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The case for Mr Osborne's austerity

Stephanie Flanders | 08:45 UK time, Tuesday, 7 September 2010

George Osborne has already shown he is a courageous chancellor. But is he also mad? In essence, the fate of Britain's recovery over the next few years depends on the answer to that question.

George Osborne with the Budget box

Thanks to Mr Osborne, Britain now has the earliest, most aggressive programme to cut government borrowing in the G7, despite widespread fears about the strength of the UK and global recovery.

But, in a major speech last month, the chancellor took credit for having put Britain's budget on a different path. If he's had any second thoughts, he wasn't letting on.

Ten days later we had a fierce response from the opposing camp - a speech by Ed Balls in which he accused the government of "ripping out the foundations [of the recovery] just as the hurricane is about to hit."

Though all agree that Britain's budget deficit must come down, there is an unusually - some would say, disturbingly - wide range of views on when this should start, and how fast it should proceed. Even more unusual, some of our leading politicians occupy the farther edges of that debate.

Ed Balls doesn't just want to delay cuts - he wants to spend more in the next year or so. Martin Wolf, the FT's chief economic commentator seems to agree with him [registration required], but you won't find many in the city who do.

On his side, the chancellor has the support of Mervyn King. The likes of the IMF and the OECD have also broadly endorsed the coalition's approach. But jitters about the global economy - especially the US - mean that his June Budget looks more extreme now than it did a few months ago. The City still generally supports cuts, but it's difficult now to think of a serious contributor to this debate who thinks he should be cutting more quickly than Mr Osborne has proposed (though I'm confident that writing that sentence will flush some out).

Which side is right? That's for you to decide - and history to judge. But as part of the BBC's series on the spending review, Stephanomics is providing a cut-out and keep guide to the debate.

Let me start here with what Mr Osborne would say to convince you that he's right.

First, he would say, this isn't about what's desirable. It's about what's possible, given the massive deficit that the last government left Britain with. It might be nice to cut taxes - or raise spending - to help the recovery. But in my view, that option simply isn't open to UK.

If the government hasn't announced a tougher approach to the deficit, Britain would have seen its international bond yields go up in the past few months - as they have in the likes of Portugal and Spain. Instead we have had new falls in interest rates - which means lower borrowing costs for the taxpayer and for business. People now talk of the UK as a "safe haven" for international bond investors. But that wasn't the perception at the end of last year.

It's true that there's a lot of uncertainty about how the economy will go. But if you look at the underlying pace of growth over the past few quarters it's not very different from past upturns. Few expect the surprising 1.2% growth in the second quarter to continue, but even if the economy slowed to half that pace over the summer, as many expect, 0.6% growth would be more or less Britain's trend rate of growth, and broadly in line with what the city expected a months ago.

There's been a lot of hand-wringing about the impact of our cuts, but last time I looked, the average private forecast was for growth of 1.9% in 2011 in the UK, and the IMF is expecting the world economy to grow by more than 4% in 2010 and 2011. That's not as high as it might be, but it's not a double-dip.

Second, people say we don't have a Plan B. But the Bank of England is Plan B - it can and will act if the economy seems to be weakening. The same can be said of the Federal Reserve. Its chairman, Ben Bernanke, recently spoke in detail of the options available to the US central bank if deflation and/or recession became a serious risk.

Third, yes, there are risks to what we are doing, but you have to consider the risks of the alternative. By supporting market confidence, the academic evidence suggests that efforts to cut borrowing which focus on spending cuts don't undermine growth - in fact they are often expansionary, even in the short term. We might have seen that already in the fall in bond yields since the election.

Dark talk of a deflationary cycle in the US at least has some basis in fact, with inflation there running at less than 1%. Here it's 3.1%, having been above the Bank of England's target for most of the past two years. In fact, the UK is one of the only major advanced economies that now has higher inflation rate than at the start of 2008. It's expected to remain relatively high, well into next year - just as the Bank of England starts to think about how they will mop up the £200bn they've pumped into the economy by buying government bonds. This is not the time to raise suspicions that the UK would rather inflate away its borrowing than bring the deficit down the hard way.

Finally, remember the starting point. When this government took office, public spending was fast approaching 50% of GDP, a level of spending not seen since the mid 1970s. Under Labour, there were large parts of the country where two-thirds of jobs created since 2001 came from the state. There aren't many serious economists who think it would be good for the long-term health of our economy to let the state take an ever larger role.

Of course, the likes of Ed Balls say they will bring borrowing (and spending) down in a few years, when the risks have passed. But that's what they always say. When he was chancellor, Gordon Brown was always promising to balance the books in a few years' time, at the same time as explaining why that year's borrowing had overshot.

The public knows that it's time to get real. That's why every recent poll - including one recently published by the BBC - shows two-thirds of the public in favour of cuts.

So much for Mr Osborne. In my next post - a summary of the arguments against.

Comments

Page 1 of 2

  • Comment number 1.

    "When he was chancellor, Gordon Brown was always promising to balance the books in a few years' time, at the same time as explaining why that year's borrowing had overshot. "

    I remember querying at the time whether or not it was prudent to be borrowing more and more during periods of economic growth - surely that should be when you are running a budget surplus to protect against potential downturns. Oh but of course, Gordon had eliminated 'Boom and Bust'.

  • Comment number 2.

    Stephanie wrote:

    "But the Bank of England is Plan B - it can and will act if the economy seems to be weakening."

    The evidence strongly suggests that the Bank of England is appallingly blind and ignorant about what is happening to the economy. They have consistently been almost totally wrong about the economy. The misses the credit bubble and the crunch. So how on earth can you possible keep a straight face and present these consummate and consistent failures as plan B!

    Their role is to manage to a 2% cpi and NOTHING ELSE - they say this often enough and their situation has not changed. You were at the last quarterly review press conference and you read and reported upon the report - pleased read the basis of the report on the front page!

  • Comment number 3.

    The correct answer is reduce the deficit by more than Ed Balls wants but by less than Osborne is planning. Under Osborne's plans more than 1% of GDP will be cut for the next few years - even if the economy continues to grow that is still many jobs and much output reduced. Cutting Govt spending does not magically lead to an increase in private sector output and this is particularly the case when Govt debt is easy to fund and has no impact on interest rates as at present.

  • Comment number 4.

    Assisted deleveraging of private debt is the only way forward. Public debt has nothing to do with it - this is an ideologically driven smokescreen to halt shifts to 'left-wing' thinking. Public debt is expressed as ratio of private GDP, and the problem is in the private sector.

    The only solution to the world's problems with debt is direct intervention in the banks. These must be seized, regulated and debt must be directly reduced without concern for profit of private shareholders. (Alternatively, the recent SectretsOfOz video advocates making government issued money legal tender and legal for repayment of private debt. This amounts to the same thing in a roundabout way).


  • Comment number 5.

    Steph stted;

    Here it's 3.1%, having been above the Bank of England's target for most of the past two years.

    and I gree with the point made at #2 the BOE has a responsibility to maintain inflation to no more than 2%, It has failed to do so for the past 2 years and is still doing nothing to reach it's target. In fact its actions have contributed to failing its own target. When is the governor of BOE being called to account on this.

  • Comment number 6.

    And what exactly is Plan B given that the BoE's remit is simply to control the inflation rate via interest rate adjustments?

  • Comment number 7.

    From the academic evidence:

    "We find that fiscal adjustments which rely primarily on spending cuts on transfers and the government wage bill have a better chance of being successful and are expansionary. On the contrary fiscal adjustments which rely primarily on tax increases and cuts in public investment tend not to last and are contractionary."

    Is this what is indeed being addressed? Does this mean straightforward efficiency in the public sector?

    It's not really to spend or not to spend, but how to do it efficiently and getting the public sector back into reasonable shape instead of the bloated non-accountable mess that has developed. (without all the excess salaries, bonuses, waste etc.) Too many (useless) chiefs and too few indians?

  • Comment number 8.

    Stephanie

    You explain the case put by George Osborne succinctly above, yet do not allude to the ideological component of the coalitions policy.

    My cards on the table first. I don't advocate fiscal stimulus of the headless chicken variety, but targeted for the long term restructuring of the UK economy. I don't advocated waste in government expenditure so run along with overhaul of benefits system. I characterise excess government spending as th overrun from a period of growth and wealth that is no more if not created on the back of the asset bubble so was nevr really there. Equally, I don't expect the private sector to rush in and fill the vacuum. Why would we want that to happen and create a further impetus to skewed economy. The private sector will rush in where it sees a profit, not where it is good for the long term restructuring of the UK economy. The economy's problems are too deep to be solved by the private sector.
    Osborne, in my view ideologically driven, places his bet on the private sector and exports to earn the UK out of the deficit. That is a huge gamble with the livelihoods and life chances of the UK population for generations.
    Also, you do not develop the international angle, for it will matter not what the UK private sector does or exports in solving the deficit problems, if our main trading partners USA and Europe are in intensive care and bumping along the bottom with coordinated withdrawal of stimulus packages.
    Similarly, the Coalition has no coherent plan to deal with the global banks based here in the UK. They simply threaten to leave as soon as any plan coalesces. This is part of the problem because until the (any) new bank regulations are bedded down, the government will be unable to sell its stake in the nationalised banks for a good price and use proceeds to pay back the deficit.

  • Comment number 9.

    It's not really cuts that are the problem. It is the complete lack of any credible plan to re-invest the 'savings' in the future well being of the national economy. Merely chanting the mantra that the private sector will somehow magically take up the slack and thereby power the recovery is both facile and an abrogation of the governments responsibility for economic management.

  • Comment number 10.

    Sadly, it looks like the UK is set for a "double dip". What is the reason for this? Simple:

    + a lot of public servants will be put out of work or should be
    + inflation will increase
    + as inflation increases the BoE will put up interest rates - this will serve as an immediate shock to mortgage holders and freeze a lot of spending so chocking off demand.

    As demand falls more unemployment hence for uncertainty hence less demand. Whichever way you look at it there is not "good outcome" in this.

    Mr Balls whether right or wrong is unlikely to get a chance to prove his mettle. The only thing that is clear is that Labour have lead us to this sorry state. As a nation we all now have to take the medicine. Unfortunately as the London tube dispute shows some "old Labour" dinosaurs just "dont get it".

    Whatever happens the economic performance of the UK is a tragedy wrought by the last government. We can only hope and pray this one is not as bad. Sadly, the otucome for many will be worse.

  • Comment number 11.

    If action is delayed as Ed Balls, Martin Wolf and others (Stephanie Flanders?) want there is every likelihood that another election will be looming just when it will be absolutely essential to cut expenditure. So one can see why they want it postponed.

    We saw the problem at the last election when no party was honest about reducing borrowing and spending.

    No doubt there are arguments on both sides but the consequences of doing little or nothing immediately would be far more serious than beginning some modest spending cuts now. If we fail and rapid cuts are forced on us by the IMF they will be far more damaging, especially to the poorest. The debt will still be growing well after 2015 and it is morally wrong to expect our children and grandchildren to pay for our profligacy.

    Government here is far too big at over half of the economy, the coalition has a mandate and 60% of the population believe cuts are necessary. For heavens sake let us get on with it.

  • Comment number 12.

    So the draconian cuts in Eire's public sector are doing the trick? Re-emergence of the the green tiger? - begorrah I'll move tomorrow! Stephanie's own analysis pre vacation showed that the UK public debt has no problems being funded at current levels. Mr. Osborne is the expert in Micawber moneynomics and how to make slash and burn look like economic motherhood and apple pie. The time to constrain the public sector is when the private sector actually generates jobs in large numbers - which it is more likely to do if the public sector does not become the double dip!

  • Comment number 13.

    I think we get too hung up on whether we are in for a period of low growth or whether there will be periods when we are in recession.

    It is widely accepted that some of the growth in the last 10 years has been artificial, boosted by dubious credit creation, low interest rates and exuberant government expenditure.

    We need to reduce the government deficit, we need to reduce net imports, particularly from China. We need asset prices, particularly homes and commercial property to reconnect with reality and probably some peoples income will have to reduce, whether that is lower benefits and pensions, higher taxation or real reductions in pay.

    What we have to remember though is that things were pretty balanced back as recently as 2003. UK consumer and business borrowing was funded by uk savers without borrowing £100m's from the rest of the world. The standard of living was ok. Hospitals kept people healthy, house prices were more affordable.

    The question is how do we get back to that point in a controlled fashion? Would a couple of years of pain be better than a lost decade where growth stagnates, the UKs competitiveness struggles and central bankers carry on printing money in the hope the rest of the world doesn't balk at their £ and $ investments falling in real terms.

    The problem is that asking everyone to take a 10% cut in income or benefits would trigger house price falls and bank losses. The preferred solution seems to be to prop things up and let sterling devalue and inflation result in us effectively losing that 10%, but hopefully with our electorate and international backers not noticing.

  • Comment number 14.

    If Mr. Osbourne can steer the government budget towards a surplus of £1 Billion and that surplus could be maintain indefinitely and all of it used to pay down existing debt it will take about 1000 years to pay down all of the debt or 800 years to bring it down to around 20% of current GDP!
    It is essential that the UK economy is quickly brought to a state where it can grow and grow mightily. The real challenge for this and succeeding governments is to create the right environment for that to happen.
    I believe one of the biggest obstacles to sustained economic growth is the heavy burden of direct taxation on individuals and companies. The current scheme has recently demonstated its weaknesses which have arisen over time largely due to its complexity why can we not move to a very simple tax structure, say a flat rate of around 5%? And let not our intellectual resources and brightest minds be employed as tax collectors, tax accountants and tax consultants!

  • Comment number 15.

    This idea that showing determination to cut the deficit somehow causes bond yields to fall seems incorrect to me. The bond markets say this to force governments to cut spending, and in so doing, keep the deficit higher through a failure to grow - this is a calculated move to maintain the supply of risk-free government debt and undermine democracy.

    The slightly higher bond yields (compared to other countries) we have at the moment has nothing to do with the budget deficit, it has to do with the fact that CPI is higher than in many other countries, and this in turn is because Darling put VAT back up to 17.5%. Of course CPI will remain artificially high next year because Osbourne is putting VAT up again!

    I'm not against some cuts per se, provided the money saved is directed toward fiscal stimulus. What this recession has proved is that monetary policy (even QE) is inefficient for stimulating the economy, and fiscal policy should always be the main source of stimulus. The monetarists have also been proved wrong about bond yields and inflation. It's time to put our democratically elected government back in charge of the economy and the money supply!

  • Comment number 16.

    I too have watched the Wizard of Oz video. It is indeed compelling-I could not stop watching. It should be compulsory viewing for all politicians, but keep it away from the bankers!
    There is a massive transfer of wealth happening at present from the prudent to the imprudent, through low interest rates. When coupled with inflation (what is going on?) and very low annuity rates, those that have saved privately are caught in a very unpleasant squeeze. Add to this the reduction in support for the elderly, it makes growing old look rather unattractive.
    Having said all that, yes we have to reduce government borrowing and we all have to bear the brunt. The only beneficiaries at present seem to be those that caused the problem in the first place! Bring on the Wizard of Oz solution.

  • Comment number 17.

    The coalition government has lost its credibility today 7th September 2010 with the appointment of unelected Stephen Green, chairman of HSBC as a trade minister.

    And if there’s one thing it absolutely did need to successfully introduce the forthcoming austerity measures it was credibility.

  • Comment number 18.

    I have seen very little that gives hope of large scale private sector employment increases. In fact the policies which are keeping housing costs high and relatively high inflation compared to our competitor countries look like they will permanently entrench a section of our society into work-less poverty.

    Maybe someone else has heard otherwise, if so where are the stories of the government policies now making large companies announce they intend to create 10,000+ of manufacturing jobs in the UK, instead of in the Eastern Bloc?

  • Comment number 19.

    It was hardly courageous to make the proposals Osborne has made , it was rather simple and easy to do (they are not too dissimilar to the Irish approach which he was pushing pre-election in the days when talk of austerity was the rage before the polls took fright, how'd it work out for the Irish deficit ?), delivering on them is another matter entirely and will like all things be subject to the wider shifts in the public sentiment (never forget at the base of the economy is someone buying something, something like 65% of GDP is retail sales - the rest is people buying stuff to make things to sell) markets and world economy over the full time frame.
    Certainly the initial statements have had the effects he desired (or if you want to be cynical about it, the effect his friends amongst the bond traders wanted them to have).

    However he has only announced the plan and had a short relatively bloodless skirmish at the budget - the real enemy has yet to be engaged, that happens in October with the spending review followed by the VAT rise and then the NI rise for some employees and the start of impact on unemployment of the civil and public servant job losses. At present there is only fear amongst the public of what might result very little has actually happened yet.
    Few plans survive first contact - how he deals with the inevitable set-backs and unintended consequences will mark his term of office and how history judges him.

    Madness will only be diagnosed if it occurs long after the event , if for example despite indications that his current plan or conditions change such that it is failing and he ploughs on with it unchanged that might well be classed a foolishness or madness at worst. However consider there were few who suggested Browns handling of fiscal matters was mad before the credit crunch started and just as few now who view them as sane. Opinion is a fickle thing especially amongst seers and tea leaf readers (or economists) and hindsight is not a plan for the future.


  • Comment number 20.

    I think there is now little point debating when the cuts should start and how deep they should be.

    Though Labour’s inaction on tending to the debt or the deficit since November 2009 until losing the election. And in fact, attempting to bribe voters and business with sweeteners in marginal seat such as Sheffield means it is now too late.

    Ball’s direction would put us in a debt spiral we would not be able to escape and the Osbourne method will rip a hole in the economy by spring 2011.

    We can do the Homer Simpson way or the Max Power way.

    After Homer changers his name to Max Power

    Homer Simpson: Kids: there's three ways to do things; the right way, the wrong way and the Max Power way!
    Bart: Isn't that the wrong way?
    Homer Simpson: Yeah, but faster!

    Unfortunately due to the aforementioned inaction it is now too late – there is no right way!

    There will thousands of youths, the experienced, the disenfranchised, the lazy (such will the situation be that even they will tear themselves away from Jeremy Kyle). The poor, the middle class, former public sector workers, former private sector workers, they will all be up in arms.

    When people are hungry all bets are off.

  • Comment number 21.

    4. At 09:25am on 07 Sep 2010, Oblivion wrote:
    "Assisted deleveraging of private debt is the only way forward."

    Why the only way forward?
    There are many components of debt to be considered Private or Household debt is only one. Businesses, Financial Institutions and Government are also broad components. The fact is we have been growing our debt at the rate of more than 10% compound each year since 2000. We have to deleverage or reduce the growth all of these components or we are heading for Mugabeland or rather our offspring are. Do you want that?

    "Public debt has nothing to do with it - this is an ideologically driven smokescreen to halt shifts to 'left-wing' thinking."

    Public debt is part of the problem. Kid yourself not if NuLiebour had got into power they would have had to cut debt. The problem would have been the idealogues, like Balls, would have fought tooth and nail to preserve their budgets. Brown would never support cuts, we would have had open warfare in the Cabinet and ultimately a knock at the door from the IMF offering a hand like in '76!

    "Public debt is expressed as ratio of private GDP, and the problem is in the private sector."

    I hope this isn't an example of Left Wing thinking. Yeh,yeh, I watched the Secret of Oz. It was thought provoking but our economic system is where it is. Unless the world embraces the principles of Governments printing their own money, we are where we are. So Government Debt is not a component of GDP. Do a bit of research:

    http://en.wikipedia.org/wiki/Gross_domestic_product

    The sad fact is we have been over borrowing for years and we need to be more prudent as a departed and much lamented politician said many times while borrowing more than any other Chancellor in history. And no I am not a Banker!

  • Comment number 22.

    UK GDP has been fueled by ever increasing debt for a decade. The whole problem is that GDP measures the wrong thing. It should be Gross domestic Product but in fact it's gross domestic consumption. Far from being mad the chancellor is trying to rebalance consumption with production. A hard act but then he, like us, has no choice. Produce more consume less and the economy will regain balance. Continue to hype GDP through more debt and we will all end up enslaved in poverty.

  • Comment number 23.

    Thanks for your thoughts on the Chancellor's policy Stephanie. I see that Ed Balls has set himself up as being on the other side of the argument which is at least consistent as he appears to be in favour of more government spending virtually regardless of circumstances.
    You talk about the situation of rises in government bond yields but then say Portugal and Spain, I suspect you actually mean Portugal and Ireland. This is a hot topic this morning in the markets as according to notayesmanseconomics.
    "I have discussed Greece already but the comparative government bond yields for Ireland are 4.33% then and 5.83% now,and for Portugal they were 4.22% and are now 5.72%. So we have seen outright rises at a time of general falls."
    These numbers compare March with now but worries abound this morning as Irish ten-year government bond yields have risen above 6%,presumably based on the worries he has identified some of which have parallels in the UK.http://notayesmanseconomics.wordpress.com

  • Comment number 24.

    #21 dontmakeawave

    Private debt is at unsustainable levels and cannot be paid off. Because nearly all money is debt-money issued by private banks, the debt cannot be paid off. It is as simple as that. Banks must be directly interfered with. For more info see here: http://www.debtdeflation.com/blogs/2010/08/29/what-bernanke-doesn’t-understand-about-deflation/

    So Government Debt is not a component of GDP. Do a bit of research

    I did not say that is was a component of GDP, I think you misread. I said public debt is expressed as a ratio of GDP.

    To say that public debt was at an absolute level of ten million pounds would be meaningless. Ten million pounds 100 years ago might have been a lot. To say that it is even ten billion today is also meaningless. If GDP was at ten quadrillion then the debt level would be low.

    The debt level is expressed as a debt to GDP ratio, and debt levels rose because of bailouts, and debt levels rose because GDP fell in real terms.

    To say that debt as a debt-to-GDP ratio is a public spending problem is like saying that a low fuel tank is an engine mileage problem.



  • Comment number 25.

    In Blair's book he comments that as long ago as 2005 the then Labour government knew public spending was at it's limit and should be reigned in. If you check many articles of the era from economists etc. they also express concern that the UK was in danger of overspending and that there was a recession on the way. However our glorious Chancellor and latterly PM - Gordon Brown - refused to accept this and started to increase spending for his own political expediency. If only Gordon Brown had had the courage and foresight to slow down his spending we would have had a "soft" landing and all this drastic cutting could have been avoided. The country is paying off Brown's credit card bill and the reason it hurts is because it's massive.

  • Comment number 26.

    It is not about making the sums add up.

    I think that we all agree that our economy is just a massive Ponzi scheme.

    The sums will never add up!

    It is about confidence.

  • Comment number 27.

    Personally think Ed Balls has a point, UK debt being seen as relatively safe has more to do with a return to growth and the fact we have never defaulted, unemployment remained lower than earlier projections, and UK govt. debt tends to have a longer dating than other developed relatively safe nations. Probably nothing or very little to do with George Osborne.

    Real issue is how B of E responds to a double dip, will it pump in another few hundred billion £'s if it does inflation should be the net result and likely another asset bubble based on credit. I do not know how sustainable that is in the longer term but that would surely be the key concern for private purchasers of UK debt particularly those outside of UK who not only lose in the inflation front and thus real value of debt is diminished but also with the further exchange rate devaluation, not to mention the artificial depression in the price of debt.

    My view is clear it is better to avoid a double dip recession, I love the way some people say how morally they are repulsed by the burden we place on the next generation, well the last generation have shafted mine several times over. So do I think it is morally wrong to stop another tranche of people to be thrown on the dole queue with none of the state services to mitigate its effects and destroy the life chances of future generations by slashing education funding. I have read today on the BBC news website of about 10,000 private sector jobs being lost Connaught and 250 high skill jobs in Realtime worlds which all reek of Osbornes summer budget, this is the real cost, and the policies applied today will likely have far worse longer term consequences than a realignment of the tax burden and longer term plan for extricating ourselves from this “market” which society seems to worship beyond God and respect beyond democracy.

  • Comment number 28.

    24. At 12:21pm on 07 Sep 2010, Oblivion wrote:
    "To say that debt as a debt-to-GDP ratio is a public spending problem is like saying that a low fuel tank is an engine mileage problem."

    To be pedantic a low fuel tank is an engine mileage problem if you have 20 miles in the tank and 21 miles to the petrol station. However ratios are never a problem but absolute levels of debt are.

    The issue with the Government debt is the bigger it gets the more it costs to service. Even if the Government achieves it's cost reductions in 5 years time, the extra debt that will need paying will be equivalent to the Education budget!

    If we don't do anything about the deficit, debt servicing will soak up horrendous amounts of tax money - yours and mine. Many Public services will disappear unless taxes rise to unsustainable levels. Do you really want that?

  • Comment number 29.

    How quickly and how severely a govt should cut the deficit is a judgment call. It should not be the same for all countries. Whether GO is right or Ed Balls closer to the truth ultimately we will only know 10 years down the line.

    Lets take some facts and see how they can confuse things:

    Debt: we started with a lower public debt than most of major competitor countries. Most of it is denominated in sterling (so if all else fails BoE can start the printing presses to pay for it) and the public has a longer maturity than most countries. THIS indicates we could move a bit slower than other countries. BUT

    Private debt: is worse than other countries (other than USA) and only very low interest rates are keeping many people afloat BUT recent banking stats indicate people are paying their debt down faster than anticipated. THIS indicates we should be more aggressive in deficit reduction because any significant rise in interest rates caused by higher inflation will choke off domestic demand completely

    Public sector: Prior to rescession in 2007 public sector spending was 43% of GDP and tax take 38%, in 2009 spending (partly due to bank rescue) rose to 51%. Over the last 50 years generally public sector spending has been about 35-36% in good times and about 43% in rescessions (the main exception was also under labour govt). So the Labour govt had clearly let spending out of control and was spending in good times an amount that most govts only spend in rescessions. This implies we have a structural deficit of about 7-8% of GDP which as a percentage of spending (taking the 43% in 2007 as the base line) means public sector spending needs to be cut by 16-19% simply to drag the public sector back to its traditional size. THIS implies that spending cuts do need to be as severe as GO suggests (says nothing about timing) BUT

    Under Labour income inequality actually got worse. If you accept that poverty is principally driven by differences in relative incomes not absolute figures (I do not but do accept there is some relative component) then THIS implies there is a need to spend more on the less well off which would imply less severe cuts in public spending.

    Obviously these are not the full facts but do show that the position is not clear cut

  • Comment number 30.

    "Though all agree that Britain's budget deficit must come down, there is an unusually - some would say, disturbingly - wide range of views on when this should start, and how fast it should proceed. Even more unusual, some of our leading politicians occupy the farther edges of that debate. "
    •...
    I'll keep it simple, the problem is DEBT! The solution to this problem is also simple, its called monetary reform. Why? Because we have a debt based monetary system just like every other country in the world. Because our money supply is now almost all created out of thin air by the commercial banks (97%) in the form of loans on which interest is due, the money supply much constantly and perpetually grow to service the debt, and even worse it is compounding (growing exponentially), which means you need even greater levels of economic growth to do this. However, at the same time the value of the currency is being eroded. Given that our planet is not growing exponentially and our resources have a finite limit, this is the road to oblivion. It doesn’t matter what cuts are made or the level of them, it wont fix the underlying problem, only monetary reform can fix this. When will the government realise that the expression “sustainable economic growth” is an oxymoron.

  • Comment number 31.

    Maybe if the government didn't keep giving away our money to large corporates - what was it, GBP 5 billion to Vodafone last week (in the form of tearing up a tax bill for them) - we'd be in a slightly better position.
    I guess this is what they mean by backing the private sector.


  • Comment number 32.

    It's seems that many who are writing about the cuts are not aware of the dreadful inefficient waste at the heart of the public sector: Vast sums squandered on consultants because the incumbents can't do their job, or are seeking to cover their backsides; 3 people for every job, so that they have to invent work. It's about time these cuts were made, although I'd hope to see some strengthening of those fighting benefits fraud - surely extra staff there would more than pay for themselves.

    However, where is the other side of the equation? What is the government doing to stimulate the private sector? In particular, why does it not undertake infrastructure projects (road, rail, telecoms, etc) that will help the private sector, while helping to keep unemployment down? The net cost of labour isn't that much when you factor tax in and benefits out, and at least we have something to show for the money.

  • Comment number 33.

    #28 dontmakeawave

    If you are stopped on the highway trying to work out whether to refill your tank or decrease the power of your engine, which do you do?

    That's what it really boils down to. If a high debt level equates to a low tank, and GDP to the BHP of your engine, the right wing governments are trying to tell you that BHP is evil and the solution is to remove a cylinder from your engine.

    The correct solution is to refill the damn tank, and that means direct intervention in the banks. The right wing governments will never admit to this because it represents ideological failure, and they simply don't have the economic insight/advisers to carry it out.

  • Comment number 34.

    There is nothing wrong with being mad. One of the nicest people I know is a schizophrenic. It is the sane you have to watch.

    On that point if Ed Balls told me it was raining outside I would have to go out and get wet just to make sure.

    The most amazing thing about this crisis is the shortness of memory. I suspect this the media hopping from one issue to another which induces confusion.

    The UK is now heavily leveraged if you take the fiscal deficit, the National Debt, obligations to the state pensions system, obligations to public sector employee pensions, private debt and so on. If you add all that together to make one big loan we will be committing to a GBP 6 trillion sum. All this guaranteed by the taxpayer!

    We didn't get there in just the last two years, did we?

    So we have to change our ways. This is generally agreed. However, you have the puritanical attitude, which I share as I am a puritan, that if it is necessary then it must be done so we might as well start now, or, alternatively you have what we could call the Augustinian approach of make me virtuous but not yet. Both have their arguments so the choice is visceral.

    Now if times were good nobody would be focussed on this issue as they would all be out getting loans, buying 4x4 vehicles and extending their houses. Now, since the times are bad they are focussed on the debt. We are experiencing a truism and that need not be a bad thing.

    Let's stay focussed and set out to cut the debt down through both tax and cuts as quickly as possible. Let's get it over with. There are those who argue that this process should be structured. In an ideal world this should be the case. The problem is that the state's funding appears so byzantine we will only end with slash and burn anyway. This will upset a lot of people, including me: but life can get like that from time to time. So lets keep the big picture in our heads.

    With regard to restructuring the economy, a favourite of mine, this will take longer to do than the cuts. I would like to see what the government has in mind on this issue. For there to be a private sector business driven revival we will need business opportunities and cheap assets. I don't see either of these at the present time, but who knows what will come forward in due course. What are soup kitchen futures looking like?

    So, we can only proceed on the basis of dear old Doctor Johnson, the prospect of a hanging concentrates the mind. In the end all you have between yourself and eternity is faith.

  • Comment number 35.

    Steph - your comment about "This is not the time to raise suspicions that the UK would rather inflate away its borrowing than bring the deficit down the hard way. " is interesting. The facts seem to suggest that the BOE is in fact eager in inflate away debts by having a higher inflation that it is supposed to support - as per John from Hendon's post, their actual remit is to keep inflation to approx 2% NOT to support the economy etc etc.

    The BOE does NOT want people to suspect this for a number of reasons:-
    Fewer investors for £ denominated bonds (incl Gov bonds which we certainly need)
    Political backlash (all those savers and retirees on fixed income).

    Sorry but higher inflation is here to stay - when the spending cuts hit home, they'll issue more via QE if needs be.

  • Comment number 36.

    #32 Thorsson

    You are right, there is inefficiency, but there is also inefficiency in the private sector. Any large institution, state or otherwise, suffers from modern organisational problems and political in-fights.

    In terms of GDP, the engine could always use a tune.

  • Comment number 37.


    I am not a Tory. Never will be. But in my view Labour are very wrong - the cuts have to be made sooner rather than later. There is no other option. As any good economist will tell you - pay off your debts first, then the fruits will follow. This will be very painful in the short term but the country will benefit hugely in the longer term.

    I would only ask for one thing from the Chancellor. Fairness.

    If we are all truly "in this together" then those who have been lucky enough to make huge sums of money from the old system, should pay a larger amount than your average struggling man in the street. The cards which are all currently stacked against honest working families, should be re-shuffled in a much fairer way. We should start with the banks.

    Fairness. Fairness. Fairness.

    If there is no fairness then our society CAN and WILL fall apart. That is called anarchy.

  • Comment number 38.

    Justin150,
    "This implies we have a structural deficit of about 7-8% of GDP which as a percentage of spending (taking the 43% in 2007 as the base line) means public sector spending needs to be cut by 16-19% simply to drag the public sector back to its traditional size. THIS implies that spending cuts do need to be as severe as GO suggests (says nothing about timing)"

    Although this analysis seems logical at first glance, the problem lies with where you place the base line. The base line for the economy is a reflection of the money supply where the economy is at full capacity. The economy before the recession was not at full capacity, as we were a long way from full employment, which is estimated to be 2 - 3% unemployment. This means we have a much smaller structural deficit, and possibly even a surplus. The size of the government is a political choice not an economic one. In theory with high unemployment the economy can support a deficit of 100% of GDP - though this would clearly not be politicly acceptable.

    The whole concept of 'structural' deficits is highly theoretical, and estimates are typically subject to huge margins of mathematical error (plus or minus £80Bn typically, and that's if you use the mainstream models - other methods indicate a possible surplus.

  • Comment number 39.

    What governments of all political shades fail to understand is the great British publics ability to out-manouver them. cash is again king,it matters little what the rate of VAT is if cash customers are not paying any. The problem I forsee is how will they get Joe public back on the straight and narrow when the economy eventually recovers.

  • Comment number 40.

    #38 nice try but that assumes that going back over the last 50 years the statistics were based on full capacity at peaks times and 2007 was somewhat different.

    If on the other hand we assume (which is broadly matched by other statistics) that the UK at peak times is basically similar to other peak times over the last 50 years - although this has to be an assumption only because the manner in which the basic info and stats are based has changed - then my maths remains accurate.

    In any event no matter how you look at the capacity issue if the UK, when supposedly in good times, spends 43% of GDP on public sector and only collects 38% in tax you have a long term problem that will not be solved by simply by the rescession ending and growth resuming (which is really the definition of a structural deficit). To suggest that this may be a structural surplus is absurd unless you are suggesting that the boom times were simply a bankers mirage (which is possible) and that actual economic performance (in a good time) was in fact a rescession of roughly the same severity as the 1989-92 period. It certainly did not feel that way to me and I am not a banker.

  • Comment number 41.

    33. At 1:21pm on 07 Sep 2010, Oblivion wrote:

    "......... If a high debt level equates to a low tank, and GDP to the BHP of your engine, the right wing governments are trying to tell you that BHP is evil and the solution is to remove a cylinder from your engine.The correct solution is to refill the damn tank.."

    What you say is true but I am struggling to answer your car analogy sensibly. The only way I can think of is every time you empty your tank you have to fill it up. But because you've been heavy with the right foot you've got less mileage. i.e. you've spent too much so you can't afford the cost of continually filling it up - pathetic example I know!

    "and that means direct intervention in the banks. The right wing governments will never admit to this because it represents ideological failure, and they simply don't have the economic insight/advisers to carry it out."

    If it's that easy I have but one question "Why didn't NuLiebor do it? They took over several banks, we are now in control, so why don't we fleece them. You answer!

    To complete your petrol tank analogy, I have to go to the garage now to have a Recall fixed. Funny, its an electronic brake problem. Apparently the parking brake can engage while the car is in motion. Sounds like a problem the Government might have if it doesn't fix it's recall programme with spending cuts! Boom, boom!!!

  • Comment number 42.

    Justin150,
    "To suggest that this may be a structural surplus is absurd unless you are suggesting that the boom times were simply a bankers mirage (which is possible) and that actual economic performance (in a good time) was in fact a rescession of roughly the same severity as the 1989-92 period. It certainly did not feel that way to me and I am not a banker."

    I can imagine that most people saw these times as boom times, because most of them had a job, and also most people were relying on consumer credit which fueled these booms (amongst other things). If there was much less unsustainable consumer credit then we would have been in a recession during these times I submit. Further, even with full employment, real wages were so much lower than productivity, that even such full employment may not have been adequate to generate enough aggregate demand, and this would immediately push unemployment up again.

    The answer, I believe, as others here have alluded to is Sovereign Money (what the Americans call 'Green Backs') which would allow money to be created by the government which does not need to be paid back. Even if we do not choose this approach we will be forced into it by events soon enough I suspect.

    Kind Regards
    Charlie

  • Comment number 43.

    Dontmakeawave

    If it's that easy I have but one question "Why didn't NuLiebor do it? They took over several banks, we are now in control, so why don't we fleece them. You answer!

    I am not sure, I think a couple of possibilities might fit:
    a) They didn't have time. The coalition got in partially on the strength of so called "budget" issues and the propaganda that public debt was purely down to Labour overspending.
    b) NuLabour are also a right wing government.

  • Comment number 44.

    As I understand it from all the talk at the election, the budget deficit is about 150 billion, and the conservative cuts are about 6 billion. So pressumably the cuts are fairly irrelevant other than from a psychological point of view, to make the population work a bit harder and spend a little less, and expect less from public services, and to reassure speculators and investers that we're fully committed to capitalist doctrine. Pressumably the only way a 150 billion deficit will go is if the economy grows and tax revenues increase. Please correct me if I'm wrong, Stephanie.

    Also, I'm not necessarily against cuts, but if they cut a billion from the public sector wage bill, presumably they're really only saving half a billion, because they lose half a billion in tax revenue if those public sector employees are now out of work (before we even mention the cost of unemployment and housing benefits for those people).

    We probably lost 6 billion in tax revenue from the BP thing?

    Also I have trouble understanding how 6 billion in cuts is significant compared to 200 billion in quantitative easing last year.

  • Comment number 45.

    #29

    "Private debt: is worse than other countries (other than USA) and only very low interest rates are keeping many people afloat BUT recent banking stats indicate people are paying their debt down faster than anticipated. THIS indicates we should be more aggressive in deficit reduction because any significant rise in interest rates caused by higher inflation will choke off domestic demand completely."

    Aggregate domestic demand is GDP plus the change in debt. If there is household sector deleveraging where is the crowding out?

  • Comment number 46.

    #36. At 1:27pm on 07 Sep 2010, Oblivion wrote:

    You are right, there is inefficiency, but there is also inefficiency in the private sector.#

    Agreed, but the private sector has been experiencing pain for the last two years in an attempt to improve it. And it was never as bad as the public sector, which hasn't been touched in decades.

    Anyway the pain has already started. I know one government department that has totally divested itself of consultants over the last few months, and is now waiting for 30% cuts in staff.

  • Comment number 47.

    People often forget that Thatcher's government not only managed to turn around the usual mess left by Labour but also then went on to repay large chunks of the national debt in the good years that followed.

    They left an incredibly healthy scenario for Brown/Blair to inherit in 1997 and... Brown set about grabbing even more money by removing pension tax credits and stealthily taxing freelancers for both EE and ER NI.

    And then he squandered the whole lot and borrowed some more and squandered that too. MOstly creating artificial jobs.

    What most people don't realise is that a public sector job has its' salary paid by the taxpayer so the tax that the employee pays is only recouping a small amount of what we already gave him to start with from the public purse - therefore every public sector employee from the Prime Minister down must always be a net cost to the nation. It is a drain on GDP in real terms and therefore when we talk of the need for growth... creating public sector jobs can never, ever achieve REAL growth, since by "growth" we mean growth in GDP.

    It doesn't take a rocket scientist to realise that giving some of your GDP to someone and getting only some of it back in return will not increase the number you started with.

    You use exactly as many public sector employees as you need to get the job done and not one more. That is the way to a sustainable economy, anything else is just massaging the figures for short-term political gain.

    The fact is that (in terms of how smoothly the country runs) we got by perfectly well with the State the size it was in 1997 and things got no better after 13 years of massively expanding the public sector.

    This is a message that the Conservatives/Coalition have been very poor at getting across. They seem to have been driven into their shells over the Thatcher years due to yet more Labour spin they seem reluctant to mention that once again a mess was inherited from Labour, industrial unrest as well as economic disaster that had led to measures as extreme as devaluation and yet at the end of her tenure Thatcher left a rosy picture for Labour to inherit. Compare that with what we see toady as the legacy of 13 years of Labour.

    Perhaps it's time the Tories hit back and started showing people across the history of the Labour party just how poor they are at running a country. They are an election winning spin machine, they are not a party for government.

  • Comment number 48.

    29. At 12:55pm on 07 Sep 2010, Justin150 wrote:
    'Public sector: Prior to rescession in 2007 public sector spending was 43% of GDP and tax take 38%, in 2009 spending (partly due to bank rescue) rose to 51%. Over the last 50 years generally public sector spending has been about 35-36% in good times and about 43% in rescessions'

    I find your contributions interesting but I still don't understand where you get these figures from - Perhaps you could point me to them?

    I believe public spending as a percentage of GDP was below 40% from 1996 through to 2009. In the 2007 tax year I see several sources indicating net tax and national insurance take at ~ 36.9% of GDP. I believe this is a lower tax rate than that achieved under Margret Thatcher whose administration has a reputation for lower taxes.

    Pre crisis the rate of public sector net borrowing was actually starting to fall. The following treasuring graphs are worth working through.

    http://www.hm-treasury.gov.uk/junebudget_diagrams.htm

    An argument that the (pre crisis) deficit arises out of a failure to collect sufficient tax seems equally possible. That, of course, depends on your view of what purpose taxation serves in both social and economic terms.

    Post crisis the increase in spending as a ratio of GDP appears largely due to the reduction in GDP rather than increases in government spending.

  • Comment number 49.

    44. It is not £6bn in cuts I think it is £80bn (New Labour Cuts) + £60bn (Osborne Tory Cuts) = £180bn, so very roughley equivelent to QE. And I think I mentioned the 10,000 jobs that appear at risk in Connaught earlier that gives you an idea of what only part of those £6bn in cuts can do to the Private Sector never mind all those public sector workers and services that would also be involved.

  • Comment number 50.

    Apologies for my roughly equivalent spelling

  • Comment number 51.

    I wonder if the sheep running global markets have lost all capacity to reason or remember. A few months ago the markets - and certain interest groups - stirred up worries about sovereign debt and the need to cut public spending dramatically (the word "baying" wouldn't be going too far in some cases). Didn't they consider how spending cuts work?

    I don't know all the details, but the woes of Connaught apparently demonstrate all too clearly the problem with drastic cuts, and the impact on the private as well as the public sector. Seems public contracts dried up - hence the company being unable to secure credit.

    Most people seem to agree too much borrowing is bad (doh!) and one has to judge what's too much, and when to cut. But it won't just be nasty public sector bureaucrats who suffer, there will also be pain for front-line providers of public sector services, and private sector workers too. My sympathies for employees of Connaught, who I guess feel pretty grim at present - though I'm not sure which category they fall into. Unfortunately for many of us, wherever we work, things are going to get tougher.

    Hold on, do I hear bleating about cuts threatening growth...

  • Comment number 52.

    If the BOE was Plan B, then Plan B has already failed.

    BY 'GROUNDING' INTEREST RATES AT 0.5%, THE BOE CANNOT CUT INTEREST RATES SIGNIFICANTLY FURTHER SHOULD A RECESSION OR ZERO GROWTH REAPPEAR.

    Had they any sense, interest rates would be about 2% by now.

    Remember,remember that Q2 2010 growth is +1.2% and CPI inflation at +3.1%(RPI +4.8%).

    Time for Plan C ??

    Then you need to look at real wages.
    up or down ?
    down ?
    Oh dear.

    Time for Plan D...but have you got one ??

    The foolocracy remains.

  • Comment number 53.

    Hola Steph.
    just thought I'd check with you on this.
    Do you, by any chance, have a view on Fractional Reserve Banking ?
    I'd love to hear your thoughts
    Cheers

  • Comment number 54.

    47. You are simply incorrect Thatcher did not pay down debt and if you look at the figures to 2008 (not sure how it would look after last two yrs which is a fair failing in my data) Thatcher & Major where roughly double as bad at spending more than the exchequer raised as a % of GDP when compared with the Blair/Brown govt. and when Thatcher did pay-off debt it was a miniscule amount as compared with Gordon Brown as Chancellor.

    I think to consider either 92 or 97 as rosy pictures except maybe for a few is a little misleading, a world where the old and infirm where left in pain for years awaiting medical treatment. School buildings where absolutely shocking and the playing fields sold-off. She went around enriching the Oil & gas industry (not that I would suggest any corruption within the Thatcher household). Also Thatcher actually employed just as many civil servants as before but she did finance tax cuts by selling all the countries assets with a few minor exceptions.

    The issue is not how Labour Bankrupt a country it is how the current system is disconnected with reality, that companies avoid paying tax, that the banking sector essentially invent money and gamble with each other and when they get their bets just plain wrong the state losses a shed load of tax revenue. Nobody is saying public services are all 100% efficient and wholly delivering effectively, but that is not the same as saying all publicly funding projects are useless, that is like saying sending kids to school and educating them is a net drain on resources when even if you do not believe schools teach all the things they should or as well as is required denies the true complexity of the inter-relationship between public investment and private profits.

  • Comment number 55.

    The government will be instituting the plan as proposed by the bankers...what did you expect.
    Government could use a serious reorganization and through that could gain efficiencies but governments and efficiencies always tend to find political barriers in the way.
    The European governments have yet to actually deal with the debt problem. It would be difficult to be optimistic when the cuts become EU wide. They all continue to cross their fingers and hope for things to get better. The banks continue to profit through it all although no one else does.
    They all keep ignoring the trillion in personal wealth that the bankers stole and how that loss of personal wealth has played out as not having the resources for many purchases. It is not that difficult to understand unless you are a politician, an economist or a banker. None of them care to discuss the matter as people may wish to assess blame and we can't have that. It is just the big empty hole they all dance around and say it doesn't exist...after all that was just the money of working people and everyone knows that they don't count. Securing the investments of the rich does not grow the economy...but it does make the rich happy.

  • Comment number 56.

    Post 49 it is not just your spelling that needs checking but your maths.

    6 + 80 + 60 = 146 not 180.

    I personally would take anything Ed Balls says re fiscal prudence with a very large pinch of salt. After all he was Stilletto to Gordon Brown's Baron Silas Greenback during the so called New Labour days of milk and honey.

    Gordon spent all the money when it was flowing in, forgot to put any away for a rainy day and then carried on spending like there was no tomorrow when times got hard.

    Ed Balls has always responded to His Masters Voice and has to bear his share of the blame for the awful mess we are in financially. For him to come out like he has is farcical. I expect whichever of the Millibands wuins the Labour leadership election to sideline him pdq.

  • Comment number 57.

    47. At 3:48pm on 07 Sep 2010, chris911t wrote:
    People often forget that Thatcher's government not only managed to turn around the usual mess left by Labour but also then went on to repay large chunks of the national debt in the good years that followed.

    =========================

    There is reason people forget this, it is because it is simply not true.

    In the same way people believe Thatcher cut real public spending which is also not true, in fact in cash terms it increased every single year she was in power.

    National Debt stood at circa 87bn when Thatcher came to office and was circa 150bn when she was booted out. If a rough doubling of the national debt despite flogging off most of its assets is a recommendation of fiscal probity then Browns feat of moving it from circa 350 bn to 770 bn is not much worse. Neithers rule was entirely good nor entirely bad - this is the reality of life outside blind adherence to one particular political creed.

    You can also pick up that in the four years (the only years a surplus was run under the 18 year Conservative rule from 1979)total repayment of debt was a modest 15.5 bn pounds (just under 105 of the total). Most of that in 1989 (13.5 bn).
    In contrast Labour managed in the three years if ran a surplus to repay 40.9 bn pounds of debt (helped for sure by 3G licences and following previous policies so not their own policies at work) or just under 10% of the outstanding amount at that period of time i.e. the same.

    You should also look at these columns of figures:
    A B C D
    1: 14.8 3.1 2.4 3.0
    2: 36.5 31.6 5.6 2.8
    3: 47.2 35.7 6.8 3.0
    4: 40.2 41.2 5.5 3.3
    5: 32.1 39.0 4.1 3.0
    6: 25.9 37.0 3.1 2.6

    What do these represent? These are the deficits of two governments over a period following their last surplus years in cash terms (billions)A&B and %GDP deficit C&D.

    Which is the better steward of the nations finances? That in column A and C or the one in B or D or actually neither of them?

  • Comment number 58.

    48. At 4:10pm on 07 Sep 2010, Squarepeg wrote:
    "Pre crisis the rate of public sector net borrowing was actually starting to fall......Post crisis the increase in spending as a ratio of GDP appears largely due to the reduction in GDP rather than increases in government spending."

    The problem with looking at rates and percentages is what numbers do they relate to. The Treasury graphs you alluded to look cosily comfortable but the Government Debt rose from £200billion in 2001 to £500billion+ in 2007. That's a staggering increase of over 66%.

    Obviously the crisis drove a coach and horses through government spending and in 2-3 years it's gone up another £400billion!

    Without going over old ground again, it pays to pay back debt or store your nuts in good times - Squirrels do it - and borrow in bad times. That to me was the failing before this crisis. Beware of ratios, percentages etc, look at the raw numbers!

  • Comment number 59.

    If you tell a lie often enough, then people will end up believing it. The lie we are telling is that the deficit is a problem, it is not. Recently, the IMF has stated, that both the USA and the UK could add 50% to their existing debt without having a problem borrowing at existing rates.

    If cutting the deficit was really neccessary then increasing the efficiency of tax collection and reducing tax avoidence would be sufficient. The Tax Justice Network estimates that in excess of £40 billion extra could be collected each year. Problem solved QED!!!

    Except the cuts are not about the deficit but a continuation of the attack upon ordinary people started by Thatcher and continued by Major, Blair and Brown. Privatisation and contracting out not only stuff the pockets of private companies but reduce pay and conditions and job security making a docile and compliant workforce.

    When we can no longer work Cameron, Clegg and co can bring back the Victorian workhouses from the 1834 Poor Law. But instead of being on the Parish, the workhouses will probably also be contracted out!!!

  • Comment number 60.

    There's no need to 'borrow' money in a fiat/sovereign floating exchange rate currency system.

    The government as monopoly supplier of money by net government spending merely 'creates' the money enabling the private sectors desire to save/pay debt.

    Budget surpluses take money out of the system and destroy/reduce private saving/wealth for all bar the rich.

    Far better to employ the un/deremployed at minimum wage putting a floor under demand and boosting 'confidence' so business can service the higher demand facilitated by the generally inevitable budget deficits.

    http://bilbo.economicoutlook.net/blog/?p=11302

  • Comment number 61.

    #49 - I'm not sure your figures are right, for a start 80 + 60 = 140 not 180. Also I've just googled for a second and http://www.guardian.co.uk/business/2010/jun/08/coalition-must-cut-budget-deficit-faster-fitch
    seems to confirm what I was saying with

    "Fitch applauded Cameron's £6bn spending cuts, saying the government had acted "very quickly" to make fiscal consolidation its top priority. After downward revisions to last year's deficit to £156bn"

    You're right to point out I wasn't really considering what the 6 billion difference of labour Vs conservative might be on top of. Also I'm not sure whether the conservatives are now cutting a bit more than they said they would, but I don't imagine it's much more as people were arguing about whether the public services could withstand the 6 billion cut.

    Stephanie - can you clear this issue up in the main blog post rather than leaving us to google for the actual figures?

  • Comment number 62.

    Actually, I believe the ongoing big problem is the public sector and the whole way it is perceived and run and overseen.

    Far too much of it is self-perpetuating as opposed to outcome-focussed or result delivering.

    I genuinely believe many of the 'classic' and traditional ways of running town halls, NHS Trusts / Boards and the Civil Service - to name just the obvious ones - could be ditched and the delivery of many of the services these groups allegedly deliver be undertaken much more efficiently and effectively. No, not necessarily in the private sector either.

    We need a kind of Public Sector II, a completely changed marketplace where service is the underlying motivator, the raison d'etre and the measure of success as opposed to self-promotion, self-preservation or systemic perpetuation of the status quo (and all three financed out of the public purseat that!).

    The predicament is that the public sector costs us a fortune to maintain but also is the current vehicle for the delivery of many services that the public value highly or regard as essential. The solution is to radically re-write the entire concept of public service.

    How radically? Very much so - perhaps eligible persons should have to compulsorily work in the public sector for say three or five years, much as eligible persons currently have to do jury service. Subject to satisfactory performance they might leave with some qualification, perhaps some sort of Masters in Public Service Delivery which would surely make them of interest to many potential employers in the service industries?

    Is it really helpful to have people in town halls, or the civil service who have been there for years and years? Do we want 'career' public servants? Can we afford their wages and their pensions? Might we prefer to have a constant cycling between private and public sectors that would prevent the public servants becoming too comfortable in their public-funded posts?

    There is a major potential to reduce vast amounts of public spending commitment by daring to re-think the whole ball game from parks to planning and from security services to social services. Why oh why do we keep perpetuating the same old, and very costly, ways of doing things?

  • Comment number 63.

    #48 tax take figures can be got from OECD website. They are actually pretty interesting as they cover about 20 leading countries.

    What they show for the UK is that 38% of GDP is about the maximum that govt can squeeze from the economy in any medium basis - we have significantly exceeded that figure over the last 18 months. Where I find it interesting is that the comparable figures for Germany over the last 30 years are very similar to the UK. Italy and France a bit higher (42-43%) and the Scandinavians a lot higher (just under 50%). It seems to me that each country has a "natural" ceiling on the amount of tax the population is prepared to stomach (as the numbers do not vary much even if tax rates do) which I have always assumed is a function of their social history.

    GDP and public spending figures can be found on the office for national statistics although there are a couple of websites a simple search on "publci sector spending as percentage of GDP" will pick up that are much more interactive.

    Of course one of the problems with statistics is the old cliche "lies, damned lies and statistics" - they are capable of misinterpretation. So for the period 1997-2002 or 2003 Lab govt kept spending relatively under control but thereafter opened the taps. SO for example the figures for 2007 and 2009 came from HM Treasury and have been reported on BBC website before. Most of the public sector spending figures tend to flatter the figures by forgetting to include debt service

  • Comment number 64.

    George Osborne has already shown he is a courageous chancellor. Does it take a courageous chancellor to place the burden on the taxpayer, to reduce social spending, to cut services…or does it take a rather run-of-mill sort of Chancellor, unwilling to do the right thing, or even recognize the right problem.
    What is the right problem?
    Unregulated financial institutions free to gamble and bet (even against soverign debt, as in Greece). These are sometimes known as hedgers or hedge funds.
    By the way I also believe that Ed Balls is wrong. A country cannot go on bailing out, stimulating, and thereby increasing the deficit while pretending the economy is getting healthy, recovering.
    I’m not impressed by the IMF or the OECD – too much American input and pressure. The Americans are not in a good position to advise any country financially. It is in the worst financial position of any country in the developed world – trillions and trillions in debt.
    So, I do not think Mr. Osborne is courgeous, nor do I think Mr. Ball’s stimulating ideas are truly stimulating.
    Neither side is right.
    Cuts, cuts, cuts…The public knows that it's time to get real. That's why every recent poll - including one recently published by the BBC - shows two-thirds of the public in favour of cuts, but are cuts the only option?
    Debt reduction can happen via
    1. raised taxes
    2. reduce wages and/or folks fired
    3. cut, cut, cut or
    4. join with the EU in the creation of a uniform Tobin Tax thus that in taxing financial institutions’ foreign transactions we can then apply the projected billions of pounds into the deficits as well as into vital social programs. (This money should not be set aside to provide a future bail-out pool for financial institutions. Let these gambling fools take care of themselves.)

  • Comment number 65.

    62 Sutara

    Some interesting thoughts there. I agree we need to redefine the provision of public service through dedicated professionalism.

    Currenty the public sector in general determines management status and salary by the size of budgets controlled and the number of reports rather than the more obvious outputs such as public satisfaction. Hence management focusses on career progression within the hierarchy and its related politics rather than on results which that satisfy the taxpaying public.

    The fascination that I have in dealing with both the Civil Service and local authority employees is the enthusiasm of well motivated people utterly frustrated at the barriers their management erect which make their ability to facilitate the public more difficult and often downright impossible.

    In some way these good folk need to be liberated so they can be allowed to do their jobs properly.

    The concern I have with the pending cuts is not that they are happening, but that it will be most likely the jobs of the well-motivated people lower down the pay scale which will be axed whilst the management, who are the real problem and expense, get left wholly untouched.

  • Comment number 66.

    61. At 5:21pm on 07 Sep 2010, arny5000

    Have you been on holiday for a while?

    That 6 billion was cuts from the already settled budget for this fiscal year and have been announced - that was the emergency budget in June for the most part.

    The debate which this blog is all about is the further cuts to public spending which will be required to reduce the structural deficit to zero as proposed over the course of the full parliament. These are to be addressed in part at the spending review to be announced in October which is why this topic is being discussed.

    The figure of saving on annual expenditure is variously described at 50 to 100 billion pounds on revenue spending. These sum up to around 25% of total expenditure by the government outside healthcare (including councils etc). Imagine if you had to live off 25% less than you are used to and currently you are already borrowing 25% of what you spend to meet the demands you have on the money - that is a measure of the challenge.

    If you read any of the other blogs - try Nick Robinsons from yesterday: he likened the debate over the 6 billion at the election as like a fight over a fiver on the floor whilst the house is burning down around you. It really is that level of insignificance.

  • Comment number 67.

    I'm with #60 RNG, as-well-as those here that are sick of debt-money. The position of Modern Monetary Theory and those opposed to debt money are very close. MMT is not against debt-money per se, but they do believe that by default governments should spend without issuing debt (i.e. not borrow money to spend it). This is the same as saying the BoE cashes the Treasury's cheques on demand without interest or the need to pay it back - like 'Green Backs' only it's the same currency.

    Ed Balls is the closest to this - though still very far away in an operational sense.

    We CAN keep stimulating the economy whenever the economy needs it - infact it is essential to maintain aggregate demand - but it must be mostly fiscal stimulus (rather than monetary stimulus) including:
    1) a properly funded Job Guarantee;
    2) small business loans;
    3) quarterly discretional stimulus bonuses for anyone eligible for Working Tax Credits and possibly Pension Credits too.

    This quarterly stimulus gets paid-out whenever unemployment gets above say 5%, and CPI inflation is below say 2.5%. (The current CPI of 3.1% is distorted upwards by the VAT hike, so if Darling had left it at 15% then current CPI would be about 1.5%.)

  • Comment number 68.

    Stanillic

    The fascination that I have in dealing with both the Civil Service and local authority employees is the enthusiasm of well motivated people utterly frustrated at the barriers their management erect which make their ability to facilitate the public more difficult and often downright impossible.

    You speak as though you have never worked in a large private organisation. You are wrong to insinuate that these political/structural obstacles are exclusively associated with state entities. Every medium to large organisation has the very same problems.

  • Comment number 69.

    This morning on SKY the Scottish CBI spokeman bluntly admitted the private sector north of the border wouldn't be able to replace the public sector jobs about to be cut in Scotland.

    But Gorgeous George's plan is for the private sector to REPLACE these lost public jobs AND create an ADDITIONAL 2M private sector jobs to generate the tax income, so avoiding the huge welfare bill for mass unemployment that would otherwise INCREASE our debt.

    This does rather hole the ConDem economic strategy below the waterline, I'd say....

    So is he mad? I think he is sane - but his beliefs in free market economics as the solution to our problems are pure dogma.

    As we approach the autumn spending cuts announcement, there have been a number of hints about how this will play out - between 1 in 4 and 1 in 6 jobs are already going in local government. In the construction sector which saw a 8% growth last qtr there are now 500,000 jobs about to come to an end as public projects (e.e. Olympics/schools) come to an end - the Scots CBI guy was clear he wants public spending in this sector to continue, yet we know it is to be hammered. Our exports have not picked up despite the devaluation of the pound, whilst investment in UK capacity is planned by the ConDems to rise by £400 BN, it is actually falling.

    The right question is whether Gorgeous George is simply deluding himself - is his libertarian ideology that the State "crowds out" the private sector really true? Will free trade and further deregulation enable UK PLC to trade our way out of debt?

    We are about to find out.....

    .... but IMHO all the evidence points towards 5,000,000 unemployed, a collapse in sterling and the 40% fall in house prices that the OECD has been predicting for some time and as govt revenue falls and welfare spenidng balloons PSBR will RISE - so all the pain will have been for nothing.

    TRADE and its regulation is the key issue - we have seen where having unregulated financial trading leads to - we now need to recognise the need to stop the abuse of the UK by rigged global markets in manufacturing, energy and food and begin to build a sustainable economy where we produce what we consume, we employ our people in production rather than paying them to be unemployed, where we recycle and use renewable energy, gow our own food and so earn the money to pay for our consumption.

    Cameron is right to say that the UK economy needs to be rebalanced away from banking towards manufacturing - a few marginal tax breaks won't achieve this. Government has a critical role to play in driving this change - far from crowding out the private sector, government should be creating the environment where it can flourish.

  • Comment number 70.

    Osborne is absolutely right and retains my full confidence, well provided he also puts all that talk about fairness into practice....

  • Comment number 71.

    Thanks Stephanie for the simple presentation of the issues. It's important that everyone understands, so I say putting things simply is important.

    I believe GO is right, but as someone has said we'll only know for sure 10 years down the line, but we couldn't go on as we were.

    The general tone of the blogs seems to have changed from that around election time: the left-wing writers seem to recognise at least some degree of cuts are required.

    As far as the GB/EB Keynesian view, I prefer whatever stimulus there is to be on infrastructure as the Hoover Damn built in the U.S. following the depression helped build for the future. I don't object to long-term investment in infrastructure. I don't count hospitals and schools in this as we got by before all the PFI and excessive spending.

    Although the significance of markets on bonds etc may be overrated at times, it can turn very nasty very quickly so I think GO is correct to steer a tight ship. When we get out of this we may repeat what some said of Thatcher's reduction in deficit and be strong.

    I would look to make each penny count in public spending.

    The comments about BoE should be responded to (Steph?) as I think their remit has changed a little and keeping inflation under control is their remit but so much of it is looking far ahead, which might explain why there seems to be little action at times. I agree with GO and MK and am pleased at a greater concensus in the blogs about the situation.

    The trouble I see is how are we ever going to get back to where we were before? Some analysis on whether it would be 20 or 30 years to get back to deficit of 40% of GDP would be helpful. It just seems so impossible.

    It would helpful if Steph. you could play out different scenarios, say hyperinflation, currency devaluation to show us how things might pan out in the event of a crisis. It's important to see hope as to how we can get out of this otherwise it's a generation trapped (sorry to sound so grim but GO has an absurdly large deficit to deal with - somehow!)

  • Comment number 72.

    I might add that the banks may yet prove the solution to this problem. As long as they are allowed to make billions this might be used to sort this problem out, not least when/if the public ownership is sold on, but perhaps more imaginatively too - there's alot of money there to be used sensibly and they ought to be held responsible when the time is right to pay down this deficit, hopefully in a seriously big way. The economic rebalancing is a very long term project so the banks should in my opinion remain important for their tax contributions for a long time to come. I'm not a banker and hate the way FSA imposed changes by GB resulted in so much destruction to this country, but see as more than just a problem, but a solution too (or they should be).

  • Comment number 73.

    The truth is we have built up loads of private debt by people (ie vast numbers of the electorate) buying houses we could not afford by taking on vast amounts of debt. We reached a point where the credit supply for this madness got turned off. No we all have to pay the consequence of this, even those who did not subscrbe to the madness and pay for vastly inflated house prices by taking on ridiculous amounts of debt. This will be done through people losing their jobs, more tax and higher inflation than interest rate levels.

    The labour government used the virtual windfall to spend wastefully on vast amounts of public services. We need a debate about the boundaries of government. Then eliminate those things it should not do completely so we can cut less from those areas we need it to be involved in.

    Also, economics needs to be a compulsory subject taught to all students from an early age at school, something we have failed to do since the mid-80s when the Thatcher government gradually moved more financial decisions onto the electorate without teaching the people (electorate) how to take those decisions sensibly.

  • Comment number 74.

    Re #66, thanks for enlightening me. Basically I'm a casual daily reader of the news (this blog was linked to front the front page) and your reply is the first I've heard about the cuts being 10 times bigger than all the talk during the election debates.

    Regarding Nick Robinson, why on earth didn't he say it in May, not now (OK maybe he did but if he did it was certainly burried off the front pages). The arguing about a fiver thing was exactly what I thought at the time.

    Incidentally your analogy about having to live off 25% less is ironic, as that's probably what I'm having to do, with rising fuel costs and obliteration of income from savings interest.

    Thanks again for taking the time to explain.

  • Comment number 75.

    #73 wearealldoomed

    Most economics is ideology. The schools that teach it should be called churches. They do not teach economics as a broad sociological study of how people manage trade, commerce in different times and places, they teach economics according to specific schools of thought.

    The macroeconomics of today is a flawed and fallacious cult.

  • Comment number 76.

    #65 stanilic

    "The fascination that I have in dealing with both the Civil Service and local authority employees is the enthusiasm of well motivated people utterly frustrated at the barriers their management erect which make their ability to facilitate the public more difficult and often downright impossible."

    Well in advising employees in setting up employee buyouts I've been constantly amazed at how business survives. As the founder of the Eden Project, Tim Smit, says "most businesses survive by accident." Any hierarchical organisation will as a matter of course throw away 90% of the energy, innovation and creativity of its employees, simply due to its structure. Watching the dam break and this creativity pour forth never ceases to thrill me.

    On a similar note I have been regularly approached by villagers galvanised by the threat of their village pub closing and hoping to set up a pub co-operative a la Hesket Newmarket. Unfortunately the fundamentals are often that the pub is worth (say) £250k as a business and £450k as a detached des res or flats. Those who twitter on about Govt "crowding-out" the private sector should try visiting the real world occasionally. The diversion of resources from industry into housing is a fundamental imbalance in the economy and one that the ConDems show no sign of addressing. We desperately need a wealth tax, land tax or property tax to redress these imbalances. I believe that we are the only developed nation without some form of property tax, but am happy to be corrected.


  • Comment number 77.

    Behind all three main political parties' policies is what has come to be called the ten points of "the Washington Concensus:"

    1.Fiscal policy discipline;
    2.Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
    3.Tax reform – broadening the tax base and adopting moderate marginal tax rates;
    4.Interest rates that are market determined and positive (but moderate) in real terms;
    5.Competitive exchange rates;
    6.Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
    7.Liberalization of inward foreign direct investment;
    8.Privatization of state enterprises;
    9.Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;
    10.Legal security for property rights.

    From New Labour to the Conservatives, these ten points now form the bedrock of political opinion and policy in the UK ever since the Libertarian entryism of the Thatcher/Reagan years shifted the political centre of gravity to the right.

    We recognise aspects of these imperatives in our use of terms like "globalisation", "quantitative easing" and "public sector borrowing requirement" that contain the tenets and value system of the Washington Concensus, yet based on our experience of the recent Credit Crisis we seem to face both ways on a number of the Points. e.g. deregulation of the financial services industry and market interest rates.

    Could it be that most if not all of the Washington Consensus now needs to be called into question? New Labour swallowed Washington (C) hook, line and sinker whilst the ConDems claim to be more radical in implementing these policies that Margaret Thatcher's government was.

    At the same time as Mrs T was in No10, the Labour Party was fighting off its own entrist ideologues - the Militant Tendency, who were unreconstructed Stalinists who dreamt of a Marxist command economy - the only difference between them and the Libertarian entryists to the Conservative Party, is that the Libertarians won - and went on to redefine the political agenda to embrace the Washington Concensus.

    Several major planks of the consensus have been discredited: we need to question the others and end our quasi-religious belief in the market as the ultimate and only legitimate force in forming human society.

    Sustainabilty is the real loadstone in a world of social, economic and environmental pressure. Complex globalised networks of economic, trade and environmental relationships are vulnerable and unpredicable. We need to start taking responsiblity for our own societies, economies and environment - globalisation is not the answer - so the Washington Consensus is not a doctrine of responsiblity, it's a gambler's charter which may have big winners, but far more losers.

  • Comment number 78.

    That's why every recent poll - including one recently published by the BBC - shows two-thirds of the public in favour of cuts.

    I suppose you're not amongst those two thirds and next thing we'll see from you is the usual inflationary propaganda in support of the credit bubble that you love so much...

  • Comment number 79.

    Hi Stephanie
    If the pace of growth is adversely affected by fiscal consolidation Mervyn King ( apart from talking about automatic stabilisers) says that the Bank of England will take on the role of resuscitator of the economy through further asset purchases. So, you only judge George Osborne's austerity with the Bank of England riding shotgun with QE Mk 2.The heavy-lifting is coming from the BoE whilst HMG cuts - fiscally united!

    Its all down your view as to whether QE is the golden bullet.I find it amusing to read the cheerleaders of QE

  • Comment number 80.

    Whoops...jumped the gun on the 'post comment' ...just saying I'm watching the QE cheerleaders losing confidence in their policy and calling for more spending and less cutting.

  • Comment number 81.

    One of Ghandi's backers said that keeping Ghandi in poverty was very expensive. Image is everything. The Left will clothe you, put a roof over your head, feed you and nurse you when you're sick...just don't ask how they will pay for it.

    The Left always promise to carpet the world but as Thatcher said "The problem with socialism is that eventually you run out of other people's money."

    Stuff'n'Nonsense keeps trying to give credibility to her Labour economic guru, Balls, but where does the money come from to pay for his largesse?

    She must realise this is the man, along with his 'maddening, weird and emotionally incapacitated' side kick Gordon Brown, who broke the banks of England (and was forced to bail them out). This is the man who destroyed the education of a whole generation of children. This is the man who was part of a government that thought nothing of suddenly employing 66,000 more people in the NHS in an election year(and countless others in local government)....'we give you a paycheck, you give us your vote.' This is a man whom she thinks is a fit and proper example to us all.

    A man who wants to continue on his gambling addiction....he lost the first throw of the dice but is back for more...double and double again until lady luck smiles on him...the old gambler's ploy. Keep going until you're potless..or in this case until you've put hundreds of thousands on the dole and onto the streets.

    Labour's economic legacy....'a seedy dream world mired in debt and bankruptcy, facing a looming crisis of employment and employability, trying to find the money for a diplomatic and military role that it cannot afford. The consequences of Labour's debt will be ' a millstone round the economy's neck in the decade to come, a blinding headache that will hobble economic activity and consumer spending for years.' Guardian.

    The vast majority of analysts back the more austere route to economic recovery....a route that gives confidence that the government recognises the dangers of massive debt and is taking real action to deal with that debt rather than, as Labour propose, literally buying time in the hope that the ugly duckling grows into a golden goose.







  • Comment number 82.

    "That's why every recent poll - including one recently published by the BBC - shows two-thirds of the public in favour of cuts."

    If the BBC had even a scintilla of respect for the truth or the British people,you`d be polling us to find out whether we want to continue being debt slaves to the bankers.

  • Comment number 83.

    After a few prime-time showings of SecretsofOz et al

  • Comment number 84.

    Evening Stephanie,
    I have a puzzle that you may be able to help me with. My local authority subcontracts out the bin collection for my area. If that service is cut to save money, is that a private sector cut or a public sector cut or both??
    USW

  • Comment number 85.

    Its strange how there’s so much and so many spending cuts ‘desperately needed’ at this time and yet the PM, during this age of ‘austerity’, can still find funding for his ‘pet project’ the National Citizen Service… I think it’s always extraordinary how the powers that be manage to discover vast amounts of money when it suits them, another good example could perhaps be the £1 Trillion in guarantees to bailout the financial overloads who where supposed to be participating in a ‘free market’…

    I’m sick of hearing so many unfair and seemingly unbalanced/ ill informed comments regarding the so called ‘public sector’. By now I have gained several years experience working in the much maligned ‘public sector’ to date. Prior to that I gained numerous private sector experiences, most significantly in the financial services sector, over a ten year period.
    In the private sector I recall experiencing pressure to meet some targets but the overwhelming memory was of working in the call centre of a large well known international bank. There staff where organised like robotic battery hens, had to get verbal permission to use the toilet from a line manager and also staff could be reprimanded for spending too long in trying to genuinely sort out customers queries (this was doing the job I was supposed to do but the bank didn’t want anyone on the line over 3 minutes so as to meet communication traffic targets! So if your query was complex I guess I was supposed to cut you off after 3 minutes! Great service eh?).
    I decided to return to higher education to see if that may provide me the chance to experience more gainful, worthwhile and meaningful employment.

    For what its worth here’s my take from the ‘front-line public service’ since gaining my post graduate qualification to practice in the field I work in (my work could best be described these days as providing information, advice and guidance for young people – IAG. It used to be called careers guidance…): -

    - Unreasonable caseload levels to be able to service clients effectively, eg: 1: 600 clients.
    - Overwhelming culture of ‘target’ chasing which requires significant/ massive amounts of time to be devoted to administrative tasks in order to fulfil target aims!
    - Constant and never ending culture of organisational change/ restructuring.
    - Staffing levels that are never even close to being adequate to be able to effectively meet the needs of the sheer amount of clients being serviced, EVEN IN SUPPOSED BENIGN ECONOMIC CONDITIONS! Certainly these low levels will now be annihilated by the coalition policies.

    I made the decision to go into the public service profession I did now out of what I would describe as a passion to assist young people to make the most out of their experiences, abilities, ambitions and qualifications. On that basis the decision has already been deeply rewarding and enjoyable, as well as productive. What could be more rewarding than helping a young person gain access to the college, apprenticeship or employment opportunity they aimed for?! Surely that's enabling them to participate in society and the 'labour market'? A good thing yes?..
    It now turns out that my career decision, in this modern neo-liberal type of society, was somewhat ill judged. Having in recent times become much more aware of the enduring impact of such personages and extremist entities as Milton Friedman, Ayn Rand, Libertarianism, Free Market Economics, Thatcherism, Reaganomics, Neoliberalism, Objectivism and other such peculiar features I now fear that the entire political arena appears to have been effectively persuaded that altruistic behaviour does not, actually, really exist. Therefore the altruistic behaviour I feel I try to display in my work is no longer valid or recognised by them or their ilk. It would appear that they themselves prefer to mimic the questionable behaviours of those who participate directly in the Market/ Stock Markets/ Financial Markets. Those types, politicians and bankers, prefer to spend their time squandering ‘other people’s money’ eh?
    Also I understand that many modern economics schools teach students that altruistic seeming behaviours are actually people acting in their own ‘self interest’! What a deeply limited and pessimistic viewpoint… I guess it suits the wealthy and privileged to believe such flawed and negative suggestions. I suppose it’s easy to believe these things if you’ve never experienced genuine acts of kindness, love or trust.

    So my rant is coming to its conclusion. I’ve found it quite cathartic…

    As we move ever further towards the ‘every man for himself’, permanent right wing UK state that began with the rise of Mrs Thatcher and continues apace today I will now need to ‘take the hint’ and look for somewhere else to live, work and survive. Resistance is clearly futile here eh?

    Exits to the sound of Rule Britannia..!




  • Comment number 86.

    Re 78 - I am very much worse than you think...

    We can neither cut our way nor spend our way out of the current debt crisis - the Keynesians are right when they say taking £1Tn of demand out of the economy will be massively recessionary and ultimately counterproductive - the monetarists are also correct in saying we cannot carry the burden of yet more debt, which will also consign us to a counterproductive spiral of decline.

    The dual delusions they respectively have are that cutting spending will allow the private sector to grow to replace the state's jobs and activity - it won't - or that public services and the taxpayer can afford the cost of servicing the debt and even take on more debt - personal, community, corporate and national - they can't.

    With me so far?

    There are also the "inbetweeners" who think there is a halfway house between both positions - there isn't.

    Stand back a bit - "Fair competition" and "free markets" are as unrealistic concepts and as utopian in their own way as the ideal of communism: "from each according to their abilty, to each according to their needs." Think OPEC - the EU CAP - think about the rigged Chinese currency/terms of trade - rigged markets we are powerless to prevent.

    So BOTH are ideals that cannot exist in an imperfect world.

    The nub of the question is how much "imperfection" should we accept and how far should we go in building a central authority (a "government")to intervene to prevent the inherently anarchic nature of complex human relationships and systems from producing outcomes we find unacceptable.

    It is my contention that we live in a world that has been seduced by the allure of globalisation. The UK consumer gets cheap, imported goods and food produced overseas, whilst the liberal well-meaning progressive tendency sees economic development overseas as a positive thing to be encouraged.

    Those that benefit from this system are the financiers and the multinational companies that support, own and manage this process - those that lose out are the people in the developed economies that are uncompetitive in the global labour market (un/underemployed), those that pick up the welfare bill and those that are exploited in overseas countries where production is now located.

    This system is now unsustainable at many levels:

    1. Debt - can't take on any more - nor can we cut back enough to pay it off without driving our economy over the cliff.

    2. Society - we can't go on soaking up the unemployed with public sector jobs - but the private sector can't create jobs in a rigged global labour market where goods are sold in the UK below the oost of the raw materials, that are made where the workforce is repressed and help in poverty by their government at the point of a gun/starvation - neither can we afford 5m unemployed.

    3. The environment - we already live beyond what climate change experts say is a tenable level of CO2 emissions - the developing world cannot adopt our current lifestyle - and we need to change too.

    4. Food - grain supplies are now in crisis - it is not possible for everyone on the planet to enjoy our level of diet, n.b. use of cereals to produce meat.

    5. Energy - fossil fuel is not only a climate chage issue, it's also running out whilst demand continues to grow. Unless we take a strategic approach to trnewable energy, we will face major disruption to supplies in the next decade.

    6. Population - it continues to grow whilst available land, food and water decrease - on current global warming trends there is a crisis of 6 Bn people who will have nowhere to live, no food or water on current trends within the lifetime of the current generation - this is beyond our capability to address - we will struggle to feed the people who already live here.

    7. Finance - there are untold values of currencies already in circulation and governments are not only printing vast amounts of new currency, they are also buying up commercial debt and government stock to replace it with new liquidity. In the end simple logic tells you that this paper cannot really be worth its face value - in the end someone will blink and ditch it (particuarly the dollar) and the whole system will collapse as the true, underlying value (probably 0.001 %) becomes plain. I'm no fan of monetarism, but Weimar and Zimbabwe show where this policy ultimately leads.

    Against this backdrop I reject both the libertarian view that we should slash public sending nd then sit on our hands and leave it to the market to resolve these issues, or that we can carry on as before by borrowing and public spending.

    We need regional, national and international initiatives to reforge our economy and society to reposition ourselves with our neighbours and trading partners to move away from the impending trainwreck towards a sustainable set of relationships that do not embody the naive political, economic, environmental and social suicidal path we are currently set upon.

    I regret that there is no neat political pigeon hole to put me in -left, centre or right - none of these dogmas either explain the way the world is, or offer a solution. What is clear is that doing nothing is not an option.

    Gordon Brown, George Osborne and Vince Cable are on the same policy spectrum - they simply have slightly different takes on the same pointless debate about the level of debt we can/should have and the balance of public/private spending in the economy - none of them recognise or accept the true nature and extent of the unsustainable position we and the rest of the world are already facing and the need or fundamental change.

    See - I told you I was REALLY bad, didn't I?

  • Comment number 87.

    #76 Cooperateordie

    "We desperately need a wealth tax, land tax or property tax to redress these imbalances."

    We have them, but interest and rent are taxes imposed on us by those in the private sector with sufficient surplus to invest. Like Governments, banks and landlords have responsibilities and incur costs meeting them, but by investing in stockbroking and shares of diverse property they are able to keep their ownership private and irresponsible; by investing internationally they can evade even responsibilities to the nations whose infrastructure and resources they use.

    The whole point of the Wizard of Oz comment and the wider demand for Government to be the issuer of new credit is that the interest we are paying would more than cover the needs of Government and pensioners. We would still need to pay our way internationally, but that should be the responsibility of traders, not Governments.

    The Ponzi scheme which is banking as it has been for centuries is not the only convention we are insane to keep accepting, and I found #78 offensive coming after #77's helpful explanation of the Washington Consensus on globalisation. (See how WC's provide for outgoings rather than personal incomes).

    The Wealth of Nations is not real wealth if most of it is possessed by a few for whom further increments have no real value, and Economics is not economic if it is about not maintaining the wealth we already have. If money is just credit, then what is the point of paying it back if it is used to support - from our existing surplus - work to maintain and regenerate wealth which benefits society? (That includes looking after ourselves, our families and our property). Credit cost the banks nothing to create, so when savers need their money it can be (and in fact is) simply recreated.

    What is most disheartening about the present situation is the complete absense of any sign that the un-technically educated public schoolboys, taking and reporting decisions to cut public services when unemployment is high, are even aware of cybernetics (control theory), the dynamic significance of positive and negative feedbacks, and the mathematics of destabilision where change is too rapid for error-correcting feedbacks to be effective. Try to cut down a wave and the effects flow sideways.

  • Comment number 88.

    #86 Richard Bunning
    I sympathise with your position entirely, but there is a way out.

    This solution requires that we disabuse ourselves of the neo-liberal rubbish that we have been taught to believe in.

    First, the government does not have to raise taxes to spend.
    Second, the government does not have to borrow to spend.

    The government is the monopoly issuer of its own currency and can simply spend. So why does it not?

    You need to know what monetarism is. It is there to make sure governments (particularly left wing governments) do not spend too much. So it makes a rule to say that if a government spends more than it receives in taxes it must borrow the money from the markets. This is an arbitrary rule! It is also why BoE has been made independent - to control government excesses.

    This seems like a fine objective, however, in a crisis it ties the governments' hands. If, instead, the government creates money and 'spends' it into the economy, they have no debt to pay back, and yet are able to meet their obligations to the public. Normally this means that the increased money supply causes the exchange rate to fall, which is often no bad thing, but can cause problems. Fortunately, the government could (if it was clever) spend without borrowing and not suffer depreciation....

    The BoE has already created new money in the form of QE and have tried to inject this into the economy, but it has only been partially successfull. So it needs to 'reverse QE' (sell the bonds it has bought) and give this money to the government to use for fiscal stimulus e.g. loans to SMEs, Job Guarantee etc. This will not have any negative impacts on the deficit or on public debt, and would amount to about £50Bn of stimulus.

    There's always a way out, and what I have outlined above is the start.

    The coallition will not get this however, as their neo-liberal conditioning is too strong.

    Kind Regards
    Charlie

  • Comment number 89.

    Dave,
    I'm with you on the 'Wizard of Oz' comment. Modern Monetary Theory (MMT) proposes much the same thing, that governments should be the monopoly issuers of their own currency, and should never have to pay interest on their own spending. MMT is seeing some success in spreading its paradigm, as it is politically neutral and based on empirical evidence.

    Kind Regards
    Charlie

  • Comment number 90.

    60. At 5:20pm on 07 Sep 2010, RNG :
    67. At 6:36pm on 07 Sep 2010, Charles Jurcich:

    I never thought I'd say this but I guess I am now a modern monetarist
    providing there is an inherent assumption that the banks are no longer able operate Fractional Reserve Banking in the way they currently do.

  • Comment number 91.

    Only a time traveller will know if G.O. has got it right. The problem surely is that there are things he can attempt to manage, but many of the variables are beyond his control. A policy whose success is dependant on Trade, will not work if other countries do not want to trade. An explosion of trade, might see us squeezed out. My concern is that if jobs don't get created unemployment will increase. We will still make financial gains as benefits are less than wages, but what it will do to our social fabric is another matter.

    The whole debate seems to centre on financial stability and wealth creation, which are seen as ends in themselves. They are very important and cannot be ignored, but is their importance being elevated because they are easy to measure? Vague concepts centred around social fabric are getting an airing under the banner of 'the Big Society', but don't they need working on and resources, as they will be needed if G.O.'s plans take longer to succeed than anticipated and requires serious retuning?

    Wealth and social fabric are linked, but wealth does not always lead to a sound social fabric. The history of the last 30 (or maore) years in this country demonstrates that. Wealth isn't bad, it is the cost of achieving it which needs careful consideration.

  • Comment number 92.

    Just read about Vince's intention to cut scientific research. I can understand the reasons for his needing to cut research costs, but they are built on a false premise. The premise being that at a start of an investigation, you know how it will end up. This is to highlight the problems of cutting and wealth creation. Here are a couple of examples.

    Soon after the laser was invented, it was being described as 'the solution looking for a problem'

    Einstein, especially in the early days, did not see any practical benefit of his theories.

    Vast sums of money are being spent at CERN, but it is the spin offs (eg the Internet and many other advances) which are the real benefit.

    The problem is that lots of these 'blue sky' projects do end with nothing to show, but it is not easy to decide at the start which ones are doomed. The most successful new ideas are those which challenge conventional thinking and would be rejected if a strict 'could lead to success' criterion were applied. Similarly a group of leading scientists sitting in judgement may not be so good as new ideas might seek to undermine their scincerely held views.

    We may have no alternative to making cuts in scientific research, but the way it is done is more complicated than it seems

  • Comment number 93.

    #18 >>Maybe someone else has heard otherwise, if so where are the stories of the government policies now making large companies announce they intend to create 10,000+ of manufacturing jobs in the UK, instead of in the Eastern Bloc?

    So long as bolshi unions, like the RMT, insist on going on strike for the sake of going on strike to boost their failing political support, no businessman in his right mind will create 10,000 jobs in the UK just for the sake of creating jobs.

    The London strike yesterday put already shaky small and medium-sized businesses in London at risk of going under with their disruption. But did the union care about the workers in those businesses ?? The union representatives are already talking about how much *MORE* disruptive the next strike day will be !! If other workers lose their jobs, tough luck; so long as the unions can make their political statement !!

    And you want people to create more jobs in *THIS* climate ??

  • Comment number 94.

    part repost from

    http://www.bbc.co.uk/blogs/newsnight/fromthewebteam/2010/09/tuesday_7_september_2010.html


    #77 : Richard, i agree with your general anger at the Washington Consensus, but the statements you made regarding its policies could be more nuanced, sorry:

    "1.Fiscal policy discipline;"

    - slightly better than fiscal irresponsibility, but dumb if ignores need for investment for actual future growth (ie into jobs, not helping banks). So i largely agree.

    2.Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;

    - they are slashing social payments and the Welfare State across the board. This IS a 'consensus' policy. An absolute Disaster wherever it was "tried", ie "enforced".

    3.Tax reform – broadening the tax base and adopting moderate marginal tax rates;

    - except the Govt are also narrowing the tax-base, by cutting the numbers of tax-inspector offices considerably, very soon no doubt the large corporations will be doing their own tax-receipts by email - it'll "save money". But there is certainly a move to increase taxes upon the lower earners, and cutting benefits to the middle classes, you are right.

    4.Interest rates that are market determined and positive (but moderate) in real terms;

    5.Competitive exchange rates;

    - as opposed to what? No offense.

    6.Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;

    - works best with cooperatives at both ends. And there should also be the case that an economy might wish to nurture a new or strategic industry. So although this HAS been a staple of neo-lib/WC policy, as a *theory* it still holds water. Scandinavia has benefited enormously from its internal trade, for instance. It has a negative effect if there is a monopolistic control over 'movement-of-goods'.

    7.Liberalization of inward foreign direct investment;

    free movement of capital is a disaster, when there are international multi-national corporations to take advantage of the system and destroy national economies. Completely agree here.

    8.Privatization of state enterprises;

    9.Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;

    crux.

    the opposite happened, please read this slightly edited version:

    -"9.Deregulation – abolition of regulations that aid market entry or support competition, along with those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;"

    Deregulation was on weakening regulation (ie powers) for things like the Monopolies Commission, for instance the US laws concerning how much mass-media one company/individual could own were drastically weakened during reagan's 80's. In the UK, the loss of tax-support for small and medium business as for instance supermarkets moved into the area, whereas these large companies received tax-breaks all the way down the line, prevented the smaller companies from competing - the neo-libs *prevented* competition against the big supermarkets through their deregulation. And we can *ALL* see that financial regulation to increase consumer protection did NOT come in under the 'deregulation'!
    My apologies, you are definitely heading in the right direction, i've liked your posts before, richard. :)

    10.Legal security for property rights.

    - this is one of the basis for our being Liberal societies - Liberal Democracies is how we are usually described. There is nothing wring with this, or in people owning things in collectives if they so wish, and it is a fairly easy system to understand and organise. Any problems tend to come with large scale tax-avoiding intergenerational inheritance, allowing build-ups of concentrated wealth and power.

    "Several major planks of the consensus have been discredited: we need to question the others and end our quasi-religious belief in the market as the ultimate and only legitimate force in forming human society.

    Sustainabilty is the real loadstone in a world of social, economic and environmental pressure. Complex globalised networks of economic, trade and environmental relationships are vulnerable and unpredicable. We need to start taking responsiblity for our own societies, economies and environment - globalisation is not the answer - so the Washington Consensus is not a doctrine of responsiblity, it's a gambler's charter which may have big winners, but far more losers."

    whilst 'the market' has a place, it should not be god. Sustainability is an absolute necessity.

    richard, your post was well laid out and quite thought provoking, even if i disagreed with some. :)


    -haven't read the rest of the thread, yet.

  • Comment number 95.

    #77 Richard Bunning

    Great post and I fully agree.

    #85 PoliticalGoose2

    Likewise.

    The irony is that the democratic process is so badly hijacked in favour of the prevailing doctrine. Our democracies are conglomerates of financiers, media firms, and elected administrations that together represent a political elite capable of shifting public opinion to preserve itself. Democracythreat's idea of voting directly for laws, as opposed to groups, might help in this regard.


  • Comment number 96.

    77 and 85 great observations and inputs.

    Altruism has evolved for humans and higher mammals because it works for societies (and hence the individuals in them) to survive and indeed flourish.

    Where it desperately needs tweaking in the modern world we find ourselves in is to take account of sustainability.

    We surely need to take intelligent decisions about this huge elephant in the room instead of ploughing on stoking the boiler of the juggernaut that our economic structure has become which is well on the way towards calamity.

    To do this we need to apply longer term sustainable thinking and policies with far more emphasis on improving our environment and societies rather than plundering and brutalising them.

    In short we need to apply our collective intelligence to a longer and wider horizon than it is currently focussed on.

  • Comment number 97.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 98.

    90. At 06:52am on 08 Sep 2010, Alesha Soba wrote:
    "I never thought I'd say this but I guess I am now a modern monetarist
    providing there is an inherent assumption that the banks are no longer able operate Fractional Reserve Banking in the way they currently do."

    I clicked on your link to Secret of Oz and found the video interesting but a bit long and repetitive. After some research through Google, I found a theory that seems to embrace this whole concept of MMT. It's called Chartalism (sorry if someone has already covered it).

    If my assumption is correct just Google Chartalism or Questions about Chartalism and the theory is all laid out.

    The theory seems hard to fault except you have to trust Government to always act in our economic interest. Is that a good idea? The expenses scandal comes to mind!

  • Comment number 99.

    It is now quite clear the austerity program will plunge the UK back into recession, if we ever climbed out if it which is debateable, the question is would things be any different if Osborne didn’t take us down this path. Situations are developing in other countries that will either affect the UK directly or provide circumstantial evidence of our fate. The austerity program is really a sideshow to try and stave of the inevitable, unfortunately whatever Osborne or anyone else does will make little difference to the end result.

    Ireland – their austerity program continues to cause economic shock waves, GDP is falling, no growth, high unemployment, further bank bailouts due, falling credit rating and no manufacturing of any worth to export out of recession. With minor exceptions the UK suffers all of these problems and where we are mildly ahead of the game like GDP and growth we will soon come crashing back into negative territory as the money and demand in the economy dwindles with the cuts.

    US – the states is deep in the brown stuff, their debt and deficit are unsustainable and they are likely to commit the printing press to prolong the agony. When they finally run out of green ink hyperinflation is a possibility and a period of severe downturn and social unrest will follow. I’m not saying this will spread to these shores but the impact on a global scale of a dollar collapse and foreclosure of the biggest consumer on earth will be devastating. They are also motioning towards war in the Middle East.

    BRIC’s – they are asset bubbles about to burst, more so the Asian bloc than Brazil. When these bubbles burst they will start offloading dollars, stop acquiring sovereign bonds and return to national instincts. This will exacerbate the US problem and cause partial sovereign collapses in Europe.

    Europe – the sovereign crisis hasn’t gone away it’s just not news at the moment. The central bank is still holding rates low, injecting money and guaranteeing sovereign debt. This can’t continue; Spain will be at or near default in 2011 with Greece a few months behind and Ireland looks doomed. European banks are hiding exposure to sovereign debt and in addition to their exposures need to find £300Billion in the next twelve months. Where is this money coming from, answers on a postcard. Only Germany could possibly withstand the downturn but unfortunately the intravenous line has been stuck into Germany’s artery and the donor line is keeping the near dead alive.

    The Good Ole UK - Well we’re bouncing around the bottom, keeping our heads above the sediment with fanciful accounting, low interest rates, bank profit based on promises, dubious GDP and growth, inflated asset values and questionable statistical data. Despite the lack of overwhelming bad news things are getting dire, and taking money out of the economy rapidly by so called “Austerity” is a grave cause for concern. However as I said earlier the outcome is inevitable whatever decisions are made by government, it’s just a case of when we reach the end, at a gallop, slow lope or crawl. We have gone past the point of no return because the bigger picture dictates it, if it was the UK suffering alone we would be able to manoeuvre but with the rest of the globe in the same or worse boat there are no economic magic bullets.

  • Comment number 100.

    What is the evidence for Mr O's view that bond yields would have gone up? What happened in Portugal or Spain is irrelevant, since unlike the UK they do not have a central bank which can intervene by open market operations to control the yields of government bonds.

    The BoE should be plan A not plan B. Why does Mr Osbourne believe that the Bank might no longer be able to control bond rates as it has done for many years?

    The remit of the MPC needs to be kept under review and its membership should be more balanced, so that it is no longer packed with monetarist economists whose extreme free market philosophy was the delusion which caused the financial crisis in 2008.

 

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