Instead of constantly asking questions about the “cuts”, the question that needs to be asked about the UK economy is why hasn’t the huge public sector stimulus injected since 2008 succeeded in pushing the economy back into growth?

Since April 2008 there has been a surge in public spending and borrowing. In 2009-10 the state borrowed 11.1% of our National Income, in 2010-11 another 9.9% and in 2011-12 another 7.9%. Before my critics point out that borrowing was bound to be higher owing to the poor state of output, let me also give the cyclically adjusted figures which allow for this. On that basis the state borrowed 8.9%, 7.4% and 5.3% of National Income adjusted for the extra borrowing needed for the weak output levels.

This level of extra spending and borrowing is far higher than previous recessions. In the early 80s recession the cyclically adjusted borrowing was 4% of National Income. In the early 90s European Exchange Rate Mechanism induced recession it peaked at 5.5%.

Current public spending has been rising in cash and real terms. Public sector growth has added to the output of the total economy. So no-one can say that the public sector “cuts” account for the disappointing levels of output. The disappointing levels of output are despite the increased size of the state sector.

There are two main reasons why growth has been elusive.

The first is the private sector has been starved of new money to borrow. This has made it difficult to expand business activites and to invest. The broken or over regulated banks have been unable to finance a traditional private sector business recovery.

The second is the high tax rates and the big prices rises put through in the public sector have squeezed people’s incomes, cutting confidence and demand. High rail fares, high energy costs, higher VAT, National Insurance, and Income Tax for those pushed into the upper bands have all conspired to cut demand. Inflation has been a big problem, producing a large fall in real incomes for many.

Because the state needs so much tax revenue, other income and borrowings to feed it, it squeezes the rest of the economy. If the government decides on an extra pound of public spending paid for by a tax increase, that has no overall beneficial impact on the economy. The public sector grows by a pound, but the private sector shrinks by a pound. It is not a stimulus. If the state borrows an extra pound to spend, the private sector cannot spend the pound it lends to the government.

If the state spends another pound which it prints, that can increase total activity in the economy, as long as the extra money goes into more output and not into more inflation. So far the money printing has gone into both, with the price rises offsetting some of the public sector stimulus. The more prices rise, the bigger the cut in real incomes for the private sector, and the bigger the fall in output from the private sector.

The biggest ever fiscal stimulus, Keynsian stimulus, is being tried. It is not working. Instead of asking for a bigger one, more of the same, people should ask what can be done to promote a more buoyant and successful private sector. That, as readers will know, rests on mending the banks, setting competitive tax rates, reforming welfare and tackling costs like energy and transport.

2012 ended with another down quarter. For the year as a whole the public sector produced real growth of 1.9%, Business services grew 1.3% and utilities 1%. Mining and quarrying (especially oil and gas) fell 11%, Construction fell by 9.3% and manufacturing fell by 1.8%. This year oil and gas output should fare a bit better, but public sector growth should fall.

 The Coalition came together to eliminate the structural deficit over the lifetime of this Parliament. The government tells us they have cut the deficit by one quarter so far, and intend to go further.

Mr Clegg now says he does not think it was right to cut capital spending so much at the beginning. This is a criticism of Labour as much as of the Coalition, as all the Coalition did was inherit Labour’s plans for large cuts in capital spending, reducing the cuts just a little. They reduced them further in subsequent budgets. I think Labour were right about this. In a previous blog I have described how cutting out “growth” spending on new capital facilities is one of the best and easiest ways of stopping public spending growth overall, as new capital items often lead to continued extra current spending in future years.

There is no particular magic about capital spending as opposed to current spending. It is all spending, and needs borrowing to pay for it. Capital spending does not have unique properties which bring the deficit down or create more economic growth whilst current spending increases the deficit and cuts growth. The only exception is capital spending on better technology and automation which replaces state employees and makes it cheaper to deliver a given service.

A few billion more capital spending in 2010-11 or 2011-12 would not have transformed the growth rate of the Uk economy. The Coalition did raise current public spending by 5.3% in its first year in cash terms, and overall spending by 3.7%. The Coalition has increased public spending in real terms since coming to office. The poor performance on growth compared to forecasts comes from declines in private sector output, especially in financial services, construction and banking , and in oil and gas. It does not come from reductions in the public sector.

This week’s figures do not make good reading. Between April and December 2012 the state borrowed an extra £106.5 billion, £7.2 billion more than the same period in 2011. There were two main reasons for the high borrowings. The first is a shortfall in tax receipts from Income and wealth taxes and company tax. The second is the large increase in public spending.

Taxes on income and wealth were £194 billion for the whole of 2012 compared to  £199.7 billion for 2011. As I have reported before, income tax on high earners has fallen sharply this decade with the higher 50% tax rate in place. Corporation Tax has also been weak.

Spending in December 2012 was 5.4% higher than spending in December 2011. According to CEBR, the economics consultancy, real public spending rose by 2.8% in 2012 compared to 2011.

I have long argued that the government’s strategy for cutting the deficit relied entirely on higher tax revenues, with real increases in public spending in the first three years. The latest figures reinforces this view of the government’s strategy. Their  problem is the high rates of tax allied to the poor rate of private sector growth are not delivering the extra tax revenues they forecast, so the borrowing is continuing at higher levels than planned. They need to get a stronger grip on the increases in spending, especially at a time of good progress in the private sector generating many more jobs.

I have also been asked to comment on Mr Cameron’s debt remarks. I assume he just made a mistake. I can assure my readers that he does know the difference between debt and deficit, and does know the debt is still rising.

         Proponents of more EU integration always concentrate on a small part of the UK’s balance of payments, our goods exports to the continent, which in turn is a small part of our total economy.

          Whilst the goods balance is well in deficit anyway, with the EU selling us much more than we sell them, the position on the transfer accounts is far worse.

          The UK earns a healthy surplus of dividend and interest income from the rest of the world, amounting to a net £25.3 billion in 2011. The balance with the rest of the EU was a negative £8.5bn, meaning they earn more from us than we earn from them.

          Worse still we send the rest of the EU a net £11.4billion, much of it our contribution to the EU club paid by UK taxpayers.

          Our total surplus with the rest of the world was a positive £17.6 bn in 2011, whilst the total deficit with the rest of the EU was a depressing £46.6 billion.

          It would be good if the UK could reduce its deficit on foreign account. We are as a country exporting more cars and still doing well with exports of services. Meanwhile, the government’s large transfers to the EU institutions drag us the other way. The EU is also a weak area for us making investment abroad. Most UK companies expanding overseas prefer to go the Americas or Asia than to the continent. As a result the UK ends up having to pay more out in profits and dividends to the rest of the EU than we earn from them.

           At a time of need to bring our costs more in line with our income, the government should turn its attention to the big deficits we are running with the EU. Business says it likes the single market, but the figures show us that UK businesses do not by and large invest on the continent and create jobs and dividends out of doing so.

Mr Cameron has recognised that the EU is not working for the UK. He is setting out the new kind of relationship he wants with emerging Euroland, and has offered a referendum on the results of a renegotiation.

SELF ASSESSMENT INCOME TAX  RECEIPTS

Official forecasts:

Budget 2010                                                      Autumn 2012

2008-9     £22.5bn                                                £ 22.5bn

2009-10   £21.7bn                                                     £ 21.7bn

2010-11    £21.5 bn                                                     £21.5bn

2011-12     24.2 bn                                                      £20.3bn                           

2012-13     £ 29.2 bn                                                    £22.6bn

2013-14      £32.5  bn                                                    £23.8bn

2014-15      35.1                                                       29.4

 

Self Assessment tax income fell 10% from the peak to 2011-12. It fell 5.6% in 2011-12. By the end of the second year of the 50% rate receipts were down by 6.5% on the level before its introduction.

The bulk of the Self Assessment Income Tax is at higher rate. The decline in 50% revenues is likely to have been faster than that in total Self Assessment revenues.

It is interesting to contrast the very optimistic forecasts made by the government in June 2010, and to see just how much they have taken off their forecasts in the light of experience since then.  This year they think they will be almost £7bn down on estimate, and the revenues are currently undershooting even the latest forecast.

In contrast, raising the VAT rate has produced some extra revenue. Capital Gain tax receipts are forecast to fall this year.

The poor performance of revenues is the main reason why the public borrowing figures have remained high this year, well above the 2010 forecast.

 

           The State is threatening to many people who work hard, try to provde for their own families, and wish to keep out of the way of officialdom.

            The motorist is hounded by an avalanche of official rules and regulations. If a driver fails to notice, misunderstands or fails  to comply with some minor part of the enormous encyclopaedia of rules, he or she will be fined. There are very complex rules on how and where to park, how much to pay for parking, how to display tickets, how to proceded in a box junction, endlessly varying speed limits in apparently similar conditions, varying rules on access to bus lanes.  The motorist feels the state is out to stop him getting to work or going to the shops. Often it appears that unworkable  requirements have been introduced just to increase the fines revenue.

            The government lectures the motorist not to use the car so much. It forces up the taxes on motoring, from Vehicle Excise Duty, to new car taxes, to petrol and diesel duty and VAT. The state is reluctant to explain how many of us can do other than go by car for many of the journeys we wish to make, given the inadequacies of  public transport outside central London.

          The worker is hounded by the tax system  which always want more of  the money he earns to pay for the ever rising public spending. The homebuyer faces higher Stamp duties, the family has to pay higher VAT on the things it needs for living, more and more people are dragged into the 40% tax band, whilst anyone who dares to earn a six figure salary is regularly pilloried by politicians and required to pay more one way or another.

           The owners and managers of small and medium sized enterprises are constantly forced to read and understand more regulations. Their attention is often diverted from their customers and managing their output and sales, to managing a wide range of matters that the state thinks are more  important. Business owners are often attacked for failures to live up to standards on a wide range of issues which the public sector often does not achieve. Businesses are accused of paying too little tax, of paying low wages, and of charging too much.

            Many people who pay their own way in the world and who work hard think they get a rotten deal from the state. They think the state takes too much money off them in tax, wastes too much of their tax revenue, and imposes far too many rules on them.  They feel the state is not there for them. If their home is broken into, or if they need hospital treatment, they are often disappointed with the level and speed of service on offer for them.

 

           UK and US politics is increasingly polarised between those who see the state as a threat and those who see it as a lifeline or ally. This week I want to explore why some people think the state is the answer to most of their problems, and why some think more or less anything the state does is harmful to their interests or undertaken for cynical reasons.

            In the Commons a majority of MPs are optimists about state activity. They tend to the view that the state is there to right wrongs, create  greater  equality, provide important  services and look after people. They therefore tend to like more state activity rather than less, and regularly support governments which like to raise spending and take on more tasks for people. In every year I have been in the Commons so far state current spending has gone up in cash terms, and usually has gone up in real terms as well.

             Those who see the state as a friend say that it is thanks to the state that people with little or no income have money to spend, that everyone gets access to health care regardless of means, that we are kept safe in our communities thanks to the plolice and criminal justice system, we are provided with free schooling, pensioners recieve a range of additional benefits, and money is taken from the rich to help pay for it all so there is greater equality.

           They often go further, and see private sector companies as potential exploiters or  bullies. In their view  the state has to tax, regulate and check them to stop them abusing their customers, employees and local environments. Only the state can make people and companies respond to the threat of global warming, the dangers of unregulated motoring, and much else which defenders of the state fret about.

           I will look at just how frustrated the advocates of freedom and free enterprise are by the ever growing modern state tomorrow. They respond to these arguments for a larger and more powerful state by pointing out the large gap that often opens up between the aims of the state actions, and the outcomes.  When the state took over large industries with a view to running them in the better interests of the customers and employees, they found instead that nationalised industries topped the lists for sacking people, losing business, and putting up prices. The more the state tries to tax people into equality, the more the rich go offshore or hire better accountants to avoid the taxes the state seeks to impose. Inequality rose under Labour despite all their efforts to bring it down. With the demise of grammar schools in most parts of England, the gifted child from a low income household now finds it more difficult to advance than previous generations who had access to selective schools as the rich continue to enjoy. The more money that is put into the less successful parts of the country, the less successful they remain. All my time in Parliament has had a similar list of places that need special treatment.

 

             I recently went to Birmingham by train. I wanted to make a speech there first thing in the morning and get back for Parliament later. That meant staying in London the night before to be close to Euston. It was a good opportunity to see how much we need High Speed 2.

             I caught the 7.23 fast train from London to Birmingham, stopping at just Watford and Coventry. It was the train to get you to Brimingham for 9am, the crucial business train you might think. It left on time and arrived close to the scheduled time, despite a delay and slow movement at one point.I bought a standard class day return on the day of travel, as I had not had chance to buy an advance cheaper ticket. I had no complaints about the speed of the train or the time it took me to get from station to station. It was fast, considerably quicker than I would be allowed to travel on the M40.

              The carriage I was travelling in was 17% occupied. The next door one was around one fifth occupied. The first class carriages were much emptier than the poorly used Standard class.  There was little sign of all this need for extra capacity. Returning later the same morning, at half the price of the outbound fare, the carriages were still more than half empty.

               The approach to passengers was not very  businesslike. On the outbound journey it was not until after Watford that a crackly announcement told us there was a shop on the train where we could buy food and drinks. We were also told that the credit card machine was not working, so we could not buy anything unless we had sufficient cash.  It was not very inviting.

                There were regular announcements to tell you the name of the  next station. They also repeatedly told us we had to be unpaid guards, looking out for anything or anyone suspicious and reporting this to the police. It was difficult to see how I could do this, as there were no police travelling in uniform on the train. Fortunately I did not see anyone suspicious so I did not need to bother.It was an unusual approach to winning over customers.

               For almost £80 single to Birmingham I got no offer of a  newspaper, no drink, no information about onward travel, no seat belt, no moving map to show us where we had got to, no safety restraints on some people’s heavy luggage in overhead racks,  no hard copy maps in the seat pockets as you would on a plane. There was waste paper left in between the tray table and the back of the seat.  No-one tried to sell me any additional good or service, other than the announcement about the shop. On the return journey there were no ticket checks at either station I walked through nor on the train itself.

            Out of the train windows you could see large tracts of railway land that were not being well used, and numerous freight wagons and carriages left in sidings  and looking unused and in poor state. It did not give the impression of a well run set of  businesses with tight control over assets and money.

                First Group when it bid for the West Coast franchise said its load factor if it had started the franchise would have been just 35%. Even Network Rail, keen not to release capacity figures, did show in 2010 that overall load factors out of Euston were just 60%.

                I can see no reason why my random day to go to Brimingham was unrepresentative. Even if you allow for more use on other days and at other times, you have to conclude trains from Euston to Birmingham do not seem to be near full capacity or that busy. If I want to seea  crowded train I get on a commuter route at peaks, or try to get from Reading to London by train. The case for HS2 I thought rested on the need for more seats to Birmingham, to attract more Londoners to make the journey.

 

       The latest figures show poor retail sales continuing to the bitter end of 2012.  Low wage rises, continuing price rises, high taxes and the squeeze on real incomes that has been going on for five years now are taking their toll.

         It’s not just the income squeeze though that results in more shop bankruptcies and closures on the High Street. More and more purchases are made using the internet. Some people shop on line because they do not have the time to go to the shops. Some shop on line because it is easier than getting to the shops. Some shop on line because they find more choice and keener prices than they do in some local shops. The internet is taking off as method for picking, buying and paying.

     The High Street business model is highly geared. Shop fitting out costs are high. Stock holding costs are high, rents are high, business rates and taxes are high. To succeed a retailer needs to attract a large number of customers on a regular basis, and needs to be sure of foot in choosing products and pricing them well.

       I have asked people about their shopping habits recently. Some say they have gone to shops only to find they did not have what they wanted. On returning home they found the items on the internet. Others have said they like the clicks and bricks approach, favouring those shops which let you choose and buy on line, and pick up from a local store almost  as soon as you wish.

           When it comes to shopping, more and more people like to make it an occasional event. They want to go to a large centre with many good brands and stores. They expect there to be cafes and restaurants for them to eat and drink as well as visiting the stores. In this world the successful large centres get better and better, and the magrinal High Streets and local shopping areas struggle to retain custom. Councils often add to the distress of local shopping areas by imposing penal car parking charges on visitors, and making it more and difficult to get access to the shopping centre by car. This drives more people to out of town retailers where you can park free of charge outside the shop of your choice.

           The recent clutch of business failures in the retail sector are a reminder that a lot needs sorting out to restore health to some High Streets. Councils need to improve access and allow more free and cheap parking for shoppers. Landlords need to be more realistic about rents if they wish to keep tenants. Government has to tax everyone less.

           We also need to accept that we now have too many shops for the style of shopping people wish to do. In some cases shops have to be converted into offices or residential and shopping streets have to contract. There is oversupply. Fashions are changing. Our towns and governments local and national  need to change with them.