Government tightens fiscal policy more to help slow the economy

The latest figures for borrowing show a further reduction in additional borrowing in the first quarter of the new financial year, as forecast here. Tax revenues are well up on a year ago, by more than the rise in spending, so additional borrowing falls again.

The authorities just need to be careful lest they slow the economy too much. Then they will find the deficit stops falling, as tax revenues are sensitive to the rate of growth. As expected, the combined fiscal and monetary tightening is slowing the economy, at a time when other advanced countries are offering more stimulatory policies.

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  1. Rien Huizer
    Posted August 6, 2018 at 12:41 pm | Permalink

    Even under normal circumstances a ratio of public debt to GDP of over 75% during a period of record low unemployment* would be high for a relatively small country with an independent currency** , a problematic trade balance and a very large financial sector. The UK is the only large offshore banking centre with those vulnerabilities. A country in those circumstances must be extremely vigilant about macroeconomic stability. The US is the only country that can afford to be like this.

    Therefore it is commendable that Treasury (and the Cabinet I presume) and BoE are doing their best to reduce vulnerabilities when the country is about to face a very large shock (depending on the severity of the Brexit version that will emerge) that may cause an inflationary spike, challenge exchange rate stability and stimulate unusuall migration of businesses.

    Chaos may be what some people think desirable but even those who expect to profit, might lose. Even the consequences of a no-deal Brexit and subsequent replacement deals outside the EU might not be to some people’s liking. It is as hard to pick a winner when all the horses are lame as when they are all healthy.

    Reply The state debt to gdp ration is around 67% as we have bought in £435bn of the debt!

    • Rien Huizer
      Posted August 6, 2018 at 12:49 pm | Permalink

      Apologies. Should have added:
      * unemployment/employment measures are emerging as a basis of anchoring (targeting) modern monetary policy and the BoE is one of the most prominent pracxtitioners of up to date policy tools
      ** Although during the past 14 months, GBP/EUR volatility has decreased considerably. One should expect that in the case of a consensual brexit, GBP’s external stability would be actively supported by all major central banks/official reserve managers, including the ECB. The latter might be more problematic should the Brexit outcome (in the eyes of those foreign institutions) be perceived as suicidal.

      • Caterpillar
        Posted August 6, 2018 at 10:28 pm | Permalink

        * (i) what? References please. (ii) even when the BoE issued forward guidance based on u/e it ignored it (iii) it is underemployment that has been linked to lack of price pressure on UK, u/e does not pick this up.

        Agreed there is debate about anchoring expectations, but * requires more data/warrant.

        • Rien Huizer
          Posted August 7, 2018 at 9:43 am | Permalink

          References: why not start here. Not a book or article but a well-known blog:

          I hesitated when writing this comment because the post itself is a great example of simplistic statements that require an elaborate rebuttal. I am sure that Carney (one of the CB managers usually considered sympathetic towards market monetarism (to use that term) would agree with the statement that the evolution of employment situation is of key importance . The argument for central bank independence rests on the technical feasibility of a rules-based monetary policy. Since the well known approaches such as simple inflation targeting do not work very well (except where the CB has a very limited mandate like the ond Bundesbank and targeting money supply is problematic given that money supply is an increasingly elusive concept, one must consider different approaches. One alternative approach would be to give more discretionary freedom to the CB (ie make it less rules-bout and less transparent. Not a good idea because then either one would be effectively ruled by unelected experts (politically problematic) or politicians and CB managers would have to cooperate (no independence). As a firm supporter of economic liberalism, I am in favour of a rules-based system that matches the money supply to the real economy using transparent techniques and “anchors”. The latter is the problem: one would like to see NDGP (level) as the target variable, but channels are complex. An established e/u index would be one of the best proxies for economic activity in a modern economy. I agree, monetary policy is a work in progress. Better able at flattening the business cycle than improving it. Of course, and I suspect without knowing who you are that you would agree, that government intervention in the economy is unlikely to result in more growth, but can create unwanted noise and friction that would reduce total factor productivity and hence, growth.

        • Rien Huizer
          Posted August 9, 2018 at 8:09 am | Permalink

          I tried to give you a good reply, necessarily more academic referenced but so far that has not passed the Redwood gate.

    • Lifelogic
      Posted August 6, 2018 at 4:44 pm | Permalink

      You say “The Treasury (and the Cabinet I presume) and BoE are doing their best to reduce vulnerabilities”

      How does inflicting real damage to real and productive businesses in the private sector “reduce vulnerabilities”? It does quite the reverse, it reduces taxes, kills jobs, damages productivity and investment.

      There should be no large shock at all. The only shock (for the remainiacs) will be that we are actually economically better off out, providing we get a nimble, democratic & sensible real Tory government. One that responds to the needs of the EU. This rather making us mere regions of the dire EU.

      Of course their could be a shock if May does the appalling deal (worse than remain) deal that she insanely proposes. Then, worse still, Corbyn/SNP actually gets into power and start to create the next Venezuala but without the oil or the sun.

    • hans christian ivers
      Posted August 6, 2018 at 5:24 pm | Permalink


      Your reply does not stand up to deeper scrutiny. Yes, BoE bought part of the debt, but it is not something the BoE can just write off, due to the future value of the Pound, so the UK debt still stands at nearly 90% and not the ^&% you are claiming John R

      Reply Not so – we will probably do what the US is doing and gradually retire the bought in debt

      • hardlymatters
        Posted August 6, 2018 at 6:44 pm | Permalink

        Don’t like the word ‘probably’ it sounds too much like should and maybe..neither do I like any comparison drawn with the US..they are on their own and have a different dynamic..for us, on the other hand we are looking into the unknown..we have so much else to do with planning for a future by WTO rules that we have not yet come to terms with, so
        it hardly matters discussing debt

      • Rien Huizer
        Posted August 6, 2018 at 9:28 pm | Permalink

        Thanks, Hans Christian. Mr Redwood knows very well that his argument is problematic. Debt by itself is not the problem, the drag caused by debt service is. Unless you monetize debt (implied in the Redwood approach) you will have to pay interest and principal. Keep in mind also the accounting of the “BoE” holdings of gvt securities resulting from QE.

        • Mitchel
          Posted August 7, 2018 at 9:43 am | Permalink

          Yes…to think our host was once a member of a “sound money” government(albeit one that had North Sea oil revenues gushing in)!

          Reply Still am – try reading what I say – tax rates down, domestic spending up, borrowing down, EU spending cancelled.

      • Mike wilson
        Posted August 6, 2018 at 10:28 pm | Permalink

        Why not buy in all the debt.

      • Rien Huizer
        Posted August 7, 2018 at 9:49 am | Permalink

        But Mr Redwood, the US is redeeming the portfolio runoff out of fiscal means. You are suggesting that the debt does not really matter beacuse it is an internal bookkeeping matter (or so I think that is what you mean). Not replacing maturities means that thos will have to be funded out of net receipts or fresh debt.

      • hans christian ivers
        Posted August 7, 2018 at 12:38 pm | Permalink


        Interesting perspective but not necessarily sustainable

    • lojolondon
      Posted August 8, 2018 at 3:55 pm | Permalink

      Spoken as a true remainder – total garbage.

      “a relatively small country with an independent currency” – truly insulting for the fifth biggest economy in the world. Note that removing the UK from the EU will cut the size of EU economy by 16%, but will cut EU reveneus by 30% as the EU loses it’s second-biggest donor.

      The UK economy has been irreperably damaged by the EU over decades. Now the Remainder Elite, supported by the dishonest media are trying to prevent us leaving. The raising of interest rates has only one purpose – to point and say ‘see how house prices fell and the economy contracted as we approached Brexit’.

      We want our Brexit hard and fast as possible, so that the UK can be a symbol of democracy and economic prosperity to the rest of Europe.

    • Peter Martin
      Posted August 8, 2018 at 7:32 pm | Permalink

      Reply to reply,

      “The state debt to gdp ration is around 67% as we have bought in £435bn of the debt!”

      No. That’s not the right way to look at it.

      All the Govt is doing is swapping one type of Govt IOU (pounds) for another type of IOU (gilts). Nothing really changes.

      Its rather like a bank encouraging all its customers to move their money from savings accounts which pay some interest to current accounts which pay much less, or even zero, interest.

      Of course there needs to be a sweetener to make this happen and that is the Govt entering the bond market and bidding up their price!

  2. NickC
    Posted August 6, 2018 at 1:18 pm | Permalink

    Given the official, average influx of migrants (all sober, BBC admiring, hard workers – so we’re told) of over 250,000 every year since 2004, our economy should have expanded at 3.8% avg per year since then. Its actually been about 1.4% avg/yr. So we have been in recession, on average, for 14 years, probably longer. The official figures are all to pot anyway, so the reality is worse.

    No wonder ordinary people have seen house prices rising (higher supply but much higher demand) and wages falling (that pesky supply and demand, again). When will our government start telling the truth? NINos may slightly exaggerate the problem but the IPS grossly underestimates it. If we weren’t so tolerant there would have been riots years ago.

    • Lifelogic
      Posted August 6, 2018 at 2:48 pm | Permalink

      I though they were all doctors, brain surgeons, physicists and graduate engineers according to the BBC. With all the physicists & engineers being female of course this being the BBC propaganda unit.

      • Sir Joe Soap
        Posted August 6, 2018 at 5:35 pm | Permalink

        No those are the people who retired, went part time or took sabbaticals due to tax hikes and pensionlimits.
        It’s pretty obvious that if you replace them with folk on the black market or digging spuds, productivity can only go one way.

  3. Lifelogic
    Posted August 6, 2018 at 1:49 pm | Permalink

    Banks have very severe lending restrictions coming from Government and from regulators in some areas (particularly property investment and development). But often people are borrowing against property to sensibly develop a business. Hammond’s totally idiotic double taxation of landlord interest does not help lending either. The stress testing and slotting rules are very damaging indeed and make no sense at all most of the time. Clearly they designed by an innumerate idiot with little understanding business or risk. Or of the effect they would have.

    The banks often cannot be bothered with all the regulation and obstacles often – especially for the small loans. Second charge lending is almost unavailable and yet this was often a good way to finance things.

    The banks were clearly a bit too free with lending but now they are absurdly tight. It puts me off doing sensible and sound deals just because they banks are so slow, restrictive and often rather incompetent too. HSBC seems not to lend on commercial property anymore unless the loan is several millions – not worth the hassle they say. Even calling existing sound loans in and refusing to renew them.

    One large bank pays you nothing if in credit but charges you 68% PA if you overdraw even if agreed! So borrow £100 for ten years and you will owe them £17,900! While you £100 in the other account is still £100 (less charges)!

  4. Lifelogic
    Posted August 6, 2018 at 1:52 pm | Permalink

    So why JR are Philip Hammond, the Treasury and Mark Carney adopting such hugely damaging policies for UK businesses?

    • Ian wragg
      Posted August 6, 2018 at 2:09 pm | Permalink

      So they can blame Brexit.

      • stred
        Posted August 6, 2018 at 3:46 pm | Permalink

        And winkle out landlords for the CGT and double stamp duty.

      • fedupsoutherner
        Posted August 6, 2018 at 4:06 pm | Permalink

        @Ian. Exactly right!!

    • Lifelogic
      Posted August 6, 2018 at 2:53 pm | Permalink

      I see the HS2 outfit seem to be able to take people’s property off and lumber them with huge legal bills even before they even pay anything. Government sponsored theft and this is before we have a Corbyn/SNP government. What are HS2 enthusiasts May and Hammond playing at? Are they going to correct this outrage or ignore it? Better still cancel the mad project now.

      • Lifelogic
        Posted August 6, 2018 at 4:59 pm | Permalink

        Strange the government is happy to spend so many £billions on HS2 (to save 10 minutes getting to Birmingham). Yet they seem very happy for people at Heathrow and indeed Gatwick to wait well over an hour just to have the passport checked. This all for the sake of a better system or just better scheduling of border staff – costing virtually nothing.

        A queue does not save anytime anyway the same number of passports still need checking – queue or no queue.

    • Yorkie
      Posted August 6, 2018 at 5:05 pm | Permalink

      Because they passionately and genuinely believeD Brexit would be a failure…and are stuck.
      “Pride is a weakness” ~ The Patriot (movie )

  5. Peter Martin
    Posted August 6, 2018 at 4:18 pm | Permalink

    “The authorities just need to be careful lest they slow the economy too much.”

    Yes. Of course.

    “Then they will find the deficit stops falling…..”

    It (presumably the Govt deficit?) won’t necessarily fall anyway. Someone in the UK has to borrow to fund the trade deficit. If this remains the same and the Govt wants to borrows less, the private sector will have to borrow more. This is unlikely to happen when interest rates are rising.

    “……as tax revenues are sensitive to the rate of growth”

    Only in the sense that, and all other factors being equal ie tax rates don’t change, tax revenues are proportional to GDP. If GDP doesn’t grow then neither will tax revenues.

  6. acorn
    Posted August 6, 2018 at 4:40 pm | Permalink

    Simply because, they want a “balanced budget”; the Conservative Party is ideologically committed to such a policy. Simply because, it still thinks we are on the Gold Standard; and, that the currency issuing government’s accounts, are the same as a currency using household or private sector business.

    For those that understand a bog standard departmental monthly budget sheet, have a look at

    You will see in Row 70 “Public Sector Current Receipts”, that Treasury is maintaining its 3% per year increase in the total tax take, while the GDP will be increasing, and your wages, somewhat less than that.

    As I said before; to get to an Osborne style balanced budget, Hammond has to shrink the growth of the economy. The same process is going on in the EU Club Med countries, occasioned by the stupid “EU Stability and Growth Pact (SGP)”. The latter has yielded up to 50% youth unemployment in Club Med states. Boy Oh Boy, are they going to be angry when they grow up!

    • Edward2
      Posted August 6, 2018 at 9:57 pm | Permalink

      But nations in the past and present times have growth and have a budget surplus.
      According to your theory it cannot be done.

      • Jack
        Posted August 7, 2018 at 4:22 pm | Permalink

        It’s possible to have a government surplus and GDP growth, not for the UK as it currently stands though. You need a private sector deficit or a current account surplus (or both).

        Private sector deficit means the currency users are going into debt rather than the currency-issuer, and a current account surplus means you need to net export your domestic output to foreigners.

        • Jack
          Posted August 7, 2018 at 4:24 pm | Permalink

          Private sector deficit could also mean private sector savings are being drained. Either way, it’s not what we want right now. We need a much larger government deficit.

          • Edward2
            Posted August 7, 2018 at 10:18 pm | Permalink

            Even bigger than the huge debt and annual deficit we currently have !
            Amazed that with this debt we citizens are not very wealthy.
            Your claim that more state debt makes all better off is a very seductive thought but economic history is littered with examples of nations who tried this and failed.

      • Peter Martin
        Posted August 8, 2018 at 5:47 am | Permalink

        @ Edward2,

        Yes, it can. The Government’s surplus is everyone else’s deficit. So there is no reason why everyone else can’t be in deficit for a short time.

        A problem would arise if the Government wanted to be in a state of permanent surplus. Sooner or later everyone else would run out of pounds. If Britain had a strong and permanent trade surplus the Govt would simply have to just create pounds (from thin air!) to satisfy the needs of our exporters. Do you count that as part of the budget surplus?

        It’s not just a theoretical point. All the big net exporters have this problem.

        • Edward2
          Posted August 8, 2018 at 11:46 am | Permalink

          So a nation that had an industrial sector, a service sector and a financial sector all very successful with large export earnings and a government that taxed at moderate rates and spent a little less than its tax revenues on its priorities is impossible.
          Run out of pounds…..what are you on about?

          • Peter Martin
            Posted August 8, 2018 at 7:20 pm | Permalink

            @ Edward2,

            You should look at the movement of any currency as flow. The Government creates ££, spends them into the economy, and gets some of them back in taxation. It can’t get back more than it has created in the first place! So it can’t be in overall surplus in the movement, and accumulation, of its own currency.

            Of course, it can accumulate other currencies. Just as other countries can accumulate ££. But what is an asset (+) to the country holding the pounds has to be a liability (-) for the UK govt.

            Everything has to sum to zero !

  7. Nig l
    Posted August 6, 2018 at 5:03 pm | Permalink

    On the basis that we are constantly being told Brexit will impact on our economy negatively, I find it strange they are slowing it down. I would have thought that they would have found some stimulus to make up for the alleged expected slow down or at least waited to see what the effect was.

    Surely such honourable men would not be manipulating the economy solely to achieve their political ends?

  8. Adam
    Posted August 6, 2018 at 7:48 pm | Permalink

    The Chancellor could make changes. Or perhaps changing the Chancellor would be a better remedy.

  9. Ken Moore
    Posted August 6, 2018 at 9:16 pm | Permalink

    Things are pretty desperate if we have to rely on (yet more) debt and borrowing to get the economy to grow. John Redwood must now realise he was mistaken to welcome with open arms so much ‘inward investment’ to balance the Uk current account . With so many companies, airports etc. sold of this has led us down the road to a low wage low skill economy that sends ever more of it’s money abroad. The game is almost up.

    Since 2007 there has been a MASSIVE stimulus to the economy in the form of QE and very low interest rates. The response has been tiny or no growth. Utilising monetary manipulation and borrowing to stimulate the buying of consumer goods and housing isn’t a healthy economy. It is a ponzi scheme. The Uk economy is crumbling the politicians just don’t want you to know the truth.

    Like much of the Western world the Uk is now ex growth. Blame globalisation and the rising cost of energy.

    • Mitchel
      Posted August 7, 2018 at 10:00 am | Permalink

      Plus the importation of a large number of new consumers to keep the consumption figures up.Ponzi scheme is exactly what the model is.

  10. Maid
    Posted August 6, 2018 at 11:50 pm | Permalink

    Mr Cameron carried back a pot of thin gruel last time.
    One wonders what will be in Mrs May’s pot .

    • margaret
      Posted August 7, 2018 at 5:33 pm | Permalink

      Whose fault is it for cutting out many middle men who were good salesmen at all levels?

  11. Canuck
    Posted August 7, 2018 at 1:24 am | Permalink

    Dopey Trudeau got zero trade deals with China, has none with Russia, miraculously has just scored a minus in trade with Saudi Arabia. It’s not the end of the world. Just a big chunk of it.
    No-one tell him where India is.

  12. Jack
    Posted August 7, 2018 at 4:33 pm | Permalink

    The BoE raising rates is fiscal loosening, albeit not much.

    Higher rates directly increase the government deficit via increased spending on interest payments. This is stimulus to the economy and increases aggregate demand.

    However, it’s very inefficient fiscal stimulus, as higher rates also directly increase inflation on the cost side, they are factored into prices. For example, raise rates to 10,000% and the inflation rate will go to ~10,000% on an annual basis.

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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