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The case against Mr Osborne's austerity

Stephanie Flanders | 13:05 UK time, Wednesday, 8 September 2010

Spending cuts will be this government's "poll tax", according to the TUC chief Brendan Barber in an interview with the FT [registration required].

George Osborne

Yesterday I laid out George Osborne's best arguments for pressing ahead with the steepest cuts in public spending in more than 50 years. Today, I bring you the case against - taking each of yesterday's points in turn.

First, the anti-austerity school would say, Mr Osborne is wrong to say there is no alternative to his plans. Britain may have a high deficit, but borrowing is already falling, without any help from new spending cuts. In fact, the monthly borrowing numbers have come in below expectations in nine of the last 12 months.

There aren't many economists who support a big new stimulus programme in the UK, but - as this blog noted last week - research by the IMF suggests the UK could have more room to run up debt than many other major economies.

Mr Osborne says the fall in long-term interest rates - government bond yields - since the election shows the benefits of his tougher approach. But investors were choosing the UK over the likes of Spain and Portugal, long before the election.

When bond yields in those countries went up, yields in the UK, Germany and the US have tended to all fall. That has been true since the start of the year.

At less than 3%, UK 10 year bond yields are close to historic lows. We see the same low rates in the US, which has not said how it will cut its massive deficit.

Some say it's a "bond market bubble". Perhaps. But it is difficult to argue that investors are focussed on the size of deficits - or fears of inflation. Those rates suggest, rather, they are betting on a very long period sub-par growth.

The economic data are all over the place: we can't say for sure we're heading for a double-dip. But nor can you take much comfort from the "consensus forecast" for growth next year. In January 2008, only one of the dozens of independent forecasts monitored by the Treasury was expecting any fall in GDP in 2009. And that was months after the credit crunch had begun.

In the wake of this crisis, no-one believes we are looking at the kind of 3-4% growth we had coming out of the past few recessions. That means there will be less room for spending cuts to be lost in the mix: the NIESR estimates that the June Budget will cut growth by 0.4 percentage points in 2011 alone.

Second, the austerity school say that the central banks can always come to the rescue. But, as the Economist recently argued, Ben Bernanke and Mervyn King can't do everything - especially when official interest rates are already at all-time lows, and they have already hugely expanded their balance sheets to help the economy.

At a time when companies and households want to run down their debts and increase their savings, it's difficult for the central bank to force them to borrow.

Third, Mr Osborne says the evidence shows that cutting deficits by slashing spending can be expansionary. But it turns out that nearly all of the countries that feature in these studies [311.35KB PDF] were already experiencing strong recoveries when they started to cut.

There is simply no historical precedent for budget cuts on this scale - across so many countries - in the wake of a financial crisis which may subdue growth. Simple arithmetic says they can't all export their way out of recession.

The Irish example shows the opposite: its government was the first to embrace fiscal austerity, for all the reasons put forward by the coalition. But their borrowing rates have gone up again in the past few months, because investors simply don't think they can grow their way out.

Finally, the government says we need to shrink the public sector - to allow the private sector to climb out from under the dead hand of the state. That's a reasonable philosophical position to take. But this isn't - at bottom - an argument about the proper size and function of the state. It's an argument about how to insure against a disastrous economic slump.

Everyone can agree that it would best for the economy if the private sector took the lead, especially through rising investment and exports. The question is whether this is likely, at a time when most businesses and households want to save, not invest.

In those circumstances, Keynes taught us that the government becomes "borrower of last resort" - whether it likes it or not. That is Britain's true Plan B. If Mr Osborne's spending cuts do push the economy back into recession, tax revenues will fall and other spending will go up - meaning the deficit stays high.

If the government is going to have to prop up the recovery for longer than hoped, surely it is better to choose to do it, through higher public investment, than simply foot the bill for rising unemployment? That is very real risk if the government sticks to its approach.

So much for the case against austerity. Tomorrow: how to decide which side you are on.


  • Comment number 1.

    These are very stong points, especially the final one about investment versus paying for increasing unemployment - thank you.

  • Comment number 2.

    There's an alternative to austerity (& Keynesian fiscal stimulus) - public ownership of the mans of production.

    It may not be on the political agenda at the moment.
    But when the second phase of the crisis hits (this autumn?) & the authorities can do nothing to stop the economy going off the cliff, & many businesses go bust, unemployment rockets, people lose their houses, then people will want real alternatives that will improve the lives.

  • Comment number 3.

    First the banks should be asked to repay the money they were given as this is a substantial part of the debt and the citizens are being asked to pay off a loan for the banks. The money was given to "save" economy but did nothing more than save the investments of the shareholders and the bonuses of the executives. If the government would hound the banks in the same manner the banks hound those behind on loans things may work out. Maybe they could sell off some of their assets.
    Certainly cuts can be accomplished but to propose that higher unemployment in a stalled economy will not have an impact is hard to understand. The cuts will be political as usual and not target the areas that could be reduced. Maybe they should start with a list of private contractors. Wrong actions at the wrong is what makes government, government. Investors buying up debt is not a sign of an improving economy, it is simply and understanding of who owns the printing press.
    They have no plans for economic recovery so they will cut the budget. The actions of people without plans or purpose. The attacks on a shrinking middle class while no comparable taxes on the banks and the wealthy will only lead to continued economic stagnation. Because the initial actions of dealing with the financial crisis were wrong every following action as been to support the initial wrong decision. Saving the bankers and not holding anyone accountable for a banking cabal of collusion that striped individuals of retirement accounts and investments reflected the true nature of the corruption in government and how it represents the wealthy and not the people. Until this changes nothing else will matter....and we chastise the Iraqi and Afghan governments for their corruption...we look at theirs and shut our eyes to our own.

  • Comment number 4.

    Whilst the size of the deficit may be the prima facae reason for the cuts being implemented, the fact is that many parts of the public sector have become too big, bloated, inefficient, corporatist and wasteful over the past decade or so. Deficit or no deficit the public sector must be reined in. (Go to it Eric Pickles ;-). Equally, who can sensibly argue that the amounts being paid in benefit of various sorts at the moment aren't a colossal waste of resources?

  • Comment number 5.

    OK, two questions...

    1) Why is the Bank of England NOT buying banks corporate debt as part of its QE programme???

    2) Why is it buying foreign company's debt (admittedly UK issued)

    The list below shows the asset purchase facility in corporate bond secondary market scheme purchase operation:

    Date of Operation 09 September 2010
    Total Size of Operation 344
    Stocks Offered For Purchase Amount Reference Gilt
    AZN 5 3/4 11/13/31 5 UKT 4.25 06/32
    BATSLN 7 1/4 03/12/24 2 UKT 5 03/25
    BRITEL 5 3/4 12/07/28 5 UKT 6 12/28
    BRITEL 6 3/8 06/23/37 5 UKT 4.25 03/36
    BRK 5 1/8 05/04/35 (XS0218520582) 2 UKT 4.25 03/36
    BRK 5 1/8 05/04/35 (XS0218526274) 2 UKT 4.25 03/36
    BRK 7 1/4 08/04/28 2 UKT 6 12/28
    BSY 6 05/21/27 5 UKT 6 12/28
    Stocks Offered For Purchase Amount Reference Gilt
    CENTRI 6 3/8 03/10/22 2 UKT 4 03/22
    CENTRI 7 09/19/33 2 UKT 4.25 06/32
    DT 6 1/2 04/08/22 2 UKT 4 03/22
    DT 8 7/8 11/27/28 2 UKT 6 12/28
    EDF 5 1/2 06/05/26 5 UKT 5 03/25
    EDF 5 3/4 03/08/24 5 UKT 5 03/25
    EDF 6 1/4 05/30/28 5 UKT 6 12/28
    EDF 6 1/8 06/02/34 5 UKT 4.25 06/32
    EDF 6 1/8 06/07/27 5 UKT 6 12/28
    EDF 6 7/8 12/12/22 5 UKT 4 03/22
    EDF 8 1/2 03/31/25 2 UKT 5 03/25
    EOANGR 5 7/8 10/30/37 5 UKT 4.25 03/36
    EOANGR 6 3/4 01/27/39 5 UKT 4.75 12/38
    FGPLN 6 7/8 09/18/24 2 UKT 5 03/25
    FRTEL 5 1/4 12/05/25 2 UKT 5 03/25
    FRTEL 5 5/8 01/23/34 2 UKT 4.25 06/32
    FRTEL 8 1/8 11/20/28 2 UKT 6 12/28
    GE 5 1/2 06/07/21 5 UKT 4.75 03/20
    Stocks Offered For Purchase Amount Reference Gilt
    GE 5 1/4 12/07/28 5 UKT 6 12/28
    GE 5 1/8 05/24/23 5 UKT 4 03/22
    GE 5 3/8 12/18/40 5 UKT 4.75 12/38
    GE 5 5/8 09/16/31 2 UKT 4.25 06/32
    GSK 5 1/4 04/10/42 5 UKT 4.75 12/38
    GSK 5 1/4 12/19/33 5 UKT 4.25 06/32
    GSK 6 3/8 03/09/39 5 UKT 4.75 12/38
    HMSOLN 6 02/23/26 5 UKT 5 03/25
    HMSOLN 7 1/4 04/21/28 2 UKT 6 12/28
    IBESM 6 3/4 05/29/23 5 UKT 4 03/22
    IBESM 7 3/8 01/29/24 5 UKT 5 03/25
    IIILN 5 3/4 12/03/32 5 UKT 4.25 06/32
    IIILN 6 7/8 03/09/23 2 UKT 4 03/22
    LGEN 5 7/8 04/05/33 2 UKT 4.25 06/32
    LINGR 5 7/8 04/24/23 5 UKT 4 03/22
    MOTOPG 5 3/8 06/28/22 5 UKT 4 03/22
    NGGLN 5 7/8 02/02/24 5 UKT 5 03/25
    NGGLN 6 05/13/38 5 UKT 4.75 12/38
    Stocks Offered For Purchase Amount Reference Gilt
    NGGLN 6 1/2 07/27/28 5 UKT 6 12/28
    NGGLN 7 12/16/24 5 UKT 5 03/25
    NGGLN 7 3/8 01/13/31 5 UKT 4.25 06/32
    NGGLN 8 3/4 06/27/25 2 UKT 5 03/25
    NGN 4 7/8 06/30/27 5 UKT 6 12/28
    NGN 4 7/8 11/15/35 5 UKT 4.25 03/36
    NWENET 6 1/8 07/21/21 2 UKT 4.75 03/20
    NWENET 8 7/8 03/25/26 5 UKT 5 03/25
    NWGLN 5 5/8 04/29/33 5 UKT 4.25 06/32
    NWGLN 6 7/8 02/06/23 5 UKT 4 03/22
    PG 5 1/4 01/19/33 2 UKT 4.25 06/32
    PG 6 1/4 01/31/30 5 UKT 6 12/28
    PPL 5 7/8 03/25/27 5 UKT 6 12/28
    PRUFIN 6 7/8 01/20/23 5 UKT 4 03/22
    RWE 5 5/8 12/06/23 2 UKT 4 03/22
    RWE 6 1/4 06/03/30 2 UKT 6 12/28
    RWE 6 1/8 07/06/39 2 UKT 4.75 12/38
    SEVTRE 6 1/4 06/07/29 5 UKT 6 12/28
    Stocks Offered For Purchase Amount Reference Gilt
    SGN 4 7/8 03/21/29 5 UKT 6 12/28
    SGN 4 7/8 12/21/34 2 UKT 4.25 06/32
    SGN 6 3/8 05/15/40 2 UKT 4.75 12/38
    SGOFP 5 5/8 11/15/24 5 UKT 5 03/25
    SSELN 4 5/8 02/20/37 5 UKT 4.25 03/36
    SSELN 5 1/2 06/07/32 5 UKT 4.25 06/32
    SSELN 5 7/8 09/22/22 5 UKT 4 03/22
    SSELN 6 1/4 08/27/38 5 UKT 4.75 12/38
    SSELN 8 3/8 11/20/28 5 UKT 6 12/28
    TELEFO 5 3/8 02/02/26 5 UKT 5 03/25
    TSCOLN 4 7/8 03/24/42 2 UKT 4.75 12/38
    TSCOLN 5 03/24/23 5 UKT 4 03/22
    TSCOLN 5 1/2 01/13/33 2 UKT 4.25 06/32
    TSCOLN 5.2 03/05/57 5 UKT 4.25 12/55
    TSCOLN 6 1/8 02/24/22 5 UKT 4 03/22
    TSCOLN 6 12/14/29 2 UKT 6 12/28
    UU 5 02/28/35 2 UKT 4.25 03/36
    UU 5 5/8 12/20/27 5 UKT 6 12/28
    Stocks Offered For Purchase Amount Reference Gilt
    VOD 5 5/8 12/04/25 2 UKT 5 03/25
    VOD 5.9 11/26/32 2 UKT 4.25 06/32
    WESWAT 5 3/4 10/14/33 5 UKT 4.25 06/32
    WESWAT 5 3/8 03/10/28 2 UKT 6 12/28
    WMT 4 7/8 01/19/39 5 UKT 4.75 12/38
    WMT 5 1/4 09/28/35 5 UKT 4.25 03/36
    WMT 5 3/4 12/19/30 5 UKT 6 12/28
    WMT 5 5/8 03/27/34 5 UKT 4.25 06/32
    Note: Figures for amount are in GBP million.

    SOURCE: Bank of England

  • Comment number 6.

    "If all the economists were laid end to end, they'd never reach a conclusion." ~ George Bernard Shaw

  • Comment number 7.

    Further, I would add to this side of the debate by saying that if anyone is hoping that the planned US fiscal stimulus is going to offset the coming austerity in the UK and Europe - it is simply too small to have an effect. $50Bn US is just 0.05%GDP! So mass-unemployment is on the way.

    The reason the monetary stimulus (QE) has only had a limited affect is because a) Banks only lend when they feel like it - not just because they have spare reserves, and b) giving cash injections to big corporates who are unlikely to use it to create jobs is pointless. This money should be clawed back (using reverse QE) and redirected into proper fiscal stimulus at the bottom end of the economy (e.g. Job Guarantee, small business loans etc).

    Kind Regards

  • Comment number 8.

    For me, you can save the "How to decide" blog. I stand firmly on the side that says investment must continue, perhaps not at the rate we saw under the last couple of years of labour, but it must not be cut now and most certainly not at the rate placed down by the ConDems and in such a regressive manner.

    I fear the double dip, not because I am a pessismist, simply because I see it as a racing certainty. I wonder what odds I'd get at the bookies on this? After all, I'm certain some casino style hedgies are preparing some financial vehicle for the same bet on the stock markets.

  • Comment number 9.


    "Equally, who can sensibly argue that the amounts being paid in benefit of various sorts at the moment aren't a colossal waste of resources?"

    This money is not wasted, infact it is the only thing that is propping up aggregate demand in the economy at the moment. These benefits are helping people to buy goods and services and helping to prevent the economy going back into recession. Welfare is not just social policy, it is macroeconomic policy too.

    Kind Regards

  • Comment number 10.

    4. At 2:11pm on 08 Sep 2010, Brian_NE37 wrote:

    Any hard evidence for this position?

  • Comment number 11.

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

  • Comment number 12.

    Good write-up, Stephanie.
    I think a large part of the problem and why the public is getting so very angry is that the financial institutions just keep on bonusing, hedging, gambling and speculating while the cost of this free-for-all is dumpted onto the backs of the taxpyer. If that's not a double-tier living standard, what would be?
    And you know what?
    The publuc is right!
    If anyone must face austerity from George Osborne's steepest cuts in 50 years, why in Heaven's name isn't it the financial institutions that put us in all this debt?
    Indeed, Mr Osborne is wrong to say there is no alternative to his plans. As you say cost of "borrowing is already falling, without any help from new spending cuts."
    As I say, we need a Tobin Tax on all foreign exchange transactions; In fact the EU is working on this now and 60-country submission will be made to the UN.
    We need to bring these transactions under monitoring, scrutiny and accountability, and personally, I can think of no better way than capturing an audit chart and imposing a tax. This tax should not be held to help bail-out future gambling by the gambling banks, but should be immediately diverted to the deficit and assistance of social programs that should not be cut.
    Please, forget those economists who support a big new stimulus programme in the UK! Enough already!! Stimulus, in my book, was a mistake in the first place. The first thing that should have been done was find a way to make the guilty financial institutions pay for what they had done. Why did this not happen. Why did the burden land on the taxpayer? Do you fine an innocent man for the crimes of a known miscreant?
    Please, forget about the economic performance of the US; the Government there has surrendered so throughly to the gambling-speculating financial institutions that it can't even pass meaningful financial reform, and as you say "the US..has not said how it will cut its massive deficit".
    Investors with investment banks, which are a large source of the problem for the rest of us, are not foocussed on the size of deficits - or fears of inflation. All these investment banks want is $$$$$$$$, dividends, $$$$$$$ and more dividends...
    If you want to nip these money barons where it hurts, tax them to the benefit of the poor, overburdened taxpayer.
    As you write, "There is simply no historical precedent for budget cuts on this scale - across so many countries - in the wake of a financial crisis which may subdue growth."
    So why is it happening now? Why are we letting it happen now when we know, for example that Goldman Sachs (credit default swaps) helped to take Greece to the cleaners? Why aren't we taking steps to reign in this huge investment banks that know no regulation?
    To protect and allow investment banks to operate in their own little world of BIG money while the rest of us eat cake is just plain wrong?
    As for cutting the public sector, I haven't seen a report yet that validates these cuts; possibly the intent is far more cruel as in reducing salary costs and reducing pensions, hurting more little people.
    I already know which side I am on:
    I am on the side of the taxpayer.
    I am against unregulated investment banks that fail to split mom & pop banking from speculation, and KNOW that they can get away with financial murder because for some reason, Governments do not want to make them accountable.

  • Comment number 13.

    This governments stated policy is to 'do something' about the defict, regardless of pro or anti Keynesian theory.
    That they will push the country into a serious recession I have no doubt. But as the opposition are currently non-existent, as they were when tatcher ruled our world, do not expect them to change policy if a few million are thrown out of work. No doubt we will be bombarded with more Nu-Labour type statistics that tell us we are all better off, even though no one will believe they are better off.

    Finance, don't you just love it!

  • Comment number 14.

    #12 Bluesberry "If anyone must face austerity from George Osborne's steepest cuts in 50 years, why in Heaven's name isn't it the financial institutions that put us in all this debt?"
    Exactly...if government spend overran because we thought we could afford diversity managers so did the level of house prices because of the asset bubble and while we're at it bank profits and consequent bank bonuses. All inflated to artificially high values.
    If you ask Joe Public if they were worried that the banks would leave the UK they would, I guarantee to a man or woman, say let them go. If the migration of banks offshore happened then it would generally be the investment banking arms being so sensitive to tax. The retail (utility) bits would stay as they have c.50million customers here who they make a killing from as a matter of routine.
    It would wipe out significant tax revenues, accepted, but managed over a period of time this would allow our skewed economy to adjust. Investment would return to being long term and for the benefit of UK, not buying up the world supply of cocoa.

  • Comment number 15.

    I am sure that the real reason that this policy was adopted was that it was seen as an election winner, because it fitted so neatly into the right wing idea that it is in principle a good idea to cut back the size of the state.

    Cutting back the size of the state is probably no longer a winning idea by itself. Too many middle income people had discovered that even though taxes had gone up under Labour, they nevertheless had a substantially better standard of life than in 1997. The millions working in the caring professions knew that this was the result of money being pumped into areas like the NHS and education. But adding the fear factor by means of the absurd notion that the UK might suffer the fate of Greece, if we did not act quickly, revitalised the policy.

    It is perhaps significant that the US, the arch exponent of the small state is having a difficult recovery, while Germany,the arch exponent of the much derided European model, is doing rather well.

  • Comment number 16.


    i watched that video the other night - interesting stuff. evidence, if any more was needed, of who's really pulling the strings - and just how long it has all being going on for.

  • Comment number 17.

    What we have with this new government is a more radical attack on the public sector than that even contemplated by Thatcher. That is the real political meaning of their commitment to reducing the deficit. Sad to say that their approach was previewed by some of the actions of Blair-Brown

  • Comment number 18.

    All these people who are claiming that the banks should pay for the defict are I think slightly off course.

    If I go on a holiday that costs a lot of money, and as a result find my self in debt, do I then blame the travel company for getting me into financial trouble? and if I say that they should pay to get me out of the situation, who would agree?

    We borrowed the money, the banks just gave us what we asked for. We now have to pay for our own extravagences.

  • Comment number 19.

    Why is it banks can call in loans at any time, if they feel they have reason to do so and yet the Government are not calling in our loans to the banks, who are making vast profits and giving themselves obscene bonus'
    The last Government borrowed to bail out the banks, not to spend for spend sake. The amount we bailed out the banks is vast compared with the national debt. Why are we all going to suffer because of their imcompetence and greed of a few? Called capitalism, free market etc. Riches for the few.
    Also where do people honestly think the public sector spend the money they use, on themselves!!! The money the public sector spend is almost all spent in the private sector, from loo rolls to IT, to construction, in fact most sectors benefit in some way shape or form from the public sector. Why do people demonise the public sector, maybe when they start loosing their jobs because of the Government cutbacks they will see the public sector differently??
    Throw millions of people out of work and they are not paying taxes and picking up benefits and not spending, possibly using the NHS more for depression etc.and since many major companies have relocated overseas, I am not sure what the Government thinks we are going to export to buy ourselves out of this hole.
    We have no real manufacturing base and all the skills have gone long ago. No-one is going to invest in new factories and please don't tell me the financial sector will bail us out. They got us in this mess fairly and squarely in the first place. Would hate to think we are depending on their expertise to bail us out!

    This Government is opening up a can of worms, if they continue down this route and civil unrest is a real possibility.
    Divide and rule was Mrs T's philosophy but if they think they can do it this time, they haven't reckoned on the power of the Internet to galvanise people into protesting.

    I didn't vote for either of the coalition parties, as I remember the pain of the last Tory Government and leopards don't change their spots, why should they, they are who they are.
    Those who voted for them must accept the pain they are going to inflict and the rest of us have you to thank.
    Not long ago they were quoting billions to prop up the banks, nightly on our screens now they talk of millions being taken away from those who cannot afford it. Take away free bus passes and some people will be trapped in their homes seeing no-one day after day. This is the cost of some bankers bonus'
    Vindictive politics, the reason I know not why, as yet.
    I feel so sorry for the Lim Dem supporters who spent hours and hours on the streets persuading people to vote for them in the belief that their manifesto was a true reflection of Lim Dem beliefs and the policies they stood for. They must feel so betrayed by their politicians in Government who have just rolled over like puppies and accepted every Tory policy.

  • Comment number 20.

    The SecretofOz film on Youtube shows a different way that all in the BBC seem to ignore – debt free money. It has existed before and the roof didn't fall in; its just that the banks wanted to be in a position of power over states and they managed to get themselves into that position. They are hardly likely to now give it up at all easily. In fact they will probably have to be forced to. If the BBC is independent, surely it should be picking up the ideas shown in this overly long video and those from similarly minded researchers [eg. The MMT community], making a programme and letting all see there is an alternative. First, with a programme that simply explains the ideas, then with a second programme where there is a debate between those for and against.

    The public can then be informed {BBC charter is to keep the public informed}.

    So why is this not happening?

    Answers on postcards to the BBC Board of Trustees. Better still, we should all write to the BBC requesting such a programme be produced. I'm sure contributors to this blog would form a willing audience to the debate in the second programme. Also we could also do much of the BBC programme researchers job by suggesting how the programme might be organised and structured.

  • Comment number 21.

    If borrowing is falling without Osborne's intervention then we can only assume that it was Gordon Brown who did the borrowing and Alastair Darling who did the cutting.

    I think there is a risk that cause and effect are getting confused. Our improved condition, if you can call it that, according to the IMF is that we can borrow some more and so logically can cut less and more slowly. Yet possibly this situation has come about because we have committed to cut more. I don't know.

    Yesterday I remarked that whether to cut or not is not necessarily a rational decision but a visceral one. I am by instinct dour and austere, so deplore borrowing and I fear indebtedness. I also intensely dislike the nature of the modern state. Others have a more relaxed attitude to borrowing and to government.

    It is quite evident over the last few days that there are people all over Europe who feel they have been let down by governments who have taxed on the basis of promises they cannot now fulfil, abused by bankers who continue to pocket huge salaries despite their industry being taxpayer funded, and now are facing the ruin of all their plans and dreams. I am one of them and I too am angry about it.

    In my view this will eventually feed through into a redefinition of politics and an alternative view of the state. Social democracy has failed. The turbo-capitalism of big business has also failed. The corporate idea of big business and big government working things out to benefit everyone has also failed. I am not surprised at this failure: I expected it.

    Sure the knee-jerk response of the Ritual Left will have all the comrades out on the streets. Good luck to them. But this will be such an inadequate statement as to how the public feel it will inevitably fail. Change it has to come but what change, how and when? This is a time for radical thought: the action will have to come later.

  • Comment number 22.

    austerity and cut backs must come. just think about the bureaucracy in Cumbria 400 plus elected officials plus all the quangos etc. for only 500,000 people think of the cost.
    there is one city carlisle 100,000 and 84 councillors.. why.. no decisions can be made lets cut down to 12 -16 councillors....
    expenses have been estimated at £12,000 per councillors never mind the hours spent to compromise negotiate and still no decisions...

    lets get on and make government less expensive and most important work fast and efficient

  • Comment number 23.

    Neither of the alternatives put forward are viable. Both depend on evoking the prejudices of the 2 major political tribes. Sadly the criticisms of both are correct, and neither gets to the heart of the problem. We don't have enough well paid jobs.

    So there is a 3rd way.

    1st. A simple (ie not accounting the potential for political embarrassment and interest groups) cost benefit analysis for every rule, reg and piece of legislation which adds cost to UK business and consumers. Dump those that fall over.

    2nd. Define the core functions of the state, ie law and order, defence and taxation, rationalise these and keep in house. Hive off everything else to private contractors and let them bid for those functions with draconian punishments for market fixing.

    There is overwhelming US research which proves SME's are the creators of jobs while large business' shed job. By removing the cost barriers created by legislation, rules and regs, we'd unleash an explosion in UK commerce. And with the cuts proposed, were going to need an explosion.

    If you take one thing away from this comment let it be this. The physical and trade geography of europe is such that the east and south coasts of the UK should be the richest manufacturing sites in the world.
    The banks got 'planning legislation free' london docklands and de-regulation of financial services. These created a world powerhouse in financial services.
    Manufacturing, transport, housing and retail need something similar all across the east and south of our country.

  • Comment number 24.

    The problem is that tax income less spending shows a deficit. This deficit has grown substantially as one would expect in a Depression. So 'what is to be done' (mis-citation from: Vladimir Ilyich Ulyano!!!!)

    1. Do Nothing.
    2. Raise Taxes
    3. Cut Spending
    4. A mixture of 2 and 3.

    Do Nothing - The problem with the strategy is that the country will need to borrow increasing sums of money to pay its bills (see the Greek position)

    Raise Taxes - the problem here is the law a diminishing returns - raising taxes may at present levels not increase income as it may result in increased avoidance and or so depress the economy that the profits and sales may diminish such that there is in fact less tax to be paid.

    Cut Spending - looks like the only way (perhaps - but I am not convinced that more tax rises are not still possible). Spending is made up of several parts, but most of spending is revenue spending on salaries and wages as it is, as much capital spending is already on borrowed money (see PPP/PFI etc.) So we have to cut spending and at the same time avoid actual cuts to services.

    The best way to do this (and avoid cutting services) is actually across the board pay cuts for the civil service of (say) 25%. Now this type of cut has consequences. Individual civil servants may be forced to default on loan repayments and have their homes repossessed, just as they will be if whole tranches of civil servants are sacked the other option (rather than having across the board pay cuts).

    The economic consequences of either tax rises or either type of spending cuts are the same. Less money in the economy to fund economic activity and a new slump creating the Depression that these cuts are ostensibly to avoid!

    We are unfortunately up to our necks in the brown stuff and this government's 'talk' of what it might do are in itself causing us to sink deeper quite rapidly.

    So George Osborne and David Cameron MUST immediately stop 'talking' about cuts. It was a huge and historic error to start 'talking' about them in the first place and they should have understood this if they had any economic or political understanding (which they haven't as newcomers to running anything, let alone a Nation). Cuts should have been sprung on the country not pre-announced. I am very much afraid they have single-handedly created the Depression, - from a disaster they have created a catastrophe and there is now nothing that they or we can do about it!!!

    Anyone for Soup Kitchen and Hoover-Town Tents options and futures!

  • Comment number 25.

    #20 and others

    I agree that government issued money could be one answer. I think a more realistic immediate assistance would be to simply place new legal constraints on the banks such that they became effectively nationalised, with the aim of encouraging and facilitating deleveraging.

    This debate about public debt is a smoke screen. It is irrelevant. The core problem is private debt, which is at monumental levels. The UK government is simply afraid of speculative attacks on it bonds and wants to appear to be playing to the markets. Public debt is meaningless if it is not compared with or expressed as a ratio of GDP. GDP is hampered by deleveraging.

    We should all ask Stephanie en masse to comment on why the SecretOfOz solution is not even on the table, and why direct intervention in the banks is not on the table?

  • Comment number 26.

    24. At 7:48pm on 08 Sep 2010, John_from_Hendon

    'Anyone for Soup Kitchen and Hoover-Town Tents options and futures!'


    Do you think that will be the next bubble!?!

  • Comment number 27.

    This is great - we are seeing a balanced argument from both sides. Well done. The problem is that we don't know what will happen but we know (I think) further QE and continued low interest rates at the expense of rising inflation are probably likely.

  • Comment number 28.

    That means that if there is a “winning” economic theory out there, then it must be one that argues that government action alone can help an economy recover from a crisis, and indeed maintain output growth at a level that will maintain full employment

  • Comment number 29.

    This has more to do with Stephanie's last blog but part from above that read-

    'Finally, the government says we need to shrink the public sector - to allow the private sector to climb out from under the dead hand of the state. That's a reasonable philosophical position to take.'

    -forced me to post it here, this coalition government is trying to direct the debate about cuts with quotations like the above, promoting the belief that not only are savage cuts neccessary for the sake of the economy but that the previous governments excesses mean those cuts have to be more savage, and to find it in a third person account of an argument against cuts is quite shocking from a supposedly impartial news organisation.

    Just to clarify the size of the public sector may now be over 50% of GDP but before the credit crunch/recession it was consistently below 40%, Source:, the reason it looks so big now is the private sector has shrunk so much and the (neccessary) stimulus that followed.

    Quoting the 50%+ figure (as Stephanie did yesterday) without this obvious clarification is, in my opinion, deliberately misleading and is just more propaganda about the previous governments excesses.

    Can the BBC PLEASE mention the above alongside any percentage based analysis of the size of the public sector, otherwise I and others with an objective mind will start to believe that the BBC really has been strong armed into towing the coalition party line, which would be hugely damaging to the quality of debate in this country.

    And I repeat 'to climb out from under the dead hand of the state', if that isn't trying to influence the reader I don't know what is.

  • Comment number 30.

    #25.At 8:23pm on 08 Sep 2010, Oblivion wrote:

    * * * *

    I've been out for a meal an a couple of large glasses of wine. A nice anaesthetic!

    The country's and probably the world's financial system needs to alter. All the while we are using money borrowed in the UK and having to pay interest on it, the mass of the population will suffer and have a diminishing standard of living, and now this includes all the middle classes and excludes only a limited few. I didn't realize this until earlier this year. Now I see the con-trick we have all been subjected to. Its a slow burner. My children will now reap its effects, and I do not want that. It actually doesn't need to happen to any of us or our children. We can have debt free money. There is no inter-generational financial time-bomb. The financial mechanism exists, I am now convinced, for all of the population to have a reasonable standard of living. Those who succeed on merit -great, wealth can be theirs. But for most of us under the current financial system, we will be increasingly impoverished, just due to our current financial system. I'm not even certain how many politicians and senior civil servants are really aware of what is really happening. If they are aware, then they are highly culpable.

    The change will affect the banking fraternity and many connected with it, directly or by patronage. In the UK – yes, but particularly in the US, but also in all other countries. I have no quarrel with those like Bill Gates, its those hidden from view, unknown names reaping millions a year, who JUST WANT MORE. Greed, pure and simple on their part; but their current actions also reveal their fear of being found out and potentially loosing their lifestyle. Their Fear now seems to me to drive them to protect their position, they will do and claim anything to bolster their false position. They will be able to protect it for a time, maybe for 50 – 100 years, but, in the end, they will be found out and fall. They do not seem to realise however that the current system may break them first, and much sooner than they supposed. The longer this goes on the greater their moral culpability and responsibility. In the past, for many, wealth and position, meant responsibility – this generation does not have an inkling of the meaning of this concept. So, in my view this needs to change.

    Individuals need to accept their responsibility for the debts they have incurred, agreed. But the current system has encouraged a false view that all of us can have it all now and pay in the future without the future ever arriving. The purveyors of such falsity are the real mischief makers together with those who provided the finance to lure the unsuspecting and trusting into their clutches. They, too, must bear their part of the burden in paying off the personal debt this country is now saddled with.

    I will freely admit that I do not know the best way forward. I am certain the government is going the wrong way. Debate and discussion by the open minded is needed [those with an entrenched view will not help in any way and are just intellectual and moral dinosaurs who, when identified, should just be ignored and metaphorically buried]. Innovative thought and discussion is essential to find someone of Keynes's calibre, but not necessarily his views, to show us the way to a better and secure financial future. A forum is needed for this to happen- a BBC blog, probably not; but a programme, maybe, just maybe!

    Sovereign states used to issued debt free currency. I don't see why this cannot happen again, freeing us from the current debt spiral that can only end in tears. Financiers have held us all in their thrall for many years. Their era is, I hope, now over, providing, we the people will it, democratically through the ballot box and demand it through our parliamentary representatives. Our representatives have to be forced to listen.

  • Comment number 31.

    Are we hung up on 'economic theory'? Are we hung up on balancing the books? Are we detitmined to create wealth? Are these the only things that matter.

    Further thought is the idea of an 'economic theory' just an example of an attempt to create status for what is really a hypothesis. In science a theory has some backing in practice and in general has some general acceptance (eg relativity and evolution). A hypothesis is an idea which has yet to reach this status. It could be that an economic theory is impossible to achieve, so lets's see it for what it is. A hypothesis which may fit the facts for a short time, but which will probably fail in the long term.

    In other words economists are little more than the soothsayers of Ancient Rome. There are so many of them that at least one stands a good chance of being seen to have got their predictions right. They will be given the Noble Prize for Economics or made chairman of a casino bank.

  • Comment number 32.

    #29. At 9:40pm on 08 Sep 2010, errrrrrrrrrm wrote:

    This is a good point. Percentages change - yes agreed; the cause can be in the numerator or denominator or both. Its essential to understand where the change has come from. A failing private sector can seem like an expanding public sector if the underlying figures are not also known.

  • Comment number 33.

    I well I never though that I'd come to write this, but Vince Cable will, like Tony Blair, be able to look back and say, "I was an idiot".

    Cut science and what do we have left Mr Cable?

  • Comment number 34.

    Basic journalism and GCSE economics are all you need to see where Gorgeous George is taking us.

    It is not possible to take £1 Tn of aggregate demand out of the economy and not tip it into a depression that will probably take at least a decade to recover from if we're lucky.

    The evidence already in the public domain shows that direct and indirect job loses caused by the spending cuts will clearly top 2m - the private sector will not create the 2m+ ADDITIONAL new jobs, neither will it invest the £400 Bn in new capacity or raise our exports by a third, all of which MUST HAPPEN to achieve the reduction in borrowing needed to meet the Office for Budgetary Responsibility's forecast.

    If this level of growth and investment is not met, the deficit will INCREASE, as the tax take falls and the welfare bill rises and this will hole international confidence in our economy below the waterline - there will be a run on the pound, a collapse in UK banks and big increases in interest rates, the probable halving in house prices and a whole load of other consequences we cannot yet predict. No Euro lifeline for us - we're on our own.

    Maybe I am being unreasonable? Maybe there is a resonable chance GO will hit the numbers?

    To do so UK PLC would have to outperform EVEN THE VERY BEST ECONOMIES of the last half century - UK PLC would need a revolution in productivity, in investment, in profitabilty and in competiveness. Better than China - better thn India - better than the tiger economies of the Pacific Rim and achieve export-led growth at a time of global recession that has never been done before. All these economic miracles took place in an era of easy credit, trade liberalisation and global expansion - nothing like the current economic climate.

    Face it - this is simply not going to happen - we don't have the depth of manufacturing industry, the solid export markets or the level of self-sufficiency needed to cushion these public spending cuts, but we also have an exposed currency, a dependency on financial services and an unsustainable appetite for imports we simply can't afford, in a global economy still fragile from the credit crisis where other governments are also hacking back aggregate demand in their economies too.

    GO is taking a huge risk with all our futures and those that back this policy, they had better be ready to pay the price when it fails. Say goodbye to your pension fund, your job, the value of your house and your childrens' chance of a decent life and career if he's wrong.

    Feeling lucky?

    REALLY lucky?

    Unbelievably, incredibly lucky?

    We will all need to be for this to work....

    Your kids' future, your retirement, your community, your home, your family, you career, your dreams - all are on the line.

    This is by far the biggest gamble any politicians have ever taken with a major developed economy - did we really give them a mandate to take these risks with all our futures?

    I thought the outcome of the election was inconclusive - that no party was given a mandate for their policies? That the electorate was split about what should be done?

    Yet we now have a government that trumpets that it is MORE radical than Mrs Thatcher - that is going to implement more radical more fundamental change than any other government in living menory.

    I do not accept that this is valid - I do not accept that we should see these policies as the legitimate ones of a democratially elected govenment carrying out its manifesto.

    The ConDem Coalition was not on the ballot paper - I simply do not believe LibDem voters thought in their wildest dreams that this could happen and that once the full effects of this massive and irresponsible gamble are realised,the LibDems will once again be able to hold their MPs' meetings in the back of a London Taxi.

  • Comment number 35.

    this government have been successful in blaming the undeserving poor for claiming too much in benefit- too many children, idle loafers etc - why don't they ever mention folk who lie and cheat and don't pay taxes on their large sums of money paid to spouses who live abroad. those who avoid tax at every possible point and object to every attempt to cap city bonuses and city pay no-one in this country every deserves more that 100.000per year -tops

  • Comment number 36.

    With Unemployment now set to rise sharply under this Con-Demned Governments Plans to reduce Public Expenditure there will no choice but to create more Money under Quantitative Easing to prevent both a Double - Dip Recession, [ or, rather too try to ], and to be able to Pay off our ever rising British National Deficit.

    This will mean that effectively we will be returning to Paying - Off our Debt's with a large Government Credit - Card, along with Eye-Watering Rates attatched to and upon the UK Over-Draft levels in Compounded Interest forever going upwards all the time while any Productivity in the UK's Economy continues to fall away along with still Massive forever rising Unemployment.

    The problem is once you start down this Down-wards slippery slope of a Road their will be in the Short to Medium Term NO ways left open to turn around, for even if the Government was to have a Plan "B", it will become totally impossible to turn any Cameron, Clegg and Osborne Coalition Road - Train around once it is half-way already over the Cliff.

    With Boy George in the driving seat along with Cameron and Clegg holding onto Georges Tail-Coat, none of the Working Classes at least will ever be in for any Soft Landings for many, many Years to come.

  • Comment number 37.

    #26. DebtJuggler wrote:

    "24. At 7:48pm on 08 Sep 2010, John_from_Hendon

    'Anyone for Soup Kitchen and Hoover-Town Tents options and futures!'


    Do you think that will be the next bubble!?!"

    In answer to your question: Do I think - Yes I try to!

    As to your second question: the next bubble: I hope not, but I fear that it may be! But as (an almost indomitable) optimist I know we will survive even if 30% of us go bust in the process!

  • Comment number 38.

    Guess what? I'm feeling happier tonight than I have been for a very long time.

    Look at the majority of the above posts and you can only come to the conclusion that the majority of us have little faith in the system that got us all into this mess. Nearly every poster is looking for a way out that run almost contrary to the solutions proposed by our political parties. More importantly is the emotion expressed by SleepyDormouse.

    So why am I feeling so happy? Well to me the general mood is slowly but surely creeping back to the reality that people are more important than profit. That, in terms of the market economy, the drugs aren't working anymore. That Marxism is dead, that Keynsianism is dead and so is Montearyism. That a new reality MUST be created.

  • Comment number 39.

    I'm not as optimistic as many. I don't believe our politicians are able to put country above their lust for power. The program I outlined above is no different to that china and many others have followed to successfully grow their economies. Indeed we did it ourselves for financial services and canary wharf to create our leading business sector. But as it would drive down house prices to a realistic level it's not a vote winner so it won't happen.

    On top of that our competitors are racing to adopt the internet work paradigm. We, on the other hand, have reams of legislation, rules and regs that price it out of existence. As things stand there are 2-3 million without work as a result.

    The buyers of securitized UK business loans only bet on a sure thing. They don't see a realistic program for growth from our govt that gives them the confidence to buy, so our banks can't lend to business.

    We are undergoing a paradigm shift. They're always especially painful for the many whose assets will lose value and whose skills wont attract the same premium. What's important is to facilitate this change for business and every worker to lessen that discomfort and loss.

    We need to get on with it. Our competitors aren't burdened with bubble house prices and disastrous mortgages. They are taking action.

  • Comment number 40.

    All our hopes hinge on America which is printing money like mad. This is why US GOV bonds have such low yields. The Fed is buying them up like crazy, the same goes for stocks, with retail investors taking record amounts out of the market week after week, stocks continue to rise!

    If we're smart we will not play the same game as the US, we will have policies that will make us stronger against the rest of the world, rather than copying what the rest of the world is doing. It's not what other countries are doing is working is it?

    We are far better off cutting now rather than when it is too late (see Greece/Spain/France). Seems others here disagree and think we should spend in the manner that got us into this mess.

    As the house builder Connaught found out the hard way, one day you might not be able to pay off your debt with new debt.

    Keynesianism will not work in our current state. Keynesianism policies are meant for recessionary cycles, mild recessions which are just adjustments in economies. This crisis was never that. It has been meltdown of the financial system right from the start. Then throw in housing bubbles in the UK, Europe and the USA and you don't have something a bit of Gov spending can solve.

  • Comment number 41.

    Why is it that every time we have a recession/depression that the government of the day does not know what to do? I want someone to explain to me how making people unemplyed and paying benefits to them will aid recovery as national insurance for these people is lost and as for taxing them this is a paper transaction which does not happen. Money paid out must be covered by money paid or else you are in deficit.

  • Comment number 42.

    I think someone has asked this before, but if so I didn't see the answer and aplogise in advance if I missed it. I also apologise to serious economists if it seems a totally stupid question.

    But, if there's so much debt around (public and private and across most of the world), exactly who lent this huge amount of money?

    If the lenders are the banks, are they the same banks that we (taxpayers) are subsidising? Are they governments? Or are the debtors and creditors the same entities so there isn't any net debt?

  • Comment number 43.

    Thank you for your posts over the past couple of days which have reflected the case for and then the case against austerity. I mentioned in a comment to your first post the case of Ireland which appears to be deteriorating.According to notayesmanseconomics.
    "Is the status of Ireland as a sovereign nation really that low? It is increasingly looking as if Ireland has made improvements in her public finances just in time for further problems with her banking sector to offset them and maybe be so bad they make it worse."

    What should bother all UK readers is what will happen to all the commercial property purchases in the UK by Irish institutions? Also there is a clear implication for countries with large banking sectors in relation to their economic output which is a feature we share with Ireland if not quite on the same scale.

  • Comment number 44.

    No. 42

    I don't understand that either. Its as though someone somewhere has cornered the market in money and no-one will tell us who it is. And if our banks have bought a load of sub-prime mortgages, and the mortgagees failed to keep up their payments, then why doesn't that mean that the banks now own loads of property in the US? If they've been swindled out of the property by crooked middle men why aren't they pursuing them through the courts to get their money back. The banks and building societies appear to be making no effort whatsoever to recoup their losses.

  • Comment number 45.

    The problem with UK Politicians, particularly, but not exclusively, those on the right, is that they have very little respect or feeling for 'normal' people and only think of the Markets. You could just as easily replace Markets with obscenely wealthy individuals, because in reality they control the Markets.

    UK politicians seem oblivious to the point that they need the support of the people to rule. I guess this is largely because we in this country have never had a revolution. Politicians here forget that if they stress the masses too much we could rebel and look what that did for the length of the political and ruling classes necks in France......

    On a serious note simple mathmatics dictates that if you cut loads of jobs and take lots of spending power out of an already damaged economy you have less demand for things other than energy, shelter and food. We are already seeing this in a fall in demand for things like cars and luxury goods - people arent willing to gamble on buying things they dont absolutley need. These are hardly indicators for a robust and healthy economic powerhouse are they?

  • Comment number 46.


    99% of the population owe money (to banks)
    1% of the population live a life of luxury on the interest paid by the other 99% (after the banks take their cut).

  • Comment number 47.

    42. At 10:33am on 09 Sep 2010, WolfiePeters wrote:
    But, if there's so much debt around (public and private and across most of the world), exactly who lent this huge amount of money?

    In my opinion the public debt is not debt. Public debt is accumulated Govt deficits i.e. the difference between Govt spending and taxation.
    Govt spending does not require financing from taxation, borrowing or otherwise. They can just create the money and spend it. You could view the public debt therefore as the money supply and taxation as removing some of that money supply.

    The original idea of a budget deficit was and should still be to target full employement and production of real goods and services. It is however now being manipulated by private banks for their own ends with our politicans blessings.

    Private debt has been used as spending in the recent past in the same way has the deficit should have been to maintain jobs and production. With the credit crunch that private debt is falling as people can no longer get credit (probably a good thing) but we need the deficit to take its place in the short term until we can generate real growth.

    That is why some see the upcoming cuts as a disaster because employment and output will fall off a cliff.

    Ideally if we can move public spending somewhat towards private sector growth of real goods and services and away from public sector sepnding i think that would be a good move.

  • Comment number 48.

    3. At 1:55pm on 08 Sep 2010, ghostofsichuan wrote:
    First the banks should be asked to repay the money they were given as this is a substantial part of the debt and the citizens are being asked to pay off a loan for the banks. The money was given to "save" economy but did nothing more than save the investments of the shareholders and the bonuses of the executives.
    While in truth, no-one knows exactly what would have happened if RBS and Lloyds were forced temporarily (at best) or short-term (a year or two?) to stop trading. Other banks would have followed them into administration in the UK as well as around the world.

    People would have not been paid. Businesses would not have been paid. Creditors would not have been paid.

    The knock-on effects could have been credit card company failures, haulier failures, food shortages, hospital closures, business closures and school closures all in quick succession. People would have been made homeless and jobless in$ large numbers and the legal and accountacy sectors would have been overrun and may have collapsed under the weight. That in turn could have caused more businesses to fail. Ther may have been civil unrest and increased criminality and consequent problems in the criminal courts and prison systems. Local authorities would then probably have collapsed under the resulting pressures.

    I could be wrong of course but I think that was what waited under the cliff edge we were approaching.

    And before you get too comfy after lunch, it could still happen.

  • Comment number 49.

    The problem with the way you have structured your articles is that the nay-sayers have the last word - and yet there are valid points to be raised regarding the 2nd article by those in favour of cuts. There is also a degree of Labour-style disingenuity about much of this, to take the first point as an example:

    "... the monthly borrowing numbers have come in below expectations in nine of the last 12 months."

    That is said as though the slight reduction versus expectation is in itself enough. It isn't. Not even close. IT's like saying that you don't have to bother paying off your mortgage because interest rates went down a quarter of a percent.

    It isn't necessary to play the balance game all the time in these blogs - what I wold really like to hear from you is... what do you think? By all means state your analysis in terms of pros and cons, but tell us your position or you may as well be paid as a political researcher.

  • Comment number 50.

    @46 duvinrouge

    ... they must be a lot smarter than me at finding the good interest rates.

  • Comment number 51.

    49 chris911t

    "... the monthly borrowing numbers have come in below expectations in nine of the last 12 months."

    One implication of this fact is that the structural deficit may actually be smaller than the forecasters have assumed. I personally think that there is a structural surplus.

    Kind Regards

  • Comment number 52.

    47 Alesha

    Thank you. I'm now much better informed and a little wiser.

    Unfortunately, it leads me to another quextion. I can sort of understand your argument that public sector deficit isn't really debt, but rather money creation by UKgov. I remember, back in the 60s, Wilson saying that if the gov. didn't have enough cash, they'd just print some more. However, if the real wealth (i.e. stuff that we have or make and people want) stays constant does that mean the deficit becomes a source of inflation or currency devaluation or both?

  • Comment number 53.


    The bankers & those who own bank shares (often one & the same) are keeping it all at the moment.

  • Comment number 54.

    16. At 4:03pm on 08 Sep 2010, pheasant-plucker wrote:

    i watched that video the other night - interesting stuff. evidence, if any more was needed, of who's really pulling the strings - and just how long it has all being going on for.

    And ... ?

    Are you gonna tell us?

    Or keep us all in suspense?

  • Comment number 55.

    "However, if the real wealth (i.e. stuff that we have or make and people want) stays constant does that mean the deficit becomes a source of inflation or currency devaluation or both?"

    Expanding the money supply can cause the value of the £ to fall, but only if our main trading partner nations are not expanding their money supply too. Even though they are not doing much of that now, they will probably have to to avoid further recession, and also remember that a lower £ is good for many businesses.

    In terms of inflation, it is only a serious risk if we had very low unemployment (say 2 or 3%). Inflation is caused by too much money chasing too few goods/services as you elluded to. There is plenty of spare capacity in the economy to absorb any extra money spent into the economy, and the high unemployment is one indicator of this.

    Kind Regards

  • Comment number 56.

  • Comment number 57.

    45. At 12:51pm on 09 Sep 2010, Woody wrote:

    "On a serious note simple mathmatics dictates that if you cut loads of jobs and take lots of spending power out of an already damaged economy you have less demand for things other than energy, shelter and food. We are already seeing this in a fall in demand for things like cars and luxury goods..."

    Woody, that mathematics is too simple, I'm afraid. 1+1=5 looks like a simple sum, but it is wrong.

    If you cannot afford the jobs, the spending "power" is an illusion. The fall in demand for "things like cars and luxury goods" is because we can't afford them - because mostly they are made elsewhere in the World. We have to produce enough goods or services to exchange for what we buy. Clothes, electronic goods, cars, foreign holidays, etc. have to be exchanged for something of equal value. People buy our university education, pop music, TV programmes, financial services, and many other things. But not enough, by billions of pounds.

    We need to produce more of what we consume. This is how other countries succeed: Germany, for example, or Australia.

    Government employees are essential, but they have to be affordable. Although they are productive, we can't eat, drive in or play games on what they produce, and nor can they.

    One of our "luxuries" is unproductive people. According to a news report I read today, the UK has about 4 million people living in households where NOBODY has a job. That is a luxury, but to pay for it, we need even more people producing consumables so that we don't have to import them, or so that we can export them.

    Unfortunately for all of us without jobs at present, we cost the country less unemployed than employed in public service. We need to find jobs producing things people want to buy. And soon!

  • Comment number 58.

    The issue here is that whatever response the UK makes to it's deficit - it'll be going on like this for maybe 20 years at this rate before it's back under control, pre-bank bailouts.

    The banks are the only facility to extract the billions from, otherwise it will be a whole generation wasted and we've surely seen nothing yet.
    The other possibility which I think Step has refered to is to grow ourselves out of it, which I see as unrealistic.

    Alot of posts refer to the banks being the problem, but they must in my opinion be the solution, otherwise it will drag out. I also think that the problem should not be allowed to drag on for years and years, because 'events' could conspire against the UK over a long period - maybe a currency crisis, inflation/deflation, credit rating - all sorts of things. However, until the banks are ready to be plundered for tax we're pretty much stuck. The OBR appointment might help keep the Chancellor 'real' as to what's really happening out there so things might be adjusted. I don't think the deficit will be paid off using any standard means - however market confidence does need to be maintained - trouble is it will cause alot of pain for possibly a small gain - tricky argument isn't it, but I side with making the banks pay and getting rid of the ballooned welfare state. Drastic measures may be required - forced emigration of welfare dependents - but my main point is this will carry on for years unless the banks are dealt with properly.

  • Comment number 59.

    Charlie @55 and Alesha @47

    Thanks you for your excellent replies.

    Government deficit is or can be dealt with by 'printing money' in a controlled way. Presumably, Euro region countries are limited strictly to printing paper that’s not money, bonds or whatever. As these can be paid only by printing more bonds or huge taxation and spending cuts, presumably those governments easily slide into a debt spiral. While the UK has its own currency, it has an inflation/devaluation limited degree of freedom (and no doubt there are some other rules) that the Euro countries don’t.

    Until we have an economy that can compete with Germany, it sounds like a good reason for keeping the pound.

    Am I broadly right?

  • Comment number 60.

    You're right about 'printing money' - in Modern Monetary Theory it's simply referred to as 'Deficit Spending' to avoid the historically imotive conotations, and false assumptions about hyperinflation that critics generally bring up. For your informtion, every historic occurence of hyperinflation has always been caused by a 'supply shock' of one sort or another e.g. oil in the 70's, farming in Zimbabwe, the French taking over the Rhine Valley before WWII. Supply shocks cause hyperinflation not government spending!

    As far as Europe is concerned, they do not have sovereign currency, they have Monetary Union, which means that each country in Europe does not have control of it's own money supply. For this reason countries in the Eurozone CAN become insolvent unless the ECB steps in to rescue them. The UK can (if it chooses) increase or decrease the money supply to solve it's problems - thus depreciating the currency if necessary, as was done in the 70's.

    Either way, when ever a bank issues a loan to someone - this increases the money supply, yet no one seems to complain about it depreciating the value of the £. For some strange reason, people seem to think it only happens when the government issues 'new' money.

    Hope this helps you out

    Kind Regards

  • Comment number 61.

    58 Piglet3
    The banks are to blame and should be made to pay a price.

    I think I would be failing in my duty as a human being to point out the flaw in your statement about 'forced emigration of welfare dependents'. I'm sure you're a wonderful human being, but I recommend you do some volunatary work involving working with people who depend on welfare before making such assertions. All around us there are people with undiagnosed mental health problems, young people being beaten up by their drunk step-fathers, people being sexually abused by their own families. These people can only stay alive with benefits to help them - without benefits, we would be stepping over corpses in the streets.

    I hope you take this in the spirit in which it is meant.

    Kind Regards

  • Comment number 62.

    58. At 6:42pm on 09 Sep 2010, Piglet3 wrote:
    The issue here is that whatever response the UK makes to it's deficit - it'll be going on like this for maybe 20 years at this rate before it's back under control, pre-bank bailouts.

    The deficit is a mirror image of whats going on in the economy. It does not have to be represented by public debt and it is not a target that needs to be controlled.

    Exess of Govt spending over taxation does not have to be financed by debt or taxation.
    Double entry rules do not apply to UK Govt accounting because it is the sovereign issuer of a fiat currency. There is no Balance sheet in the sense that accountants understand it.

    Govt spending is putting money into the economy
    Taxation is taking money out.
    Excess of Govt spending over Taxation replaces non spending in the private sector in order to maintain employment and output.

    Spending cuts will reduce employment and output further. They are a mistake unless the private sector is growing and I dont think it is.

  • Comment number 63.

    A question why did this blog not get a link from business page
    I only saw it today when I went looking for it as it was referenced in the new OBR blog?

  • Comment number 64.

    Cuts alone cannot create growth, that really is a no brainer
    cuts in public sector can however be a good thing, there are many non jobs and lots of overpaid management posts in the public sector. Make the cuts but spend the money helping private sector in particular engineering
    I am an unemployed software/electronics engineer, in looking for a job I see lots of little engineering companies with good products, these companies are too small to employ people who dont already have exactly the right skills, at the moment they can only poach them from each other. There are now few big firms that take on graduates and train them in industry specific skills mainly since they are only growing staff in India or China.
    Keeping the spending power of the people in the public sector non jobs is not an intelligent long term solution, its like justifying bankers enormous pay because they use the money to employ interior designers and boat builders.
    Put these 2 issues together and..
    Cut public sector pay and spend the money on setting up training centres that train in specific industry related skills as dictated by the needs of our small companies and give companies tax breaks for employing people in this country.


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