Austerity or growth?


            It’s a strange choice to hear debated. Of course most of us will choose growth, if the alternative is austerity. Mr Hollande’s slogan was the more popular in the French election. In a way the surprise was how narrow the gap turned out to be , not how wide, between him and his rival.

            It’s also a false choice. You cannot have either auserity or growth, if you start from the position of many European countries with high state spending and high state borrowing.  Most serious people in the debate from all parts of the political spectrum agree that highly indebted countries with large deficits need to get the deficits down. Most  agree that borrowing more is not the way out of debt. The argument is over how you get the deficit down.

            Some say that if a country heavily in debt with a large deficit allowed itself just one more “fiscal stimulus” – allowed itself to spend just a little bit more in the public sector – and pay for that with more borrowing, it would trigger growth. It is difficult to see why that might work. After all, the Greeks, Portuguese and Spaniards have been running huge budget deficits for some time, yet their economies are amongst the weakest in the EU. State spending that is financed by borrowing  may provide very little stimulus to activity. If the money is borrowed from the private sector in that country, the private sector then has less to spend, similar to the effect of  a tax rise.

            Many of these heavily indebted countries want to get their deficits down by more tax revenue, rather than by cutting spending. If this happened through the proceeds of growth, that would be benign. Unfortunately in several cases there is no growth, or there are large falls in output and in tax revenue. If the countries then respond by increasing the tax rates or becoming more aggressive on tax collection, they may make the position worse. They might take their countries above the tax saturation point, and end up with less revenue, not more.  The rich, the enterprising are always looking out for legal ways to arrange their affairs to pay less tax, or move to more hospitable jurisdictions. Others in the society may simply move into an enlarged black economy.  

              Countries in a financial mess have to do enough to control spending to keep the confidence of markets and to create some downward pressure on total spending. They also need to do enough to promote a more vigorous private sector led recovery. Higher taxes could kill that. Weak banks are also a big part of the underlying problem. If a country gets into a badly exposed situaiton like Greece, then the banks will find it hard to keep hold of deposits, leading to further contraction. As bank deposits fall, so bank lending has to be reined more as well.


  1. Gerard Fox
    May 12, 2012

    The problem though is that when you reach this point of high indebtedness your options to restore growth are limited. With the market imposed constraint on further borrowing to boost demand, you become reliant on a lower exchange rate to raise output & or supply side reforms that make investment in productive assets & labour more profitable. But you still have the issue of deficient domestic demand which requires an almost excessively relaxed monetary policy. In truth to some degree you are doomed to suffer a combination of low sub trend real growth & higher inflation as your economy slowly readjusts. Dealing with the bad debts in the banking system & forcing capital on all the banks can go some way to alleviating deficient demand by getting lending going again. The problem for weakened countries in Europe is that devaluation is not an option, monetary policy is not lax enough & the banking system remains under-capitalized. Monsieur Hollande’s tax & spend prescription & rejection of existing & future supply side reforms will sadly make matters worse not better.

    1. Acorn
      May 12, 2012

      “But you still have the issue of deficient domestic demand which requires an almost excessively relaxed monetary policy” While I agree that the problem is a lack of aggregate demand not a lack of supply side competition, can I ask if you meant “fiscal” not “monetary” in that sentence. Monetary policy will change interest rates and bank liquidity (QE), nobody has yet proved that it will change aggregate demand via money supply.

      The demand side (households) are up to their knicky knacky noose in debt, they are not debt fuelled spending like pre-crisis. Most SME people I deal with don’t actually want to borrow money until they can see the hoards of customers coming over the horizon. They complain about bank lending at the bar, which is just willy waving; they haven’t got any big ideas to spend it on. The customers aren’t turning up at the door to tell them what new products they want, or if they still want the old ones.

      Fortunately we still have our own sovereign currency so our Treasury does not have to save or borrow before it can spend; unlike the EuroZone that uses a “foreign” currency that has no Treasury to spend money into existence; only the ECB that lends it into existence against, what is looking like, some very dodgy collateral.

    2. A Different Simon
      May 12, 2012

      Gerard ,

      Is Monsieur Hollande really serious about tax and spend though ?

      He talks about 60,000 extra teachers (over the term of office) . That is small change and overall a good investment if standards are not lowered to allow admission of inferior teachers .

      As for the proposed 75% income tax rate , that scared me . To get such a rate itself to work would require a really , really strong politician to convince the top-enders that it was in their long interests .

      Simmilarly , extensively elevated corporation tax would require a really really strong and incredibly smart politician to make it clear to corporations that if they wanted to do business in France , those were the terms .

      I’m not saying it’s impossible , just that I haven’t come across any politicians who could pull that lot off and make it work .

      Far more likely that is was just rhetoric to appeal to voters emotions rather than their brains – not a very smart game to play .

      1. uanime5
        May 13, 2012

        It’s entirely possible that that the majority of those affected by the 75% income tax rate won’t be able to leave France and get a similar salary. After all it’s not like there are a large number of jobs in the world that pay the equivalent of a multi-million euro salary.

        Reply: The highly paid within large organisations can often switch office within their multinational.

  2. lifelogic
    May 12, 2012

    “The argument is over how you get the deficit down.”

    Not really much sensible argument over this. You just have to get more people doing productive things that earn money (and fairly quickly), generate exports and create wealth. With fewer pushing papers around, inconveniencing the productive, over regulating, building absurdly subsidised green tosh or £200M Olympic Helta Skeltas (that are not even Helta Skeltas), giving money away to the pigis or the IMF, wasting taxes on carbon capture, green deals, happiness indexes, gender neutral insurance, no retirement and all the rest of the Cameron nonsense.

    Or as in Greece they just move back to black economy, bartering, or hand to mouth existence, collecting wood growing your own food and the likes.

    1. lifelogic
      May 12, 2012

      I see in the telegraph that Stephen Hester the RBS chief defended the bank’s lending practices amid continued criticism that businesses are finding it hard to access credit. “We’re not there to stuff money at them when they don’t have a good use for it or can’t pay it back. That will just repeat the cycle.” What a joke!

      In my experience they are not lending to loads of sound businesses that have very good uses for the money and (are far more solvent than RBS) and perfectly able to pay it all back with interest.

      The bank might as well just sack all the lending staff and replace them with a lending line answer phone saying perhaps “get lost we are not lending (unless you do not need the loan) and also we want all the existing loans back”. It would save a lot on staff and bonuses.

      1. lifelogic
        May 12, 2012

        Typical property investment loan terms for good customers in 2007 from Natwest/RBS perhaps 1/2% fee base + 0.8-1% and 75-80% loan to value. Typical terms now perhaps 1.5% fee (Libor being higher than base too) plus say 3.75% and 45% loan to value (due to new artificially restrictive rent cover rules) and perhaps only on a five year loan basis so a new fee payable then too.

        If (as is somewhat unlikely) RBS/Natwest group do actually offer you a loan then you will almost certainly get one far more cheaply almost anywhere else.
        They are simply not in the lending business but the loan recovery business and are surely one of the main reasons for the lack of UK growth.

        The government owns them and yet is damaging it own tax receipts and employment figures by forcing them to pull back funds from sound solid businesses. Why? So Mr Morally Repugnant can lend on soft terms £10Bn to the IMF or the PIGIS perhaps, or just buy MPs some new Ipads to play with for a couple of years until the batteries go?

        1. zorro
          May 12, 2012

          “We’re not there to stuff money at them when they don’t have a good use for it or can’t pay it back. That will just repeat the cycle.”…..Comedians who have missed their true profession….this MO being exactly what they did in the years leading up to the crash in an unseemly rush to get bonuses without adequate supervision from their managers or the owners of the bank who should have been made to fail instead of being bailed out and provided ridiculously easy terms to repair their balance sheets. Almost free money from the BoE and a couple of per cent on gilts, or if they can be bothered personal loans at usurious rates or business loans where they will only loan a small percentage of what you need….

          It is quite frankly an insult that after some of the ridiculously risky loans they made before the bust, they now come out and act paragons of virtue who think that they can pick winners instead of looking at the facts of the business and then assessing risks.


        2. uanime5
          May 12, 2012

          The rate at which money is loaned by banks is determined by the markets. Perhaps the problem is allowing the markets to control vital services, rather than the Government.

          Anyway I suspect that the markets aren’t encouraging loans to new businesses because:

          1) There is no limit to the new ways people will find for going bankrupt.
          2) New businesses with new ideas have a high risk of going bankrupt.
          3) Innovation is best conducted in small departments of large companies with large cash reserves.

          1. forthurst
            May 12, 2012

            “The rate at which money is loaned by banks is determined by the markets. Perhaps the problem is allowing the markets to control vital services, rather than the Government.”

            How many times on this site has JR advocated achieving greater competition amongst the banks by breaking up the taxpayer owned banks including the erstwhile empire of Fred the Shred (or more accurately, Fred the Shredded)? Why not start paying attention for once?

          2. lifelogic
            May 13, 2012

            You say “Perhaps the problem is allowing the markets to control vital services, rather than the Government.”

            Are you mad? Do you want everything to be rationed by a monopoly state? Have you looked at any history?

          3. uanime5
            May 13, 2012

            forthurst how is splitting one bank into several banks any more likely to increase lending? These new banks will be even less likely to take risks because they will have less capital.

            lifelogic given how badly the private companies are doing I doubt the state would be any worse. It may even be better because elected politicians are more receptive to the mood of the general public than directors in a company.

            Reply: The aim would be to create competing banks with stronger balance sheets who would have to lend more to compete.

          4. Lindsay McDougall
            May 14, 2012

            Unfortunately for your arguement, large companies with large cash reserves are rarely inclined to set up small departments to innovate. They are not motivated. Large companies are all about corporate crap and lionising top management, saying what wonderful chaps they are and listening to their pep talks.

        3. StevenL
          May 12, 2012

          I heard a prime time radio ad from a big UK bank for ‘invoice factoring’ while I was driving the boss to a meeting.

          “You hear that? Payday loans for small businesses.” I commented.

          1. lifelogic
            May 13, 2012

            Indeed and Payday loans advertised on daytime tv at 3000% APRs. Many sound businesses have been forced on to personal credit cards to fund businesses due to the lack of banking. But the government still has £10Bn to waste on the IMF.

    2. Bazman
      May 12, 2012

      Starting to sound like HRH Prince Charles on agriculture, gardening, architecture and any other complex subject that takes his fancy.
      Interesting to see that any building scheme thought up by private companies is sound and any scheme thought up by the state is a waste of money. Daft flats are not a sound investment anywhere by anyone except private builders knowing that ultimately they will be bought by the local authorities for social housing at inflated prices. Square that one off.

      1. lifelogic
        May 13, 2012

        The government makes the rules the private sector just responds to them.

  3. alan jutson
    May 12, 2012

    John it often amuses me that people/politicians think that in the great order of things, we should always have natural growth, that by some devine right, an economy should always grow, no matter what the circumstances.

    Given this stupid train of thought, we have had politicians, and yes some housholds, then belive that because their economy or income will/should automatically grow, then they can guess what that growth will be in future years, and increase planned expenditure accordingly.

    How very, very wrong.

    No Country and no houshold can guarantee growth, because situations change.

    For a very basic example:
    If the population of a country grows by 10% and people produce no more than they did before, then the economy would grow by 10%, but it has done so simply because more numbers are producing, nothing has changed only the population numbers.

    Just like in a family, if only one person goes out to work, and then another member joins them, the family income has increased dramatically, but not because of any real growth, its simply because another has gone to work and is earning.

    Given the UK population has grown by millions over the past couple of decades, and those in work have also increased (due to a rise in population) of course our economy has grown, but how much is due to that population increase, and how much by more real efficiency, by real growth.

    Not a lot I would suggest, but deluded governments have increased future spending plans as if it would.

    1. alan jutson
      May 12, 2012


      Austerity or Growth ?.

      Can I suggest a more simple solution.

      Forget either for the moment, and simply plan to live within your means, that is not Austerity, that is simple commonsense.

      Austerity is when you have planned to live within your means, but are forced to live at a much, much lower standard caused by outside influences, out of your control, and unforseen.

      The writing for governments has been on the wall for decades, as they have never even planned to live within their means.
      If they did, then spending would be no more than last years income, and given we are in debt and will need to pay it off at sometime , spending should be curtailed to only 80% of a KNOWN INCOME (TAX TAKE)

      Eg: LAST YEARS INCOME, not some pie in the sky guesstimate.

      The media have swallowed hook line and sinker the politicians drivel of:

      Borrowing which has been called investment, not debt.

      Cuts to public spending, when the bill is rising.

      Growth when there has been none for decades, despite billions being spent in the past to find it, and figures manipulated to try and prove it.

      Quantititive Easing, a flash name for printing money and devaluation.

      Time for everyone to wake up and smell the bacon.

      The only real growth will be in the alternative economy, as more and more people try to circumvent government tax and waste, Thus tax revenues will actually drop in the future, leaving even more problems for any government trying to balance the books.

      Governments need to face up to the facts, they have now reached the limits of the populations willingness to pay ever more tax, only to see it wasted.

      1. Mick Anderson
        May 12, 2012

        Part of the problem is in allowing Government spending to be included in the GDP calculation.

        JR has explained in the past that this is to try and give consistancy between figures for different Countries who may have State funding for a different range of services. However, if you don’t try to have an international GDP competition, and if you are not permanently trying to borrow against that projected GDP, the figures just don’t matter.

        A more honest approach would be to calculate GDP and growth only from the private sector – everything else is a drag on the private sector, therefore hindering genuine growth. Then year-on-year GDP would be a proper indication of whether the country is improving, if it really matters. It would be more sensible than a random “happiness index”, at any rate!

        This would encourage small-statism, and by definition prevent the absurd claims from Mr Balls that higher borrowing is a good thing because it makes the GDP figures look better.

    2. lifelogic
      May 12, 2012

      @ alan jutson

      The economy should, in general, grow over the years due to the massive improvements in technology made and the increase in population/work force. Against this growth we have however the limited resources of some minerals, materials, land and energy and we also have a bloated expanding government sector, employing lots of people at tax payers expense, often doing nothing very useful, misdirecting resources or even doing things that are actually destructive. Also all the pointless wars and strife.

      On balance however growth, mainly through improved technology, will win out – I suspect. Technology has a positive feed back mechanism. New technology helps speed up the next discovery. Progress in electronics, manufacturing and medicine has been huge and is accelerating every day. We just need to keep the dead hand of the state off the loot and stop inventing new religions like the new green/renewable energy one.

      1. alan jutson
        May 12, 2012


        Whilst I agree technology should make for improvements in efficiency, does this actually happen in real life.

        Perhaps in the private sector, to a degree, but even then not much for the majority.

        In the Public Sector advances in technology have actually cost money (just think of all of the computer systems which do not work after billions £’s have been spent on them) and personel numbers have increased for years.

        Ask yourself
        Is the NHS more efficient than 10 years ago.
        Are the Tax offices more efficient than 10 years ago.
        Is the Department of Work and Pensions more efficient than 10 years ago.

        In short, do we employ more people in State funded organisations than we did 10 years ago, and are they more or less efficient and productive for that additional cost ?.

        1. David Price
          May 13, 2012

          The thing about technology is that you aim to get improvements in effectiveness and not just efficiency. the problem with efficiency is that it is so easily counteracted, for example word processing made document productio so much faster but it was counteracted by people making more revisions because it was so easy.

          Mobile phones have made for more effective communication capabilities but people spend far more time on the phone or messaging.

          Improvements in effectiveness is something else. Examples in the NHS I am aware of include the da Vinci robot which enables surgical techniques that weren’t really possible before. Wireless heart monitors mean cardio patients can start moving around and recover sooner. IT technology facilitates drug development and should reduce the administrative burden but can’t seem to remove any of the bureaucratic overheads.

          The state certainly employs more people now than previously, I believe the payroll increased by 20% between 1997 and 2007. Quite what all these people are doing I haven’t a clue. More to the point is whether the effectiveness and/or efficiency of the public sector increased by the same amount?

        2. A Different Simon
          May 13, 2012

          Alan ,

          You mention “advances in technology” and Govt computer systems .

          15 years ago you could have found enough people with sufficient understanding of the principles underlying the field of management of information to design a centralised NHS database .

          Back then I had high hopes for future database management systems . Unfortunately none of this has come to fruition and worse the industry is not even heading in the right direction .

          Structured Query Language was never meant to be the final solution . Unfortunately too much has been invested in it to just throw it away . Practitioners out in the market lack knowledge of the theories underlying the field so there is no demand for anything better .

          I am 45 and do not expect to see improvements in my lifetime .

      2. Bazman
        May 12, 2012

        Ain’t going to help you if you do not have the basics like clean water or a local chip shop.

        1. Bazman
          May 12, 2012

          More scary is laser uranium enrichment genetic manipulation and global warming..

      3. zorro
        May 12, 2012

        True, though what Alan says is quite reasonable. Technology, and its very quick advances since WWII have assisted efficiency and productivity. We also have highly advanced telecomunication devices (smart phones) which allow us to have the sum of human knowledge at our fingertips.

        Never before has a generation had so many technological advantages which can create business opportunities and give you the ability to acquire knowledge in double quick time. We also have the ability to interact with each other and our MP on a variety of subjects from all four corners of the earth and contribute to the democratic process. Indeed, we have our own forum!

        But as lifelogic states, it is the dead hand of the state which inhibits this growth with its addiction to pilfering our money and throwing it down the drain or lending it to lost causes.


        1. Yudansha
          May 12, 2012

          Zorro – That same technology enables outsourcing and the automation of jobs.

      4. Electro-Kevin
        May 12, 2012

        @Lifelogic – The key component here is revenue. Corporations will doubtless continue to invent, innovate, adapt and expand regardless of what fate befalls Britain or the EU.

        The human race will continue to experience progress somewhere but will it be here ?

        The corporations are ever more mobile and amorphous. Key employees become more loyal to them than to nation and will travel.

        The question has to be as to whether or not the growth you speak of remains ours. The way Britain is structured in terms of welfare and pensions requires a huge amount of revenue and – if not extracted directly from the corporations themselves – will be extracted from them indirectly via their workers (payroll taxes) and from the people who buy their products (VAT)

        Labour costs will remain higher as the taxpayers revolt against policies by which their unemployed neighbours are being ‘paid’ a better rate than they are and so democracy plays its part in making it too expensive for corporations to operate here.

        The £35,000 a year welfare dependant simply has to become a thing of the past and by a big margin. Coupled with the largesse towards bankers it will make it very difficult for any politician to be able to tell key workers that they must accept pay restraint – especially when David Cameron has reneged on every single promise that would have made it all worthwile.

        1. David Price
          May 13, 2012

          Quite right. The technological advances that everyone seems to assume will save our economy through greater efficiencies actually make the act of wealth creation more portable. The result has been that the capability to develop those technologies and so exploit the growth has moved (ie been given away) to our competitors in China, India, russdia etc.

          Also, the efficiencies don’t actually happen, the efficiency and cost improvements of email are offset by the increase in browsing and tweeting.

          This is not to say we can’t devlop new stuff or compete more effectively regardless of labour costs, robotic assembly lines should cost about the same wherever they are run, maybe even cheaper in a western infrastructure. The issue is whether our engineers and scientists and workers in the private sector are motivated enough to do it. Why bother when our income diminishes in value through imposed inflation, the public sector wastes money, our politicians give it away, grow the national debt and engage in unilateral free marketeering in a world of protective markets?

          1. Electro-Kevin
            May 13, 2012

            The corporations which own those assembly lines can be based off-shore for tax purposes. Those skilled enough to work on them will be heavily taxed and their wage settlements subject to inflationary effects due to VAT needed to make up the shortfalls.

            All of this to support public sector pensions, welfare, NHS before paying down national debt …

            It simply cannot go on. Worse than this the welfarist system doesn’t work anyway. It is not giving us a fair or civilised society at all – quite the opposite.

            I urge people to watch the film Kidulthood for a frightening insight into why the riots occured last Summer and why I shifted my young family away from London at huge financial cost.

            A broken economy is one thing. A broken ideology is another and will not keep law and order no matter how much money is thrown at it.

          2. lifelogic
            May 13, 2012

            Indeed the bloated state sector, over regulation and misdirection of resources (like the green religion) and most that flows from the EU are rendering the private sector unable to compete. That is why Cameron must find a new compass or go.

      5. libertarian
        May 12, 2012

        Exactly, totally agree.

        For a full explanation of this I highly recommend matt Ridley’s excellent book The Rational Optimist

      6. StevenL
        May 12, 2012

        Our ageing demographics mean that the workforce is not increasing surely?

      7. David Price
        May 13, 2012

        We don’t really have limited resources of minerals, materials or energy, we just use them wastefully – it depends very much on your point of view.

        Politicians see rubbish dumps and want to tax people because they use up land. An engineer sees electronic and technology waste as a higher concentration of minerals than occurs naturally and a mining opportunity (see Urban Mining). Fuels are getting scarcer, whether through raw material shortages or higher demand from the devolping countries so politicians want to add more taxes to reduce consumption. An engineer would look at how we could use less energy in the first place (for example, Geopolymers versus Portland Cement). A staggering amount (50%?) of generated electricity is wasted in transmission losses, what is being done to address that? Perhaps start fining utlities for wasted water, gas and electricty rather than fining the customers with 20% “government obligations”. In that light PV panels on a private roof makes a bit of sense (fewer losses) except politicians want to give unfair grants and the utilities want to control it. The real idiocy of FITS PV panels is that in a power cut the householder is not allowed to use the electricity from his own PV panels.

        Isn’t the problem that it is politicians and financiers dictating the solution and they will always, but always, look for a political solution and do it in a way that maximizes their control and revenue?

        1. David Price
          May 13, 2012

          I take back the 50% in transmission losses (this would include losses in some forms of generation), it’s more like 7-8% for the UK. Not staggering but still not trivial considering we pay a further 20% on those losses for government obligations.

          1. lifelogic
            May 13, 2012

            Most of the losses are wasted heat at the generator transmission is quite efficient. But even wasting the heat and transmission losses it is far better than expensive PV cells on the roof, in cloudy England and growing moss on them that needs cleaning off and costs far more than the electricity ever generated.

      8. Steve L
        May 13, 2012

        Growth in efficiency through technology has two effects. Yes, it increases profits/reduces prices, but it also reduces employment within a company. That surely knocks on to the economy as a whole, unless some new business or new products are created, though that relies on demand.

        Even in technology creation companies, improving technology reduces the need for jobs. What required 10 design engineers to achieve 30 years ago now only needs 1. Look at the state of the defence industry as an example, and how dozens of thriving companies years ago have disappeared by consolidation and technology growth, with the corresponding reduction in jobs.

        When I graduated in the late 70s as an electronics engineer, I had about 7 or 8 job offers to choose from, without much effort – the employers were chasing graduates!

        We need some realism and honesty about how our current society and economy really looks and can operate.

    3. stred
      May 12, 2012

      Alan. Also, some growth made possible by new technology seems to make life more difficult, not better. For example, my newer car has a computer controlled fuel supply and this can suddenly cut the engine, making it dangerous to use at high speeds. The garage can’t fix it as the problem is intermittent and disappears after switching off and on. My 2 year old HD television had to be retuned because of the ‘growth’ of digital TV, with 114 stations- and 100 of them T.C.. So now I have to retune every time we switch it on because it can’t remember the increased number.

      But think of all those extra ‘jobs’ selling diamonds to housewives or ‘adult babes’ to dirty old men. Or those employed by internet gambling sites, enabling the redistribution of money between fools.

      1. lifelogic
        May 13, 2012

        I tend to agree that companies can often get away with “designed in redundancy” and failure to repair or support products (with spare parts at sensible prices) I would support rules that deter or prevent this.

        Rechargeable Batteries (that have a limited life and cannot be self replaced) are a good example of this. On some cars now you need to be a trained mechanic just to change the bulbs.

  4. Steve Cox
    May 12, 2012

    Simon Heffer, love him or loathe him, is on the mark this morning. I know he dislikes David Cameron with a passion, but he does raise some points that make me wonder if our Dear Leader is awake. According to Heffer, Cameron followed Merkel and publicly endorsed Sarkozy over his challenger. It seems to me that in mature sovereign democracies it is highly unwise for a leader to take sides during a foreign election in which he has no mandate. And this was in spite of opinion polls at the time indicating that President Sarkozy would soon be history. On top of this, in February he refused to meet Francois Hollande, now President-elect of France, when he visited London to canvass some of the 102,000 French expatriates who are registered to vote in Britain. Well, as a nation we never were terribly popular with the French, but I should imagine after Dave’s antics in the least few months that the new French government are seething at us. Was this really wise of Cameron, was it statesmanlike, was it in any way sensible or acting in our national interest? I may be wrong, but it seems like rather juvenile behaviour to me.

    Here’s a link to the article:

    1. lifelogic
      May 12, 2012

      Heffer is pretty much right I think.

    2. Denis Cooper
      May 12, 2012

      According to Spiegel in early March, Merkel set out to forge an anti-Hollande alliance and Cameron agreed to take part in it.

      “Merkel secretly agreed with Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy that Hollande should be shunned, SPIEGEL has learned. British Prime Minister David Cameron also agreed not to meet him.

      They weren’t just motivated by sympathy for Sarkozy but also because they’re angry at Hollande for saying he would seek to renegotiate the fiscal pact agreed among 25 of the 27 EU members. The agreement on fiscal discipline, pushed through by Merkel at an EU summit in December, is a central component of the EU’s strategy to save the euro in the debt crisis.”

      So we have Cameron exercising a veto over the “fiscal pact” becoming an EU treaty, and refusing to sign us up to it, but nonetheless apparently content to see other EU countries bound by it and willing to help prevent any interference with Merkel’s plans to impose it.

      1. lifelogic
        May 13, 2012

        Rather typical of Cameron, white is black, duplicity – if true.

    3. zorro
      May 12, 2012

      It was certainly not good politics. There was nothing to be gained by over enthusiastic support of Sarkozy and cold shouldering Hollande. On reflection, it was also rather stupid because as you say the French are never slow to make life difficult for us…….We are rather closely dependent on France now for our defence strategy. Is that a good place to be bearing in mind the instability in Europe?

      Our border strategy is also highly dependent on maintaining effective juxtaposed controls with France which allows us to examine passengers and goods on French soil. Our cooperation there also allows us to work with the French in dealing with illegals/asylum seekers with some ordee. If the French withdrew from this arrangement (on whatever pretext) we would have to spend a lot more on border controls and would face larger influxes as there would be little impetus on the French to deal with the issue if they were making a beeline for the UK. Sangatte reborn, and huge queues waiting to enter the UK illegally just what Dave needs to keep down net migration!


  5. Nick
    May 12, 2012

    And why do these people believe that you can borrow and spend a bit more to solve the problem?

    The main reason is the lies put out by all parties, Tories included. Namely that the current debt is affordable, because the ratio of debt to GDP is only 60%.

    Now for the outright fraud and lies involved in this.

    That ratio is a fraction. Its one figure divided by another. You can make it smaller by excluding debts from the numerator, and putting other people’s income in the denominator.

    So only borrowing is included in the numerator and all the really big debts are excluded. Pension, State pension, civil service pensions aren’t in the debts. Neither is the state second pension. A pretty safe assumption is that they are going to default. That is the plan for the state second pension isn’t it John? Not pay out on the promises and ‘divert the money’ to other people. Fraud.

    On the denominator, rather than using government income or taxation, why not include all of the UK’s income. Tax revenues as a number can’t be fudged, but GDP, well we just get the ONS to do a job on that. However, if a member of the public included their neighour’s income on a mortgage application, they would be a fraudster. If politicians do it its prudent financial management. The results are the same. People have money stolen off them.

    So what’s the true figure. Accrued debts of 7,000 bn, on taxes of 550 bn, means the governments is 13 times geared. Worse than RBS before it went bust, and RBS didn’t have the expenses of schools, roads, the NHS, defense, police, the Lords, MPs, the justice system, …

    Weak banks are an irrelevance. They are going bust, because you’re bust, and you’ve forced them to loan money to you to spend.

    The rich as you say will move. The middle class with offshore their assets away from the thieves in Westminster. The poor as usual will be screwed because they choose or were force to rely on MPs to pay them. The Greeks have the right idea. Bypass the state. Move to the black economy, because that way your money isn’t going to paying services, its going on debt payments run up by fraudsters.

    Just because other countries are in a mess, you can’t imply that the UK isn’t.

    1. stred
      May 12, 2012

      Do other countries calculate the debt/GDP ration in the same way-ie standardised by international agreement? If so then countries such as France with far more generous pensions must be fiddling the % even more. Also countries with a bigger black economy would have a less helpful denominator.
      It would be interesting to recalculate all these national figures with real pension committments included.

    2. lifelogic
      May 12, 2012

      @Nick “why do these people believe that you can borrow and spend a bit more to solve the problem?

      Because easy solutions are always popular. Such as putting PV cells on your roof, books such as eat all you like and stay slim, how to get muscles without any exercise, get young again with these vitamins …….. and similar. The fact that non of this works does not make it unpopular. Just a con.

      1. lifelogic
        May 12, 2012

        And of course the most successful and historically very profitable ruse or “promise” of live by my rules and laws do this and that and give much of your money to the church and our high priests will ensure you will be richly rewarded in the afterlife. All very popular with many people.

        After all why do people buy lottery tickets? They just want the promise of a simple solution – even if it won’t actually be one.

        Hence socialism and the evil politics of envy.

        1. StevenL
          May 12, 2012

          Or moving your pensions into a ‘landbanking’ scam or suchlike. If it sounds too good to be true…

  6. Alan Radfield
    May 12, 2012

    “After all, the Greeks, Portuguese and Spaniards have been running huge budget deficits for some time, yet their economies are amongst the weakest in the EU”

    cf. Wales, the North East, Scotland . . . socialist welfarism produces one guaranteed outcome – terminal decline.

    1. Bazman
      May 12, 2012

      Where do you think the North East would be without any support from the state and why should they take the hit as much of their decline is due to previous government policies. More starve em’ nonsense from someone who has probably got a good job due to circumstances rather than wit or intelligence. Ram it.

      1. StevenL
        May 12, 2012

        I’m from the NE, and much ‘decline’ is due to the bubble bursting and the fact well educated kids all leave it after school. Some of the schools are excellent and there is less to lead your kids astray.

  7. colliemum
    May 12, 2012

    Some home truths about the economy in a country need to be told repeatedly, such as that one cannot borrow one’s way out of debt.
    Also, the difference between deficit and debt apparently needs to be explained repeatedly.
    So thank you for this post, John – I hope some treasury mandarins and some journalists will take note.

    In addition, I think, a lot of people still don’t understand that a bigger tax load on private households means they have less money available to spend, which inevitably affects businesses upstream and thus tax income.
    A shrinking economy means a shrinking revenue, means deficit increasing, means debt increasing – a nice spiral with only one way to go: down.

    Additionally, I can’t help but think that far too many economical experts are dazzling us – in government or in private life – with far too complicated explanations, or ‘dazzling with BS’.
    My tongue-in-cheek advice is to get together a group of housewives who have leaned their ‘trade’ during the truly austere times after WWII. I think we’d be quite good at cutting expenditure – the one thing needed to grapple with deficit, debt, tax reductions and thus kick-starting growth ….

    1. lifelogic
      May 12, 2012

      @ colliemum

      “one cannot borrow one’s way out of debt”

      Well you can, I have done it, but you need to put it on sure bet investment. But the government would not spot a sure bet investment if it bit them on the bum.

    2. uanime5
      May 12, 2012

      While you can’t borrow your way out of debt you also can’t cut your way to growth.

      Most people do understand that more taxes = less money to spend because for most people more taxes gives them less money to spend. The only ones who aren’t affected are those who don’t pay taxes and those who are so wealthy that they can survive a higher tax rate.

      Though higher taxes will effect businesses upstream and tax income this doesn’t automatically result in lower tax revenues. As long as the extra revenue raised from higher taxes is greater than the loss from businesses upstream and tax income tax revenues will increase, not decrease.

      1. lifelogic
        May 13, 2012

        As I say above you can borrow you way out of debt if you pick a good investment to put the money on. You can also cut your way to growth. You cut out the dead wood doing nothing of any use or even positive damage and encourage the new shoots and a growing private sector. Indeed it is the only real way.

        1. uanime5
          May 13, 2012

          Despite all the Government’s cuts to the public sector we haven’t gotten more growth. It seems cutting the public sector is much easier than encouraging the private sector to grow.

          1. Lindsay McDougall
            May 14, 2012

            Yes, there is always a time lag, which is why recessions are so grim. The lack of growth is no excuse for failing to carry on cutting the public sector deficit.

          2. lifelogic
            May 15, 2012

            Indeed they have not cut sufficiently or even much at all, they have not got the banks working, they have not reduced regulation, reduced “green” energy prices or taxes on the private sector and there is a time lag too.

            When they do this growth will clearly follow.

  8. Derek Emery
    May 12, 2012

    For countries sharing a common currency as in the EZ will just cutting spending solve their problems? Their salaries and pensions etc are likely to be far too high, all supported by by easy debt at German interest rates. For their economies to grow they also need to bring down wages and other conditions to a point where it makes economic sense to perform work in these countries rather than in the rest of the world.

  9. oldtimer
    May 12, 2012

    The notion that governments can borrow their way to growth is indeed absurd. Yet this is what politicians is most western countries promise their electorates, and that a majority of those electorates are willing to believe. They salve their consciences by voting for different politicians the next time. We see it time and time again.

    Countries need wealth creating activities in the form of enterprises that must compete nationally and internationally to achieve any chance of real growth. The role of governments is to provide the infrastructure to enable this to happen – for example security, an honest legal framework, sound money, an educated population, physical and electronic communications networks and tax system. The more competitive this infrastructure is the better the chances that businesses will be able to generate economic growth.

    Unfortunately the UK has been slipping down the international league table because it has paid itself money it has not earned and must be borrowed – or printed. Furthermore it has embraced policies designed to inhibit growth through the Climate Change Act. Some of the more extreme advocates of this policy have even recommended a return to rationing. So long as this thinking prevails, the UK will remain an unlikely to be able to get itself back to a growth path. Yet this is the thinking that dominates the top of the three main political parties. Until it changes the UK has no hope.

    1. Tad Davison
      May 12, 2012

      Good point, and exactly what got many Euro zone countries in their present mess in the first place. All this ‘jam for everybody tomorrow, and all you need to do is sign up’ balderdash finally turned around and bit them on the rear end. They’ve only got themselves to blame for being gullible enough to swallow it all. Perhaps the French will eventually pay the price for electing the new president too, and already, people are asking pertinent questions about his ability to deliver. Too late!

      That happened here in 1997. We got rid of an unpopular Europhile, only to elect an even bigger one! And the mess Blair and ‘the legacy’ left, is going to be with us for generations.

      There seems to be an historic parallel in that the Nazis came to power in much the same way, by promising the Earth without properly explaining how that would, or even could, ever come about. When one of my friends (one of the Maastricht rebels) put forward that very point, he was criticised and derided as a merchant of doom, but just take an overview of the present political situation throughout the EU, and it isn’t difficult to see how potentially dangerous it is.

      And of course, the ‘entrance examination’ to join the Euro was fiddled and fudged in an appalling way by those still in positions of great influence. How in God’s name was that ever allowed to happen?

      Does that not show the level of acquiesance and downright deceit of the Europhiles?

      To hell with the long-term consequences, just as long as they get their short-term political advantage.

      Tad Davison


      1. lifelogic
        May 13, 2012

        Does that not show the level of acquiesance and downright deceit of the Europhiles?

        Yes it does.

  10. Paul Danon
    May 12, 2012

    The left like to portray the state as the fount of all wealth, as if investment and enterprise didn’t exist. Privatising education mightn’t just raise standards and cut state-spending on schools; it could also engender a more competitive spirit in teachers which they might pass-on to pupils. The first institution that most of us encounter is a government-agency.

    1. Bazman
      May 12, 2012

      Much evidence says this is fantasy. Ban all private schools and if the rich want to send their children abroad then let them. The state schools would be beacons of eduction for sure.

    2. Mike Stallard
      May 12, 2012

      Which is precicely why the benighted people of this once great country are about to re elect the Labour Party which at least understands them.

    3. lifelogic
      May 13, 2012

      The first institution that most of us encounter is a government-agency. An indoctrination agency the BBC and schools often even religious ones with an additional agenda in addition.

  11. Andy Man
    May 12, 2012

    Growth cannot come from deficit government spending. It can only come from ordinary peoples savings being used for investing in business. Any other sort of “growth” isn’t real. If you borrow money to go on an expensive holiday your spending (GDP) will grow but your wealth won’t. That’s the problem with the way GDP is measured, it doesn’t tell you how wealthy you are just how fast you’re spending money – not the same thing at all. Every politician is obsessed with GDP growth that is meaningless. What we want is more wealth not more spending.

    1. Electro-Kevin
      May 12, 2012

      Is equity in housing a measure of wealth ?

      1. Robert Christopher
        May 12, 2012

        Yes, if it’s your home, you want to live in it, you can afford to live in it, and it is in good repair!

        Anything else is an investment and can vary in ‘quality’. And great wealth does not necessarily mean spare cash is available, for holidays or even food and heating.

      2. A Different Simon
        May 12, 2012

        A measure of our follie .

        More than anything else our obsession with bricks and mortar and land has killed our country .

        It’s not the houses though is it , it’s the land they sit on .

        Land should be treated as other natural resources like mineral rights and be owned collectively .

        Would like to replace the current principle of “private ownership of land” with “exclusive access to the commons” .

        1. David John Wilson
          May 12, 2012

          In fact the queen owns all the land and even those who think that they own it only have a freehold. It would be interesting if she decided to call in all the freeholds and reallocate them as she felt fit.

          Reply: I do not think Parliament would allow that, and the Queen will certainly not try it!

        2. Lindsay McDougall
          May 14, 2012

          What tosh. Land prices are not absolute or eternal, any more than the price of gold is absolute or eternal. They generally follow house prices up or down, with a time lag. What is important is to maintain the integrity of the measuring stick – money – which mans zero inflation. Defending the realm, the monarchy and the currency are the three primary duties of government.

      3. waramess
        May 12, 2012


      4. waramess
        May 13, 2012

        Electro Kevin, Is equity in housing a measure of wealth? It is in fact a share of the cost of government interference in the private sector.

        Housing is made expensive bcause of the effect of planning regulations on land prices and as a result of the expansion of the money supply finding it’s way into property prices.

        I built my house in 2000. it is 1200 square feet and pretty high quality finish; solid wooden internal doors, brass fittings granite work surfaces etc in the kitchn and it cost me £70,000. The rest went on fees, taxes and land cost.

        The market value it now has bears no resemblance and so long as I continue to live in it the increased “value” is of no use at all.

        There is no reasson why land for house building should be different to agricultural land and the desire for society to control housebuilding to conserve the countryside is not only a fallacy but also an expensive one.

        The debt necessary to support this “illusory”wealth is a great drain on society.

        Far better we had cheap housing and cheap rents (and by the way sounder banks) than we continued with the present destructive mirage of housing wealth

  12. sym
    May 12, 2012

    The growth vs austerity debate is a fake – but eye catching – topic injected by the big-government, big-spending, statist/collectivist, left wing brigade.

    Their big problem right now is that we’re reaching the end-game for the expansion of the big state. Everywhere it becomes painfully obvious that a bit of capitalism cannot sustain massive and more than generously paid public and welfare sectors. Expanding the state even more will leave us sliding into the previously attempted extremes of communism or fascism, and I think that people still aren’t quite ready to follow them down that path.

    But they won’t throw in the towel. They never do. Just just invent new ways of clinging on. It’s just about always an apparently positive message – “growth”, “fairness”, “social justice”, “help the poor” etc. – but the goal and end result are always the same: more state control, more taxes, less freedom.

  13. Brian Tomkinson
    May 12, 2012

    The true nature of this country’s deficit and debt is still not common knowledge, despite the best efforts of this blog. Clegg showed just how little he understands about it (or how cynically mendacious he is) with his claptrap this week talking about wiping the slate clean within six or seven years. At the end of Question Time this week Peter Oborne attempted to make the point that the debt will be virtually doubled by the time this government leaves office only to be met with virtual derision by Oakeshott, Dimbleby and other panelists. If politicians continue to lie about the depth of the problem they can’t expect the public in general to understand and agree with whatever they do. This government has given the impression that it is tackling the deficit by cutting spending when so far it has been increasing it overall whilst increasing taxes. Just think what the deficit would have been if they hadn’t been hooked on ever increasing spending. The public have been conditioned to think that these “cuts” have taken place when they haven’t. They are now being told that this so-called “austerity” isn’t working because GDP isn’t increasing. What will they think when they finally realise that the “cuts”, if the government actually makes them, are still to come and the best this government is planning is to virtually double the debt in just 5 years?

    1. A.Sedgwick
      May 12, 2012

      Peter Oborne was on the money with his statement that the national debt grew from zero in 1692 to £800 billion in 2010 and will double by 2015.
      Simon Heffer, with whom he seemed to swap jobs, also cuts through the wilful blindness of the main political parties. The economic day of retribution will come.

    2. waramess
      May 12, 2012

      There will come a time when the money runs out. Then what?

      The old chestnut is that as the debt is in sterling they need only to print some more. What actually happens is an exodus of funds from the UK, both by residents emigrating and from foreigners withdrawing from investing.

      What will we do when our reserves do not support the claims on sterling by both residents wishing to leave and non-residents?

      I guess we can watch what is happening in Greece.

      It will not happen to us? Yes it will, and then hopefully there will be nowhere to hide and the governments will have to reduce their bloated size

  14. David John Wilson
    May 12, 2012

    One solution to both of these alternatives is efficiency. There are numerous examples where simple efficiencies would save governement bodies huge amounts of money.
    Take as an example the subject of adoption. If the courts and other bodies were more efficient and reduced the time to achieve an adoption then local authorities would save large amounts of money currently spent on fostering the children awaiting adoption.
    Similar arguments apply for example to repatriating illegal imegrants.
    In each of these cases employing a few extra people would be cost effective as well as reducing the unemployed.

    1. Robert Christopher
      May 12, 2012

      Nice thought! ::)

    2. Bazman
      May 12, 2012

      Deportation is a good idea and could be used for kids without parents, the unemployed and illegal immigrants. Political dissent may be a useful future attachment. I agree all checks should be stopped to increase the efficiency of this policy. In secret would also stop do gooders and the majority who do not understand.

      1. Electro-Kevin
        May 13, 2012

        Chillax, Bazman.

        We’re getting the policies you approve of. We’ll see exactly how they turn out in comparison to other Anglophone countries which operate strict points systems for entry and stay, and for access to health and welfare services.

        Hold on a minute …

        Canada and Australia. They’re doing terribly aren’t they ? We’d better not follow their systems.

    3. lifelogic
      May 12, 2012

      If you make a better car you sell more and make more. With courts you have a government monopoly so the less efficient the system the more hours and charges the lawyers and courts can extract from the unfortunate litigants and legal aid. They have a clear incentive towards inefficiency so that is what happens.

      1. David John Wilson
        May 12, 2012

        Of course if we stopped buying these French cars that seem to have a maximum chance of failing their first MOT then we would buy more cars manufactured in the UK helping to solve this problem.

      2. Bazman
        May 14, 2012

        Car safety and pollution has largely improved due to legislation. Car Makers are very conservative in the main. Today’s modern cars could look very different had this not been the case.

    4. waramess
      May 12, 2012

      David John Wilson

      Dream on

    5. zorro
      May 12, 2012

      Unfortunately, they are too short termist to think about this. Enforcement officers could remove many people over time who would be a charge on the state. Ever government’s first duty should be defence of the realm, control of the borders, and the rule of law. It is failing on these measures by forcing through ill thought out cuts which take no account of targeted expenditure to save the state money.

      I heard that they were measuring up Somerset House in some silly stunt to show that under the Empire we could govern with a few thousand civil servants. Yes, but what did they have to do, and did they have to engage in social engineering, increase diversity, consider HRA, Data Protection Act, countless EU regulations, restrictive labour laws….Of course not! Before undertaking silly stunts like this, they need to work out what legislation in the last 100 years they wish to repeal, and then we can look at what cvil servants do and how many there should be!


    6. alan jutson
      May 13, 2012


      Do not forget that foster Parents are paid by the Local Authority to be foster parents.

      In Wokingham that can be nearly as much as £500 per week I am informed (press adverts) for an experienced parent.

      But agree, still cheaper and a long term foster home should certainly be better than being looked after in a Local Authority Care Home

  15. Kenneth
    May 12, 2012

    John talks common sense. It’s not rocket science.

  16. Gary
    May 12, 2012

    This talk of growth is a pipedream. First, we have so much debt that we cannot grow our way out of it at any historical growth rate. So we have to start restructuring the debt, but the bankers and the politicians refuse. They don’t know what they are doing.

    Second, until we rebuild capital, we cannot have any sustainable growth. The central banks have been serially cutting rates for 30 years, each time they do so they increase the present value of debt liabilities on existing debt and destroy capital. As they have approached zirp the capital destruction accelerated. Cutting rates in half doubles the present value of debt and as you approach zero rates you half the rates faster.

    Until we do both points we won’t get growth. But our politicians are too illiterate or too short termist, or both to do anything about it. So we plough on to disaster.

  17. sym
    May 12, 2012

    PS: John, I’m reading what IDS is doing with the pensions. If I understand it correctly, this amounts to a tax increase on the private sector, as they’re either losing the second state pension or the rebate on the contracted-out scheme, when they save privately. To get nothing in return, just pay for the welfare state.

    Didn’t Cameron say only a couple of days ago: ‘doing right by “the do-ers, the strivers, those who work hard and play by the rules”‘?

    Why do they lie like this? Do they take us all for idiots, or is it a simple and cynical vote calculation, trying to beat Labour at their own game? Neither strategy will work, I might add…

    1. lifelogic
      May 13, 2012


      “Do they take us all for idiots, or is it a simple and cynical vote calculation?”

      It is both.

  18. Neil Craig
    May 12, 2012

    Growth has to precede spending, so to that extent it would be worthwhile to cut back the deficit first.

    However the important one is growth. With a growing economy almost all other problems (except what to do with the Luddites) is much easier.

    We can have growth any time our political nomenklatura want it. The just don’t want it.

  19. Gary
    May 12, 2012

    And this business about King saying we had benign inflation is poppycock. The trouble is they attempt to measure the effects of inflation in prices. The inflation is the oversupply of money wrt demand in the real economy and the price rises are the effects.

    But they never measured the biggest prices rises ever seen in there basket of prices ie. Houses and govt bonds. There is an almighty bubble in those. United states t-bonds is a vast bubble. When that bursts we get instant hyperinflation.

    They don’t know what they are doing.

    1. rose
      May 12, 2012

      Tinkering with the money supply is just what they should know they shouldn’t be doing. Slow inflation always leads to quick inflation if not checked. You would think they knew that by now. There have been enough historical examples.

      But then you would think they should have known they were in a really big long boom, and that a slump would eventually follow. Why did the Queen have to ask out loud what we were all thinking? Why hadn’t her loyal opposition made that unnecessary for her to do?

      Reply: I remember forecasting the dangers of boom and collapse in the Opposition’s Economic Policy Review Foreword. I also remember the Conservative front bench warning about excess credit several years before the bust.

      1. rose
        May 13, 2012

        This should be shouted from the rooftops but never is. Why?

        Don’t answer: I suppose if it were it wouldn’t be reported.

  20. Gary
    May 12, 2012

    There is an easy foolproof method of measuring inflation, just let the free market price of gold tell you. But no they won’t allow that because that will upset their paper counterfeiting operation and then they lose the ability to loot us.

  21. Gary
    May 12, 2012

    So, they must raise interest rates. Or better still, get rid of the central bank, stop printing money and let the free market raise the rates to liquidate debt and rebuild capital. Then we can grow.

  22. forthurst
    May 12, 2012

    “Austerity or growth?”

    How about a bit of efficiency in public procurement? Here’s an article from the DT recording the wastefulness in NHS procurement:

    Do we have a private sector, some parts of which are geared toward ripping off the taxpayer rather than competing through price/performance here and abroad? There used to be a large enterprise called GEC whose business model was geared towards ripping off the taxpayer; when it was forced to compete with the likes of Siemens, it floundered and collapsed. The taxpayer cannot afford to subsidise spivs and still provide good quality public services (for the world). PFI contracts, aircraft carriers which provide no realistic defence cabability: the taxpayer should not be reqired endlessly to subsidse incompetant public procurement and greedy businesses.

  23. James Reade
    May 12, 2012

    The choice is more one of anticipated growth sooner, or anticipated growth later, and I think you’re a firm believer in the effect of expectations John, thinking back to all you’ve said about the impact of QE on the 2008 sterling depreciation. More often than not, what is anticipated by the markets turns out to happen – efficient markets and all that. If markets believe that a non-austerity package has a higher probability of delivering growth sooner than an austerity one, then it will be effective. You appear to suggest there’s absolutely no way that a non-austerity package could deliver greater expectations of growth than an austerity package. I’m not convinced.

    You talk as if there’s a bona fide, well established causal link between high debt levels and economic growth when there clearly isn’t. If there was, the UK’s greatest post-war levels of growth should have come in the 1970s! It’s much more complicated than that, and of course there’s no clear direction of causality – countries become highly indebted because of a lack of growth (for whatever reason), while it may be that high indebtedness causes a lack of growth – but as said, the jury is still out on the point at which this happens (since naturally a bankrupt country will struggle to grow for a while, in the limit).

    A student of mine recently estimated (using genuine data from many countries – OECD plus some) that the point at which growth tails off is when debt reaches about 125% of GDP. I do tend to value the results of econometric models over my own intuition, and particularly that of a left or right winger.

    Now that doesn’t mean we can say the UK should just spend til it reaches 125% of GDP, but it does suggest that this apparent link you’ve mentioned is really hardly that, John.

    So, after all that – count me amongst the non-serious people then John!

    Reply: For once I do not disagree with all your points, which are fairly made. The issue of the sustainable or less damaging debt level is an interesting one. On most analyses the UK state debt level is already well above 125%, as you do need to include PPP/PFI/pension liabilities and bank liabilities in some measure, if not the full gross amounts. The issue about expectations is important – I think it would be better if the government described its spending policies accurately, pointing out the real increases so far, as encouraging confidence is an important role for government in an economy where the state controls around half the output.

  24. Bill
    May 12, 2012

    Does it really matter what any voter says anymore the Politicians just will not listen to us.

  25. Leslie Singleton
    May 12, 2012

    Personally I don’t buy a lot of this stuff about incresaing Growth and everything will be hunky-dory, just as if Growth were some sort of independent variable that one can turn on and off with a spigot. Rather, when everything else is right then there is likely to be Growth. It’s like listening to a Company’s Chairman at its AGM saying all we have to do is increase our Net Profits, chaps. That’s apart from the False Dichotomy aspects that others seem now to be seeing.

  26. Sue Doughty
    May 12, 2012

    It is not hard to say what would stimulate growth. Employment law that is preventing it, discouraging it, must change. Employers who cannot fire do not hire – simple. Workers earning part time wages do not have any left over for spending, so rules that presently inspire say, Tesco to have almost 96% or their staff on part time working must change. I suspect it is our National Insurance Tax that prevents them wishing to pay full time working. Someone should be asking Tesco and other employers what their wages books would look like if they switched to full time employing and what government needs to do to make it worth their while.

    1. uanime5
      May 13, 2012

      Employers can already easily hire and fire using temporary contacts so this doesn’t need to change.

      National insurance doesn’t have any relevance to why employers prefer part time workers. Employers prefer people who work fewer hours because they’re easier to replace. Also if you need to give someone a lunch break after they work 4 hours then hiring people to work 4 hours per day means they don’t need a lunch break.

  27. Conrad Jones (Cheam)
    May 12, 2012

    “The rich, the enterprising are always looking out for legal ways to arrange their affairs to pay less tax, or move to more hospitable jurisdictions. Others in the society may simply move into an enlarged black economy.”

    There seems to be two key problems with our economy:
    1. Banks create our money supply – requiring huge taxpayer subsidies, raising Taxes
    2. Companies seek Tax Avoidance Strategies to compete, shifting more Taxes on the remaining People who pay Taxes.

    If we re-orpganised Banks in such a way as to prevent them from creating any extra money and – instead; allowed the Government (through the Treasury or BoE) to create our money (Interest Free), Taxes would be lower and the desire to avoid such Taxes would reduce.

    Mr Redwood, can you explain why the UK Government prefers to issue Treasury Bonds rather than Issue Currency directly ? Could the MPC use GDP and Inflation to determine how much money to put in or take out of the economy ? The money create could be used by Government to spend on public works in the Productive Economy. There would be no interest to pay on this money and it would stimulate a recovery. Now would be an excellent opportunity as the money supply is shrinking due to reduced lending.

    Our Taxes are too high because some of our Taxes are used for Deposit Insurance and we are losing billions of pounds from lost seigniorage as Banks create money but pay no one for the privelege. This system does not work as Banks have funnelled this money into the Housing Market making the cost of living far higher than it needs to be. This misallocation of capital has diverted money from the productive sectors of the economy which increase unemployment and makes it even harder to start productive enterprises.

    you will see from the link that as the Financial Services Sector increases it’s share of GDP, the economy becomes more unstable.

    In the 1930s, just before the Great Depression, the Financial Sector in the U.S. was 6% of GDP.
    In 2007, the Financial Sector was 8% of GDP.

    What share of GDP do you think the Financial Sector should have in order to have a balanced Productive Economy?

    The Government’s attitude seems to be – “let’s act like a Business and compete for International Corporations to setup here in the UK by reducing our Taxes”. Great! Except who pays for the shortfall in lost Taxes as these taxes have to be reduced across all Companies in order to be fair.

    Banks are hugely subsidised, they misallocate money in the Economy, they Increase Taxes to the general public and reduce available funds to Public Services. Higher Housing Costs further reduce available capital and this is encouraged by Government through Housing Subsidies – which also increases Taxation.

    The key point is – Why do Banks get to decide where money goes in the Economy? Banks do not invest in Ideas, they make secured loans where they claim the property of the Lender if they fail to pay.

    Small businesses – even with good Business plans; are cast aside in favour of someone with poor credit record who is buying a House, because the Bank get’s the House if they default. The system is clogged up with debt and everyone is too scared to take any risks so how can we generate more Jobs in this environment?

    1. Robert Christopher
      May 13, 2012

      1. If banks loose money they should fail, so no need for any taxpayer subsidies.
      2. Everyone should seek to keep their tax bill to a minimum, legally of course. Everyone with an ISA is avoiding tax, so are you asking for ISAs to be closed down as part of your reducing tax avoidance effort?

      1. Conrad Jones (Cheam)
        May 13, 2012


        Thank you for your comments.

        In answer to your question:
        “Everyone with an ISA is avoiding tax, so are you asking for ISAs to be closed down as part of your reducing tax avoidance effort?”
        Of course not. The general public are already paying far too much tax as it is and at the same time having our Public Services Cut for which we already pay Income: Tax, CGT, VAT, Road Tax and Local Council Taxes.
        There is growing evidence that large Corporate Businesses are engaging in Offshore Tax Evasion activities in order to increase their profits. While the CEOs of these large corporations enjoy ever rising salaries and bonuses, they maintain low wages among their employees and use the line “in the current economic climate”. I could name names and companies, but then this comment may never be seen.

        When considering an ISA, the money put into one by most people, has already been Taxed, and Interest Rates are effectively negative, so in real terms we are being Taxed on an interest payment that isn’t even maintaining the value of the original sum invested.

        If you invest £100 in an ISA for one year and inflation erodes the value so that you need £105 to buy the same goods and services in a year, but you have only received an interest payment of £3. Even though it’s untaxed, you have lost £2 worth of spending power over the year.

        Big corporations go offshore and then evade taxation and only the higher levels of corporate management receive the benefits which means that less taxable income is available for the Treasury. We hear how individuals commit welfare and housing fraud but we rarely hear of the huge amounts of Tax lost through Offshore Accounts. Many Banks – who received tax payer help and repaying us by seeking ever more elaborate Offshore Trsutee and Nominee Holding Companies to hide their profits for the purpose of Tax Evasion. Corruption breeds corruption. We cannot afford to turn a blind eye to it.

        This is going to be a very hot topic in the coming months and years, especially if the general UK economy takes another nose dive. When was the last time the Police went on a demonstration over cuts during a Conservative Government?

        I believe Taxes are far too high for everyone – and there are ways to run our economy far more effectively without the need to have such a draconian Tax regime. I do not believe people should be taxed at all for productive work. I do believe people should be heavily taxed if a speculative investment – like a House; increases dramatically in value as this encourages idolness. The Conservative Party say that the Country needs to be more Productive, in which case they should Tax people heavily who profit from unproductive enterprises and reward people who produce the goods, especially if those goods are sold abroad.

        Let’s not make the same mistakes that labour made by relying on the City of London. 8% of GDP for the Financial Sector is dangerously high, it was only 6% during the Great Depression before the Crash.

      2. Conrad Jones (Cheam)
        May 13, 2012

        Hi Robert,

        One more small point about:
        “If banks loose money they should fail, so no need for any taxpayer subsidies.”
        Unfortunately, due to the fact that most (over 97%) of our currency is in the form of Bank Deposits, if the a Bank had been allowed to fail the whole Banking System would have locked up as it relies on the Interbank System of Reserve Accounts at the Bank of England. If just one Bank had failed, the Currency Supply would have shrunk over night casuing even more panic.

        The problem is – Private Banks control our National Currency – which is in stored in everyones Bank Accounts (electronic money). The only way this money can be created is if someone borrows it from a Bank. Banks only lend money if they are confident in an individual and the economy and in their ability to receive payments through the Interbank Reserve Network. If they are not confident in any one of these, they will not lend anything. As payments are made on existing debts, the money paid back is removed from the double entry booking keeping ledger of the Bank. Money paid back is then removed from circulation – for ever, new money has then to be created by a new debt.

        I thought the same as you – if a Business Fails, let it. Banks are different as they have shackled themselves to our currency – if they die – so do we.

        It’s like two people on the roof of a very tall skyscraper. One person is running around like a maniac near the edge while the other is calmly staying near the centre. When the maniac trips and falls over the edge it’s at this point that the person near the centre realises that the maniac had tied a rope around his legs – if he lets him fall, then he goes over with him. That is why Bankers get bailouts and Companies – like Rover; get thrown to the slaughter.

        Monetary Reform would change things in favour of the general public and would bring back Free Market Capitalism.

  28. Conrad Jones (Cheam)
    May 12, 2012

    “The argument is over how you get the deficit down.”

    Instead of paying for Public Services with Treasury Bonds a Government can pay for them with Currency it creates, simultaneously denying Banks that privelege.

    This “Money for Nothing” Socialist Banking system that relies on State Handouts has got to go.

    Another way would have been to use the QE Money to pay for public services – this way money would have entered the economy directly and our Deficit would have been a surplus. What exactly is going on in the minds of our Politicians? Is it some kind of abhorrence to Mathematics at School.

    Didn’t George Osborne and David Cameron get taught Maths at Eton ? They should have gone to the Grammar School that I went to and saved their Parents a pile of tuition fees.

  29. Denis Cooper
    May 12, 2012

    About half of the UK economy is somehow linked to public spending, through salaries, payments to suppliers and contractors, pensions, social security benefits, etc, but the government’s expenditure exceeds its revenues by a wide margin.

    Therefore, left with relatively little in the way of state assets which can easily be sold off to help balance its books, the government must borrow large sums of money; otherwise, the day will come when it is no longer able to pay all its bills in full and on time.

    If it cuts its domestic spending then that will inevitably depress demand in the economy, and the loss of economic growth or economic contraction will tend to feed back to reduced revenues and increased social security payments and could widen its budget deficit rather than narrowing it.

    If it raises taxes, then that will increase its revenues and reduce the sums it has to borrow, but potentially at the price of discouraging growth in the private sector; if it goes too far with raising taxes, it may find that the economy is shrinking under the increased tax burden, its revenues are actually falling while its spending is forced up, and it is having to borrow more.

    On the other hand if it cuts taxes in the right way, that may eventually promote growth in the private sector but in the short term it will widen its budget deficit.

    Because of the time lag involved with private sector growth, simultaneous cuts in both spending and taxation may do no more than leave its budget deficit unchanged in the short term.

    Meanwhile, international private investors are looking at the government’s policies and attempting to calculate whether the policy mix is making it safer, or less safe, to lend it more money; if they become nervous, then the government may find them increasingly reluctant to lend it more money so that it can pay its bills.

    There is simply no quick or easy or completely painless solution to this complex multi-factorial problem; drastic steps in any direction are more likely to make matters worse rather than better; if there is a solution, it will be achieved over years, and with the aid of inflation; the only saving grace for the UK is that at least with our own currency the government can if necessary fall back on borrowing new money from the Bank of England, rather than borrowing existing money from private investors.

  30. david englehart
    May 12, 2012

    a major problem is the myth that public sector spending creates growth.
    how many times have we seen labour polititions saying that creating public sector jobs means national insurance and tax receipts.
    why is there not a more active response that first the private sector must stump up the gross money required to fund these salaries and the cost of providing pensions premises for these people in non jobs to work from and imposing more regulation on the private sector to justify the jobs.
    holland talks about creating 60000 new teachers as if this is the answer to France’s growth problem.
    why can we not brutally expose once and for all the failed policies of eastern europe which are so beloved by the left.
    i went to a back street primary school and then a grammer school.
    (Makes allegations about violence in his household as a child-ed)
    i literally had to shed blood to stop this nonsense and then i worked in a pub at 15p an hour to see me through my studies to become a solicitor.
    i beleive in saying it as i see it yet i sense a timidity on the part of many people who were educated in the private school system when faced with verbal abuse and /or rubbish.
    (points out that public school educated people can behave badly with graphic personal allegations-ed)

    so maybe the fact that these useless schools taught the art of being a gentleman should be forgot and the resonse to the populist and simplistic left propaganda needs to be countered more aggresively in debate.
    the left do not respect someone for being a gentleman they simply despise the person and will trample over them.
    they are winning the debate.
    we need more aggression.

  31. Mike Stallard
    May 12, 2012

    When I gave up0 smoking, it was hard at first.
    When I was on a diet recently (I lost 3 stone) my wife and I kept telling each other that we needed food to eat, that we “deserved” it, that one more little tiny choccie biscuit wouldn’t matter.
    Then we got serious.

    I see no sign that this coalition government is getting serious. Too many choccie biscuits – like the few million wasted on a local government office here in Wisbech, or the £25 million plus wasted on the failing Comprehensive.

  32. uanime5
    May 12, 2012

    Given that most UK companies are currently hoarding billions of pounds I doubt that higher taxes will have a negative effect on their spending. All these higher taxes will do is reduce the amount they save.

    Scaremongering about the wealthy leaving and the black market growing if the rich actually have to pay their taxes is an unconvincing argument. At a time when the deficit needs to be reduced allowing large scale tax avoidance and evasion is the sign of an inept Government.

    Finally regarding austerity in the UK it seems that growth in the first quarter has been downgraded to -0.3% meaning that 1.1% growth over the next 9 months will be needed to meet the Government’s target of 0.8% growth in 2012. It seems austerity doesn’t always produce growth.

    1. APL
      May 15, 2012

      uanime5: “Scaremongering about the wealthy leaving and the black market growing if the rich actually have to pay their taxes is an unconvincing argument.”

      You are right, the argument is often conducted on the wrong ground. It is the Socialists that invoke ‘the rich‘ as the bogey to mobilize their supporters who appear in large part to be motivated by envy.

      The argument shouldn’t be ‘we will instigate this policy or that policy because it will attract the rich’, rather ‘ this policy or that policy will create jobs’, that rich people choose to be part of an economy where people are affluent or at least working up the wealth gradient, is actually a symptom of a well run economy.

      There aren’t many rich entrepreneurs in North Korea, in fact your fellow ideologue BAZMAN might like it there, since they don’t have much electricity either. Look at a map of the Korean peninsula by satellite at night, you will notice a marked demarcation between the south and the north just from the availability of street lighting.

      Nevertheless, a relative lack of rich people in North Korea, hasn’t made the economy poorer, it is the stupid [totalitarian socialist ] policies of the political establishment that has made the economy poorer.

      1. Bazman
        May 15, 2012

        Sit round a candle? No. An LED in fact! Lighting costs in the home are a mark of progress. Fire, candle, gas, bulb. etc. You are right. North Korean lighting standards might happen here as the population will not be able to afford to light their homes due to communism for the rich. Not to mention the price of electricity. My efforts to lower the cost of efficiently lighting my home by efficient lighting use, and continuous upgrade of lighting equipment have so far been thwarted in the past ten years. Costs have still risen considerably. Maybe a government minister could tell me how I am being wasteful and inefficient in my home lighting requirements. The same ideology will no doubt apply to my lifestyle, but not his or his chums. Ram it.

  33. Local Tory
    May 12, 2012

    The growth argument is supported by the fact that WWII, despite the loss of life, pulled us economically out of the 30s. However, that time around a lot of things were allowed to fall over which provided for a moratorium of sorts. This time around, we have kept afloat, but as a consequence are still soaked in debt. The deleveraging will take years. As a result, it is difficult for the government to borrow.

    In addition, spending on innovation and education, although vital, often doesn’t create mass employment. We do need, however, to now sensitively and urgently deal with areas of high regional structural unemployment. We need a nationally flexible labour market and some focused incentives for the private sector. In particular, the SME sector. The falling corporate tax rate is a good start (although I think this should be combined with the General Anti-Abuse Rule coming in).

    We have monetary stimulus. But with respect to a fiscal stimulus in the UK, we are still borrowing to meet operating costs. We don’t have much room for manoeuvre in the UK. Within the context of the complete mess handed over from Labour, who fiscally completely mismanaged the cycle, my view is that the Chancellor is doing what he can.

    1. rose
      May 12, 2012

      It wasn’t the war which pulled us out of the slump. That is what Tony Benn and other lazy student historians say, usually condemning weapons manufacture. It was the house building, never since matched for quality and quantity.

  34. Bert Young
    May 12, 2012

    There is no shortage of wealth/money in this country ; there is lack of confidence . Investors will not come forward until some positive signs cause them to shift position . The missing catalyst is political leadership . The Fine Art and Classic Car markets provide more attraction and are very busy and , the top end of the property market shows no abatement . Incentive and confidence has to be politically led , first from the USA followed by a positive surge in Europe . The surge in Europe depends on Germany releasing its hold on the so-called fiscal union and support for more democracy .

  35. David Price
    May 12, 2012

    I see in the DT that William Hague has stated “bluntly” that Britons must work harder to drag the country out of recession.

    My response is fraid not!

    I worked hard over the last 15 years, in return the politcians of all three stripes and the civil servants simply wasted all the taxes I paid and got the country in to debt which they continue to grow today.

    I see no point of benefit in working harder or contributing more taxes than I do until I see significant and sustained real reductions in public expenditure. Government needs to get rid of the deficit and start reducing the debt before they start demanding people work harder.

  36. BobE
    May 12, 2012

    2 years 11 months to go

  37. Arunas Ruksnaitis
    May 12, 2012

    Sovereign borrowing is not “like tax”, it is much worse than tax. It sucks money out of business environment now, and it creates an obligation to tax in the future to repay the debt. If fact, none of the governments are ACTUALLY collecting taxes to repay debt; they are rolling debt over, replacing it with new debt and borrowing a bit more. It is a Ponzi scheme; individuals practising it are normally sent to jail. Governments can get away with it for much longer, but it looks like the financial pyramid is on the verge of collapse.
    I do not believe there is any logical and sustainable way out of it other than writing the whole debt off in one act, and forbidding state borrowing once and for all. Tax receipts of the day should be all that the State has to play with; it should not have a hiding place for own inefficiencies; it should be accountable to the voters who it taxes, not the debtors from who it borrows. The current system is broken beyond repair. It may last a couple more decades, perhaps, but there are two possible outcomes: 1. Treasuries collapse under the weight of debt, the Chinese step in and buy up the national assets and firms; 2. The debt is written off (and thus retrospectively converted to tax and trade tarrifs), the Governments and the Nations start living within their means. There would be conflicts, maybe even wars (cold trade and technology wars, I hope) because of unfulfilled obligations, collapse of the global trade and WTO, but this would result in self-sufficient diversified national economies.
    Today, the first scenario looks much more likely….

  38. Backwoodsman
    May 12, 2012

    Austerity is not a very palatable message,especially to the modern ‘instant gratification’,generations.However it can be sold ,if it is apparently equitable,and for a recognizeable and achievable end within a reasonable duration.It should also avoid minor irritant measures,like the granny tax,the pasties,and the disappearance of the ancient Scottish regimental names.Mr.Hammond may not believe in sentiment but a good many of us do…and that matters.Perhaps there are too many MBA’s in influential positions,rather than too few.Their arid brand of rationalism touches no emotive chords except among their own kind.
    Above all there should be some leading by example by the politicians and senior executives of all kinds..Councils of austerity from Klosters or the yachts of the international mega-rich do not sit well.Similarly that the very rich will intelligently evade their taxes,or abandon Britain is not an argument that will have much resonance in Warrington or Wakefield,or even I suspect in some parts of Wokingham.Wise and enduring elites have a sense of the parameters within which they can act ,or be seen to act, without destroying the the essential fabric and unwritten understanding which makes their privileges and their leadership acceptable Where such limits are ignored we will assuredly see the return not only of Socialists but of full-blooded class warriors like the new French president and the Greek left.

  39. Mike Fowle
    May 13, 2012

    Sunday morning and the BBC news was still presenting this false choice with regard to the European elections. Regarding tax, when I first became self employed a quarter of a century ago, paying tax at first was quite a problem as I was often paid a long way in arrears. I telephoned the tax office and explained the problem. They were helpful and accepted a couple of instalments, with no penalties and even no interest. Compare that with today when people are “fined” for not submitting a return even if they don’t owe any tax. More reform is urgently needed of the tax offices. They should be on the side of business.

  40. David Langley
    May 13, 2012

    Pickles on this problem (Politics Show BBC – Sunday), was asked if the government would borrow more money to finance industry led recovery, answer , NO. Was shown a graph showing it would not be business led investment based on the crash of investment by business levels this year.
    When pushed by Neil, Pickles went quiet and mumbled something about a few easements of employment regulations.
    We are screwed John, its just got be a complete slaughter of restricting EU regulations and Dictats , directives etc that business managers ie-eg CBI decide have to go. Spend our money where it will do most good. Build something, home grown, roads, railways with Bombardier trains on them, use the steel we are making to build ships etc it could be done. There is a vast labour pool out there and we still have skills in our older generation use it before we are “bored counter sunk and reamed” by our industry experience deficient politicos. Do not give this money to the banks or the treasury to waste. Ignore Hollande and his demands, and Merkel, let them stew in their own political juice. No transaction tax, etc, lets get back to the Common Market we have all voted for, not this!

  41. simon
    May 13, 2012

    Greece is a basket case, but the governemnts of both Portugal and Spain were living within their means before the private sector crash of 2008.

    All three are undergoing auterity programs, even as their government debt rises. Every euro extra they try and take in tax is another euro removed from the spending power of their citizens. Every euro they cut from their spending results in 0.85 euro less they receive in tax, and another euro’s increase in unemployment, increasing their social security liabilities.

    The twin radical economic policies of Euro Membership and Austerity During a Recession mean that they are all in for a long hard slog out of their slump.

    As are we, to be fair, because we’ve got the same dumb economic policy – and the UK’s 5 year borrowing repayment terms are below (expected) inflation, so we don’t even have the excuse that borrowing is expensive.

  42. Alex Sabine
    May 14, 2012

    Agree with some of your points, John. For example, I think a fiscal stimulus package simply isn’t a realistic option for highly indebted countries with high borrowing costs (eg Italy and Greece). And it would be risky even for those highly indebted countries which – for the time being at least – have low borrowing costs, such as the US and UK.

    That said, as Martin Wolf pointed out in the FT the other day, the bond markets are telling a different story, with 10-year yields having fallen for heavy borrowers like the US, UK and Japan as much as for low borrowers like Germany, even after central bank buying activity has ceased. Wolf could be right that conventional relationships between deficits, debt and interest rates break down in balance-sheet recessions.

    Nonetheless high-borrowing countries are vulnerable to sudden shifts in market sentiment, so on balance I’m unconvinced of the case for a deliberate loosening of fiscal policy. Some shift in the current/capital spending balance might make sense for the UK, to kick-start business investment.

    Fiscal stimulus might make more sense for Germany, with its low deficit and very low financing costs, to support a eurozone recovery through a boost to demand rather than reinforcing the (necessary) austerity elsewhere and then ultimately having to bail out its weaker eurozone partners that are trapped in perpetual recession and the associated rising debt/GDP ratios.

    One point of fact: It isn’t true that the Spaniards have been running huge budget deficits for a long time. In fact the Spanish government’s deficit was less than 1% of GDP from 2001-04 and from 2005 until the financial crisis the public finances were in surplus. The surplus was 2% of GDP in both 2006 and 2007, in marked contrast with the UK government for example, but in common with Ireland (whose surplus reached almost 3% of GDP in 2006).

    In both cases the subsequent ruination of their public finances reflected (and were a direct consequence of) the collapse of unsustainable construction booms and asset price bubbles. The key failures were in monetary policy and financial regulation rather than fiscal incontinence.

    Portugal and Greece are a different story, since they (especially Greece) ran persistent large structural deficits throughout the ‘good’ years. Germany wasn’t actually a model of fiscal virtue in the early-to-mid 2000s but put its house in order just before the crisis. The real paragons were the Nordic countries, Australia, New Zealand, Canada, who gave themselves maximum scope to absorb the effects of the crisis and deploy fiscal support during 2008-10.

  43. Barry Brooks
    May 19, 2012

    > Most agree that borrowing more is not the way out of debt.

    Most? Since borrowing is what causes debt, how could anyone think that borrowing could be the way out of debt?

    The debt problem is not hard to solve. We could just tax the money we borrow, mostly from the very rich. The bigger problem is that even if we can fix the financial/political problem the scarcity of resources and the limits of tolerable pollution impose an urgent need to cut physical consumption.

    We can cut consumption with planning instead of poverty. Here’s how …

    Barry Brooks

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