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When fiscal stimulus isn't stimulating

Stephanie Flanders | 17:14 UK time, Tuesday, 7 April 2009

Why on Earth are they doing that? That would be a reasonable first reaction to the emergency Irish budget unveiled this afternoon.

In the teeth of the worst recession in decades, the government is raising taxes, for the second time in six months.

The G20 leaders may have endorsed a global effort to kick-start the global economy, but for Ireland, it's tightening all the way. What gives?

Brian LenihanThe answer isn't that Brian Lenihan, Ireland's finance minister, gets a kick out of inflicting pain. There's method to his madness. And also some lessons for the UK.

The first lesson is that, if you're lurching further and further into debt, there comes a point when fiscal stimulus isn't very stimulating at all.

Here's the basic argument. If the markets believe that the public finances are out of control, they demand a higher and higher return for buying government debt. And a higher interest rate for government borrowing means higher rates for everyone else as well. So, the negative impact of that rise in borrowing costs may more than outweigh the positive effect of extra government borrowing.

Everyone accepts that a country will reach that point eventually. Debt cannot rise indefinitely without raising doubts about the ability to repay. In effect, the British Conservative party thinks that the UK reached that point some time ago - which is why they opposed the UK stimulus package last November.

Others are less certain, but the possibility of future funding problems is one reason why the likes of Mervyn King and the International Monetary Fund think it is so important for governments to accompany any stimulus plans with a credible plan to get borrowing back down again.

Clearly, a big fiscal stimulus plan for Ireland was not on the cards. Before today's mini-budget, the government was looking at a deficit of around 11% of GDP this year and 13% in 2010. And that's all down the effect of the recession - they haven't had any stimulus plans to speak of.

But at first glance, you might think a fiscal tightening was a bit over the top. After all, Ireland's stock of debt is low - a mere 25% of GDP in 2007, less if you consider that Ireland's Pension Reserve Fund is worth nearly 10% of GDP. That compares with a Eurozone average of 66%.

As Kevin Daly, an economist at Goldman Sachs, has pointed out, Ireland's debt stock is rising fast - at this rate, it could reach 68% of GDP by 2010. But by then, the Eurozone average will be over 75%.

The trouble is - investors are not relaxed about Ireland. Rightly or wrongly, they think that the Irish government is much more likely to default on its debt than even the likes of Spain or Italy. In that sense, Mr Lenihan was bullied into today's action by the markets.

Rates have fallen back a bit over the past few weeks, but the interest rate on Irish government debt is still more than two percentage points higher than on German debt. So far, Ireland isn't having any trouble raising funds, but that interest premium is a high price to pay for reduced credibility.

If investors conclude, on the basis of this budget, that the government has things under control, that yield could fall back again - and this tightening could turn out to be a stimulus.

I suspect Alistair Darling would find a tax-rising budget on April 22nd a pretty hard sell. We can't remember many stimulating tax rises. But as Kevin Daly reminded me, the Irish can.

Back in the late 1990s* 1980s, debt was over 120% of GDP, and everyone thought that a recession would be the price to pay for bringing borrowing back down. Instead, getting the government's books in order was the start of the long boom.

There's also the fact that imports account for 80% of Ireland's GDP - even if you had room for fiscal stimulus, a large part of it would flow overseas.

So, yes, it seems like an odd response to a major recession. Mr Lenihan now thinks the economy will shrink by 8% this year. And yes, it is to some extent a panic move. Investors are panicked about the collapse in government revenues - which were heavily dependent on the housing market - even if ministers are not.

But for a highly open Eurozone economy which cannot inflate away its debt, this kind of fiscal tightening was probably the most sensible thing they could do.

Being outside the Eurozone gives the UK more options, and more benefit of the doubt from market investors. We're not going to be forced into tax rises this year.

However, Britain's budget deficit this year is likely to be almost as large as Ireland's - if not larger. As the IFS pointed out yesterday, we can't afford to ignore the consequences of that borrowing any more than Ireland can.

* Apologies for the typo.

Comments

  • Comment number 1.


    Proof, if proof were needed, that a spendthrift Government cannot borrow it's way out of debt (any more than anyone else).

    The fact that Ireland is in the Eurozone, and cannot inflate it's way out of trouble may have left it few options - but the option, retained by the UK, of inflating it's way out of trouble is more apparent than real. As soon as it becomes apparent that this option has been exercised the markets will require an inflation premium if it is to buy Government debt.

    If the Government goes down that road then the cost of borrowing will shoot up, creating a negative spiral which would likely require the UK to raise taxes too, if only to calm the market.

    The fact is that both Government's are "maxed out" on their credit and things will only come back into balance when they start to pay down their debts. The Irish have bitten the bullet - but don't bet on this happening here (not until after the election).

  • Comment number 2.

    UK Taxes will go up. That is all they think of doing in Westminster.


    You watch!

  • Comment number 3.

    "Being outside the Eurozone gives the UK more options"

    These are the options:

    1. The poorest people get hit the hardest by rising food prices (as a result of the protectionist policy of devaluing the pound), while the wealthy and the politicians sit prettily in their leafy suburbia.

    http://news.bbc.co.uk/1/hi/business/7838238.stm

    2. The banks can continue to rip off the millions of British residents and businesses that exchange pounds for euros every year and vice-versa. I recently sent money in sterling to a Eurozone country, to be converted into euros by the Eurozone bank. They charged 0.3% commission. If I had instructed my British bank to send the money in euros, they would have charged me an exchange rate commission of 2.75-3%. No wonder the UK hasn't joined the euro; not only the tabloids stopped HMG from doing that, the banks also put their foot on the project, in order to save their gravy train.

  • Comment number 4.

    "The Irish have bitten the bullet - but don't bet on this happening here (not until after the election)."

    +++++++

    I think it will be a very good bet that taxes will go up in the budget.

    This link to the Institute of Fiscal Studies, Public Finance Bulletin March 2009:

    http://www.ifs.org.uk/publications/4463


    It says Central Government current receipts down 9.8 per cent in Feb against Feb 2008.


    It is not looking good.

  • Comment number 5.

    Whilst some will cite all the usual arguments against membership of the euro (loss of sovereignty, loss of the head of state's image on the banknotes, etc, etc, etc), I suspect we may see that Ireland's presence in the eurozone is enforcing a fiscal discipline that we in the UK will wish in a year or two's time that we had also enforced.

  • Comment number 6.

    They are doing exactly the right thing - Brown/Darling are going in the wrong direction completely.

    They should have raised taxes, cut public spending, and raised interest rates.

    By doing the opposite we have a fiscal boost on top of the mother of all fiscal boosts (the last few years of crazy borrowing/spending).

    The result is slow stagnation with a horrendous bill mounting up. When the economy eventually recovers that bill won't just disappear- we will be paying the Brown/Darling bill for decades, a massive drag on our economy, whilst wiser countries like Ireland will be in a much better shape.

  • Comment number 7.

    I think there is a different mind set in small countries and large ones. If the Irish bankrupt their economy, they see themselves as at risk of falling off the world stage for good. If the British screw up their economy, they just remember back to the last time they screwed up and figure they will evenually rise back to the top the same way they did before. Hence, individual Irish might accept heavy taxes more readily than Britains.

  • Comment number 8.

    We are know that the government are hoping to give us the bad news after the election . I just can't see them getting away with this , I believe a drastic reduction in pubic expenditure will have to happen within the next 3 to 6 months . Ireland have made the right call,the UK will have to follow suit sooner rather than later.

  • Comment number 9.

    I've wondered about his for quite a while now.. but (with the addition) of yesterdays news of £1250 extra tax per year (so far) that is required, how will this help the stagnated housing market? As you mentioned some time ago about the 'Ricardian' [something or other] people will are not likely to take the risk of buying if they know that higher taxes are just around the corner! Won't this therefore lead to a (further) delayed recovery?

    Haven't heard this take on it from any commentator.... would be interested on your thoughts?

    As you can tell, I'm one looking to get on the ladder!

  • Comment number 10.

    Minesapils

    THERE IS NO SUCH THING AS THE HOUSING LADDER!!

    It was a consequence of wage inflation, experienced during the 70's, 80's and early 90's that inflated away mortgage debt . Wages are now falling and debt will become more difficult to service despite IR being at historical lows. Don't trust anyone over 40! they've never experienced economic conditions such as we're going through.

  • Comment number 11.

    Surely this is called running out of money. ie Reality Crunch, the next stage. About time, can we import it and get rid of the berks currently in Drowning Street. Not waving but drowning.

  • Comment number 12.

    10 ben rush

    Dont talk tripe. If your hit your hit. Plenty wont be this time around. We were last time around. The only minor operation is the one somebody else has. What do suggest next a competition of recession operation scars.

  • Comment number 13.

    Maybe I'm missing something here.

    The whole point of a fiscal stimulus is to pump money into the economy. The Government can do that by increasing borrowing or by printing money. Both have the same effect, so why not just print the money? Is it just because "printing money" is associated with Weimar and Zimbabwe? This is a completely different situation, and printing money seems exactly the right thing to do. The long-term aim should surely be that a greater proportion of the money supply is printed by the Government and a lesser proportion is created by the banks via fractional reserve banking (ie the banks should permanently have a smaller loans to capital ratio and thus take less risk that they have done over the past decade).

    Ireland can get away with not stimulating the economy themselves and rely on other bigger countries to stimulate the world economy instead. If other, bigger countries follow the lead of Ireland, then this depression will make the 1930s look like a picnic.

  • Comment number 14.

    BenjaminRush,

    So you can trust people under 40? Those under 40 have also never experienced what we are ALL presently going through.

    BTW there are far more reasons for the housing bubble and its deflation than wage inflation!

  • Comment number 15.

    Was there really any other option for Ireland? As Stephanie points out they do not have the option to inflate their way out of problems. It will be interesting to see the effects of the tax rises and spending cuts on the rest of the Irish economy.

    However, has Ireland set a precedent for the other members of the Eurozone as far as the ECB and EU Commission are concerned? There seems liitle apitite for stimulous in Europe - except for banks and French cars. However, will the politicians welcome having one of heir options closed for them by another country's actions?

  • Comment number 16.

    As the UK is not cutting expenditure, viz Home Office today announce £650 million expenditure on ID cards, then taxes must go up.
    The sensible thing to do is to tax the source of the problems; a double whammy, an annual tax on property ownership to even up the rent v buy decision and an end to the complete exemption to CGT for your primary residence to dilute the "homes are tradeable assets" outlook.
    They also would tax consumption, not income, and that is what you want to restore health to an over-indebted economy

  • Comment number 17.


    Stephanie - your piece simply illustrates that no one really knows what to do.

    Every economist in the media seems to offer a different perpective. They can't even agree on the cause - let alone the solution.

    You don't though have to be an economist to know that the world's resources are finite: oil, mercury, lead to name three. Add to this the thousands of plant and animal species that have become or are in danger of extinction - for example whales or microrganisms which all contribute to ecosystems. We've seen what happens when one key feature in our economy fails. I don't see any reason why the same won't occur in biological or environmental areas.

    It would be interesting to hear from some economists who are able to describe how the world continues at it's present rate without simply relying on empty phrases like "something will be invented" or "an alternative has always been found."

  • Comment number 18.

    #10 "It was a consequence of wage inflation, experienced during the 70's, 80's and early 90's that inflated away mortgage debt . Wages are now falling and debt will become more difficult to service despite IR being at historical lows. Don't trust anyone over 40! they've never experienced economic conditions such as we're going through."

    Were you even alive during the 70s ?? I lived through that and it is definite no picnic.

    Petrol rationed, sugar rationed, all imported goods rationed, electricity for only 3 days per week, wages and salaries *legally restrained* while inflation increased in double figures, bank interest at 15%, maximum income tax at 112.5% !! Country bankrupt !! The Chancellor, Old Bushy-brows Healey, going cap-in-hand to the IMF to borrow 6 billion quid !! Riots in the streets !! Credit cards were only for the rich, who, unfortunately, were departing in droves for tax havens !!

    If you think we have it bad now, "you ain't seen nothing yet" as a famous president said !!

  • Comment number 19.

    #16 "The sensible thing to do is to tax the source of the problems; a double whammy, an annual tax on property ownership to even up the rent v buy decision and an end to the complete exemption to CGT for your primary residence to dilute the "homes are tradeable assets" outlook."

    Yes, most sensible. then the construction companies will be totally wiped out instead of needing government handouts. Half a million construction workers unemployed !! Half a million more of the supporting industries employees out of work because there is no need of them either !! First against the wall will be the estate agents and other such parasites !!

    Who do you think will ever buy a house or flat if there is an annual tax and *NO* exemptions on CGT for the primary residence ?? What will the government do when *ALL* mortgages become toxic assets because the bottom fell out of the housing market and prices are in free-fall ?? 10 million homeless when their homes were repossessed because of negative equity !!

    Yes, a most sensible thing to do !!

  • Comment number 20.

    The Irish economy is half the size of Greater London's and is inextricably linked with the UK's economy. So are they simply riding on the Uk's stimulus? They even have a choice of which jurisdiction to live in!!!

  • Comment number 21.

    Stephanie says:
    "But for a highly open Eurozone economy which cannot inflate away its debt, this kind of fiscal tightening was probably the most sensible thing they could do."

    I still find it amusing the idea that imported inflation through a weak currency will wash away the debt. Price inflation will only wash down the debt if wages increase in line with inflation. Seeing as unemployment is high and climbing higher, we don't want price inflation thank you very much. Unemployment and higher prices will mean more people default on their loans, pushing asset prices down even further. We end up with a downward spiral. When a country is reliant on imports and can't quickly switch over to being an exporter, a depreciated currency will not increase jobs but kill jobs.

    Many importers' currency hedges (forward contracts) will expire between now and the summer. This means that Britain will now begin to see the full force of its weak currency on CPI. Bear in mind the UK's CPI is already 3% when interest on our savings is less than 1% we get an idea of how things are panning out...
    Currency hedges by importers have partly protected Britain from its weak currency up to now, but these hedges are running out, and CPI is likely to keep increasing.....

  • Comment number 22.

    It was informative watching the BBC news last night that one unemployed graduate in Dublin was suggesting coming to Britain looking for work.

    The Irish economy must be in a real deep hole!

    Or maybe she would get better benefits and a roof over her head if she came to Britain rather than staying at home whilst she loked for a job.

  • Comment number 23.

    If you have too much debt, spending more can only be a short-term palliative, until a bigger Day of Reckoning dawns.

    That day has dawned for Ireland, and their government have had the wisdom to recognise it as such.

    I hope their actions will be seen as a wake up call for the UK, so that we too, bite the bullet of excess debt.

    Unfortunately our government will not have the courage or integrity to take such action for the good of Briton and its people.

  • Comment number 24.

    #16 handclapping

    "As the UK is not cutting expenditure, viz Home Office today announce GBP 650 million expenditure on ID cards, then taxes must go up."

    ++++

    UK Govt IT Project. Another Glorious Defeat for the British. Every one has been an unmitigated disaster. Child Support Agency (software from Florida - i do not know how they thought that would work), NHS and now ID Cards.

    If they think GBP 650 Million will fix it, then think GBP 3 Billion as the actual bill. The govt think that the subject will pay GBP 100 for an ID card. How will you do that if you have no job? The recognition technology has a long way to go too.

    We must follow Ireland and STOP SPENDING and REDUCE PUBLIC PAYROLL.

    NOW!

  • Comment number 25.

    # 17 - I wholeheartedly agree. Of course, the world's economic and financial systems rely on growth and therefore it is convenient for the economists to ignore the kind of questions you ask.

    I read yesterday that Matt Simmons is predicting that we may be heading back to $100-200 dollar oil in 3-9 months time because of supply "pinches" which have exaggerated by the lack of investment in over the past 12 months or so production capability. This is despite the fact that demand has fallen by over 3% from its recent peak. If these increases in price materialise, that will be enough to kill off any recovery and negate the effects of the various financial stimulus packages. Even if he is wrong, it doesn't really matter in the long run. Whether its oil in 2010 or the lack of another resource in 2015, we're stuffed. As I see it, we need to start thinking how we can live using less resource and also how we can share that resource more fairly throughout the world. I'm not betting on the ingenuity of man to solve all of our problems; it is man's ingenuity that has got us here in the first place. Each generation thinks that is smarter than the last and can find the solutions but I have my doubts that technology can address the probelms we face. My big fear is that there is no real prospect of international co-operation to solve the world's problems. For gloabilsation, you can swap nationalism, protectionism and resource wars.

  • Comment number 26.

    No.17. Richard_SM wrote:
    "It would be interesting to hear from some economists who are able to describe how the world continues at it's present rate without simply relying on empty phrases like "something will be invented" or "an alternative has always been found."..."

    The world economy will keep contracting.

    Expansion in the past 10 years or so was driven by:
    (i) New computer technology leading to increased productivity.
    - There are no major computing developments on the horizon; so Moore's Law could well turn out to be true.
    (ii) Outsourcing to countries with cheap labour brought down the cost of production on manufactured goods.
    - Everything that could be outsourced has now been outsourced. There are no new outsourcing opportunites on the horizon.
    (iii) Cheap money from Japan, China and oil rich nations allowed huge leverage and credit expansion between 2001 and 2007.
    - This is now reversed and we are living with credit contraction, with households, businesess, and governments now concentrating on paying down their debts.
    (iv) Governments spent all their cash reserves to stimulate their economies after the dot com bust in 2001.
    - The UK and US governments spent all their reserves back in 2001, and now they have none to counter the economic crisis today.
    (v) Increased house prices and asset prices during 2001 to 2007 fooled the unwitting into thinking there would be no more boom and bust. They borrowed and spent like there was no tomorrow.
    - Tomorrow has arrived and asset prices are falling, causing black holes in lenders' balance sheets.
    - The UK and US financial systems are bankrupt.


    We cannot replace any of the above expansion drivers. Therefore, the world economy will contract. The contraction will only stop when we find a way of increasing productivity. Green energy and food production seems the obvious thing to concentrate on, as it will give us important cost reductions.. In the UK we could benefit from tidal power and forest farming. At least that would provide us with a backstop for food and electricity. I am not a scientist; so I cannot give more examples, which means we are left with phrases like "something will be invented" or "an alternative has always been found.".

  • Comment number 27.

    Keynesian economics would suggest that EXPORTERS need to raise fiscal stimuli to boost their DOMESTIC markets; whilst, IMPORTERS need to reduce debt. However, in the name of internation co-operation there could be an agreed lag. The G20 failed to address this.

    Since not all exporters (e.g. Russia or Germany) will do enough for the global good, and since China's lag could take a decade to fix, the only option for a responsible Importer nation is to reduce expenditure and reduce debts.

    In view of the facts, Ireland's decision seems sensible even if, at first glance, it would suggest they will get a bit of a free-ride off the UK.

  • Comment number 28.

    The modern generation of Irish politicians tend to be realists. This has been welcome. It possibly comes from being a small country with a history of being bullied by a bigger neighbour.

    Meanwhile this bigger neighbour is begging in the street so it can buy another bottle of scrumpy just to keep the hangover away until after the general election.

    Never before in the field of human endeavour have the lives of so many people been laid down for the protection of the careers of so few.

  • Comment number 29.

    As a response to Ian the Chopper I must say that no-one would come from Ireland to the UK just for the benefits. In Ireland the basic social security is around £200 a week, plus the usual rent and extras on top. Plus the benefit system is friendlier, more sympathetic and generally more human. One of the big savings announced in the budget is a clampdown on people from the North claiming Irish unemployment benefits.

    Ireland is really small compared to the UK, with a relatively titchy job market. No matter how bad things seem in the UK, there's still more chance of getting a job there than in Ireland.

  • Comment number 30.

    Irish banks are under the cosh again this morning.I wonder how safe are my savings,deposited under the UK guarantee,with Anglo Irish,now covered by the Irish government guarantee.Is it worth the paper its written on?If Ireland defaults,do I have a case with UK compensation as this was the scheme I deposited under?

  • Comment number 31.

    #26 MrTweedy

    Spot on sir!


    We have come to the end of the world's resources.

    We now must educate our politicians on this fact.

    They are still talking about Growth. (+ G20 background slogans)

    I know the whole system is based on growth but we will be forced to change that. If it is not done soon there will be a brutal readjustment to reality not too far ahead.

    It must be acknowledged that the system is truly broken.

    I do not think there is enough time or money to fix everything by 2010.


    We shall see.

  • Comment number 32.

    Government borrowing does NOT stilumate the economy, especially when the economy is being held back by a credit shortage. Every pound (or Euro) the government borrows is a pound (or Euro) that can't be borrowed by the private sector. The neo-Keynesian nonsense about fiscal stimulus was utterly discredited a long time ago (circa 1980). The Irish are doing exactly what the British did in 1980/81 - which led to a resurgence in the British economy that lasted until Brown wrecked it.

    Why is there an assumption that governments should borrow as much as possible, constrained only by the market's tolerance for their borrowing? Borrowing has to be paid back - WITH INTEREST. This can only be justified if the borrowing will itself lead to future profits (as when a company borrows to invest). Even Brown used to pay lip service to this with his now-abandoned "golden rule" on public finance.

    The fact that the average Eurozone country owes two-thirds of its annual income is actually deeply depressing and there is no reason for it, other than elected politicians' desire to "give" the electorate goodies without asking them to pay for it immediately in taxes.

    A key duty of any government should be to BALANCE THE BUDGET. Which means a lot more than merely not following an unsustainable deficit. Once balance is achieved, the goal thereafter needs to be to shrink the government as much as possible, allowing room for tax cuts.

  • Comment number 33.

    Post 29, thanks for the response I wasn't aware how generous the Irish benefit system was. Also would concur with your arguments re getting a job in a bigger pond such as the UK.

    Have read in the press this AM that the Irish PM is getting a pay cut as part of the budget. Is that true? Can't see Gordon following suit over here.

  • Comment number 34.

    Just a short note to re-inforce No 18 Ishkandar's comments. The early/mid 70's with statutary wage control and inflation and interest rates (including pretty well all mortgages) climbing to 15% plus are not experiences you forget. 3 day weeks, rotating power cuts and an inability to bury your dead are situations that ONLY those over 50 recognise. We know that a UK Government can lose complete control of an economy, to the extent that only external discipline (IMF terms) can force the correct remedial action. This is exactly the situation we currently face. Because we aren't in the Eurozone and the IMF have bigger fish to fry, this Government will be allowed to continue with policies that are unlikely to solve anything except at the cost of extending UK debt for 20 years. As it was largely the under 40's that put Blair/Brown into power - few of my generation, having experienced the 3 day week, would ever vote Labour again - it's a bit thick to suggest that the over 40s be ignored. Blog No 10 is just wrong as well as uninformed.
    As far as the Irish Budget is concerned, looks to me as if they have it right. They will experience more immediate pain, but over a shorter period than the UK. I can't see the UK government having either the political or economic courage to do the right thing. Evasion and the defering of bad news are an essential part of the habit of spin. So is the ability to deny the obvious. Ten year habits are difficult to break.
    TM - StH

  • Comment number 35.

    RE: 13. random_thought

    > Maybe I'm missing something here.

    You are.

    "... so why not just print the money? Is it just because "printing money" is associated with Weimar and Zimbabwe? "

    Yes. And with good reason. See the outcome in both cases.

    "This is a completely different situation, and printing money seems exactly the right thing to do."

    No it isn't. The parallels with Zimbabwe are particularly uncomfortable. The whole purpose of printing money in this country is to devalue the currency and thus to reduce the value of debts. It also makes savings worth less too. So, in effect, sensible people with savings are robbed and their loss is used to pay off the debts of stupid, reckless people - people like Gordon Brown and Fred Goodwin. In Zimbabwe, Mugabe used a similar technique. He sent thugs to steal the productive, mainly white-owned farms in order to get the money he needed to keep his supporters on side. Both Brown and Mugabe steal from sensible, productive people to pay for their mistakes. The main difference is that Mugabe used direct violence whereas Brown hides it under pseudo-intellectual economic theory. It's worth observing that Mugabe has now run out of people to rob and Zimbabwe is a bankrupt, starving, disease-ridden hell-hole. Do you still think that "printing money seems exactly the right thing to do."?

  • Comment number 36.

    #22 "It was informative watching the BBC news last night that one unemployed graduate in Dublin was suggesting coming to Britain looking for work."

    Considering that the Irish economy is but a fraction of UK's and that their education system is considered to be that bit better than UK's, she may not be that far wrong in her assessment. If she has the right degree, she might get a job where masses of British media studies or beach management and surfing graduates would not !! And, since she can speak English, albeit after a fashion, she will have an advantage over her Continental cousins !! I, for one, wish her luck !! Enterprise should be encouraged !!

  • Comment number 37.

    Come on, we all know that Governments raise taxes during the early years of their tenure in office, hopefully to be able to lighten the tax burden in their final years in order to stand a better chance of re-election.

    Alistair Darling and the ex-Chancellor are in a fix because taxes need to rise in order to service the interest on increased national debt and reduce the shortfall from lower tax revenues from the City. However they will be seeking not to pass on the full pain until after the next election.

  • Comment number 38.

    #24 "If they think GBP 650 Million will fix it, then think GBP 3 Billion as the actual bill. "

    From what I heard, they still haven't got it to a testable state after billions have already been spent. After all, every person *MUST* have two good eyes and ten fingers, mustn't they ?? And to think it was on Blunkett's watch that they started this project !!

  • Comment number 39.

    Stephanie

    Could you or someone with access to macro data perhaps do some research and analysis on the following thoughts:

    - Suppose a "cash" grant is given to every UK residential mortgage holder equal to, say 20% of the lower of the outstanding mortgage balance as at 15 September 2008 and the balance as of today.

    - Use of the "cash" grant is restricted to repaying that part of the outstanding mortgage or, if the mortgage does not permit early part repayments, placed on blocked deposit with the lending institution, only being released in due course to part-repay the mortgage.

    - The funds for the above grants are created by the Bank of England through quantitative easing.

    - At a stroke lenders would immediately see a reduction in their bad debt reserves and an increase in their equity capital. They would also have liquid funds which might be available for new lending.

    - The proposal could be extended to other loans (car finance, small business loans etc) if this would provide further economic benefit. If the cost was considered to be too high, complexity could be introduced - for example, limiting the grants to no more than one per person or making them means tested in some way

    - Interest rates could then be raised to a more economically justifiable level (say 3%), thereby enabling savers to earn some future income, international lending to the UK Treasury could be encouraged and sterling could be supported, thereby reducing imported inflation.

    What would be the overall cost of an exercise like this?

    At a moral level such grants would be outrageous but that is effectively what is being done at the moment, albeit spread over time. Low interest rates are currently enabling borrowers to repay chunks of their borrowings each month.

  • Comment number 40.

    #25 "Each generation thinks that is smarter than the last and can find the solutions but I have my doubts that technology can address the probelms we face."

    FYI, technology has already solved the problems. What is lacking is the political will to proceed. Right now, it's a political won't !!

  • Comment number 41.

    http://news.bbc.co.uk/2/hi/uk_news/politics/7989015.stm

    TOLD YOU SO! TOLD YOU SO!!!! You all owe me a beer. Apart from MrTweedy who also spotted this coming.

  • Comment number 42.

    #26 "(iv) Governments spent all their cash reserves to stimulate their economies after the dot com bust in 2001.
    - The UK and US governments spent all their reserves back in 2001, and now they have none to counter the economic crisis today."

    Considering that "Joseph and his amazing Technicolour Dream Coat" is a very popular musical on both sides of the pond, the politicians on either side did not seemed to have learnt the lesson in it !! They blew the wealth in the 7 fat years instead of saving it !! Well, the 7 lean years are upon us and where will we find another Joseph to save us !!

  • Comment number 43.

    No.41. FrankSz

    Looks like the penny's finally starting to drop with the likes of Gordon Brown et al.

    It's frustrating that it takes a financial crisis to focus "the powers that be" on the necessity of protecting the world's scarce resources.


    No. 42. ishkandar

    It's amazing that people really thought that winter would never arrive again. These people failed to stock up on hay during the summer and autumn, and now winter is here they have no food in the barn to feed their animals. How long has humanity been farming? - only for thousands of years; and yet still some people thought "no more boom and bust" was real.
    The name "Harry Thickers" springs to mind....

  • Comment number 44.

    #39
    - Suppose a "cash" grant is given to every UK residential mortgage holder equal to, say 20% of the lower of the outstanding mortgage balance as at 15 September 2008 and the balance as of today.
    ---
    and what about the people like myself who are desperately trying to save money for a deposit for my first house.

    I couldn't afford to buy because the prices shot up as people took out mortgages they couldn't afford, now I'm getting no interest on my savings to help those that took out mortgages they couldn't afford, now you want to tax me more (where else would the money come from?) to give to the people who are causing myself and those like me such hardship?

    Or how about the people who paid off large chunks of their mortgages instead of re-financing every 18 months to fund new car purchases or exotic holidays? How would they feel to see their hard work being undone with populist measures to benifit the fiscally irresponsiable.

    Just let the property prices fall to the historic level of 4 times average salary so sensible people can get an affordable mortgage on a affordable property

  • Comment number 45.

    Fortunately for Ireland its ultimate recovery depends upon a recovery in the world economy, as much as it does on anything Ireland might do.

    This post makes interesting points, but we know for certain from the experience of the last great depression that tightening budgets and raising taxes and interest rates did not work. Unfortunately for us, stimulus is not guaranteed to work either, but the approach of fiscal belt-tightening would seem to me to be a guaranteed failure.

  • Comment number 46.

    No.44. HardWorkingHobbes wrote:
    "Just let the property prices fall to the historic level of 4 times average salary so sensible people can get an affordable mortgage on a affordable property"

    I agree with you.
    If house prices were affordable, mortgages would be low and consumers would have more money to spend with retailers. Interest rates could get back to realistic levels, and savers would be rewarded. This would redistribute wealth away from banks and protect us from banks lending money to people who can't pay it back - those dreaded "ninja" loans. Sensible people would be supported, instead of bad behaviour being rewarded. Post No.35 nicely illustrates the results of supporting bad behaviour.

    When house prices have fallen by 40% (they are already half way there) you will be able to buy at an affordable price. The major fly in the ointment is that you need to remain in employment and somehow dodge the increase in consumer price inflation, in order to truly benefit from this "market correction" back to more realistic house prices.

    I sincerely wish you good luck, and I hope you come out on top.

  • Comment number 47.

    TOLD YOU SO! TOLD YOU SO!!!! You all owe me a beer. Apart from MrTweedy who also spotted this coming.

    er actually I also have been constantly asking for leadership in spelling out what the economy will look like (if it ever recovers).

    As an economy, we have to wean ourselves off/replace Financial Services, retailing, media, property development and estate agency and develop our skills in industries where we have a competitive advantage (or ought to).
    being on a windy tide swept island an obvious suggestion would be to promote alternative energy engineering.

    Sadly we rely on Danes for engineering our wind farms and the French to build our new nuclear reactors. Seems anyone in the UK who could do sums went into a bank and repackaged toxic debt for a living. Engineering not sexy enough for our youngsters, when you have a chance of a career on the stage by winning X factor, not that I'm cynical.

  • Comment number 48.

    #47 tonyparksrun

    I think MrTweedy and FrankSz were implying the next budget would be higher taxes with a 'Green' wrapper.

  • Comment number 49.

    #31 "I do not think there is enough time or money to fix everything by 2010."

    Of course there wouldn't be but will our Glorious Leader admit it since his "contract" runs until 2010 ?? He will do anything, even sell his soul to the Devil, to get a contract renewal. But the people have seen through his rhetoric and will vote accordingly.

    RBS is dumping another 9,000 people, 4,500 in UK. I hope they are all in Crash Gordon's constituency just so they know who they voted for the last time !! But, of course, it's London that will get clobbered *again* !!

  • Comment number 50.

    No.47. tonyparksrun

    I note your post on Bobby Peston's blog of 20 October 2008:

    "Those moaning about profiteering energy companies forget that these are the assets that make up the pension schemes of those that have them. The dividend stream pays for your pension!!"

    You were in support of profiteering energy companies and their ensuing dividend payouts......
    Is this the kind of leadership you are in favour of?


  • Comment number 51.

    #33 As Stanilic #28 said, "The modern generation of Irish politicians tend to be realists". Quite a sharp contrast to our lot who still have their snouts firmly affixed to the public trough !!

  • Comment number 52.

    #34 Ssssh !! I know I'm a BOF (Boring Old Fart) but I try not to broadcast it to the world !!

  • Comment number 53.

    MrTweedy (#26) Excellent post, but we've got a Sisyphean task on our hands if we're to ever thwart the free-marketeer PR machine's investment in getting the economy to 'recover'....

    Anyone whose first response to the above was to ask "what's wrong with that?", has already been seduced by their Faustian propaganda.

  • Comment number 54.

    No 44 - I have every sympathy for you, and indeed myself as my savings are currently being ravaged and I have no mortgage. However, in putting forward this idea I am trying to find a middle way that is actually less painful to people like you and me.

    At the moment we are being stuffed in slow motion as the low interest rates are killing our savings, are providing an undeserved monthly subsidy to those with a mortgage and are preventing you from being able to afford to buy. The interest rate policy is specifically designed to prevent house prices falling quickly since plummeting house prices would hit the economy very badly. I entirely agree that house prices are well above their "correct" level - but the economy would not be helped by even more negative equity and toxic mortgages - there is enough of these already.

    I am convinced by all I see that the current economic policy is deliberately seeking to create inflation, enabling house price falls to be minimised, debts (personal and national) to be eroded and savers to be the big losers, not least because they are politically less likely to complain. The government is madly spinning a threat of deflation so that the inflationary pain in due course can be a surprise.

    The thought behind giving a grant to those with a mortgage is to create a quick acting subsidy that is effectively a shot in the arm for the economy which then enables interest rates and the value of sterling to rise and reduce the likelihood of a painful inflationary burst. Ideally the subsidy would be smaller than it is likely to be under the current, drip-drip policy and, if there can be no more government borrowing, it might be paid for by the Bank of England printing money.

    It would be nice to find an answer to the crisis that reduces the punishment being meted out to the "good" and does leave some pain (albeit less than they deserve) for those who caused all our problems. At the moment it seems that the good are taking the full hit.

  • Comment number 55.

    Their propaganda touched my soul; those thin and cherished words; such a willing victim for the kill, again.....

  • Comment number 56.

    #45 "but the approach of fiscal belt-tightening would seem to me to be a guaranteed failure."

    Well, it depends on how you define "failure" !! If, by "failure", you mean *not* being able to get back to the nihilistic days of a credit bacchanalia, then I would consider it a resounding success !! If you mean no growth for many years to come but with a significant reduction of the National Debt, then I will account it successful, too !! If you mean that we'll be reduced to treading water while waiting for a worldwide recovery, then surely that's better than drowning in a cesspit of debt !!

    There has been far too many talking heads yammering on ad nauseum about the Depression of 1930s. What most of them forgot to mention and had left out of their reckonings is that, then, most of the major economies had empires to fall back on !! Those imperial days are over and done with; so what have they to fall back on now ??

    And if you think America didn't have an empire, ask Comrade Fidel or Comrade Ernesto (him of "The Motorcycle Diaries" fame) !! Britain had its empire to export its unemployed and its manufactured products to and raw materials to wrest from !! Until very recently, India still manufactured cars based on the old Morris Oxford design. It also has the largest number of Land Rovers in the world; some dating back to before WW2 !!

    Well, there is no empire any more and, without a fiscal belt tightening, there will be no way to repay the debts without destroying the economy entirely with Zimbabwean level devaluation !!

  • Comment number 57.

    Mt Tweedy & Frank Sz,

    You can wish all yo want for a 'stable' green economy to be established but unless you come up with concrete proposals as to how to bring it about, you are just whistling in the wind.

    please inform me as to how an economy can replenish itself without the concept of growth? What will stimulate innovation? How will green markets be regulated? Will the 'balance' within an economy be calculated on a national or international basis? Will we have to suffer the farce of carbon trading in all aspects of our lives?

    As far as the UK is concerned, I agree that we would be wiser to put our efforts into building a competitive advantage based upon ' new' technologies. To do this would require the UK government to continue its stimulous package but to focus it on developmental areas of the economy rather than the banks! The focus of stimulous so far has been completely in the wrong place.

    The G20 still sang the internationalist song. However, the UK is now in a position wherein it is vital that we re-build our economic base if we are to survive and function in the international areana. Focused protectionism is the best way for us to start this process.

    AngryCB

    I totally reject your proposal. I paid off my mortgage, I have/had no bank loans, I always pay-off my credit cards, my savings (small as they are) are not growing. Therefore why should I welcome a 20% pay-off for those who were not as careful? What would happen to the 20%? - a 1 off spending binge?

    No let house prices fall. My home is where I live, therefore its value will still be relative to other homes.

  • Comment number 58.

    No.57. foredeckdave

    My point is that sustainable economic growth can only be provided by more efficient use of the world's scarce resources. Productivity gains are the only true driver. One can play around with the money supply, currency pegging, asset values and credit, but in the end growth will only come from real productivity gains through technology providing better use of the planet's scarce resources. The planet's resources are finite and we are faced with global warming to boot. We have no option but to turn to green technology....

    During 2001 to 2007, the world economy expanded faster than the underlying productivity gains (as my post No.26. sets out). We are now living through a period of correction. However, the correction may well overshoot and land the world into a protracted slump.

    You ask - "please inform me as to how an economy can replenish itself without the concept of growth? What will stimulate innovation?"

    You then answer your own question by saying - "As far as the UK is concerned, I agree that we would be wiser to put our efforts into building a competitive advantage based upon ' new' technologies."

    As I've said before, I am not a scientist. I cannot answer exactly where the new technologies will come from, how they will work, how they will be funded, or how they will be regulated. If I knew this I would have developed the technologies myself and then become a billionaire from their sale (see that Bill Gates chap for advice). I can see what needs to be done, but I cannot answer how it will come about.

    I am pleased the government now appears to be thinking in terms of directing its spend into areas which could produce competitive advantage through improved productivity. I must rely on the government to fund and support those businesses which stand a chance of finding cheap and clean energy, cheap but healthy food, affordable but good quality housing. This is the role of government - to provide stability, and create a climate where efficiency will improve.

    Some will say that a command economy will provide a better chance for improved efficiency. Some will say the free market will stand the best chance.

  • Comment number 59.

    foredeckdave (#57) "...please inform me as to how an economy can replenish itself without the concept of growth?"

    There's 'growth' and there's re-establishing the bubble/status quo. Why does there have to be 'growth' rather than stability? Answer: because that's the very nature of competition/capitalism rather than cooperation/socialism. Hence there was no end to the Cold War, it just morphed into ruthless economic/demographic warfare which is just as deadly, if not more so (see Liberal-Democratic TFRs).

    If you don't understand, learn the language-game.

  • Comment number 60.

    THE FAUSTIAN PACT

    MrTweedy (#58) "If I knew this I would have developed the technologies myself and then become a billionaire from their sale (see that Bill Gates chap for advice).

    Gates had a very lucky break at Digital's expense! He saw a very good business opportunity at a time when the creators of Reagonomics lured young people to see the world narcissistically, something many hoped was in decline......

    Despite all the recent outrage, I bet we don't learn this time either.

  • Comment number 61.

    THE WORD INSIDIOUS

    If anyone still thinks this is not what's critical, just remember that a TFR of 1.1 means i.e. a population halves 30 years, and that with 1.3 it does so in 60 (two generations). Whilst (if?) thinking about that... look up the TFRs of Eastern European countries and then Central/Western Europe, bearing in mind pensions and welfare benefits...... It might stretch a few here to do that mind... they not being master-planners...;-)

    Now ... why do people not think very far ahead, and what does it have to do with differential fertility, education, and equality/human rights?

    Be prepared to feel a little sick.

  • Comment number 62.

    Mr Tweedy,

    I do understand where you are coming from and I share your frustration at not being able to convince/influence the decision makers that there is a 'better' way. I would entitle that better way as Social Economics. within this model there is a far better balance between capital and labour, the concept of private/good, public/bad is removed and the wellbeing of the nation (and hence all of it people) is the prime driver.

    Therefore Social Economics is not rampant capitalism neither is it communism, neither is it what was laughably called socialism in Eastern Europe. It is a mixed market economy but a stage development from what has been achieved in Western Europe.

    Many decry the social policies of Western Europe. They say that we cannot afford our social provisions and that they must be cut to reduce government spending. My question to the libierians, economic-liberals and rampant capitalists is -cut government spending to what good effect?

    I am certainly no tree hugger. I do not agree with the UK incurring extra costs meeting green targets when other countries ignore, derregate, etc. etc. their responsibilities. However renewable technologies do appear to be one area in which we can achieve a competitive advantage. I am sure that there re other areas if we look and think hard enough.

  • Comment number 63.

    #56 ishkandar,

    Whilst not wishing to detract from your argument, I'd point out that the Land Rover did not begin production until 1948 and so it is impossible for there to be examples dating back to before WWII.

  • Comment number 64.

    #58

    It's not just that. There's also the option of expansion (growth?) into space.

    I don't know, perhaps Captain Scarlet, Thunderbirds, Space 1999 and so on helped to mess up my expectations, but I am still disappointed that after the year 2000 we still don't have personal spacecraft, replete with anti-alien high powered weaponry, and that we do not holiday on distant exotic worlds with androids designed for no other purpose than sexual pleasure.

  • Comment number 65.

    For all those lauding the Irish approach, firstly, what Stephanie did not tell you about Ireland's last austerity budget in the 1980s, is that it led to mass emigration, to the benefit of the UK, US, Canada etc who obtained well-educated workers at zero "development" cost. The consensus in Ireland today is that its "young, well-educated, flexible" workforce will be headed for the exits as soon as evidence of a pick up elsewhere is evident. The FT's Lex column made this point yesterday. There is a huge Irish diaspora. Everyone here has relatives in the UK/US etc. There is a history of emigration and, in more recent times. travel, that will underpin emigration in 2010 and beyond as others recover and Ireland stagnates.

    Also the "long boom" Stephanie refers to is actually a long inflation of asset prices, specifically housing. It has little to do with early-1980s austerity, other than as a component more generally of Euro adoption (and pre-adoption convergence). As a result, Ireland's interest rates have been too low since about 1992, and this is also the time from which 7-10% GDP increases became the norm. This was fueled extensively by property speculation, just as a good chunk of Ireland's current downturn is the demise of this sector.

    Ireland did successfully attract new business in the 1980s/1990s, based on very aggressive corporate tax rates, together with cuts in capital taxes. However, it had the advantage then of being very much a low-cost EU jurisdiction. That is no longer true. The eastern European EU members now fulfil that role. There is also evidence that the low tax rates are no longer sufficient incentive, certainly insufficient to make up for much higher costs. For instance, Dell has recently cut 60% of its workforce in Ireland and offshored work to China. By way of context, Dell generated 5% of total Irish GDP in 2008.

    So, for any one who buys the "Irish approach is right" line, feel free to come on over. We'll leave the keys in the door and instructions where to find the light switch. Those of us who are here currently are actively planning our way out. Anyone who thinks the "ordinary Irish" (including the 10% of residents who are foreigners) are prepared to pay more tax is delusional. Already the bulk of shoppers in Newry (Northern Ireland) are from the Republic, taking advantage of the falling Pound and 6.5% lower VAT rates north of the border.

    We might be willing to pay more tax here if the government took some sensible steps to control public expenditure but, to date, there have been few redundancies, no pay cuts, and a modest increase in the amount public sector workers have to pay into their guaranteed pension schemes (payable by the rest of us). Contrast this with the private sector: job cuts that have resulted in a doubling of unemployed numbers in under a year, pay cuts of 5-25% for the MAJORITY of private sector workers still with jobs, cessation of company contributions to staff pension plans (which are defined contribution anyway). I don't know anyone happy to pay more tax here. Cowen's governement is every bit as incompetent and dominated by the agenda of public sector Unions as Brown's.

  • Comment number 66.

    28. stanilic wrote:

    "The modern generation of Irish politicians tend to be realists"

    You've clearly never spent any time here! For info, the main government party, Fianna Fail, has been experiencing its worst ever poll ratings for months now. Cowen's sole policy is to prop up the public sector, whatever the tax cost to everyone else, in order to protect his voters base there. The biggest short-term question is whether the Green Party feels its long-term interest are best served by continuing in government or not. If they don't (and they have no ministers in economics-type departments so can deflect blame to FF) it will cause the governement to fall.

  • Comment number 67.

    No. 64. FrankSz

    I've repeatedly heard that space travel has not produced one single useful invention. I don't know whether this is true or not. I say "what about teflon" and I get told we already had it back in the 1940s. I guess satellite TV couldn't have ocurred without space age technology, but then again is satellite television any more useful than terrestrial tv?

    I have no interest in science fiction. Given that life in general is full of irony, I still maintain that when we do discover life on another planet, it won't be populated with landspeeders, light sabres, and Barbarella; instead it will consist of girls in pearls and twinsets, Austin Sevens and men in tweed suits. If it does turn out that way, I will be the first to emigrate there....I'll quietly prune my rose bushes and enjoy a world free from plastic (although bakelite and catalin will be allowed). I can almost smell the dust burning on the warm glow of the valves....

  • Comment number 68.

    #67
    Well without satellites there would not be GPS I suppose, nor decent weather forecasts, nor I guess decent mineral/oil exploration, nor I guess decent communications technology. However, I agree that the public spending on space and military does not result in the advertised public benefits. On the contrary, as far as I can tell military spending seems to drain resources and R&D away from commercial activities. For example, why is the foil-bearing not used in cars but mainly in military stuff? Bad example but illustrative.

    As for the bakelite, I was going to ask who is Austin Seven, until I realised you were talking about the mode of transportation. Well twinsets are great anyway. Especially if you get rid of the IR filter from in front of the CCD in your digital camera....
    http://photography-on-the.net/forum/showthread.php?t=251630
    (And if you do actually follow the instruction, you may need a *near* IR lens filter to make the clothes clearly transparent)

  • Comment number 69.

  • Comment number 70.

    No.69

    Frank

    That last post was more illustrative......

    It seems we have made some interesting advances since the Austin Seven afterall.

    All the best,
    Ye olde MrTweedy

  • Comment number 71.

    FrankSz (#64) "..and that we do not holiday on distant exotic worlds with androids designed for no other purpose than sexual pleasure."

    Is that why you moved to Eastern Europe?

  • Comment number 72.

    #71

    Of course! The interactive entertainment is generally free and of a high quality!

  • Comment number 73.

    As a member of Ireland's younger generation who will graduate from a FREE 3rd level education this September, I welcomed this budget on Tuesday. Even in that first sentence there is something unsustainable. Free 3rd level education has to go. But I don't believe regressive fees will work. I have targetted the Dept of Education AND Fianna Fáil TDs to propose a means based repayment system, something that many of those in favour of an alternative to free fees wanted when asked at the University I attend.

    It wasn't sustainable to allow couples earning €100,000 enjoy a to escape with an effective income tax bill of 18% once an average €3000 medical expenses and other credits have been applied.
    The full year consequences of the changes mean that this couple will now pay an effective 21% income tax.
    If such a couple had 3 children they would, and still will receive €6420 in child benefit this year, though the budget speech indicated this will be taxed or means tested in December's budget.

    It isn't possible to tax industry any further unless we want to shed MORE jobs, and despite the doomsayers having no confidence, jobs continue to be announced. Coca Cola will establish a European HQ in Wexford, Big Fish Games will establish a base in Cork with an initial 100 jobs. Facebook has located it's European HQ in the IFSC.

    Ireland is not a basket case, but to maintain that status our country needs to further increase taxes. It was not sustainable that 40% of the workforce did not pay tax before last Tuesday, and 2% is a VERY small price to pay. €293 pw as a cut off point is even generous. EVERYONE, and I'll include my average €120 p/w part time job, should be laible to the 2% levy. Mind the pennies and the pounds look after themselves is a very old addage and is certainly worth contemplation. €2.40 p/w would buy me 2 500ml bottles of Coke. I think national recovery is a bit more important.

    I am however speaking as someone who has a job to go to, IN Ireland in October, I may even forego it to get involved in student politics for a year. There are ALWAYS opportunities for those who wish to see them.

    I for one welcome the fact that the mongers of doom are leaving in their droves, on a personal level it allows a great opportunity for me to get on the property ladder as the residential rental market collapses and one-time "fisher price landlords" of the 90s are forced to sell for at the same levels they paid in the 90s. Off ye go, and leave me and the rest of the people who see a future here to get on with it. And we won't be spiteful, the door will be open when the country rises again.

    There are STILL over twice the amount of people employed in Ireland as there were in 1992.

    To Ian #33. Yes political expenses have been hit. Although Cowen is the 4th highest paid head of government in the WORLD, it is in line with the benchmarking process. He declined a pay increase last year and all political salaries will be reviewed in line with private sector cuts at the same level.

    Bertie Ahern lost the right to draw his €110,000 pension until he retires he seat, as did previous ministers on both sides of the house. Teachers elected may no longer draw the balance of their teachers salaries as had been the custom until now. Enda Kenny, Leader of the opposition has practiced this for 30 years until 1 year before the 2007 General Election.

    Overall, this budget was tough, but could have been tougher.

  • Comment number 74.

    DDalyIrl

    Now look at the same situation from the standpoint of a shopworker, a recently unemployed head of household or a pensioner. Now let's see if your conclusions remain the same.

 

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