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Where's the risk?

Stephanie Flanders | 12:57 UK time, Monday, 25 January 2010

"Don't put the recovery at risk" could be an election slogan for all three of Britain's main political parties. The debate is over what, exactly, the greatest risk to the recovery will turn out to be.

We know Labour thinks the danger lies in squeezing the budget too quickly - before the economy is really back on its feet. For the Conservatives, it's the opposite: that by delaying too long in cutting the budget, the UK will lose market confidence, thereby pushing up the cost of borrowing for the government and the rest of the economy - and stunting the recovery that way.

Nick Robinson asked Gordon Brown to be honest about those risks in his press conference a few minutes ago. As ever, he got a long reply rather than answer. But our prime minister did admit, eventually, that timing the squeeze was a judgement call, and it certainly is.

Vince Cable had to tackle this basic issue in his big economics speech this morning. He said:

"Delaying action on the budget risks a secondary infection: a sovereign risk crisis leading to higher borrowing costs. But treatment that is too abrupt - sending off the sickly patient to do 200 press ups in the gym - risks a fresh heart attack: a relapse into recession. Treatment has to reflect the patient's condition."

At this point some of the more cynical of you may be thinking: typical Liberal Democrat, sitting on the fence rather than taking a definitive view. But Cable is right that there is too much uncertainty about the recovery to take a dogmatic view on policy for 2010 and 2011. I suspect that most investors - and ratings agencies - accept that as well. But any prospective governing party does need to show clearly how they will bring the deficit down and, crucially, how the pace of deficit reduction would respond to different economic conditions.

The Liberal Democrat shadow chancellor doesn't exactly provide that in today's speech. He does set out "five objective economic tests for determining when and how quickly the big budget correction should be attempted: the rate of growth; the level of unemployment; credit conditions; the extent of spare capacity (and therefore, inflation risk); and - crucially - the borrowing conditions in international markets."

But this sounds a lot more precise than it actually is.

In truth, there are no "objective" estimates of the extent of spare capacity, let alone inflation risk. Once again, it's a matter of judgement. In the US, officials at the Federal Reserve don't think that the crisis has made any permanent dent in the country's economic capacity. As a result, the amount of "spare capacity" in the economy is thought to be well over 10% of GDP.

In Britain, we're thought to have less to play with because the Treasury reckons that 5% of national output has been permanently lost in the crunch. But no-one knows what the truth will turn out to be. Not even Saint Vincent Cable.

The "right" answer on whether to when to start squeezing the budget is even less clear. Last month the FT asked 71 top economists whether they thought the government should tighten this year - or leave it til 2011. Thirty-three said wait. Thirty-one said make a start this year. (Though, it should be said, a large majority thought that the tightening from 2011 onwards needed to be faster and deeper than the chancellor's current plans.)

We do know there are historical precedents to support both sides. If you think the risk lies in cutting too soon, the great examples are the US in 1937, when premature tightening by Congress and the Federal Reserve helped make the Depression a lot Greater than it would otherwise have been, and, much more recently, the case of Japan.

This chart, from a recent IMF paper [1.43MB PDF], tells the story: the Japanese government raised taxes fully seven years after their financial bubble burst, the economy went straight downhill again (though, as the chart reminds us, the timing was made worse by the fact that the Asian Financial Crisis started a few months later, in the summer of 1997).

IMF chart showing fiscal stimulus and growth

That's the chart that has even small 'c' conservative economists wondering whether a tougher squeeze is the right call for the UK in 2010. But there are just as many precedents on the other side: in effect, nearly every emerging market debt crisis of the past 100 years, and certainly most of Britain's previous economic crises, have come from governments putting off the day of reckoning too long - and thus making the eventual bill that much larger.

As the Conservatives correctly note, monetary policy could play the role of insurance policy, staying looser, for longer, if an incoming government tightens more in the early years of the recovery than Alistair Darling now plans. But, the Bank is already in the realm of extra-ordinary measures, with its policy of quantitative easing.

There may be no "objective tests", but you could have a clear rule suggesting how, exactly, you would allow good or bad economic news to affect your targets for the structural budget deficit.

Alistair Darling has gestured very vaguely in this direction - but none of the key players has laid down a clear plan.

If the recovery is as weak as many expect, privately, even senior Conservative advisers admit that there will be a limit to how quickly an incoming government can cut. We also know that the faster they want to act, the more they will need to rely on tax rises. Though probably inevitable, that's not an edifying prospect for Tory high command.

I'll be saying a lot more about this in the next few weeks. Suffice to say that, for all the parties, this is indeed going to be an election about economic risk. The bad news for all of us is that there is plenty of it to go around.


  • Comment number 1.

    One thing that hasn't been addressed is how to reduce the impact of future crises.

    Gordon Brown promised an end to boom-and-bust (as if that were possible!), partly by making an intelligent promise to be responsible: Save during the good years and spend during the bad.

    Unfortunately, not only did he spend during the bad years, but also he spent during the good years -- especially shortly before the bust when many economist were screaming, "Watch out! The bust is coming!".

    I wonder how we can rein in politicians' instincts to spend money to keep themselves in power at the long-term cost to the entire population?

    [Unsuitable/Broken URL removed by Moderator].

  • Comment number 2.



    pass legislation to force government to not run a deficit above 3% during times of economic growth.

    Effectively only allowing stimulus during periods of recession.

    As it stands any prime minister can borrow gigantic sums from future taxation to spend in the present, its the biggest vote buying con of our laughable democracy.

  • Comment number 3.

    Look at the history - the reason why this country was so ill-prepared for the Credit Crunch, the reason why the public finances are in such a mess now is - Gordon Brown.

    Gordon Brown abandoned poor old Prudence in 2002 in favour of her ugly sister, Fiscal Irresponsibility. The reason this country has a deep and damaging structural deficit now is down to the decisions Brown took before he ever appointed himself Prime Minister.

    Brown believed his own rhetoric about an "end to boom and bust" and spent our money and borrowed recklessly as a consequence. The state we are now in is as a direct result of 13 years of Brown!

  • Comment number 4.

    At 1:42pm on 25 Jan 2010, Anand wrote:

    "pass legislation to force government to not run a deficit above 3% during times of economic growth."

    That wouldn't have helped

    The deficit was 0.4% in 2007, (the last tax year before the crash) down from a previous peak under this government of 1.6% in 2005.

  • Comment number 5.

    71 "top economists" were asked and you reported the replies for immediate action (or to wait) of 64 of that number.
    Okay, Ms Flanders. I will bite - as I think about guinea pigs and remember seeing on TV the fiscial "error" of 1937 in the USA - was it Simon Scharma or Evan Davis's BBC Two programme?
    What did the other 7 top economist say?
    "Do you want frys with that?"
    Subject: oh I do not believe it
    Anagram: believe Ohio do tint

  • Comment number 6.

    A very interesting and thought provoking article. Interesting to see the volume of comments are on Mr Pestons blog where all sorts of ill considered posts about bankers are appearing. This article really does have a bearing on how long and how deep the recovery will be.

    My industry is property and the speed of the fall of the market actually served to bring buyers back into the market more quickly. As soon as prices had come to what buyers thought to be sensible and sustainable levels they were back with a vengence.

    The last recession in property had similar price falls but spread over a longer period. As a result turnover remained subdued for longer.

    The point about recession is that its length is just as important to a lot of businesses as the depth. The same will apply to recovery.

  • Comment number 7.

    What would be the risk(s) to the real economy in taxing derivatives trading?

  • Comment number 8.

    Where's the risk?, Stephanie - didn't your Harvard education cover this aspect of national economic management! I do wonder at the lack of basic understanding of Economics so often demonstrated by Harvard trained economists (i.e. Mervyn King and Ben Bernanke who both need firing!)

    The 'risk' is that the international financial community we see that we are an easy touch and that the present bubble economies (of 2009/2010) created by zero interest rates will be exploited and inevitably turn to a more disastrous crash. I was going to add: will be exploited and get out of control, but that would be wrong, as the bubbles of house prices and equities are already out of control! The bubbles are out of control because the Harvard trained economist in change on monetary policy (Mervyn King) is acting as if he is a gutless wimp. It is so blindingly obvious that the money he is throwing away with QE and zero interest rates is going into fuelling bubbles, and not the real economy. He knows this but is still adopting the supine attitude that gave us the bubbles of the noughties and the devastating crash.

    The risk is caused by Mervyn King, and his boss Nick Macpherson at the Treasury, both are supposed to understand economics (otherwise they should not have been appointed!) yet both are setting about destroying the Nation once again. The bubbles MUST be constrained - if they will not use interest rates they must find some other measure, such as taxing capital gains on all homes and equity gains - whether of not they are realised - on an annual basis. If your home's value goes up then you pay tax on that increase of value as part of your annual tax. There are ways to avoid increasing interest rates, but of course the traditional and only demonstrable way that works is to put up interest rates.

  • Comment number 9.

    At 2:05pm on 25 Jan 2010, Crowded Island wrote:
    "Fiscal Irresponsibility..." etc

    Public sector debt was entirely unremarkable prior to the recession. Running a deficit in times of economic growth may have been unwise and certainly does not help us deal with the recession but neither is it the primary cause of our problems – especially considering the sheer scale of the mess.

  • Comment number 10.

    #4: mammyslittlesoldier

    If the deficit was so low during the decade pre crisis, how has government borrowing accumulated froma surplus in 2000? If we had public sector borrowing at circa 40% of GDP (government's fucged figures excluding PFI and pensions) but government coffers were in surplus in 2000, you wouold need far more than 1.6% structural deficits to accumulate that much debt over 8 years, more like 5% a year annually!

  • Comment number 11.

    Prescient article from December 2006 - UK Budget Deficit - Gordon Brown's poisoned chalice:

    Put the blame where it squarely lies - with one Gordon Brown. The UK was running with a large Public Sector Borrowing Requirement after years of growth, when we should have been running a healthy surplus. Brown bloated the state to unsustainable levels and we will now pay the price in spending cuts, higher taxes and lower growth.

    If Brown had kept public spending and borrowing under control, we would now be much better placed coming out of the recession. As it is, failure to swiftly deal with the public sector borrowing requirement will be toxic for the economy, with higher interest rates and lower growth being the inevitable consequence.

  • Comment number 12.

    #6. #mark_savill wrote: "My industry is property"

    Tell me how much should a home cost as a proportion of the income of the people who work in an area? My grandfather paid 12 percent of his annual income for a home for his wife and three children who he put through university. The structure of society was stable in his day because the domestic economy worked - his income was sufficient.

    Today your industry rants on about not income multiples but affordability. This is arrant nonsense for what is affordable under zero interest rates become socially destructive when the real cost of money resumes. The only way that your industry can thrive is if zero interest rates continue. You, sir/madam, are living in a fools paradise. Your overpriced property is one of the root causes of the banking crash in this country. You encourage self-certification or liar loans and are as guilty as every borrower who overstated his/her income to get onto your great illusion - the 'property ladder'. Your time is up!

    If you are in industrial and commercial property your prices are also too high because the domestic housing market (along with over priced farm land) pushes up the land price and that in turn makes factory and commercial premises internationally uncompetitive.

    Your culpability comes from the encouragement of 'liar loans' and a willingness to encourage purchasers to spend more than they can afford in the long term - you are turn partly responsible for the inevitable break up of families that results from a failure on the household budget to remain viable.

    House prices need to be half what they are now!

  • Comment number 13.

    There is the balance sheet mentality at work for some politicians and economists but cutting public expenditure does not lead to a pound for pound reduction in the deficit because of the unfolding of short and medium term (unintended) consequences. Sacking a load of public sector workers will incur severence costs plus additional payment of benefits where in many cases the deficit is made worse at least in the short to medium term. Similarly chopping capital spending will lead to private firms unloading their workers and not using their sub-c's and so on - not to mention the effects on the users of public services.

    There is a good case for applying stimulus to the real economy through more public works mopping up idle people (especially neets) and resources, but it would be a brave politician to advocate that.

    Raising taxes (especially universal taxes - VAT) would be deflationary - progressive taxes not so much. The issue is managing the funding of the deficit so that a strong recovery can be established and not choked - perhaps a bit of spin would help and it is the strength of the Government.

  • Comment number 14.


    I think you may be confusing deficit and debt. Public sector net debt was most certainly not zero or in surplus in 2000 and I'll brook no argument. The lowest it has been in decades is 26.2% of GDP in 1991. All this data is freely available from HM Treasury or the IFS. Of course, you could always rely on polemical pieces in Moneyweek for your evidence…

  • Comment number 15.

    Anything but holding those who caused the collapse, both banking and govenmental, will the desception of every campaign.
    Governments are impotent when facing the banking industry and people need to elect leadership that will at a minimum give the people some voice and concern when making decisions. Retirement accounts diminished, taxes to bail out banks while they continue with abusive bonuses and no change in laws or regulations to prevent a future occurances. The basic issue is: can citizens regain control of their governments?

  • Comment number 16.

    12 John form Hendon
    "House prices need to be half what they are now!"

    I tire of hearing that agents make markets and that property is over priced. Buyers make a market. Buyers believe that prices are affordable. Therefore the market is set. Nothing any agent does will change the buyers opinions.

    It may interest you to look at what percentage of income your grandfather spend on food. Probably about three times the percentage it is now with far less choice.

    Higher incomes have created consumerism which in turn has created choice the by product of which has been higher prices for desirable goods - and home ownership is perceived to be desirable and therefore more expensive.

  • Comment number 17.

    @ mammyslittlesoldier

    Faitr play, I did indeed confuse defict and net debt.

    Deficit was surplus but net debt was as you say around 26%.

    Guess just a deficit law wouldnt work, more stringent rules would be required. Either way, our nations tendency to run such significant levels of net debt as a default position.

    Perhaps Brown's Golden Rules were sound in principle but set at the wrong level and fudged to fit some economic cycle in his head.

    I don't personally have a major issue with a largish state but as long as the books are balanced.

    large state spending + large deficit + large net debt = a con on the people and a tax on future generations. It is HIGHLY unfair.

  • Comment number 18.

    It would be a lot easier to find work if my employers did not insist I did work I am not trained to do and leave 30amp ring mains lying around!

    I am not going to whine day and night about this you are the authorities you made the calls if you want to build a sturdy economy then you know how it needs to be done. You need to invest in people first to get a return and give them what they need for a satisfactory existence. You decided where to put the peg and if it wasn't a level pegging then that is not something anyone else can do anything about.

  • Comment number 19.


    "...home ownership is perceived to be desirable and therefore more expensive."

    Unfortunately it has had the undesired effect of making non-ownership (aka renting) more expensive as well, both costs haev risen in parallel.

    Its not just an ownership issue, the baselien cost of having a roof over your head whether owner occupier or tenant is sky high in todays market.

  • Comment number 20.

    #16. mark_savill wrote:

    "I tire of hearing that agents make markets and that property is over priced."

    You have deliberately conflated two separate statements that you 'tire of hearing' and you hope by doing so to justify your position.

    I agree that agents do not make markets. However property is without any doubt at all overpriced. Not your fault, but that of the Bank of England and the person/people in change of managing the Nations money supply.

  • Comment number 21.

    Vince Cable needs to add one more to his list of "five objective economic tests" and that's the level and number of investments in new companies.

    If we are to "rebalance" the economy as everyone seems to believe is now essential then higher investment is essential. If it doesn't happen then it suggests nothing is changing.

  • Comment number 22.

    If opinion on when to start cutting public spending is split, then surely we can start with the easier of cuts first to help pay for Labour's Debt Levy which we will all have to endure. If these small cuts don't damage the recovery then we can go further otherwise hold off til the economy improves. Every little helps.

  • Comment number 23.


    I didn’t intend to be sharp or rude but I believe that the radical right is using the recession to push its own minimal state agenda – you can see this in the attempts to convince us all that “big government” and “fiscal irresponsibility” are the fundamental cause of the downturn. I do not have all the answers but I believe it is far more complicated than that. The big questions should not be so much about taxing, spending and borrowing as a proportion of GDP (they never really change that much) but about the real strength (or otherwise) of that GDP. In that sense, I honestly do not see that any conceivable alternative UK Government would have made much difference to what has happened.

  • Comment number 24.


    "Buyers make markets". Not by themselves they don't! For buyers to exist there has to be a seller.

    In the housing markets, the intermediaries have become the market makers and the buyers and sellers are captive to them. Hence the housing sector is extreemely skewed.

  • Comment number 25.

    #21 Wee-Scamp & #13 watriler,

    A combination of both your points may put our thinking in the right direction. I was trying to suggest the same type of thing at the end of the last thread.

  • Comment number 26.

    for houses to exist there has to be a builder and for bricks to exist there has to be an industry to make bricks and there have to be people to manufacture them. People who are not automatons for one single purpose to make bricks just for you! Everyone who works has got the right to a share in what they have made. Try and pretend to be reasonable it doesn't work. Who of you would dig the foundations of a house with a spade without being paid properly for it? Everyone else gets their pay and what an enourmous fuss they make if they don't get it!

  • Comment number 27.

    Brown is Rubbish. Vince Cable Rubbish - one minute its local income taxes and votes for prisoners the next you journalists, economists and spivs are trying to sell him as some kind of mesiah. Cameron - Flim Flam. We need leaders with convictions not focus groups.

    Labour will keep printing cash and spending with prodigality until chucked out of power or until we have another fiscal/currency crisis.

    Put that on your graph.

  • Comment number 28.

    just because some people live in a shady world of conniving doesn't mean we all want to. I can't help what my parents decided to call me but why didn't someone talk to me about this sooner? and ask me to change my middle name if doesn't fit into to the calendar. What do I know about it? I'm only a young man.

  • Comment number 29.

    You don't like to be sceptical, but one does have to wonder if the fact that Gordon Brown's refusal to tackle the budget deficit is simply to do with the protection of a fragile economy or a rather poor attempt to hang onto his core vote in the public sector who after all would not take kindly to the kind of treatment dished out to the private sector workforce over the last 18 months? If it is, and polling does take place on the 6th May, then what an earth is the March 2010 Budget going to look like? Surely, he won't try the tactics used in the Pre-Budget Report, as his credibility would be shot after his recent falling into line with the Chancellor?

  • Comment number 30.

    is something bothering you? you decided not me nothing to do with me you just want to give me some stick 'so it's fair?' sorry who applied for the job and signed the contract and swore the oath? not my fault! just what is acceptable in this society? nothing is what. if you say you like something the other guy hates it.

  • Comment number 31.

    Mammylittlesoldier - "The big questions should not be so much about taxing, spending and borrowing as a proportion of GDP (they never really change that much)"

    The last statistics I saw showed a rise of public sector as a % of GDP from 37% to 55% from 1997 to 2008. I would say that is a real change. It means that at present, PS spending as a %age of GDP has gone beyond that of the French, who are historically high in this regard. When added to (mine and many others') perceived lack of value from that level of growth, I would say this is a question worth answering.

  • Comment number 32.

    Stating we are out of recession feels like saying to a group of people with their heads just above water that they are no longer drowning but unfortunately do have about 20 miles to swim through shark infested waters to reach dry land.
    It does not feel like we are out of trouble yet and a sea change of habits will need to take effect for that to happen.
    It is no longer, in theory at least, the depth of the recession but the length of it that matters. If we have too many unforeseen catastrophes then we could sink deeper into trouble.

  • Comment number 33.

    dropping a hint about something?

  • Comment number 34.

    Lets face it the "stimulus" was a massive wasted opportunity. Instead of propping up the benefits seekers and padding out the public sector with mroe nonjobs, the government should have done soem proper Keynsian public works.

    For god sake they SHOULD have built more prisons, invested in transport infrastructure and built moer social housing.

    Those three things alone would have been the best sue of stimulus money over the last 18 months.

    Instead the stimulus has been used to shore up votes from an increasingly skeptical and disillusioned electorate.

    What a missed opportunity :(

  • Comment number 35.

    As an aside, if you think 27% to 55% is too dramatic a figure to be accurate, please consider the extra 1,000,000 public sector workers we have, plus small expenses like illegal wars, and it all adds up.

  • Comment number 36.

    We built a house on a volcano and it erupted. And it's an unforseen catastrophe? If you don't know about it in the 21st century when all the technology of human civilisation is available?

    I'm just not with the programme sorry if I don't understand that if I build a community on an earthquake zone and there is an earthquake lots of people may suffer a catastrophe!

    Trying to blame someone? Tell a story about a girl I knew. I treated her ever so nicely made a dinner she liked and she liked me because she enjoyed the experience.

    But didn't understand the steps and the planning and the attention to detail that is necessary to make a successful dinner.

  • Comment number 37.

    #34 Anand,

    Take another look and see where the money was directed - then come back and make some informed comment!

  • Comment number 38.

    histrionic personality disorder?

  • Comment number 39.

    #32 aka-bluepeter,

    It's the diagnosis that has ben wrong. This is a DEPRESSION and not a recession. The nature and the time scale are completely different.

    I think it was John_From_Hendon who pointed out (over a year ago) that this depression had more in common with one in the late 19th century than it did to the Great Depression. Hence your analogy of being 20 miles out in shark infested waters is pretty accurate.

  • Comment number 40.

    Sorry sdrake123, my statement was a bit too casual. Public sector debt is clearly going to soar to unprecedented levels during this recession and net debt levels do fluctuate quite significantly. My point is that fiscal irresponsibility did not cause the crisis and recession. Public sector net debt was 36% in 2007, the last tax year before the crash – an entirely unremarkable figure in the context of the past few decades. Of course, fiscal conservatives will argue with some justification that that it should have been lower but that isn’t the same as accepting that it caused the crisis. Also, Labour inherted public sector debt of 40-odd percent following the early 90s recession - not 27%

    Interestingly, ONS data shows there are negligibly more (and proportionally fewer) people employed by the public sector than there was in the early 90s. There will be cuts, don’t you worry.

  • Comment number 41.

    mammyslittlesoldier - thanks for the reply. However I am not talking about debt, I am talking about the "balance" of the economy, from one that's majority private sector to one that's majority public sector.
    I have only A-level Economics and some Statistical qualifications, but in my layman's view, this switch has been created by GB as an "employment and economic miracle" whereas in fact is it funded by extra taxes and debt, leaving us little room to maneuver.
    Building such a leviathan is going to be terribly hard to draw back from - as swingeing dramatic cuts will, as if obvious, have undesirable follow-on effects.

  • Comment number 42.

    Sorry - typo earlier - it's 37% to 55% in terms of GDP percentage.

  • Comment number 43.

    One of my little nightmares is that we have used up all our reserves and some more but we haven't yet had the real recession. I get these odd panic attacks from time to time particularly when I notice something going on which I don't understand.

    It is the recovery that I don't understand this time. I am being told there is a recovery, people all about me are saying there is a recovery but my difficulty is that I don't feel the recovery. After every recession I have known in business and that is now forty years, the recovery when it arrives is palpable. It hasn't yet appeared as far as I can tell.

    There are two things we do have though of which one is uncertainty and the other is huge amounts of cheap money sloshing around within the large corporations who, thanks to QE, are assuming that recovery has to be on its way because it should arrive around about now. Is this shrewd business or is it just wishful thinking?

    I also find it odd when commentators speak of the cuts in public spending which are going to happen. I am sorry but they seem to have already started. The entire bureaucracy seems to have decided to batten down the hatches and use `cuts' as a reason for not doing something even though the former budget should still be standing upright. I just don't get it.

    The only way to get the economy moving is to encourage investment in value added activity that will generate much needed cash for further reinvestment in more of the same. This can only be done by cutting taxes and refocussing what public money remains in supporting the necessary pattern of investment.

    Then there is the prospect of future crises. Much has been made here already about the new bubble and I accept that argument wholeheartedly. Others have remarked at the failure in achieving the necessary infrastruture changes such as splitting retail banking from the casino. This is all very valid argument as the current strategy, if I may call it that, is based on a quick V-shape recession killed off by fiscal intervention.

    However the picture remains so uncertain not least because if this was the case then the recovery would be here by now. Sadly, it isn't.

    Double-dip anyone? Or are we going for the treble?

  • Comment number 44.

    There is no recovery. Quantative Easing (QE) or debasing the currency by printing money, as it should properly be called is creating inflation as can be seen in even the official figures.
    Who elected Mervyn King to devalue the currency and slash interest rates to a level where savers are penalised. Bob Chapman (you should google him) advises that to preserve your wealth (if you have any) you should buy gold and silver related assets. This is the only way to protect yourself from central bankers.
    Ask yourself, if the financial system as we know it totally unravels what have I got at the end of it.

  • Comment number 45.

    Hi Stephanie

    Firstly thank you for your update on this subject. Having been someone who has followed this crisis I find the risk quite well expressed on today where an analysis is given of Greece's situation. So my reply would be that the risk is that we go down the same road as Greece

  • Comment number 46.

    #41 sdrake123,

    I think you are wrong when you think that the swich that you believe has happened is a direct GB strategy.

    I believe that it has come about as a direct consequence of 2 major elements. Firstly, the affects of globalisation has robbed the country of thousands of productive manufacturing jobs. The service jobs that helped fill the gap were/are closer in kind to the majority of public sector jobs. Hence the switch between service and public sector has been more easily accepted.

    Secondly, all the developed economies have found themselves to be more beauraucratic. It's not just a UK 'thing'.

  • Comment number 47.

    I am late to this debate but I want to say that mummyslittlesoldier to right.

    There has been so much misinformation about the deficit issue. How many people realise that according to the IMF, the U.K accumulated deficit at the end of 2009 was the lowest in the G7 (except Canada who lie by not including provincial borrowing) and will still be below those for France, the U.S., Italy, and Japan by the end of this year. In fact only a whisker below Germany and if the latest figures are any indication we could still be below Germany.

    The reason for this is that despite the current year deficit, we started from a much lower level than the others and the policies followed in the last few years do not change this. Add to this all the nonsense about the U.K. being more dependent on Financial Services than the others (Not true) and you can see why we have talked ourselves into the belief that the U.K is bankrupt which it is not.
    The rush to buy Greek government bonds today will show that all the talk about a buyers strike in Gilts is also complete nonsense.
    All of which leaves one with a suspicion that all those peddling the alarmist nonsense about national bankruptcy lack of growth etc have a political agenda especially the vitriol directed at Gordon Brown. I am not one of his supporters but a little objectivity would not come amiss.

  • Comment number 48.

    #43 stanilic,

    Not for the first time, I agree with you about 'the recovery' but as I have made clear above I don't expect anymore than blips and slips for a very prolonged period.

    It feels like the Phoney War must have done. Dangerous times indeed.

  • Comment number 49.

    fordeckdave - I agree with Globalisation factors, however I think to say there was no intention to grow the Public Sector (and therefore create core votes) is perhaps a little naive ? The points you make do help illustrate how this has easily taken place by stealth, funded at least partially by taxation in the same idiom. Tactics such as the assault on private sector pensions, whilst telling us we are not saving enough, has also made working for the PS more attractive to many . Whilst to state some of these monies should have been used to "rebuild industry" would be facile, more use of funds to support innovation and genuinely healthy UK-based businesses to invest more in the UK may have been beneficial.

  • Comment number 50.


    I asked this question on your blog a few weeks ago.

    What is the greatest threat to the British economy?

    Double dip recession (Conservative cuts. Not quite clear if this is the outcome)


    Sovereign debt crisis and a run on Stirling (If Labour keep spending)

    There is only one answer, the magnitude of the damage a debt crisis and Stirling collapse would cause is infinitely higher than a double dip recession they are not even in the same league.

    Savers are already being raped of the value of their savings to pay to keep fools who bought into an over inflated housing market afloat. If they then have the value of the savings wiped out then the benefit bills would be unsustainable for this country and the whole house of cards would come crashing down.

    Labour has dragged its heels on this all the time for political advantage it never sees that prudence if for life not just for an election campaign.

  • Comment number 51.

    #49 sdrake123,

    We will obviously not agree about the growth being a political ploy. However, I totally agree with, "Whilst to state some of these monies should have been used to "rebuild industry" would be facile, more use of funds to support innovation and genuinely healthy UK-based businesses to invest more in the UK may have been beneficial."

  • Comment number 52.

    #16 Oh joy housing again! And yes, you are misguided on this one I'm afraid.

    The only people I see running back to the market are cash rich. Most of them buying as investments, renting out etc. Or those who for one reason or other are forced into a move. I'd hardly call the volumes rushing though...unless of course you are in London and you sell to all those bankers who have to find places to invest their/our huge sums!

    The actual problematic prices wasn't taken on board by the bankers til they started losing profits. Mainly because rentals and mortgages had led to the horrible position of nobody being able to afford much after they'd paid for their 'digs'. The rest of the economy started to grind to a halt and they finally wake up!

    Unfortunately, the number of buy to lets, bad lending practice and stupid investments have made a mess of this one and it now needs resetting.

    #16 "Probably about three times"

    Probably and about at the start of the same quote....not a good start. Think it might be an idea to look first.

    Anyway, back to the article in question, not the side show....

    And here lies the issue. It's economics. Nothing is certain, nobody has a clue how the whole thing works, so it's all pure guess work. Lots of crystal balls and some brave deluded gamblers thinking they are in control.

    I agree with your position though. It is a gamble. We should be playing it safe. The last thing we want to do is ruin our future but at the same time, we really are eating are young at the mo.

    My first priority would be finding a way to return some of the inactive to work in the private sector. Investment in research projects and the likes. Grants for new start-ups etc. I know this means deeper cuts for a start but it also hopefully means a quicker steeper recovery.

    Next in line is finding the areas to cut spending. Hopefully by doing priority #1 we get some people off benefits, but that might be a year or two down the line.

    We do need to address the situation of those on incapacity. If the figures in a recent post are correct, I'm horrified! Welfare is such a huge percentage of our outgoings and set to get worse if things continue.

    The other biggie I suppose is health but I really don't want to go there. I may try to squeeze in some areas but as I don't work in the industry, I wouldn't like to make that call.

    Third on my things to do list would be to plug the holes in our economy. Yes the bonuses, but what I really mean here is to take a serious look at following Portugals/Netherlands example and legalise certain activities which currently go untaxed.

    There are already calls from other arenas to do this but it may political suicide. Surely there's an economic incentive to do so here also. There are vast sums to be found by legalising some of the lesser activities.

    I recently read a book called McMafia which made some intereting observations and suggestion. I have to say after reading it, I could see the writers point. It can't be a winnable war when the gangs make enough profit to spend orders of magnitudes more than the police get in funding. I also believe this may reduce spending in other areas such as police and NHS! Double score!

    Cannabis from Wikipedia...sorry, was in a rush but it's a good example....The number one producer is California with an annual revenue of nearly 14 billion" dollars in production. They have half the population of UK so there's what...10 bill for purse? Plus the savings others believe you'd see to public spending with less yobs smashing windows and fighting on a Friday night.

    Do the same for some other questionable activities and we not only reduce crime, but we also bring some 'users' into the care system to help recory. But most importantly in this context, we'd help save our economy as an added bonus!

    Start light with the cuts and gradually get deeper if we aren't seeing a recovery. BUT seriously consider stimulating things with inward investment....not outward like will happen if we keep funding the banks!

  • Comment number 53.

    Immediate cessation of foreign aid would be a start. Britain has no right to borrow money with one hand and to give it away with the other.

  • Comment number 54.

    46. foredeckdave

    I tend to agree with you, having read most reports,theories, books etc, I've come to this conclusion. Old Gordy boy is not 100% to blame, but the governments actions over the past 30 years, the tories dismantling a lot of the utilities, banking de regulation , the blair years and not seeing the Tsunami coming, much like the stock market bubble in wall street, the information available and based on past bubbles made it 100% apparent what was going on in the property market.

    But that aside dress it up how you like, the UK is still in a shed load of debt and it needs to be paid back. The banks should have been let to go bust and the relevant parts to be nationalised.

    As Steve Keen points out, banks should be stable utilities who do not speculate on greed, but lend sensibly to firms and people who produce something. That would keep them on an even keel. The stock market he suggests that you buy a share in a firm, based on you expect it to be a good company with growth, this would encourage investment in business, rather than the corporate take overs based on leverage. You would hold the share for say 10 years taking a dividend then sell it back for the price you paid to the company, that takes all the short term speculation out.

    Greed, Speculation,get rich quick, that is what needs to be tackled.

    Getting back to now, we will see more printing of money , and deflation. House prices and especially commercial property needs to come down in price. If wages are dropping, you will not get a mortgage like you did before on a gazillion multiple of your income. 3x times multiples point at another 20% or so on houses to go yet.

    I had to laugh, on the radio the other day a retailer said they were closing their store in the local mall due to an increase in rents. They have hundreds of stores nationwide and have just opened more, the landlord of the big mall said, we are not concerned there is plenty of interest in the unit , there are half a dozen units empty still, so it seems to me that we won't see the bottom of this until the rents and mortgage amounts return to an affordable amount.
    There are plenty of people who would take a mortgage if they could afford one, its not that the banks have no money, they are sitting on top of it all , its that no one has the confidence to take one out or buy at the prices that are about just now.

    There needs to be a legal barrier between investment and retail parts of the banks.

    But despite all that I worry more abut any affect that will happen when the US economy explodes and the power struggle begins. I also wonder if the rumour mill of the dollar if and when it does go bust would make as some have already pointed out a case for sterling, the euro and the yen to be the reserve currencies?

  • Comment number 55.

    The original blog highlights two risks. If we cut too quickly then the economy will tank - because we are still dependent on the artificial stimulus. If we leave it too late then the economy will tank, because the markets will penalise us and because, in all probability, there will be a(nother) run on the pound.

    Either way, the economy tanks. So what are the odds on the powers that be getting it "just right"?

    Either way, the only thing that could prevent things turning out badly would be strong growth in the private sector - and, in particular, in manufacturing and exports. Given how much our manufacturing base has been eroded, this will require substantial investment. What evidence is there of any such investment - and a "rush to growth"?

  • Comment number 56.

    Count the number of actual names Steph uses...Alistair Darling, Vince, Saint Vince even, Gordon Brown, Our prime minsiter no less. Ah yes and those pesky Conservatives who are referred to without names. Keep up the good work Steph....Love Mandy

  • Comment number 57.

    Surely the lesson of Japan is to cut taxes both (income and corporation)Successful businesses and employees will generate cash for the country but to do that you have to make a massive dent in public spending.
    I'm not saying that won't be hard but at least that would give us a chance to get out of this mess.

    Please note I do not include banks as part of the private sector in this argument. Retail and commercial deposits and lending should be nationalised. The gamblers can fly off to the piste for all I care

  • Comment number 58.

    You are a bad boy John

  • Comment number 59.

    ''Continuing global economic growth "is not possible" if nations are to tackle climate change, a report by an environmental think-tank has warned''

    This is more pertinent than Cable wanting to massage and saying it'll hurt but you will bearly feel it.

    It doesnt look as though Germany is going anywhere fast. So is the UK positioned.

    ''German consumer confidence is fading, hit by the threat of unemployment, according to a survey.

    The GfK market research group consumer climate index stood at 3.2 points in February, down from 3.4 in January.

    "In terms of consumption, 2010 is likely to be a more difficult year than 2009", said the group.

    Europe's biggest economy contracted by 5% in 2009 - its worst fall for 60 years.''

  • Comment number 60.

    It seems everyone is staking their reputation on recovery and growth withour being sure where a sustainable recovery and growth will come from.

    Brown seems to be relying on a permanent stimulus until growth returns but if real sustained growth does not return and deflation starts to kick in then the more we longer we put off paying back debt the bigger the mess we land up in.

    Surely from the already horrific government figures we do know about they are relying on a pretty astounding growth figure over the next few years to help pay off the debt. I have heard a lot of 'hopes' and 'maybes' of late so you have to wonder if this is not a huge gamble and an already discredited and out of date economic policy.

    Changes are happening but no-one seems to have a grasp on which way they are going and they are still sticking to the same old game. Flexibility and adaptability certainly don't seem to be a part of it.

    The economic crisis just seems to become more confusing by the day and is now taking on a life of its own.

  • Comment number 61.

    Doesnt it all boil down to the three UK debt mountains : the UK household/corporate ; the UK banks' and the UK Government's. Has anyone got the interest payable per quarter on all three? Ball parks would be fine.

  • Comment number 62.

    #60 virtualsilverlady:

    Economic reality will focus more than a few minds (in the very near future). And that will be that recovery is many years away. Brown's only concern is the about the number of months he will have served as PM. Brown's said today it's a 'judgement call'...conveniently he didn't say who for....him or the country!

    Cameron's charge of moral cowardice at Brown today may have resonated with the chattering classes but it deinies any acknowledgement of the root causes of the problems that our nation faces.

    Until this is acknowledged...there will be no's simply that bad.

    We need leadership...and we need a new economic/ideological objective...I believe one similar to the Franco/German one, with a more balanced's time ditch our reliance on the City. It's going to be painful...but it's absoutely be necessary.

    Nothing about this country is balanced at the moment.

  • Comment number 63.

    #47 Colin Grant Perhaps you should consider sharing your thoughts with McKinsey as they seem to have a somewhat different view.

    According to McKinsey the UK has aggregate debt of 468% of GDP - a level exceeded only by Japan.

    This comprises:

    Financial Institution debt equal to 111% of GDP
    Household debt equal to 101% of GDP
    Non Financial Business debt equal to 117% of GDP
    Government debt equal to 52% of GDP

    Pretty much all of the financial institution debt is effectively guaranteed by the government, and I guess the government will be looking to the other sectors to pay taxes so as to finance government debt.

    Maybe manageable at effective zero % interest rates. However in your rush to extol the virtues of Greece you seem to have omitted the interest rate that they need to pay to finance their debt. Something quite a long way above zero I believe. And this when the main bet is that Greek debt is really German debt!!

    Still everyone knows that the British are different, and that normal rules can´t possibly apply to the British. They need endless free money, because...well, they deserve it.

    Think what you will about McKinsey but they have spent the best part of the last 90 years getting the "movers and shakers" to take them seriously.

    Hello meltdown my own fried
    I´ve come to talk with you again
    Because a vision softly creeping
    left its debts whilst you were sleeping

  • Comment number 64.

    So to follow on from Mr Cable's analogy, if the patient has Depression....

    Is Quantitative Easing the new prozac?

    If the medication is stopped might the patient turn suicidally 'cold turkey'? If the medication continues might the patient jump out of bed and become a homicidal maniac or just a binging shopaholic once again?

    I guess it depends on the cause of the Depression.

  • Comment number 65.

    43: I share your concern.

    We export 95% of what we make. The US was our biggest market, but it shrank 80% for us from Nov 08. It hasn't recovered. Europe picked up the mantle, but they're now slowing. The UK has strangely been rising for sales over the last 6 months.

    I have no idea what's going on. All I can see is that all our customers are making money, but they're not spending...

  • Comment number 66.

    Where's the risk?

    No risk for our politicians and public servants; their future is all sewn up.

    The risk has been transferred to the private sector, and the consequences have been transferred to our old, our young and our sick.

  • Comment number 67.

    ''The impact of the recession on unemployment is deeper than headline figures suggest, a report suggests.

    The Chartered Institute of Personnel and Development (CIPD) say that 1.3 million people were made redundant during the recession.

    The study says that is double the fall in employment and equivalent to 4.4% of people in work before the downturn.

    It also says that two-thirds of people made redundant were paid 28% less when they managed to find another job.

    The report also highlights the difficulty of getting full-time employment.

    It says that there were 6.2 million fresh claims for jobseeker's allowance between April 2008 and November 2009. That is seven-and-a-half times the rise in the unemployment claimant count during the recession.''

    Seems to answer some questions.

  • Comment number 68.

    Its a strange world when all the major parties are right. I believe we are due shortly a 4th quarter estimate of GDP. This should show growth of between 0.3-0.5%, if the NIESR figures are to be believed. Annualized growth of 1.5-2% is nothing to get too excited and by making cuts in spending too large, will result in a double dip recession. At the same time we can't allow the defeicit to stay the way it is and would risk future necessary investment. It would be nice for a change to get some sort of consensus on this issue because of the importance of our economy toprotecting our way of life. Unfortunately David Cameron wants to run down the ecnonmy and the country for that matter as mush as Gordon Brown wants to take the credit for all the good news but not accept responsibility for his lack of prudence when the economy was doing well.

  • Comment number 69.

    Government spending has to be slashed.

    Not in an indiscriminate way but slashed nevertheless.

    IMHO this is because
    a) no government can depend on the tax take from the various taxes on consumption. Simply put, each of us could choose (or be forced) to consume less. In fact, we are being urged to do so – emit less CO2.

    b) there is no guarantee that one million people are going to find jobs any time soon to reverse recent trends in employers and employee NI and income tax.

    c) the stamp duty take is going to take a long time to recover to the heady heights of 2007, if ever.

    d) there was an assumption that future growth would take care of the government spending funded that's fuelled by borrowing but just as house prices can fall so can the tax take

    e) the statistics are flawed. Government borrowing as a percentage of gdp when gdp covers expenditure funded by the self same borrowing or growth as a percentage of gdp when government spending is that growth funded by borrowing.

    It seems to me that that the real risk is in assuming that growth of GDP is what matters. Frankly, given that some of the recent growth was clearly based on the over inflated financial services sector and government spending, it might have been better not to have had this 'growth'.

    So, if it were possible to accept that a lower GDP is not failure, that that measure might purely be a metaphor for might and that size does not matter, its what you do with your resources then its perfectly possible to say smaller state, that will do nicely (transfer payments being a fairly small part of overall spend). Its perfectly possible to say smaller imports of oil and gas, that's OK.

    The only real casualty is big government.

    If, as individuals we end up buying fewer five pound t shirts as a consequence, its hardly going to impact on UK manufacturing or even dare I say it, banking, is it?

  • Comment number 70.

    As ever a well informed and informative blog. Even sided and makes very interesting comparisons.

    The point is - we know that there will have to be cuts, but when do you make those? The very existence of fiscal stimulus makes the point that there was a need for limited investment and spending to ease the recession.

    However, it doesn't take into account the higher level of spending that Gordon Brown feels is necessary for him to win the next election. That is the one factor missing from your analysis.

    Cutting spending is one thing and stopping increased spending another.

    One is for the benefit of curtailing the recession and improving the chances of economic recovery, the other is about Labour trying every trick in the book to ensure they get re-elected.

    Even if those tricks reduce this nation to a third world state.

    Giving away laptops as part of a government scheme is not going help the economic recovery, but schemes like this are a great way to buy votes.

    You don't even have to be cynical anymore because Labour are so obvious.

  • Comment number 71.

    So, it's official, the recession is over and it didn't become a depression. (well nearly, the numbers are only provisional but I wouldn't like to be the ONS worker who has to tell Gordon that the figures are to be reviewed downwards even by 0.2%)

    The Footsie took the news well, only dropping 30+ points so far.

    All those temporary workers the post office took on before christmas will be pleased that they find themselves entering the job market in a booming economy.

    As an aside, do you think the government will have a couple of 'Top Bankers' arrested just before the election to enhance their ratings or am I being too cynical ?

  • Comment number 72.

    "23. At 3:45pm on 25 Jan 2010, mammyslittlesoldier wrote:

    .....I believe that the radical right is using the recession to push its own minimal state agenda"

    What's wrong with that? Wouldn't it be better if we relied on ourselves, our families and local communities to provide for ourselves?

    We need to take more responsibility for own lives, but we need to be provided with an economic framework that allows this.

    Governments need to concentrate on what they do best ie. as little as possible.

  • Comment number 73.

    What now is the worry is that just because we are being told that we are officially out of Recession by a mere 0.1% is by assuming that over the next Quarter we won't in fact be returning to a level once more below a 0% Growth figure, and in doing so we will effectively be entering a period of a Double-Dip in our Recession.

    However, given the still weak state of the UK Economy as a whole, then there is every likelyhood that a Double-Dip will happen.

  • Comment number 74.

    "63. At 9:07pm on 25 Jan 2010, armagediontimes wrote:

    According to McKinsey the UK has aggregate debt of 468% of GDP - a level exceeded only by Japan.

    This comprises:

    Financial Institution debt equal to 111% of GDP
    Household debt equal to 101% of GDP
    Non Financial Business debt equal to 117% of GDP
    Government debt equal to 52% of GDP"

    Am I right in thinking that Government debt excludes any shortfall in Pension commitments? That must be a big number, which would have to be accounted for by the accounting rules applicable to companies.

  • Comment number 75.

    GORDON BROWN. We are going to have a double dip recession 0.1% growth over chrismass isn't great. This has been the longest recession on record. I think that Gordon brown should have nationalised RBS as he seems to have let RBS decide forthemselves how to spend tax payers money. He should not have given the Bank of England power to set interest rates. I believe increased interest rates would encourage pensioners to spend more money and encourage new buyers onto the housing market.I think he should not have brought in the three tier banking system of Treasury, FSA and the Bank of England as this has meant that noone knows what the other is doing resulting in lapse banking in general. Gordon Brown only claims he is responsible for stuff when it goes right but the flip side is he is also VERY VERY RESPONSIBLE FOR THINGS THAT HAVE GONE WRONG.

  • Comment number 76.

    Wardy 29. Also on the debt factor Labour spends alot of money on something called PSI. They use this to fund long term projects which I leased out to outside businesses. They are not credit to debt until decades later for example a project may be to build a hospital for 135million, it will cost the government 385million but the payment will be deffered until 2035. This shows how short termist Gordon Brown is.

  • Comment number 77.

    Everyone keeps talking about growth and how it is hoped that it will return to pre-credit crunch levels.
    For this to happen we would have to rely upon people getting into debt and Banks lending money by the bucketful which was surely the way growth was generated in the naughties!!. We would also need people to take money out of their houses in order to fund a lifestyle. Other than this failed process I cannot see genuine growth being possible.
    I think something like 35 billion pounds was taken out of property in 2006 in order to spend, so how are we going to generate that sort of spending power in the future without returning to the bad practises so stupidly used by both lenders and borrowers.

  • Comment number 78.

    There's only one thing that puzzles me after reading this, and Nick Robinson's blog on the same topic. You both seem to have a sure grasp on the issues, you both explain it well, you are neither of you blinded by partisan politics. Why on earth can't we just vote you into office to run the economy instead?

  • Comment number 79.

    Excellent blog.

    One question though: why, given the golden inheritance of 16 years' uninterrupted growth, are our national finances a disaster? Who was responsible for managing this, and have they done a good job?

    I think the answer is pretty clear, and damns Labour utterly. 1979/2009.

  • Comment number 80.

    Mrs Flanders asks here "Where´s the risk?" The basic problem here is that there is a thin line between "putting the recovery at risk" and the public spending that is not endless and it has reached a point where it has to be stopped for the reasons you have mentioned.
    But the UK is facing the general election this year, so the necessary cuts in financial support for the economy, namely the labour market, will be released after the election. In this context, the fall in unemployment at the lowest possible factor, for 0,1%, from 7,9% to 7,8% in the last three months, are according to financial support of the UK government if you have a closer look at the economic sectors where unemployment has improved.
    The basic problem of the UK is the large financial sector. Just before the recession, Gordon Brown praised the bankers of London in a speech that they "brought a golden age to this city". In fact, this statement has been on very thin ice. That success of London as a financial place has been according to a socalled "light touch regulation". The question here is how the UK deals with that: "business as usual" or restrictions at the financial market? That is the risk, Mrs Flanders!



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