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Spending cuts: Molehill and mountain

Stephanie Flanders | 11:49 UK time, Tuesday, 19 October 2010

Are we all making too much fuss about the Spending Review? Nick Clegg thinks so. He likes to point out that, even with all the cuts we will see unveiled tomorrow by the chancellor, total public spending in 2014-15 will only be back to where it was, as a share of the economy, in 2006-7. At the end of the Parliament, the government will be spending £41bn more, in cash terms, than it is today.

That doesn't sound so bad. How, you might ask, can it possibly take the deepest and most prolonged spending cuts since World War II, simply to take government spending back to where it was four years ago?

The answer, as a certain meerkat would say, is "simples". All you need is the largest, most sustained increase in public spending for over 50 years, the deepest recession in more than 70 years, and the first decline in Britain's nominal GDP since records began.

Take a look at this chart, which shows total government spending in real terms since 1955. There are two lessons to take from it. One is that the pressure on government spending since WWII has been relentlessly upward. You could do the same chart for almost any developed economy in the second half of the 21st Century. As we get richer, we demand more of the kinds of things that government provides, and the cost of those things often rises faster than the economy.

Chart showing real total managed expenditure (£bn)

 

It takes a very determined government - taking some very tough decisions - to fight that upward pressure for any length of time. You'll note that the Thatcher era barely registers on the chart.

(Before you ask, yes, I do realise that a chart of real GDP since 1955 would look similar to this. Spending as share of the economy tended to rise until the 80s. It then bounced around the low 40s until the end of the century.  I wanted to use this chart to show how the government's plans related to the long-term trend.) 

The second lesson is that, even by post-war standards, the increase in public spending from 1999-2000 until 2009-10 was exceptional. Spending rose by 53% in real terms over this period. In effect, the coalition is "only" planning to unwind half of that increase, to take the growth in spending back to its long-term trend. But that doesn't mean it will be easy.

Why did spending rise so fast? About half of it was due to the recession (see below). But, as Tim Morgan points out in a paper for the Centre for Policy Studies, spending in 2006-7 was already 26% higher, in real terms, than it had been in 1999-2000. That was Labour's promised investment in public services.

Maybe public services did not feel 26% better. But all that means is that it was spent inefficiently, and/or prices and wages in the public sector rose much faster than the economy overall (which they surely did). The money definitely went out the door.

Then the recession came, with a real decline in GDP of 6% between the spring of 2008 and the autumn of 2009. We have had recessions before, of course, but few that deep, and none, in modern times, that was accompanied by an annual decline in the cash value of GDP.

As a general rule, cash GDP rises by at least 5% a year, meaning that spending can rise by that amount, in cash terms, without rising as a share of the economy. Even in a bad recession, the cash value of output usually goes up a few percent, because prices are rising, even as amount of stuff we produce as a nationa has gone down.

The unprecedented 3.6% fall that occurred in 2009 meant that spending would have jumped as a share of GDP, even if the nominal amount of spending had remained unchanged.

As we know, spending did not remain unchanged. It grew as the natural consequence of the recession, and also because of the stimulus programme (though that had a fairly small part in the drama.) Spending by departments also took off in real terms, because the government chose not to row back on nominal spending totals which had anticipated a much higher rate of economy-wide inflation. So spending rose sharply both in real terms and as a share of the economy.

As Alan Johnson pointed out yesterday, George Osborne and David Cameron largely went along with this spending. They only sounded the alarm on spending toward the end of 2008, and then only to reject the stimulus.

So, we are only going back to 2006-7, but an awful lot has happened between then and now. And the government will find that it cannot spend its 40.9% of GDP in 2014-15 that Labour spent it on in 2006-7.

If things go according to plan, by 2014-15 departmental spending will account for 20% of GDP, or just under half of total spending. Back in 2006-7, it accounted for 24% of GDP, and nearly 60% of the spending total.

Thanks to the promise of a real terms increase for the NHS - health will take up a much larger part of that departmental total. In 2006-7 one pound of every four spent by departments was spent by the NHS. On current plans, I reckon that by 2014-15 it will be accounting for one in every three pounds spent.

What else will we be spending on? Well, there will be more spent on central government debt interest, but perhaps not as much as you might think: about 3.5% of GDP versus 2.1% in 2006-7. There will be around 0.6% of GDP more spent on social security and tax credits (though this will change on Wednesday, as the chancellor takes more cuts from there to give to departments). Absent big reforms tomorrow, we will also be spending more on state and public pensions.

Which brings me back to where I began. If the government follows through on this spending review, public spending in 2014-15 will be 4% lower, in real terms than it is today - but account for roughly the same share of the economy as it was spending in 2005-6.

Labour is right to stress that economic growth will be crucial to how tough these spending cuts feel - and, indeed, whether cuts of this magnitude are even necessary. If the economy grows faster than the coalition expects, they could take spending back to its 2006-7 level with less pain for the benefits system and individual departments. If growth falters, then the task will be harder still.

But, the coalition is right that this is not about turning Britain into Hong Kong. It is about reversing a small-ish part of the relentless upward march in government spending since WWII. The fact that it should take such a gargantuan effort to achieve even this merely demonstrates quite how relentless that upward march can be, in a rich but now ageing modern economy.

Comments

Page 1 of 2

  • Comment number 1.

    'Spending cuts: Molehill and mountain'

    Molehill if you don't lose your job, mountain if you do.

  • Comment number 2.

    Interesting article which re-inforces in my mind that we are ALL living beyond our means and have been for a while now.

    Your info graphic is very illuminating in the fact that it shows and upward trend which from 2000 to 2010 Accelerated probably due to the Financial Stewardship from the Labour party who have in effect completely imbalanced and probably destroyed this country. (Sorry Ed Balls and the other Ed milliwillieband - it's always easy to criticize and complain when you don't have to provide solutions and were the inital cause anyway of our current situation !!)

    I hear discussions everyday now from those who want, expect everything and yet do not appreciate that they are not entitled to it.......

    A rude awakening is coming and we all need to be ready for it......

    Take Care ALL

    Regards

    Ganretti

  • Comment number 3.

    Demographics.

  • Comment number 4.

    Half a million public sector workers will not take satisfaction in this analysis nor will the half a million private sector workers who will be hit by the knock on effects of the cuts. The coalition have not presented these cuts as adjustments and they do not know what the effects will be on the wider economy until they happen. It seems to be forgotten that cutting public sector budgets does not produce a £ for £ reduction in the deficit. Indeed every cut will produce a 'reactive impedance' that may result in a less than £ reduction in the deficit or even an increase due to direct (reduced taxation receipts + redundancy payments) and indirect effects in the private sector (contractors failing). It is of little interest to these undertakers of the welfare state what the impact of their decisions will be on the population at large.

  • Comment number 5.

    Meerkats say "Simples".

  • Comment number 6.

    What is really interesting is to compare the trend line up to 1997 with that shown on your graph. If that line is extrapolated we'd be looking at 10% less expenditure in 2015 than is now forecast by your graph.

    It's also interesting that, apart from the '97 - '09 period, sharp escalation - just as sharp as '97-'09 - can be seen '66-69 and '74-76. Wonder who was in government then?

  • Comment number 7.

    "But, the coalition is right that this is not about turning Britain into Hong Kong. It is about reversing a small-ish part of the relentless upward march in government spending since the war. The fact that it should take such a gargantuan effort to achieve even this merely demonstrates quite how relentless that upward march can be, in a rich but now ageing modern economy."

    Only it's not about that is it Stephanie? it's about people, their jobs, their houses, their welfare state. Its about real things that matter, not statistics or some discredited economists idea of how money and the economy should behave or some right wing ideological rubbish about free markets. I am sure your report is accurate though.

  • Comment number 8.

    Curious what the graph presents is that there is a fallacy at the heart of technology - that is that you get more bangs for your bucks.

    In 1955 there were virtually no computers. Now everything is computerised. Hmm....

    Second thought: I suggest that expenditure expressed in 'Real Terms' may not be a honest as the term suggests. The conversion of 'current prices' to 'real prices' is always more problematic than it seems at first sight.

    An example: I have just replaced a metal milk-pan purchased in Woolworth in 1929 for 6d by my mother (she still keeps detailed records!) as the handle fell off with a similar product on sale in Sainsbury's for £4 (reduced from £8) that produces an increase of 160 times or 320 times at full price. That's fine I can produce an exact equivalent product so the comparison is good. By the way that means her annual salary as a new teacher in the early 1930s of £144 equates to £23040 now using the low multiple figure of the milk-pan index. (She also paid £1.5 a week for two rooms and all meals in the early 1930s as a matter of interest I'll leave anyone interested to work out the difference the last 80 years has made!)

    Real terms indexes over long periods of time should be treated with extreme caution! They are in no way accurate or definitive. Particularly when the content of the index varies over time - so historic comparisons are invidious at best and generally entirely misleading!

    Even ten years ago the idea of remotely tasked intelligent drone attack aircraft would have seemed science fiction as would battle field observation micro helicopters - yet both are becoming vital today.

    As was said in Eastern Europe only the five year plan is certain the past and today are unknown.

    What matters most is that things are done in the most cost effective an efficient way conceivable at the time bearing in mind that there needs to be a well understood and efficient way of getting from where we are today to where we believe we should be in a year or two.

  • Comment number 9.

    SF: 'Are we all making too much fuss about the Spending Review?'
    ------------------------------------------------------------------
    What? About the completely disasterous shambles it appears to be turning into?

    No. Definitely not enough fuss.

    It's in danger of turning into a complete farce.

    Hey! And hey Dave, especially! Let's be careful out there, today ...


    ... and tomorrow.

  • Comment number 10.

    I always like to see some of the comments that arrive when the spending of the Labour government is criticised because we all have short term memory. Prior to 1997, for example, there was a great clamour for the salaries of doctors and nurses, and by implication other health service staff, to be increased because they were thought to have been badly treated by the previous Conservative government. They were also charged with increasing the staffing of the NHS and as part of this increased the number of medical schools, nurse training places etc. They were charged with decreasing waiting lists and waiting times, both of which have been greatly reduced. We asked for it and the Government invested but we have forgotten our wishes and those changes are now perceived as the norm for the service.

    In the last 13 years there was significant investment in new hospital and health centre buildings removing in the process very poor stock much of which was 19th or early 20th century.

    In this I am not saying I approved of all their investment but it is easy to forget where some of our money went at our behest. I have no doubt that there are others who could think on similar lines

    And as ever also forget our part in contributing to the debt because of our wish to spend beyond our means, supported by the laxity of the banking system.

    I cannot say that I agreed with all the previous Governement's investment decisions

  • Comment number 11.

    #8

    John

    Your mother has not been playing the game. She should have replaced her milk saucepan on a regular basis - say once every 10 years, tossing the old ones into the bin to go to landfill. She has not been contributing sufficiently to GDP.

    I may have to reconsider my approach to a favoured frying pan bought in Timothy Whites in 1973, the bread knife acquired at the same time both made in Sheffield. Alternatively, I could try and keep them in service for another 40 odd years.

    Yrs

    Mrs Bloggs

  • Comment number 12.


    It is hard to realize that this country has two leaders willing to commit their coalition government to do what is

    right for the country,regardless of the cost to themselves and their parties. Perhaps sanity has returned to

    our society once more and we have have given a second chance to prove that we are still a great nation.

  • Comment number 13.

    Finally recognition from a public figure that we used to survive with the planned level of Gov. spending only several years ago.

    Single trend lines are also horrible. just try and trick people into thinking there is a pattern and everything is following the trend.

    As others have already said, look at pre-2000. Spending was increasing at a slow rate and then it exploded.

  • Comment number 14.

    "At the end of the Parliament, the government will be spending £41bn more, in cash terms, than it is today."

    I think that answers a question I asked, some time ago. I asked whether the £83 billion cuts over four years meant a reduction of £83bn from the £661bn we're currently spending (leaving us spending £578 bn) or a total reduction of £83bn spent over the four years (leaving us spending £640bn).

    It appears to be neither, because in four or five years time we will be spending £702bn.

    Where, you might ask, are the cuts if spending is still increasing? I suppose this is the usual smoke and mirror talk about real terms and percentage of GDP.

    If this is going to actually reduce our deficit and enable us to pay off debt then the only meaningful comparator for this spending is the tax revenues (income) we have to cover it - something just short of £500bn per year (as of now). Even allowing for 2% compound growth over the next five years we're still going to have a deficit of roughly £100 billion a the end of the next Government.




  • Comment number 15.

    #10

    'In the last 13 years there was significant investment in new hospital and health centre buildings removing in the process very poor stock much of which was 19th or early 20th century.'

    The 19th and early 20th century stock lasted. If the stuff built in the recent past lasts that long, and we spend enough on science and technology that I can see it, I will eat my hat.

    I'd guess these latest edifices will fall into disrepair well before then just like the hospital I occasionally frequent, built in some previous glut of spending which needs to have every window replaced, new heating and ventilation systems, new elevators and control systems etc.

    The money spent on its sister building in the last 7 years would have been better spent on these improvements - much less spend on improvements that can pay for themselves over 20 years. Unfortunately, that 'investment' still needs to be made.

  • Comment number 16.

    Stephanie Flanders.

    "Why did spending rise so fast?"

    another reason, I'd suggest, is over-inflating the value of pet projects. for instance, the London Olympics is going to cost £12bn or so, all in. yet, in today's news (South Today) we're told the MOD will not develop a new trainings facility, which will save £14bn -- about 15% more than the whole of the Olympic circus which includes a massive building programme in the most expensive locations in the UK.

    oh, btw, the meercat does say 'simples'.

  • Comment number 17.

    So, what is their plan to increase private (business) spending? I don't see much sign of it yet. Looks to me like they will just shrink GDP and increase the deficit in the short/mid term.

  • Comment number 18.

    The impending cuts will not save any money neither in the long term nor in the short term. The government will have increased the country's debt burden by 2015 in real terms due to ever increasing welfare payments as a consequence of ever increasing unemployment. Government waste will also not be cut; it never is. What will be cut is frontline services. The devastating cuts to the University sector will stiffle the generation of new knowledge based companies (which only exist on the back of IP generated in academia). Big companies have already relocated their R&D activities abroad. All we are left with is banking and retailing and 80% of the private households in unsustainable debt.

  • Comment number 19.

    Government has inexorably become more involved in every aspect of our lives. When any organisation gets bigger at such as pace it is inevitable that inefficiencies will develop. As there is no commercial or little economic pressure in times of growth on government expenditure it is clear that when times get tough financially there will be a great weeding out and cutting back of the previous growth. The dilemma is to avoid cutting out all the good you wish to keep and it is unfortunately unavoidable that some of this will go too.

    I would like to highlight just one area of concern to me from the many that there are, namely student fees for higher education. I can not understand why we are sticking to the policy of Tony Blair in sending such a large percentage of our young people to university? What we need is quality not quantity. If we went for quality and sent say only 15-20% of the brightest to university we would be able to afford it as a nation. This would mean that we would not need to shackle students with debt that will have a knock on effect in later years on areas such as their ability to borrow to buy a house.

    The students who currently go to university and do not see the financial gain later to justify it (earn less than £21K at current rates) won't pay anything back, and hence won't be burdened financially, and the nation won't benefit from sending them for a degree.

    The students who we do want to go to university as a nation (those getting high paid jobs) will have to pay back.
    In conclusion I would cut back on the places and courses being offered at university so that only the brightest students go full time and fund it all as before from the exchequer. If less able students still wish to obtain a degree then this can be achieved the way it always was before via part-time study whilst working.

    We have given young people an unrealistic expectation of what they are going to be able to achieve and devalued the achievement of degrees in the process.

  • Comment number 20.

    #14

    Correction, allowing for only 2% compound growth in tax revenues the deficit does not start to fall!

  • Comment number 21.

    The budgetary defecit of GBP 158 billion was bad enough and these cuts should trim that out over a four year period.

    However it is the debt and similar liabilities both national and private which should be exercising people. Here we are talking about trillions and many, many years.

    If the country comes on with the vapours over a cut of GBP 40 billion a year for a short period, how is it going to cope with the National Debt, public sector pension liabilities, state pension liabilities, mortgage debt, credit card debt all rolled up into one large sum of around GBP 6.5 trillion?

    We have a structural problem with our economy. We are acquiring debt, obligations and liabilities at a faster rate than we are earning our money. This is what we should be concerned about. We might have a lot of income but we are far from rich: look at all the poor! We need to restructure the economy into producing value once again or we are doomed to repeat this episode time and again.

  • Comment number 22.

    Are we all making too much fuss about the Spending Review?

    Yes! (it's a re-alignment of spending between that which is A-ffordable and that which is U-naffordable) ... and what was/is the alternative ... Labour would have 'cut' and taxed and taxed and taxed and without any strategic planning ... until total UK bankcruptcy.

    The re-alignment of government spending will also be phased over several years.

    Many people in the private sector have already lost their jobs but it is only when it bites into the public sector that we are all supposed to get all het up about it.

    The govt can do much by re-organising, reforming, re-balancing ... be being radical and being prepared to upset big business interests that it normally depends on for funds and 'other support'.

  • Comment number 23.

    This chart in the Guardian is useful to see where government spending has increased in recent years.

    http://www.guardian.co.uk/politics/interactive/2010/oct/15/comprehensive-spending-review-2010-public-spending

    That is, largely on the NHS and Education (prior to the crisis welfare spending was flat for the period of the last government) - not that surprising considering the last governments two major tag lines - 24 hours to save the NHS and Education, Educ.......

    As the current government seems to be suggesting that NHS and Education spending is largely protected from the coming cuts you need to consider how much pain there will be in other areas that have not been growing in recent years.

    If there is any significant jobs based recovery (which seems unlikely any time soon) then welfare spending will fall anyway. Potentially this represents an easy target where the government can claim results by doing very little.

    Underutilisation of capacity in the economy is a major issue and, as yet, I see no strategy to address that and suggestions that reducing the deficit, or even running surplus, will help seem to have little supporting evidence.

  • Comment number 24.

    17. At 2:07pm on 19 Oct 2010, Squarepeg wrote:
    So, what is their plan to increase private (business) spending? I don't see much sign of it yet. Looks to me like they will just shrink GDP and increase the deficit in the short/mid term.

    They will end up with a balanced budget again once people have reduced the private debt that has been built up to something they can manage. Unfortunately it will be at a much lower level of employment and output.

    How much do we pay these guys?

  • Comment number 25.

    #10

    "In the last 13 years there was significant investment in new hospital and health centre buildings removing in the process very poor stock much of which was 19th or early 20th century."

    Indeed. If you were to sum it up in a phrase, it would be that the previous government "fixed the roofs whilst the sun was shining."

    Unfortunately they didn't get round to fixing all the roofs, and the incoming coalition government have scrapped a number of roof-fixing projects aka BSF. And then they have the cheek to pronounce that Labour "didn't fix the roof while the sun was shining".

  • Comment number 26.

    Maybe half a million people in the public sector are about to lose their jobs. On top of that, a tranche of people in the private sector whose jobs depend on spending by people in public service will also lose their jobs. They end up on £65/week jobseekers allowance plus rent plus council tax.

    The government is knocking around £10/week off the rent money, leaving people with around £55/week to live off. If they can't find a job in 12 months (which in some parts of the country is a very real possibility) they will lose another 10% off their rent money, so that they're trying to get by on around £45/week in the midlands, less down south.

    And the cuts are no big deal? You'd better hope you won't lose your job.

  • Comment number 27.

    Stephanie

    You should be ashamed of yourself. A graph of real GDP per capita for the period 1955 to 2009 shows what? A four fold increase, same as above...

    (data taken from from http://www.measuringworth.com/ukgdp/)

  • Comment number 28.

    How is the spending being financed. Higher taxes are certainly a part of that and this of course takes money that would be spent in the economy. Although spending may remain somewhat level there remains the debt so graciously assumed by the government from the banks and the continued mortgage crisis that the banks wish to also have the government assume. The bad news continues as the bankers make billions.What part of the budget is debt repayment? The greatest traqnsfer of wealth upward in the history of the world. The middle class and poor will continue to pay for the sins of the bankers and their governmental handmaidens will insure that is how it will all happen. Aren't those charts just wonderful! Makes one think things are getting better. Unfortunately,reality says something different.

  • Comment number 29.

    I'd love to see a report into what our education/health systems would look like if we spent the same % of GDP now as we did 40 years ago.

  • Comment number 30.

    Stephanie, great article. I think good journalism should put things in the right perspective - neither exaggerated nor understated - and this does. Some of the media hype recently has seemed to suggest the cuts will be "the biggest ever". But honestly I am sceptical - neither Conservatives nor Liberals are going to commit suicide over this.

    Two small requests : 1) in a future article can you give us the same chart but expressed as percent of GDP rather than PNDs 2) what is net cost of being in the EU ? This is often described as being "vast". I guess it is only 1% of GDP or less, insignificant.

  • Comment number 31.

    Yes Stephanie,

    however if it isn't such a big deal them why on earth does the government keep making it such a big deal by trailing it and making announcements for weeks before hand.

  • Comment number 32.

    #11. mrsbloggs13c2 wrote:

    précis: throw away saucepans more frequently than every 80 years.

    My mother was quite sad to have to replace such a well used, but up until the handle fell off, fully functional item - I think you get like that nearing your centenary!

    I suspect you know why I chose to highlight my mother's milkpan.

    1. These historic comparisons and fairly meaningless. Indeed even expressed as % of GDP per capita they are misleading. Even the trends do not mean much.

    2. Recycling is OK, but re or continued use is much much better!

    I have many household goods and kitchen utensils I purchased in the late 1960s and they work properly still and nothing has superseded them in function so I don't see why they need changing, just to keep the GDP of China growing!

  • Comment number 33.

    #31. Whistling Neil wrote:

    "if it isn't such a big deal them why on earth does the government keep making it such a big deal by trailing it and making announcements for weeks before hand."

    Becasue they are incompetent amateurs, perhaps?

  • Comment number 34.

    Can anyone explain to me (and this is a genuine query) what the process is whereby we cut public spending and throw public sector workers on the dole, leading to the private sector coming in and filling the gap ? Say in five steps (feel free to increase/decrease the number of steps). Thus:

    Step (1) Reduce public spending and the public sector workforce massively;
    Step (2).................
    Step (3).................
    ..............etc etc

    Step (X) Unemployment back to low levels but balance changed significantly between public and private sectors.

    Anybody care to take on the challenge? Preferably somebody with some knowledge of economics - I don't want any "it stands to reason" or "everybody knows" type replies. Feel free to use expressions like "aggregate demand" and "bond yields" as I do have some knowledge of these things. I just don't feel that economics is the science people would have us believe, and that the law of unintended consequences is just as likely to apply as any of the 'laws' of economics.

  • Comment number 35.

    Stephanie,

    "One is that the pressure on government spending since the war has been relentlessly upward."

    So it wasn't all the fault of the last Labour Government??? - oh dear, what have all those coalition fools been repeating like nodding dogs for the last 6 months then? Are you saying this is a problem older than the last 13 years?

    READ IT AND WEEP YOU TORY / LIBERAL SUPPORTERS - IF YOU HAD ANY IDEA ABOUT HISTORY YOU WOULD KNOW THIS - MAYBE THEY DON'T TEACH HISTORY PROPERLY AT ETON AND HARROW.

    ...I suppose you'll just accuse Stephanie of being a 'lefty' with an axe to grind.....if that comforts you in the face of ECONOMIC FACT.

    Fortunately I have been saying this for more than 6 months - well since the time the country tried to blame the last 50 years of increasing public spending on Gordon Brown - a claim which gave the man credit for something he did not earn.

    No wonder the Tories want to cut education spending - they're trying to erase history from the minds of the next generation - so they can tell lie after lie after lie and no-one will have the knowledge to challenge them.

    ...I'm just waiting for when they decide that burning old text books is a good idea.

  • Comment number 36.

    Hi all,
    been away, as had nothing useful to say.

    Interesting to see WOTW challenge "debt-free money". Nice challenge.

    To MrsBloggs, how did you miss the hypno-teach "spending is better than mending"? I think they had better sign you up to the re-alignment program.

    To Sage_of_Cromerarrh @19

    We have given young people an unrealistic expectation of what they are going to be able to achieve and devalued the achievement of degrees in the process.
    ================================
    To use the words "devalued" and "academic qualifications" in the same sentence has been for over 20 years! You vill go and join Frau Bloggs on the re-alignment program!
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
    This little rant is not so much about the spending review as it is about Growth, but I see the themes beginning to germinate in people's heads and dovetail.

    You see, Mushroom is still puzzled about the problem of automation and the effect it has on the employment prospects of deltas.

    I hear people bleating all the time on this blog that we need Britain to manufacture stuff that the rest of the world wants.

    But if a machine can make better widgets faster than a person and at a lower cost, the person is redundant. If the level of intelligence required to program the machine is beyond the capabilities of the person, they cannot retrain to become not-redundant.

    (Just in the 19th century, the majority of people were employed as AgLabs, until the tractor came along. In the 20th Century, the majority of people were employed as assembly line workers, until automation came along.)

    Therefore, there is not much prospect of deltas adding economic value in an automated manufacturing economy (or a tractor-driven agrarian economy for that matter).

    What economic/fiscal/welfare/education policy would change this situation?

    Bright Idea: How about if we create lots of jobs that deltas can do which cannot be automated...of course...why didn't I think of that! Things like hairdressing, nursery nursing, gardening, plumbing...

    Objection, your Honour...they would not actually be adding to the wealth of the nation? No new bridges, no hospitals, no power-stations?

    OK then, let's not measure growth in wealth, let's measure progress by continually increasing how much we spend! Let's make sure that deltas cannot hang onto any of their "earnings" by destroying the money as fast as they earn it through taxation, inflation and planned obsolescence. Let's promote "consumerism" and "credit" to make sure that everybody runs as fast as they can on the treadmill of make-work.

    Objection overruled, M'lud.

    And our Ford said "Let there be Keynes", and it was so.

    Now, lets all give thanks to our Ford for this Brave New World.

    No?

  • Comment number 37.

    #6 actually the trend lines are even more interesting.

    You will notice that there is a significant undershoot between roughly 1984 and 1997. Now if you take two new trend lines, one based on the low points between 1984 and 1997 and another at roughly mid level for those two periods you come if with the following stats:

    If TB/GB had been able to maintain a trend line equal to the low points (highly unlikely politically for any party) then spending would have been £100bn lower today.

    If TB/GB maintained a trend line equal to the mid points spending would have been about £50-60 bn lower today than actual.

    So if we had kept a hair shirt on for the entire Lab govt, there would be no deficit crisis at all, taxes would be lower. If Gordon had simply kept dating dear prudence we would still have a deficit problem (circa £100bn) but one which could have been cut gentle over the life of the parliament by £50-60bn to something around 2% of GDP.

    Similarly over the period 1997 - 2010 it looks as though public spending expanded at a real rate nearly 3x the trend line and had the banking crisis not happened Labour would still have spent roughly the same amount (but on different things)

    Now whether you think this is good or bad depends on your political views

  • Comment number 38.


    Stephanie wrote, inter alia:

    ‘Take a look at this chart, which shows total government spending in real terms since 1955. There are two lessons to take from it. One is that the pressure on government spending since the war has been relentlessly upward. You could do the same chart for almost any developed economy in the second half of the 21st Century. As we get richer, we demand more of the kinds of things that government provides, and the cost of those things usually rises faster than the economy.

    [CHART see above]

    It takes a very determined government - taking some very tough decisions - to fight that upward pressure for any length of time. You'll note that the Thatcher era barely registers on the chart.’


    __________


    The other ‘lesson’ [sic] (No1) you can ‘take from it’, Stephanie, is that you FAIL to mention UK POPULATION growth in the period in the chart from 1955 to 2015 and life expectancy and the FACT that people were living longer in the 1970s, 1980s, 1990s, compared to 1950s and 1960s; and the UK also had an influx of foreign immigration pushing up the UK POPULATION too in and thus ‘demand’ on PUBLIC and thus PUBLIC spending on the ‘kinds of things that government provides’:

    Big Public spending things like: the NHS, schools, education, the school leaving age went up in year 1972 to age of 15 from 14 (more pupils and teachers required and more spending by Government); free grants for higher education for MORE students during this period too. With older people living longer State pensions also count for more PUBLIC spending even though a large per cent age is DEFERED wages – i.e. pension contributions paid in by EMPLOYEES – often forgotten!

    The other lesson (No2) is that the chart indicates REAL Public Spending inflation within the UK system. The costs of things went up!

    In the early 1970s massive INFLATION was unleashed; oil and gold started to rise after 1971 when US $dollar gold standard in US was abolished.

    In 1early 1970s wages also increased in this period to keep pace with the BIG inflation! Heath and Tories left the economy in ruins in 1974 and value of the GB £ sterling was collapsing too! Within two years the IMF were called in to bail out the UK and impose AUSTERITY measures (check the history) and spending cuts too!

    So, why is it that ‘the Thatcher era barely registers on the chart’ ?

    A major reason, that is not mentioned by you Stephanie, is that during the Thatcher era the Tory Government ‘sold off the [UK] family silver’ to raise a few quid and cut PUBLIC EXPENDITURE spending:

    British Gas was sold off!

    North Sea oil was sold!

    The old GPO / Post Office Public National Telephone Exchange public service was sold off!

    British Rail was later sold off!

    National Coal mines were closed down to save money!

    Many NHS Hospitals were closed down throughout the UK during Thatcher’s era too!

    National Steel was closed down.

    Publicly owned car companies were closed down and spending slashed too!

    Former PUBLIC SOCIAL HOUSING (Council Houses and flats) for rent only were sold off too by Thatcher under the ‘Right To Buy’ scheme (note there was no corresponding ‘Right to Rent’ scheme!!) to raise a few more quid in savings and to benefit the PRIVATE rented sector LANDLORDS who were paid HUGE Social Security housing benefits from the PUBLIC purse since then there were fewer Council Homes available to rent for those on the Council Housing waiting list!

    PRIVATE Bed and Breakfast ‘guest house’ hotels were SUDDENLY booming in the Thatcher era too and made huge profits from the Social Council Housing shortage caused by the Thatcher sell off of former PUBLIC council already paid for homes for rent which councils then had to sell off by Thatcher era Tory law!

    From 1979 onwards the Thatcherite ‘Ridley [economic] Plan’ was being enthusiastically implemented in the UK which was to decimate and ruin the UK industrial manufacturing base of the economy and turn the UK into slave wage ‘assembly workshoshop’ economy supported by the ‘service’ sector with the newly created ‘Thatcher era’ PRIVATISED companies reaping the BIG profits from the cheap PUBLIC asset sell off of the former UK PUBLICLY owned ‘family silver’!


  • Comment number 39.


    I am both angered and saddened at the thought that the welfare state that I grew up in is slowly being dismantled. But I also recognise that we cannot go on living beyond our means - and common sense dictates that if our income can't rise then spending must fall.

    But I am also confused. My "beer mat" calculations suggest that if we were to freeze public spending at today's level £660bn and experience 5% compound growth in tax revenues then we would bring the budget into balance after six years.

    Neither of these conditions is going to be met. If spending rises to £700 bn by the end of the Parliament and continues to grow thereafter thereafter at roughly the same rate (say 2%pa) and if growth in tax revenues is only 2.5%pa then the annual deficit will continue to grow!

    Thus even if we disregard the possible deflationary effects of the spending cuts, it seems likely that on any reasonable assumptions they won't work!

    If one thing could make the "pain" of these cuts really unbearable it would be the realisation tha tthere is no offseting "gain" at the end of it.

  • Comment number 40.

    "Molehill if you don't lose your job, mountain if you do."

    ^ Spot on.

    Economic analysis so often overlooks the social impacts of economic decisions. Spending cuts may bring 'health' to the economy, but at what cost?

    I doubt that any of the pending 500,000 unemployed would consider it a 'molehill' - especially given that the system in place to support them is itself being pared back.

    Cuts are undoubtedly necessary; it's the speed and severity of cuts that are leaving many people with a mountain to climb.

  • Comment number 41.

    35. At 4:53pm on 19 Oct 2010, writingsonthewall wrote: "Stephanie wrote,One is that the pressure on government spending since the war has been relentlessly upward..........
    So it wasn't all the fault of the last Labour Government??? - oh dear, what have all those coalition fools been repeating like nodding dogs for the last 6 months then? Are you saying this is a problem older than the last 13 years?"
    23. At 2:37pm on 19 Oct 2010, Squarepeg wrote:
    This chart in the Guardian is useful to see where government spending has increased in recent years.

    http://www.guardian.co.uk/politics/interactive/2010/oct/15/comprehensive-spending-review-2010-public-spending

    WOTW, look at this link and tell me you would say the same thing you wrote in 35.

    Of course Government spending goes up as we get richer. The real question is how much it should go up (as a %age of GDP) and how much in the good times we hold back for the rainy days. Look closely at Stephanie's graph and there is a significant surge in 2005. Spending was getting out of control!

  • Comment number 42.

    'But, the coalition is right that this is not about turning Britain into Hong Kong.'

    As someone who spends a couple of months a year in Hong Kong I must say I like the place. While its not a place to be poor there are a lot of worse places the government could try to turn us into. The people are certainly very competitive and ambitious in outlook and succeed through hard work. Noone I meet in Hong Kong thinks that the world owes them a living or that they should be allowed to live off the efforts of others. Its a very outward looking dynamic and successful city.

    If our attitudes were closer to those of Hong Kong we would be better equiped for the 21st century.

  • Comment number 43.

    http://www.bbc.co.uk/news/entertainment-arts-11572171

    Oh look I'm sitting up now, go on get that ball and throw it I can bring it back just watch..go on

  • Comment number 44.

    Stephanie wrote:

    'Maybe public services did not feel 26% better. But all that means is that it was spent inefficiently, and/or prices and wages in the public sector rose much faster than the economy overall (which they surely did). The money definitely went out the door'

    A lot of people who weren't particularly well paid to start with got a pay rise (is that not a good thing?) I imagine that they felt better. Not all of the spending was on short term election stunts but on stuff that we benefit from in the longer term.

    A large amount of the money never made it out of the door as it was hoovered straight back up by the Inland Revenue, of the money that did make it out, HMRC recoups most of that as it circulates.
    Some leaks out to pay for imports, some leaks in due to exports.

    So in real terms, how much did it really cost if they got most of it back ?

  • Comment number 45.

    I see from the BBC that that marvellous bastion of democracy, the EU (yes I jest), is going to fine any country that has its budget deficit over 3% of GDP. And as we are currently running at 11%, thanks to the irresponsible policies of the last Labour government and which, had they still been in power, would no doubt have led to massive fines against us. And even under the coalition we are still not out of the woods in that regard. And I note that the unions are so determined that their predictions of another recession occurs that they are going to try to mount as many strikes as they can to make sure it happens.

  • Comment number 46.

    "... prices and wages in the public sector rose much faster than the economy overall (which they surely did)"

    This is news indeed, Steph, to myself and all the other Civil Servants who have, over the last decade, endured year after year of below inflation pay rises (de facto pay cuts)... where on Earth do you get your "facts"?

  • Comment number 47.

    Hmmm... not one mention of the banking bailout. It's almost as if it never happened, and the current crisis is all down to government profligacy!

  • Comment number 48.

    Of course, you cannot believe anything that Nick Clegg says now. I hope that everyone has seen the NUS Youtube recording of what he was saying before the election and compares it with what he is saying now over student fees. He has destroyed all credibility in our democratic voting system. Neither I nor my family are affected by the increase in student fees and I did not blame him for joining a coalition with the Tories but for him to do exactly the opposite of what he had promised on several occasions before the election shows that he is not an honourable man. What he has done in terms of integrity and bringing Parliament into disrepute is far worse than what any member of Parliament done in the last 30 years.
    For those who say the Coalition government is brave for doing what they are doing, I would say it would be brave to call an election now because they are not brave to cheat the voters who believed them. When they say it is worse than they thought before they were elected, I say call an election and show us how bad it is. If they are right, they will be voted in again with a stronger mandate and one not based on lies. What entitles these people to hold onto power when they are doing the opposite to what they were voted in for. If Nick Clegg can get away with this, then it is the end of our democracy.

  • Comment number 49.

    I know what the coallition are going to do before they do sadly! They have already made it impossible for any independent varification of homelessness figures reported by local government - that one was obvious.

    As for my next prediction:
    We will keep hearing reports from the Citizens Advice Bureau of 1000's of JSA claimants and others being charged £50 for spelling mistakes on their forms! I wonder if there is an appeals procedure for this - probably not. I take my queue for this from the Work Capability Abomination ... I mean Assessment.

  • Comment number 50.

    "1. At 12:16pm on 19 Oct 2010, Dempster wrote:
    'Spending cuts: Molehill and mountain'

    Molehill if you don't lose your job, mountain if you do."

    ..or Gravy-Train if you got one of the made up Govt Jobs through the early 00's or Soup Kitchen if you didn't..

    Bit like under the Labour Govt of the 70's, if you dug coal that no one wanted you still had a job.... if you worked in engineering and no one wanted your widgets you were out of work!!



  • Comment number 51.

    45

    "And I note that the unions are so determined that their predictions of another recession occurs that they are going to try to mount as many strikes as they can to make sure it happens."

    Dead right Sandy, they will do all they blooming lefty can to ensure that happens and try and destroy the massive amount of good the coalition are doing..Gawd bless you and people like you

  • Comment number 52.

    Spending from 1997 till 2008 was inside the Eu growth and stability pact, the growth in spending never went above the 3% limit and the net debt was always below the maximum. Who set these limits, if the restraints on spending is too lax why sign up them (John Major).
    The electorate voted for increased spending on health/education it was the wishes of the majority if governments dont conform to their wishes then thats the time to complain.What Stephanie never mentioned was the low interest rates on the national debt which meant any government would spend cheap money, debt repayment in 1997 was £28 billion it was also £28 billion in 2008.

  • Comment number 53.

    @ 41 - 'Dontmakemewave' linked to a fantastic graphic in the Guardian.

    It illustrates that we, as a society learn NOTHING from history....!

    @ 35 - 'Writingonthewall' ... how dumb do you look now trying to make a pathetic political point ??!

    As mentioned by others here the media Focuses on the 'cuts' and the 'pain' that people will feel without really understand what that means as the JOURNO'S will go back to their comfortably expensed Latte environment when they get the correct soundbite for the story.... People ARE going to suffer and it's a disgrace that in our civilized society that this will happen.

    To 'writingonthewall'...... I hold the previous Government and their amateur policies completly Guilty of causing this. The Guardian graphic illustrates the WILD spending that always happens.....and don't forget that Mr Ed Millywillyband was one of the SENIOR advisors of economic policy to Gordon Brown in the late 90's and early 00's - a point I'M SURE Miss Flanders knows....

    Best Regards

    Ganretti

  • Comment number 54.

    'The fact that it should take such a gargantuan effort to achieve even this merely demonstrates quite how relentless that upward march can be, in a rich but now ageing modern economy.'

    The upwards pressure is only just starting, that is why there is such a noise. The liabilities are not yet realised. Some can be reduced but some cannot. The trajectory of the NuLab period is something else. Thing is, what is having to be cut to get the graph back on line, are some subsets in growth more than the total.

  • Comment number 55.

    "Maybe public services did not feel 26% better."

    I think that the education system, policing and the NHS have felt far more than 26% better. My family and friends have used all three of these public services and they have improved dramatically.

  • Comment number 56.

    44 rocketman

    Have you been talking to Gordon Brown down the park.

  • Comment number 57.

    48 fairsfair

    This happens every election. Simple as. Go and read the 90s NuLab guff. No more boom and bust. This must never happen again etc etc.

    Fares fares please.

  • Comment number 58.

    We get the governments that we deserve. If you were asked to list 30 things that you would spend £5,000,000,000 on I bet 2 aircraft carriers would not feature.

  • Comment number 59.

    I have looked at the Guardian Graph and I think that expenditure has gone up and down under both parties. Expenditure is not necessarily bad. It is more likely to be good, though not for certain, if it increases because of expenditure on the NHS and bad if it increases because of increased expenditure on unemployment. Please look at it carefully without bias.

    Looking at te list of business people who have written to the Telegraph in support of early cuts, I recognise several of the signatories as chairmen of very inefficient companies.

  • Comment number 60.

    57. At 8:53pm on 19 Oct 2010, Not Buzz Windrip

    No, this is different. Look at the NUS Youtube recording. Those were definite, rock-solid promises about an exact point. He stated what he would do and now he chooses to do the opposite only weeks later. He has broken the contract with the voters. Brown thought he had got rid of boom and bust and for a time he had. It is what happened internationally that proved him to be wrong. He did not deliberately act differently. Look at Youtube again and ask yourself how can that man be trusted again. If he is allowed to get away with that, then it is the end of our democracy no matter whether it is first past the post or STV. We might as well have a raffle.

  • Comment number 61.

    60 fairsfair

    Nope your missing the point. Timescale is meaningless. You are guaranteed they dont do what they claim they will do fairly rapidly. Brown was blowing himself off course.

  • Comment number 62.

    #56 Not Buzz

    If the government doesn't get its money back eventually then where is it going?

    Looking at the balance of payments data on the ons website, whilst it is a it uppy/downy, doesn't seem to be leaking the money away at any great shakes so it is still here and every time it changes hands the government takes a little bit back.

    As the coalition restrict spending they will benefit from the trickleback of GBs mad spending rush which will make their books look good in the shorter term.

  • Comment number 63.

    #62
    "As the coalition restrict spending they will benefit from the trickleback of GBs mad spending rush which will make their books look good in the shorter term."



    Oh thats all right then if you lose your job.

    No one on this blog seems capable of getting their mind round the significant issues - 'the beef' as they say in USA.

    Economic cycles are, as the name suggests, cyclical and we were due a down stroke in the cycle anyway.

    However, which ever way you look at it, the banking failure and the totally unjustified bailout has made it worse, far worse.

    Bailing out the cause of the problem is little different from arriving home finding your wife and daughter raped and cooking the rapist breakfast.

    Wake up. The French have.

  • Comment number 64.

    Stephanie has just shown that Schumpeter was right!

  • Comment number 65.

    "As we get richer, we demand more of the kinds of things that government provides, and the cost of those things often rises faster than the economy."

    There is a positive correlation between inceasing standards of living and state provision of services. Most of which we take for granted.

    The graph shows a starting point in a period of austerity and had only one direction to go.

    Believe it or not there are certain things that the state does best and we have still to reach an understanding of where the optimum spend level should be - probably about 50 - 55 per cent of GDP as in very successful Scandinavian countries.

    As for Meerkats - anyone for a cull. Or is that a Freudian slip :)

    Simples.

  • Comment number 66.

    Browns antics clearly made things worse. Cycles are alright up to a point provided you store up money to smooth things out. However when you have a manufacturing sector which originally provided your export engine, but which is in long term decline, then what happens is each downturn you get scorched earth and the scorched activity never recovers. So you have an origami folding economy not cycles, a step dysfunction not a cycle.

    The French have set themselves up as the distribution hub of the EU and are strong on agriculture. Circumstance has also given them a strong nuclear power generation base - no oil, no gas, no choice. Critically they still have cheap housing compared with the UK and far higher levels of control on private debt. However better placed they are than the UK it still doesn't matter how awake the French are they will have similar problems. Sarkozy is dismantling many supporting mechanisms from the subsidy of the village shops and bakeries by the local community rates system upwards.

  • Comment number 67.

    ""Sunny Clouds wrote:
    Maybe half a million people in the public sector are about to lose their jobs. On top of that, a tranche of people in the private sector whose jobs depend on spending by people in public service will also lose their jobs. They end up on £65/week jobseekers allowance plus rent plus council tax."

    Pure propaganda from your post.

    For a start these cuts are happening over 4 years - so they are not just about to loose their jobs altogether tomorrow.

    Secondly 50,000-100,000 will be retirements.

    Thirdly there also will be natural job leavers, who will move into other private industries or mothers taking maternity or deciding to bring up their kids.

    And lastly after all of that if they get made redundant they won't be on £65 a week immediately. They will have redundancy pay out which is usually very good in the public sector and then they might find new jobs before it runs out.

  • Comment number 68.

    Mountain or Molehill, who knows! We will not find out for many years to come. Cuts or no cuts, the real difference will be made by what happens within the global economy. This is not a domestic event.

    Over 2 years ago a number of us were calling this mess a depression. At the time we were decryed by many who still thought in terms of recession. Even now the vested political and financial interests are still trying to tell us that, with a little pain, things will return to 'normal' within some defined timeframe. Whilst the term 'green shoots of recovery' has disappeared much is being made of minor changes. Yet globally nothing is being done to fix the problems in the global fiancial system. The tired old mantra of preserving global markets is still being promulgated even though its direct effects are clearly strangling national economies.

    It is the very nature of depressions that is being missed. Wall Street's Black Thursday was a dramatic event. But the whole US economy did not shudder to a halt on Friday - it took a lot longer. The UK's timeframe was even longer. Yet, ultimately the whole world felt the effects. This I believe is the problem that we face now.

    So, are UK cuts mountains or molehills? In global terms they are most definately molehills. For the UK, they will be very dramatic if they are enforced as has been promised. It is rather like Poll Pot. Of no significance globally but dangerously dramatic nationally.

    We will not know what effects the cuts will have. For what it's worth I believe that the law of Unforseen Consequences will come into play. When political and economic theory comes directly into play with peoples lives it will become plain that there is a great deal of difference in understanding. So we wait and see BUT in the global scheme of things it won't make any difference at all.

  • Comment number 69.

    " Richard Dingle wrote:

    However, which ever way you look at it, the banking failure and the totally unjustified bailout has made it worse, far worse."

    If we had not done the bailout our banks would have gone the way of Iceland and everyone would have lost their money including local councils..

  • Comment number 70.

    #36 yes, I probably do need to be re-aligned. Having been through some ancient clothing that appears to have shrunk since I last tried it on, that might be essential.

    I am considering a new trend. Its going to be called manualisation.

    I would like to manualise street cleaning. Men with brooms and dust pans and hand wheeled carts seem to do a better job than the sit upon things probably imported from somewhere that need fuel.

    I would 'manualise' private transport in London. We'd get about just as quickly in hansom cabs and such like. We could employ lots of carriage drivers and stable hands and farriers. Hooves would need shoes and we could use coal or coke to make them and open a few mines to get the coal or coke.

    I'd consider manualising ship dismantling in Hartlepool and I might insist that all imports be disembarked from ships by armies of men. It would cost more but we could import less.

    I would offer a manualisation incentive - no employers NI for processes that are manualised and stay manualised. My rationale would be that the manual workers would be slimmer and fitter and in less need of drugs. They also might die younger costing less overall.

    This is just a start.

    I would go on to make brooms locally for use by my street sweepers.

    I'm pretty sure that I would ban much computerisation. I would force school children to write and use books and do without calculators and such like.

    Its possible that I would encourage the manual dismantling of retail parks and turn them into allotments.

    Manualisation can go on and on and I am sure that manualisation would be lean, mean, green, provide for full employment, reduce imports, lower the benefits bill, improve the balance of trade etc. In might even produce 'growth'.

  • Comment number 71.

    Interesting chart Stephanie, but it would have been good to see it with the GDP chart as well so we could make the comparison ourselves.

    Overall I guess it leaves me feeling that Gordon Brown piggybacked a moneymaking engine in the city that he didn't understand, claimed to have "ended boom and bust", then believed his own publicity and started spending money we hadn't earned yet. He then missed the warning signs as he focussed on getting the top job and continued to spend spend spend to bribe labour members.

    This leaves the coalition doing their best to pick up the pieces with the lib dems doing their best to restrain the tories from destroying the welfare system completely. I guess there was a need for the infrastructure spend but the speed at which it was done and the bungled attempts by big government to commission incentive heavy private initiatives such as PFI leave you wondering if this will be a real legacy.

    Maybe the lesson is that first past the post with it's implicit regular ideological swings is just not conducive to sensible management of the economy at a time when we really need to have an honest and cooperative approach to maintaining our future standard of living and our effectiveness in the world economy.

  • Comment number 72.

    Stephanie, your graph does have some "wow" factor, if you compare the angle of increase from 2000-2010 to the downward angle after 2010, you have a "rate of change" that is massive.

    But what you have failed to mention, and other responders here have fallen for as well, is that this graph is only telling part of the story, as Labour pushed much more into the future, to keep these graphs looking respectable.

    For example, many schools and hospitals were built with PFI... so totally missing from the graph. When #25 thinks the roof was fixed when the sun was shining he couldn't be further from the truth. Gordon Brown even had the nerve to stand in the new (about to open) QE hospital in Birmingham during the election campaign as if to boast about what "they had done". Yet the media never scoffed at the stunt or told the electorate that NOTHING had been paid for it yet. It would all be in the future.

    The labour government also failed to sort out the massive liabilities of Final salary schemes, ageing population and early retirement dates. Another massive future liability stacked up and not shown on the graph.

    They also failed to ensure any meaningful investment in energy provision, meaning we have an enormous investment to now make to keep the lights on in 10 years time.

    And we are seeing clearly about the defence commitments made, unfunded £35 billion or so.

    So it is the fact that so many of these spending commitments in the future are now needing to be addressed as well as needing to reduce the deficit, that the future will seem so hard.


  • Comment number 73.

    #70 mrsbloggs13c2 wrote:


    'I would 'manualise' private transport in London.'

    That's not a bad idea but not horses.

    Lightweight pedal powered covered trikes with electric assist as taxis and ban all trucks from entering the current congestion charging zone during the day with cars banned completely.
    Create a new wider charging ring around the car free zone but with reduced prices so that the revenue for TFL stays the same.



  • Comment number 74.

    saysay
    Should we believe, instead, an economist who can't even express his ideas about economics in an economics forum?
    Its a basic accounting identity. Are you saying that the UK's budget deficit does not directly reflect increased savings (reducing private debt in the non-government sector.

    Economists remind me of the philosophers in The Hitch Hikers Guide to the Galaxy.

    'Here Vroomfondel, why do we never think of things like that?'
    'Dunno' , said Vroomfondel in an awed whisper, 'think our brains must be too highly trained, Majikthise'
    So saying, they turned on their heels and walked out the door and into a lifestyle beyond their wildest dreams.

    I've got the time. Teach me.

  • Comment number 75.

    Sorry wrong blog.

  • Comment number 76.

    Apparently according to the BBC 'hopes have been raised' by the governor of the BoE that there will be more QE, up to £100bn worth. Well I wasn't aware that there were any 'hopes' for more QE...only worries about high inflation eroding the cash in peoples pockets. Its all very one sided isn't it, the way QE is sold to us via the media?

    Regarding inflation, Mr King seems to have abandoned the line that above target inflation is either 'short term' or even 'temporary' and now admits that it may be 'some time' before it returns to the target level.
    What does that mean exactly?
    Very reassuring I'm sure to all of us who, due to rising prices and falling incomes, are being 'inflated' out of existence...

    http://www.bbc.co.uk/news/business-11580674

  • Comment number 77.

    The debt problem remains in the private sector. Most particularly financial companies (Budget report June 2010 refers). The growth of private sector debt over the period of the graph would probably look more alarming.

    Half of the problem is the recession. Thank you for reminding us that a fraction has a denominator - the point is entirely lost in the US and is in danger of being lost over here.

    It is interesting to note the comments from Mervyn King: http://www.bbc.co.uk/news/business-11580674

    We're in for a sober decade BUT we have money for further Quantitative Easing. Stephanie mentions waste. Is there a bigger waste than quantitative easing? It has left us with the obscene spectacle of the investment banking community continuing to play casino with cheap Central Bank funding in the reasonably safe knowledge that they will be bailed out again if necessary , whilst shorting the sovereign debt of those countries that have put themselves at risk to keep their banking system alive.

    Further QE will continue to fuel further increases commodities that in turn will mean a lowering of standards of living for people on lower incomes in this country.

    For QE to be resorted to again after these spending cuts have been announced should be a clear sign to us all that we're not all in this together.

  • Comment number 78.

    #72 The point about the rate of change is a very good one. These are flows in the system. Combined with the rate of change of private sector debt these changes will trip up the economy.

  • Comment number 79.

    @70: ROFL

    On second thoughts, as the Sage keeps telling us, when the oil gets expensive, you might well be describing the future that is forced upon us.

    Be careful what we wish for, eh?
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
    On a more serious note...I attribute the pressure for an upward trend of the graphs entirely to a poor understanding of the concept of wealth.

    The substitution of "GDP" for "wealth", and that damnable equation about growth being related to the velocity of money (which takes no account of the difference between investment and consumption) is IMO at the root of Britain's poor policy decisions of whatever political persuation.

    PS Just a thought...if we were to have a national referendum on the introduction of a Financial Transaction Tax and/or Forex Tax, how do you think the vote would go?

    enough puzzling...time to go and earn some more taxes.

    TTFN

  • Comment number 80.

    "Lies damn lies damn and statistics". Ok all you folks who simply look at a chart like the one above and come to weird conclusions about spending under Labour. Compare this chart with the one for GDP ie what we earn as a country. When you do that the increase under Labour simply tracked what we earned as a country. We didn't spend beyond our means but within our means.

    The Tory government (and little helpers) like to hit us with "big" numbers like the 120million a day interest...but omit to say we earn 2 TRILLION a year which is 5.5BILLION/day. Granted every penny is spent leaving little room for manoeuver but surely it is not rocket science to see that growing a little is far preferable to cutting back on something alreaady exceptionally tight! Keynes where are you :-(

    The cut backs are due to ideology, Thatchers unfinished business of shrinking the state and privatising everything. The BANKING CREATED CRISIS (who are getting away with it!) is a perfect smokescreen which some people are falling for hook line and sinker. I mean surely you can recognise the well reheased first sentence from every minister : "The crisis we inherited from the previous administration" is why we have to blah blah blah....

  • Comment number 81.

    77. At 08:40am on 20 Oct 2010, SeanBroseley wrote:
    For QE to be resorted to again after these spending cuts have been announced should be a clear sign to us all that we're not all in this together.


    Agreed. All you need to do is put both policies in the same sentence to see the absurdity as you have done.

    One adds liquidity to the financial assets economy which employs rocket scientists and computers and makes nothing.

    The other takes money from the real economy that produces real goods and services, as well as employing the vast majority of real people.

  • Comment number 82.

    69. At 00:08am on 20 Oct 2010, LoveLondon wrote:

    If we had not done the bailout our banks would have gone the way of Iceland and everyone would have lost their money including local councils..



    I see you have fallen for the official line.

    I recommend...
    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4424418/Let-banks-fail-says-Nobel-economist-Joseph-Stiglitz.html

  • Comment number 83.

    65. At 11:57pm on 19 Oct 2010, Richard Dingle wrote:

    "As we get richer, we demand more of the kinds of things that government provides, and the cost of those things often rises faster than the economy."

    There is a positive correlation between inceasing standards of living and state provision of services. Most of which we take for granted.
    ========================================
    Woop de doo! Bang On. Needs repeating in big letters.

    It's called investing in infrastructure...which enables the manufacture and exchange of goods and services amongst members of a community, but does not extract the profit from those activities.

    The whole community pays for it, the whole community can make use of it, and the whole community benefits from it.

    Therefore infrastructure should never be owned by private interests, or be operated for profit.

    No infrastructure -> poor standard of living.
    Infrastructure for profit -> wage slavery and social injustice
    State-owned infrastructure -> land of opportunity.

    But we are a million miles from Shangri-La. Do you have any suggestions for a way back?

  • Comment number 84.

    Stephanie said - It is about reversing a small-ish part of the relentless upward march in government spending since the war.

    If that's true why are interest rates at .5% when they have never, ever, been below 2%. Even in the darkest days on the Great Depression.
    Why did Merve just say we're in for a sober decade. Why does he hint at injecting more money into the economy thru more QE; when we all know the last lot of QE didn't get out of the Banks' front door. Why does he talk of re-balancing the economy when it wasn't an "out-of-balanace-economy" that caused this mess.

    This disconnect between cause, effect and remedy only leads me to conclude that this is all about rebuilding the Banks' balance sheets.

    Let's not forget this is a financial crisis : sub-prime - Fannie May, Freddie Can't, Lehman. AIG, Northern Rock etc, etc.......... It was not caused by T C Mits not spending in the High Street because his investment income had dropped to zero, or he feared for his job. But the common man in the street is expected to either spend, but not borrow, or sacrifice his job to aid the recovery. It's got very little to do with FRB or which school of economics you belong to. It's a global disgrace, and sorry Mr King - it's just not good enough.

    End of rant.

  • Comment number 85.

    Lies, dam lies and statistics. Why is no one asking the big questions? Why have all governments, both left and right, spending been increasing since the war? Why is the debt constaintly increasing and growing at a faster rate? Is there some underlying problems that are never being addressed? Note these issues apply to ALL countries and not just ours.

  • Comment number 86.

    #82 ...continuing.

    Too much attention is paid to bank bonuses.

    Of course the amounts are obscene but so are footballers and pop star wages.

    Bank Bonuses are part of a private contract between a bank and it's employees and it should not concern anyone else.

    However it becomes an obscenity and utterly wrong if they are paid by a bailed out bank / sector.

    This is why the bail-out was totally wrong - to let an entire sector enjoy huge rewards from risk taking and then remove the risk contrasts starkly with the treatment about to be dished out to thousands of public sector workers.


    This one will run and run.

  • Comment number 87.

    83. At 09:14am on 20 Oct 2010, stillpuzzled wrote:

    But we are a million miles from Shangri-La. Do you have any suggestions for a way back?


    Borrow Dr Who's Tardis travel back a few years and...

    1. Let the banks crash and burn

    2. National retail banking (for peanuts literally - each Ordinary share worth £0) - keep the cash dispensers, chequing accounts running.

    3. Investment banking would have come back in its own time with a new culture.


    Trouble is politicians (all of them) are Vote Tarts and do not do lateral thinking.

  • Comment number 88.

    84. At 09:16am on 20 Oct 2010, The-itinerant-ex-pat
    End of rant.

    Don't stop. Keep going. All excellent points and you may well be right about rebuilding the banks balance sheets. I keep thinking it's stupidity but then I look at who wins.

    What really amazes me is that, collectively, we fall for it.

  • Comment number 89.

    @88 We're the ones who are stupid - for not holding to account those who are responsible for this sad state of affairs.

  • Comment number 90.

    Today the government will embark on an experiment for which there is no evidence for any assumption of success; it is driven by ideology and failed understanding, there are many alternatives despite constant claims otherwise. It seems almost certain that this will be a disaster; I very much hope I am shown to be wrong.

    http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/19/no-confidence-fairy-for-austerity-britain

    http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aedIreDq6OXY

  • Comment number 91.

    An interesting thread Stephanie but it seems to be at odds with what you were saying a few weeks ago via the link at the top of your page entitled
    'People don't grasp the extent of cuts'

    http://news.bbc.co.uk/today/hi/today/newsid_8993000/8993317.stm

  • Comment number 92.

    You say Stephanie:

    "As we get richer, we demand more of the kinds of things that government provides"

    and imply that this drives public expenditure upwards.

    This assumes that personal prosperity is the horse and public expenditure is the cart. It can be argued that the reverse is true. If a government taxes the rich and spends on welfare to help the poor, then this helps the economy by reducing the tendency for money to accumulate in the hands of the rich, facilitating the circulation of money.

    The truth probably is that these two mechanism work together to promote general well being.

    You also say:

    " ... the increase in public spending from 1999-2000 until 2009-10 was exceptional. Spending rose by 53% in real terms over this period."

    However, it appears from closer examination of your chart, that in the 10 year period 1959-60 to 1969-70 expenditure rose by more than 60% in real terms. So 1999-00 to 2009-10 was not quite so exceptional.

    If the chart were redrawn with a logarithmic scale for expenditure it would give a clearer picture.

  • Comment number 93.

    #90 Squarepeg

    http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/19/no-confidence-fairy-for-austerity-britain

    That Stiglitz article is almost poetry its so perfect in its conclusions anyone who thinks huge cuts quickly are the answer should read it....Thanks for posting it

  • Comment number 94.

    Such clarity, Stephanie.
    Such belated honesty!
    Is the change in the transparency of your writing about the economy the price that the Beeb has to pay for a less-swingeing cut in the Beeb's funding; a halt to the bidding-up of the 'cuts' lie?
    Will it be taken up by the estimable Nick Robinson in his political 'reporting'?

  • Comment number 95.

    Stephanie, all previous and future blogs on this topic have be summed up by Demster at #1.


    Incidentally I heard you on the Today programme on Radio 4 this morning saying something along the lines of .... "If the economy grows more than hoped we might get tax breaks, but if we enter a double dip the government will want to cut spending even further to reduce the deficit...."

    Not denying the treasury might do this (for they haven't a clue) but I didn't hear you explain the consequences of this fallacy.

    Do you even know where cutting spending, when GDP is shrinking as a result of cutting spending, will lead us?

  • Comment number 96.

  • Comment number 97.

    I have just heard Stephanie comment on Governement 'investment'.

    Governments virtually never 'invest' they 'spend'. An investment requires an identifiable direct financial return.

    From one economist to another would she kindly not use the term invest when she means spend.

  • Comment number 98.

    Is this the first time the BBC has actually said that spending will rise in cash terms and not be cut.

  • Comment number 99.

    93. At 11:22am on 20 Oct 2010, dudeHangingon

    I don't know which is worse; the thought that the Government does not understand what it is doing or the though that it does.

    It will not (cannot) work in the way that they suggest.

  • Comment number 100.

    I have to wonder how much of the "need" for austerity is actually the current govt trying to tarnish the Labour "brand" (more even than they managed themselves!) and win public acceptance for a change in economic approach which is born as much from ideology as it is necessity.

    I've been reading quite an interesting thought piece on the Austerity Economy over the past week and one of te points it made is that, relative to GDP, the national debt is about a quarter of the size it was after world war two, yet the post war govt managed to reduce the relative impact of the debt, and associated interest payments, by investing heavily in the NHS and other public services which helped drive economic growth.

    It's also hard to see how announcing massive spending cuts, & public sector job cuts, in the lead up to christmas, the retail sector's most profitable period, is going to aid the economic recovery.
    Surely it's just going to mean that, overall, the UK consumer has less spending power, and will be less inclined to spend, which combined with the banks current reticence about lending, is likely to squeeze business. Surely not the ideal situation when Osborne's looking to business to drive the economic recovery?

    I don't think there's any question that Labour's spending was over the top and needs to be reduced, but to my mind ensuring that the economy doesn't experience a (very costly!) double dip has to be the top priority, & it seems to me that if Osborne cuts too deeply he may actually precipitate another crash.

 

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