contributions to game theory (some of which were applied to analysis of nuclear defence and terrorism as well as to politics – Shapley-Shubik analysis (1954) explains the power of the Lib Dems in the current government). His contributions to monetary theory deserve wider study: he just published his third volume that examines the role of institutions and government in money, credit and banking. Between the maths, he writes lucidly, with a sharp eye for what really matters.

  5. Brian Tomkinson
    September 13, 2011

    I see there was cross party agreement on the ICB report. On past experience, doesn’t that mean it is probably the wrong way to go? As it will take 7 or 8 years to implement, I see the logic in the argument that it will in fact never happen as we struggle to get economic growth. Why didn’t the Conservatives really try to reduce current government spending as a means of reducing the deficit instead of pinning their hopes on higher taxation much of which was dependent on growth levels, which, as you point out, were unrealistic?

  6. Nick
    September 13, 2011

    I like your idea of the new banks very much because I do not want my tiny little country to be engulfed by a tidal wave of debt like Iceland was.


    It already is. People have relatively little debt. The real problem is government debt and the accounting fraud hiding the really big liabilities.

    In spite a promise by John Redwood before the election the government hasn’t published the figures.

    However, to give you a little pointer. Total accrued liabilities of the government has a present value of around the 7,000 billion mark.

    The government income is under 600 bn .

    [That doesn’t include bailing out the feckless, people we know haven’t saved for retirement and don’t have assets, in their retirement. That takes the figure to 20,000 bn. Present value means that figure goes up with inflation]

    So the government is highly geared, far more than any bank is now allowed. The limit there is 10 times income.

    You can’t compare multiples for the government with a bank either. Banks don’t have forced spending in the same way. All their income bar a small percentage can service their debts.

    The government has to pay for schools, roads, NHS, defence, police, prisons, legal system. The debts have to be paid out of the remainder.

    So the error is that we won’t be engulfed. We already are.

    Reply: The Treasury has published figures for state debt, pension liability, bank liability owned by state and PFI, as promised.

    1. norman
      September 13, 2011

      While I agree we’re indebted beyond redemption I have some sympathy with the government only talking about interest bearing debt. The principle on that debt will never be paid back so we can forget about that, it’s interest that matters in the year to year running of the country.

      The other debt can be got rid of, not easily, but it is possible. Means test pensions (has to happen sooner or later) for those on public sector pensions and private pensions, the bank liability only comes into play if things go catastrophically wrong and in that case the government can just throw up it’s hands and say ‘things have gone catastrophically wrong, we can’t pay’ (as Iceland did) so that isn’t really a debt either although that’s not to say it’s not dangerous. PFI should be included in the base debt, perhaps it now is.

      The main point is that we can’t continue with a welfare state such as we have now or the debt really will start to run out of control but no politician will say that for obvious reasons.

      1. sm
        September 13, 2011

        The growing total (principle) of outstanding debt effects the rate of interest. It really matters. That’s why we have QE and ZIRP. Look at Greece it cant borrow privately.

        If we retain Fractional Reserve Banking we will have boom and bust severity dependent on the levels of leverage taken. Under full reserve banking the Politicians cannot hide or obfuscate. They will decide the level of the Money Supply, by printing it,spending it , or withdrawing it via taxes.

        The bad debt needs to be written off. New growth/tax may then rise to meet the deficit. We should be very careful about means testing and the price signals it sends.

        We would be better with a single state or possibly mutual backed (but mostly independent) compulsory pension scheme for all. Probably massive economies of scale and with limited costs, they could fund long term projects for secure revenue streams, power stations and infrastructure directly.

        The problem we have we have completely distorted price signals and money and capital using FRB and QE/ZIRP.

        Close the deficit:
        Lose the EU contributions.
        Minimum immigration.
        No more bailouts/subsidies to private banks.
        Manage the public sector down. Start with salaries over £150k, then above £100k. We could reduce both House’s substantially. Why not?
        Review the number of £1m+ pension pots in the public sector?

  7. Nick
    September 13, 2011

    This includes 13% real growth, plus some inflation.

    Taxes would increase from £480 billion to £ 656 billion.


    13% growth.

    33% tax increases.

  8. Samuel
    September 13, 2011

    “UK GDP would rise from £1.4 trillion in 2009-10 to £1.8 trillion in 2014-15”

    Nominal GDP is $2.25 trillion and Purchasing Power Parity (PPP) is $2.17 trillion.

    Which figures are correct?

    Source: Wikipedia

    Reply: You are comparing 4 with £s, so multiply the £ figures by 1.57, gives you around $2.2tr

  9. Bob
    September 13, 2011

    Stop thinking up new ways to raise more tax, take a closer look at the expenses (esp. waste)!
    I’m sure the Tax Payers Alliance (and your readers) will be able to offer some advice if needed.

    1. Samuel
      September 13, 2011

      We could cut about £50 billion and still be comfortable

      1. zorro
        September 13, 2011

        This is true, but I do not think that we have senior management within the Civil Service who are able to deliver efficiencies. It is all about voluntary exits no matter where they occur. They do not have the ability to analyse their departments and decide what their core business should be. They are too quick to spend the money on non productive PC policies. It really could be done if we concentrated on what some departments are formed for…i.e. Border Control, Immigration Control. There are plenty of studies around which say the economic benefit (GDP per capita) is negligible. The costs in the long term of increased settlement are enormous. I could go on…


  10. Neil Craig
    September 13, 2011

    I’ll look forwad to your assessment of the options for growth. Historically the wealthy countries have grown faster bit over recent years this has been reversed – alongside the rise of regulation and “environmental” Luddism in those western developed countries (though not in developed Singapore or Hong Kong).

    If we achieved the 10% groeth China manages we would have no economic problems and I believe we could do better.

  11. Caterpillar
    September 13, 2011

    (1) If banks are given ‘earning’ opportunity via QE I don’t see why they would bother with lending. But if there is going to be QE2, is there a way this could be directed towards the hypothetical new banks?
    (2) Many efficiency and productivity gains (hence much growth) through the spread of new technology and business processes come from failing firms being displaced or taken over. Sadly protecting firms that were only marginal during cheap money boom years slows this kind of recovery – it may even persuade some companies to keep cash on the BS whilst waiting to see.

    1. zorro
      September 13, 2011

      QE1 was always a scheme to facilitate the government’s deficit spending, and allow banks to park their cash.


  12. waramess
    September 13, 2011

    Is this government interested in real growth or just in number gazing and thinking up ways of attracting some big beeasts in order to repair their depleted revenue base?

    Looking at trend growth is delusional given that the trend of all else that supported this trnd growth has changed. We should now expect a trend growth of zero, if we are lucky and a negative growth if we are not

    New enterrprises are easily destroyed by the state who demand taxes in advance of the new enterprises earning a profit, demanding they pay the minimum wage to any hirings and enforcing a vast array of regulation upon them. It really is little wonder that fewer and fewer people are willing to risk all to start a new business.

    Perhaps this government should cut its cloth to suit its revenue base and put in place a system to encourage new ventures. Stop increasing the cost of energy by building these rediculous windmills and start looking at how we might best use our own natural resources to improve our energy competitiveness.

    Too difficult, I suppose. Much easier to get a bit more QE going attract a couple of big beasts with some subsidies to start an assembly plant and find another way of raising taxes.

    What, I wonder, is there to feel good about the fact we have a Conservative government?

    1. uanime5
      September 13, 2011

      New businesses won’t have any staff if they don’t pay minimum wage. No one will work if they’re paid less than those who stack shelves at Tesco or flip burgers at McDonalds. They also won’t work if they have less rights than those at Tesco or McDonalds.

      1. waramess
        September 14, 2011

        Just goes to show how silly the minimum wage is then, doesn’t it.

        If you think it does not matter then why not pay a minimum wage of £25,000 and keep everyone happy

  13. Ralph Musgrave
    September 13, 2011

    Given that UK bank assets relative to GDP forty years ago were ONE TENTH of what they are now, and that economic growth in those days was much the same as now (if not better), there is clearly something seriously wrong with the idea that new banks are prerequisite for improved economic growth.

  14. zorro
    September 13, 2011

    I think that it is good that you took up my point in the ‘All we need is growth’ blog. I thought an assumption of 7.5% overall growth over the Parliament was generous and did not know that the Conservatives had made that assumption previously.

    I think that the international situation warrants a more pessimistic reading but I was keen to know what the effect would be on output and tax intake, because I haven’t seen it discussed in such candid terms.

    It really would be a blow to the government’s strategy if it was forced to borrow more because of a lack of growth or engage in more manipulative QE tactics. I think that yours is one of the least worst solutions to this horrible mess. If managed properly it could help boost economic growth but I don’t think it will be enough but anything apart from the horrible drift at the moment.

    I wonder if Cameron spends much time wondering how the normal person whose job is threatened, income falling, savings evaporating with inflation feels…..What feeling of empathy do our elected representatives have towards their honest, hard working constituents?


  15. David Price
    September 13, 2011

    Why should everyone else be limited by the short sightedness of bureaucrats and socialists?

    It depends on the business but it’s not unheard of in the technology sectors to work for low salary on the basis of profit sharing and shares in the business? Also, There is more than one way to organise an enterprise and its members don’t have to be employees.

    1. David Price
      September 13, 2011

      apologies I clicked the wrong “reply” – my comment was in reply to;

      Posted September 13, 2011 at 3:55 pm

      New businesses won’t have any staff if they don’t pay minimum wage. No one will work if they’re paid less than those who stack shelves at Tesco or flip burgers at McDonalds. They also won’t work if they have less rights than those at Tesco or McDonalds.”

  16. BobE
    September 13, 2011

    No public servant to earn in excess of £100k (Including the BBC)
    Public pension pots to be stopped at 1Mill.
    There we go boys……

  17. Gary
    September 14, 2011


    Actually, I agree with you. The problem is the underwriting of risk in fractional reserve banking by the taxpayer. For fractional reserve banking to survive with such extreme leverage for any extended period of time, then third party underwriting has to exist. Taxpayers bearing the burden of bank risk, almost eliminates Shubik’s harsh bankruptcy penalty ,u, that he assumes in all of his 4 theorems(starting page 133 ). His theorums assume a “sufficiently harsh bankruptcy penalty” .

    If the central bank, especially, and deposit insurance were not underwriting fractional reserve risk, and the risk had to be entirely assumed by the banks themselves, it must follow that they will lower their gearing and tend towards 100% reserve banking, to survive.

    This is why Douglas Carswell’s bill is so subtle. If all currencies are allowed as legal tender, then the central bank monopoly will cease, and without the central bank underwriting them, fractional reserve banks will tend towards 100% reserve banking. Without fractional reserve leverage credit bubbles become less likely ,and so then does boom and bust.

    1. Mark
      September 15, 2011

      Needless to say, Shubik has analysed the situation of private currencies too.

      We conduct an experimental game in which each agent issues her personal IOUs, and a costless efficient clearinghouse adjusts the exchange rates among them so the markets always clear. The results suggest that if the information system and clearing are so good as to preclude moral hazard, any form of information asymmetry, and need for trust, the economy operates efficiently at any price level without government money. These conditions cannot reasonably be expected to hold in natural settings. In a second set of treatments when agents have the option of not delivering on their promises, a high enough penalty for non-delivery is necessary to ensure an efficient market; a lower penalty leads to inefficient, even collapsing, markets due to moral hazard.

      The full paper is here:

      In other words it’s probably cheaper to have one issuer rather than trying to assess the honesty of many. Our problem is that there is no adequate sanction on those who debauch our currency. Perhaps we need to resurrect Draco from 623 BC for that.

      1. Gary
        September 15, 2011

        “Our problem
        is that there is no adequate
        sanction on those who
        debauch our currency . ”

        And therein lies the problem. They have proven, to our ruin, that they cannot be trusted. History is littered with their theft.

        It is not an inconvenience that ALL participants in the market have to assess their own risk. Nothing can be more inconvenient than what these bankers have done. In fact, without risk, the free market ceases to function. If there is no fear of loss and consequences, there is boundless greed.

  18. John Moss
    September 15, 2011

    We don’t nee dmore lending, John, we need more equity investing with people and pension funds buying shares in businesses for long-term income and growth.

    Your original CGT idea from a couple of years ago, which mirrored my own thoughts, would help. Transfer all gains across to income or profits tax, then relive them at 20% per annum after the first two years. So no tax after seven years.

    Apply this also to principle homes and you cool some of the speculation which we saw in the homes market between 01-08.

    1. Mark
      September 15, 2011

      I had thought about a “special offer” on CGT for BTL investors – say a reduced rate of 15% available for 2 years on any property held for more than 5 years, with reversion to mainstream arrangements after that. It might generate a fair amount of revenue as well as increase the supply of homes for sale and reduce their prices.

      I am not convinced that CGT exemption is the right way to go longer term, but CGT should see RPI indexation of the base price restored to the calculation, and lowered rates for long term holdings, with perhaps a rolled up allowance for non-taxable gains. The main function of the tax should be as anti-avoidance on income/corporation tax.

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