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Why the government needs another Plan A

Stephanie Flanders | 14:40 UK time, Tuesday, 29 March 2011

The government doesn't need a Plan B - it needs an alternative Plan A. That is the conclusion I have come to, observing the economic and political debates of the past few weeks.

Just so we're clear, I'm not suggesting the government should change direction on the deficit. But ministers would be a lot happier if there were an alternative scenario out there for voters to compare and contrast with Mr Osborne's.

Take today's GDP figures - which are the third official take on what happened to the UK economy in the last three months of 2010. Once again, stripping away the impact of the snow, the ONS reckons that the economy was broadly flat in the fourth quarter, with household and government spending slightly weaker than first thought, and output in the production industries a little stronger.

Ed Balls blames the government for the slowdown in the economy, even though most of the coalition's spending cuts have yet to come in. His claim is that consumers and businesses have lost confidence and cut back spending, in expectation of the larger spending cuts and tax rises to come.

In its detailed economic assessment, published last week with the Budget, the Office for Budget Responsibility does not sign up to the Ed Balls version of history. But it cannot explicitly rule it out. The simple truth is that we will never know how the coalition's deficit strategy has affected the recovery - because we will never be able to see what would have happened under a different approach.

This, more than anything, is what drives Mr Osborne's advisers up the wall. They spent most of Budget day texting or e-mailing journalists, complaining that we were dwelling too long on the economic risks of the coalition approach - and not enough on what might have happened if the deficit had continued to rise.

You can see why they would be bothered. If the choice is between no cuts and these cuts, the public will take no cuts every time. But, as Mr Osborne will tell you until he is blue in the face, that is a false choice. He and most economists would say the real choice is much less appealing: we put up with these cuts, and run the risk of a slow recovery, or even a double dip, or we cut more slowly, and run the risk of a major debt crisis.

Reasonable people can differ on which is the better course. The majority of mainstream economic opinion is in Mr Osborne's camp. But the much smaller group of Balls sympathisers includes some extremely distinguished economists, including two Nobel prize winners and the FT commentator, Martin Wolf.

In any event, neither Mr Balls nor any of the people out marching last Saturday have any intention of offering up a worked-out alternative to Mr Osborne's strategy. Why would they? It makes much more sense politically to have all voters' eyes firmly on Mr Osborne's Plan A, so they can blame his cuts for bad economic news.

Which brings me back to my starting point: the government doesn't need a Plan B so much as an alternative Plan A. It needs a worked out scenario for what might have happened to the economy and to interest rates, if Alistair Darling's plans had been implemented, or (perhaps) if there had been no deficit cuts at all.

The natural candidates to draw up such a scenario would be the OBR. Of course, you'd need lots of heroic assumptions about how the Bank of England would have responded to a slower timetable for deficit cuts - let alone the bond market. But these would not be much more heroic than the assumptions already built into their central forecast, let alone the "alternative scenarios" which the OBR has worked through to test its public finance forecasts. The OBR has, for example, carefully calculated what would happen if inflation were to remain higher for longer, or if the eurozone economies turn out to be much weaker than expected over the next few years. (In case you're interested, it thinks the economy would be weaker with higher inflation, but the public finances would be stronger, whereas neither growth nor the public finances would be hugely affected by a weak eurozone, but the re-balancing of Britain's economy would be further delayed.)

You would think it would be a simple matter to ask the OBR to run a "Darling" scenario for the public finances - or a plan for no cuts at all. Naturally, this would hold political risks for Mr Osborne if it appeared to show the economy doing better, long term, under a less ambitious approach. But the chancellor honestly believes the long-term gains of getting on top of the deficit more than offset the short-term risks to the recovery. Presumably, he would expect the OBR to reach the same conclusion. It would certainly be a good way to shut up the opposition.

All of which makes it rather unfortunate that the legislation which created the OBR explicitly bars it from considering alternative policies to the ones being followed by the government. Alternative states of the world, yes. Alternative governments, no.

Independent budget watchdogs in other countries - such as the Dutch Central Planning Bureau - often do have the power to cost other parties' policies. But you can see why Mr Osborne would want to prevent the OBR from continually second-guessing his approach. It is not the OBR's job to show alternative paths that the country might have followed, only to make an independent judgment of the path we are actually on.

The decision to limit the OBR's role means that Mr Osborne is doomed to suffer the same frustration as all his predecessors - of having his policies compared with some ideal alternative, not any alternative that Britain might have got. However, ministers and their advisers should comfort themselves with the thought that unfair treatment is the price of electoral success. Ultimately, the only way to show people what would happen in your absence is to lose.

Comments

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  • Comment number 1.

    You can hash it up as much as you desire with your economic schools and FRB/MMT theories et al but in the final analysis, a fiat currency is at the mercy of those who control the issuing of the money.

    That immediately begs the question - whom do you trust?

    An issuing Government via its central bank?

    Ooh, I'm feeling queasy already.

    It is hardly surprising that people will often, at the first opportunity, convert fiat money into something more tangible, e.g. property.

    The gruesome story of Weimar taught us all the ultimate lesson in fiat currencies - never trust them, or more precisely, never trust the Governments behind them.

    The late George Best (a footballer) said "I spent a lot of my money on booze, birds and fast cars......the rest I squandered."

    In the sense of fiat currencies, it could be argued that Mr. Best made appropriate choices.

  • Comment number 2.

    Comment # 1 related to the last blog - sorry.

    Anyway, it is up to others e.g. the Opposition to come up with a credible alternative Plan A.

    From little Balls ...

  • Comment number 3.

    GO's new Plan A should be greater public investment, and a larger deficit. If the bond market don't like it, he should simply stop issuing govt debt in response to the deficit.

  • Comment number 4.

    SF wrote: The simple truth is that we will never know how the coalition's deficit strategy has affected the recovery - because we will never be able to see what would have happened under a different approach.
    ---------------------------------------------------------------------

    It seems that you are saying that economists are as useful as headless chickens.

  • Comment number 5.

    SF wrote: The majority of mainstream economic opinion is in Mr Osborne's camp.
    -------------------------------------------------------

    As a matter of interest what was the position of the majority of mainstream economic opinion three years ago?

  • Comment number 6.

    Stephanie, I think the "Alternative plan A", in which the confidence of the markets is lost, is already being played out for us in real-time ... in Ireland, Portugal and Greece.

    The "Balls Darling (as my wife might say) plan" is being played out in the USA, but I don't think that can really be compared to Britain so long as the dollar is the world's No 1 currency and a large proportion of it still want T-bills.

    Perhaps Douglas Adams was right and the world *is* a large computer model. We live in interesting times.

    Note to self: get a book on growing vegetables.

  • Comment number 7.

    Maybe the OBR can't. But the IFS could (and should).

  • Comment number 8.

    The problem is Stephanie that we still do not know where we stand. Whilst today's figures are called final by the Office for National Statistics old numbers are frequently revised...

    Also there are alternative measures which can be looked at as I was reading online earlier today.

    "A better picture has been presented by the National Institute for Economic and Social Research which produces a monthly estimate of economic growth in the UK. It felt at the time that economic growth was positive 0.5% in the last quarter of 2010 and after a small dip of 0.2% in January has us returning to 0.2% growth in February. So not exactly inspiring but at least growth!"
    http://t.co/g1CdlYE

    So the truth is we still do not know the real circumstances.



  • Comment number 9.

    SF wrote: The simple truth is that we will never know how the coalition's deficit strategy has affected the recovery - because we will never be able to see what would have happened under a different approach.
    ================
    Which is, of course, a universal truth. If you do one thing you will never know what would have happened if you had chosen one of the many alternatives.

  • Comment number 10.

    Economist Shaun Richards explains why George Osborne's Budget is costing us more here:

    http://www.mindfulmoney.co.uk/3819/investing-strategy/budget-2011-the-hidden-tax-rises-you-should-know-about.html

    1. There are some hidden future tax rises from this section of the speech as this is announced to take place from April 2012.

    2. There was an odd forecast for inflation which implies that the Office for Budgetary Responsibility may be feeling that the Bank of England is not doing its job

    .

  • Comment number 11.

    #3

    Agree completely! Provided it's real investment, not willy nilly spending.

  • Comment number 12.

    all this talk of plan A and plan B, Labour and Conversative, cut now, cut later, public sector, private sector..........is all a smokescreen for the politicians of all sides do not want to tell the people that not only did they steer the "no more boom & bust" unsinkable economy Titanic full steam ahead into the iceberg, BUT they no longer have control of it and it is now the bond and currency markets that will decide the UKs fate.

    No, they won't admit it because that would mean the people would hold them accountable in an on the streets Egyptian kind of way.

    ...and besides, they and their friends are all doing fine thank you very much, so only too happy to keep the public arguing about how to rearrange the deckchairs.

  • Comment number 13.

    "Reasonable people can differ on which is the better course. The majority of mainstream economic opinion is in Mr Osborne's camp. But the much smaller group of Balls sympathisers includes some extremely distinguished economists, including two Nobel prize winners and the FT commentator, Martin Wolf. "

    You're getting closer Steph. I like it but, whether you nail your colours to the mast of the deficit terrorists or the deficit doves, you are still going to be on the losing side.

    Choose the third alternative. He may not be reasonable but at least he's funny.

    http://bilbo.economicoutlook.net/blog/?p=13985

    He's also right


  • Comment number 14.

    Isn't it about time Parliament had something like the Dutch Central Planning Bureau or US Congressional Budget Office so these debates could be more informed and so we have fewer situations where parties of all stripes make spending commitments before elections without saying how they'd be paid for?

  • Comment number 15.

    If Balls were to admit his and Browns thirteen years significant role in getting us into this mess and pitch in behind the government's plan, warts and all, we may see a change in the confidence factors both within our economic sphere of influence, and from a global perspective. Confidence is a crucial missing factor at present.

    The sight on TV of Balls, his Missus, Eagle, Byrne and Burnham in a permanent state of denial to their major contribution to our demise is nausiating and not doing the nation any good.

    Would the weekend anarchists be on parade if Labour were more honest about their previous role and their support for the governments future policies to attempt at turning the corner?

    From the fall of Northern Rock in September 2007 to the May 2010 election what did these useless politicians do except throw taxpayers money at the problem and increase government borrowing even more, playing treason with the nation by placing the incoming government with an even bigger agenda of cuts for the government to stay solvent.

    Labour had no real plan then and are not likely to produce anything in the near future except bile driven criticism of a government that realises the gravity of the mess and has the bottle to do something about it.

    To their credit Brown has gone AWOL and Darling is looking for another job.

  • Comment number 16.

    "It is not the OBR's job to show alternative paths that the country might have followed, only to make an independent judgment of the path we are actually on. "

    So they can tell us where we are heading, but not suggest where we should go. Wow, who thought out that piece of legislation.

  • Comment number 17.

    SF wrote: If the choice is between no cuts and these cuts, the public will take no cuts every time.

    ---------------------------------------

    Well, I won't. In fact, it is time commentators stopped talking about cuts being "bad" and government spending being "good". After all, I presume you wouldn't say more tax is good and less tax is bad?

  • Comment number 18.

    You can cut public sector budgets but that is not the same as cutting the deficit. There are not two economies coexisting but unconnected. Change the public sector and there is an effect on the private sector including those resulting from changes to taxation and benefits. Similarly changes in the private sector will affect the deficit particularly if there is growth. Osborne, in spite of protestation, has produced a policy which is not unreasonably characterised as anti growth. Any beneficial effects on the deficit will be from external sources and in spite of Coalition policies. The balance of probabilities is a slower or nil growth for 1st Quarter 2011. A policy of finding something for the 8+ million economically inactive to do is the more likely way of reducing the deficit.

  • Comment number 19.

    So, its not just that history is written by the victorious. Now the future is predicted by them and them alone as well. Nice.

  • Comment number 20.

    So the OBR isn't even allowed to model what might happen if a different approach to the deficit was taken. And the deficit is only one parameter which the government could vary. A much more interesting "alternative plan A" would be to make significant changes to the distrribution of taxation and spending, not just to the bottom line figure given by the deficit.

    It's all very well going on about the size of public (and private) sector debt. But all debt is someone else's savings (eg saved in a bank or a pension/insurance fund which then lends it out to other individuals/companies or to the State). If there is too much debt, then someone else is saving too much. The root of the problem is largely inequality. If you really want to solve the debt problem - either here or in Greece/Ireland/Portugal or elsewhere - you need policies which reduce inequality, not make it worse. For example higher taxes (or at least removal of tax breaks) on savings. It would be very interesting if the OBR was allowed to demonstrate the impact of such alternatives.

  • Comment number 21.

    Another 'Plan A'? Well, I think there is one from Labour but - apart from the mantra of halving the deficit in four years and, when pressed for details, tetchily retorting 'EMA' and 'Future Jobs Fund' - it's a bit fuzzy on the detail. As you point out, though, George Osborne wouldn't much care for another 'Plan A' in case it undermined the soundness of his own and, since they are in opposition, Labour don't particularly need or want a detailed 'Plan A'.

    So what have you got? You've got George Osborne's 'Plan A' that is, in essence, him running away,as fast as he can, from the perceived possibility of a sovereign debt crisis whilst Ed Miliband - and you have to admire his chutzpah here - invoking the likes of Emily Pankhurst, who fought the great fight for women's right to vote, Martin Luther King with his battle in America for civil rights, and Nelson Mandela's war of attrition against apartheid, has a 'Plan A' to defend diversity outreach managers, stakeholder co-ordinators and lollipop lady assessment officers...Yes, I know, most public sector workers do sterling work, day in and day out, on the front line of our society but, you've got to admit, those were three comparisons too far...

    Whatever, you can have all the macroeconomic 'Plan As' you like but I rather suspect that whichever one you go with it will evolve as it gets taken over by events-the trick is to not shout too loudly that it has evolved.

  • Comment number 22.

    It seems to me that all points under current topical discussion - the deficit, economic growth, prosperity and affluence are entirely dependent upon one massively and cynically calculated - calculation. What is absolutely central to our 'understanding' of all these phenomenon is the precise rate of real inflation. The government would have us assess all of these relative 'performances' in terms of their 'preferred' rate of inflation which is the CPI.

    The whole point here is that as much as all government policy is based upon the CPI - and once one acknowldges that the CPI is a strategically manipulated figure - one can realize that all government policy and our perceptions of growth, prosperity and affluence - are all based upon the wrong figure.

    There are I think a number of statistical anomolies that need to be addressed in that what we are told - does not seem to coincide with our experience of social and economic reality. When we are told there has been an economic recovery we think what recovery? When we are told that interest rates are at an all time historical low - we wonder how it is we are paying a 7% p.a. mortgage rate. The problem here is that the economic situation and the economic condition as it is presented to us - just doesn't add up. This means that we need to account for this discrepancy.

    Stephanie wrote on this blog.

    "In the past 40 years our economy has grown by about 2.25% a year, on average. At that rate, living standards double every 30 years. If we grow by 1.25% year instead, it will take 60 years."

    If it were true that for 40 years our economy has averagely grown by 2.25% per year, then we should all now be more than twice as well off as we were in 1969. Does anyone feel this to be the case?

    I think that there are significant problems with the measurement of both inflation and growth because this proposition doesn't logically add up. How could it be if we had truly seen 2.5% growth in both production and prosperity since 1970, that whilst there was full employment in 1969 - there are now 9.3 billion people aged between 16-65 (23.3% of the UK population) who are classed as 'economically inactive' and 2.53 million are supposedly unemployed (though it is unclear whether these people are counted as economically active or not?). We need to explain why the UK private population is £1.4 trillion in personal debt, and goverment debt at 0.9 trillion? If everyone's standard of living had actually doubled why have we been forced into debt and collectively living beyond our supposedly prosperous means?

    The only way we can account for this discrepancy is if the growth statistics are inaccurate simply because they are based on inaccurate or 'preferred rates of inflation' when the real rate of inflation has been much higher.

    That starts to explain a lot. If the rate of inflation is out by 4% then it is possible that as opposed to seeing growth at 2.5% a year on average we have actually been seeing both growth and real term incomes falling by 1.5% per year. In which case it is clearly the case that in 30 years time we will not be twice as well off - we will be a further 35% poorer in terms of GDP growth and even worse off financially as wage growth lags behind GDP growth. It is likely in this situtaion that both private individuals and governments would need to borrow even more. Living standards may be on a virtual parity with those in 1970, but this has only been achieved by both private individuals and government taking on debt. And that probably explains why UK personal debt has expanded again today as UK families and business, having experienced contracting real term wages for the past 20 years or more - have no choice other than to borrow more to survive.

    It also explains how the government deficit rises beyond 'expectations'. If they calculate their expenses based upon their preferred rate of inflation, then they cannot escape experiencing inflation at the real rate which may be 4-6% higher. Hence their budgets will always be structurally guaranteed to have a 4-6% shortfall - simply because they used the wrong inflation figure to begin with. It is not the country that is in deficit denial, it is the government that has been in real inflation denial and that is the source of all our problems.

  • Comment number 23.

    One thing that is always overlooked, when considering growth in the fourth quarter, is Labours borrowing...

    Not the massive financial debts that they rung up, but the borrowing of future growth to get them through to the election.

    Their "Support packages", the car scrappage scheme, the boiler scrappage scheme etc, bought forward future spending, to tide the economy over.

    Having bought forward future spending, that spending will not be needed again for some time. Therefore whilst it provided a temporary filip to the economy, the overall longer term effect will be neutral, and we now have the negative aspect of that bought forward spending as an anchor on growth.

    Commentators never speak of the effect that this spending made early is now having on the economy. Is that because it is negligible - which would suggest that the support given was also negligible, or is it just an oversight?

  • Comment number 24.

    In any event, neither Mr Balls nor any of the people out marching last Saturday have any intention of offering up a worked-out alternative to Mr Osborne's strategy. Why would they? It makes much more sense politically to have all voters' eyes firmly on Mr Osborne's Plan A, so they can blame his cuts for bad economic news.

    Stephanie, part of the problem is that your profession is not doing it job properly, holding these politicians to account for lies about the past. Take for example that Ed Balls and those around him still think they left government debt in good condition, but for the crisis. On Question Time last Thursday the same line was parroted by Ken Livingstone... "we were only borrowing at 40% GDP before the crisis".

    I did a quick look up for when we past £1 trillion of consumer debt (I remember it was well publicised at the time). Turns out it was July 2004. See:

    http://news.bbc.co.uk/1/hi/business/3935671.stm

    Since then it went up to about £1.5 Trillion.

    Now of course all this debt is spent, which increases GDP.

    So by allowing consumer debt to go out of control, we ended up with a level of GDP that was unsustainable longer term.

    Yet this "bubble" in the GDP was then used to justify even more government debt spending, as the amount of debt could still be increased and be "under 40% of GDP". With just simple calculations you can see that the extra £1 trillion of consumer debt over 10 years (from 0.5 to 1.5 trillion) allowed the government to increase borrowing by £400 billion without changing the debt to GDP ratio.

    Looking at that 2004 article linked above you see the following:

    Bank of England's chief economist Charles Bean yesterday played down concern about growing debt. The £1 trillion figure, he said, did not mean UK households were sitting on a "time-bomb", since an increase in borrowing had been matched by an increase in financial assets.

    This is a circular argument. The "market" had decided that the same pile of bricks and mortar were worth over twice what they had been about 7 years earlier (and by 2007 they were three times). So there had not been any REAL growth in wealth that was supporting the extra debt. This should have been a massive red light to Charlie Bean.

    The problem is that the Tory opposition were totally complicit during this whole period. They were going to match the crazy levels of government spending that were based on a GDP only possible because of already massively high consumer debt. So they cannot explain the truth of the matter to the general public as it will just highlight their incompetence and untrustworthiness.



  • Comment number 25.

    The whole point of the OBR is that it is independent.

    The public are a lot wiser than is generally thought and can make up its own mind.

    Sure, there are going to be those who believe that money grows on trees - and there are more of those in the City than elsewhere - but most people can comprehend the concept of a balanced budget and the risks to be found in debt. If they did not understand it before 2008 then they understand it now.

    My concern is the focus being only on the defecit. The debt is ramping up every day now and the interest payments are to take an increasing chunk out of our earnings as a nation for many years to come. This is the underlying cause of the cuts as government spending is actually increasing.

    Whilst we can all argue over what is cut and what is taxed extra. The questions have to be did we cut in a timely fashion? Did we cut enough? Might we have to cut more? If so, what and how fast?

    Then we have to ask about a strategy for growth that is a lot less corporate than the measures announced in the budget.

  • Comment number 26.

    No.22 IBID: I do believe you have hit on something momentous. It also explains why those in work are working longer and rarely with couples one does not work. Add into this the fact that there has been large increases in the productivity of manufacturing points to the overall 'inefficiency' of the economy. In the sixties there were actual discussions about what we were all doing to find to do when the white heat of technology had produced so much leisure time! Little did we know that those with much time on their hands were trying to find ways of making ends meet on benefits whilst waiting for the arrival of the white heat of technology. In equality of income explains it for some of us.

  • Comment number 27.

    "The government doesn't need a Plan B - it needs an alternative Plan A...

    ...for voters to compare and contrast with Mr Osborne's."

    But there is no election on the horizon and 'comparing and contrasting' is not appropriate because this is NOT an A-Level exam.

    Maybe Mr Osborne needs to stick with Plan A, and if it doesn't work he should have the good grace to apologise and resign.

    He may be YOUNG and GIFTED, but that is where it ends...

  • Comment number 28.

    No.26 watriler

    Have you read 'Consumer Society' and 'The Mirror of Production' by Jean Baudrillard?

    If not they are well worth a read as at least a beginning to understanding our current situation.

  • Comment number 29.

    I have been telling my friends and family over the last 5 years that the financial situation was going to get worse. It’s simply all about “fractional reserve banking”, this is a practice that rewards the rich and punishes the poor, as the elite can inflate and deflate the money supply at will. Nathan Rothschild said a couple of hundred years ago "I care not what puppet is placed on the throne of England to rule the Empire, ... The man that controls Britain's money supply controls the British Empire. And I control the money supply." The reason why this is no ordinary cycle is that over the last 15 years the elite have dreamt of ingenious methods to inflate the money supply, such as derivatives, credit default swaps and credit cards. This caused an unprecedented credit boom. The truth is we should have had a correction by now, but the Federal Reserve in its wisdom (note the sarcasm) commenced the quantitative easing program, I call it printing money, in turn it devalues the dollar, in turn it creates inflation and the average person will suffer as the elite get rich on our backs, my goodness what a way to redistribute the wealth.
    Unfortunately many people today suffer from “normalcy bias”, but I can assure you that this will be the biggest depression ever.

  • Comment number 30.

    re #1 & #2
    Doesn't matter - still pertinent, especially the quote! Re #2, thought crossed my mind and was followed by a couple more. Is Mili-Minor hoping that the OBR will be continually popping up to do the Oppositions job? - and - Will the continual waving of a blank sheet of paper reassure the general (voting) public or annoy them to the point that N.Labour lose votes?

    Which all leads neatly on to #4: I would have thought in this day and age that there ought to be loads of computer programmes out there to run simulations of N.Labour (Darling) cuts, GO Plan A and GO Plan A(i). {aka The SF Re-mix?} The economist chickens will end up running around headless when they go looking for the N.Labour (Balls) plan. The good point at #5 leads neatly to ...

    ... #17 a debate about the size of State that the taxpayer wants to support is long overdue. It has been said that a majority of the nation are highly in favour of GO's cuts and some would like even more but a debate first would surely be a good idea.

  • Comment number 31.

    IBID @ 28

    For an understanding of the USA and global mess try Joe Stiglitz' 'Freefall' , one big hitting Economist, who saw it coming, warned and because of, I think changed his job.

  • Comment number 32.

    20. At 17:38pm on 29th Mar 2011, random_thought wrote:

    "It's all very well going on about the size of public (and private) sector debt. But all debt is someone else's savings (eg saved in a bank or a pension/insurance fund which then lends it out to other individuals/companies or to the State). If there is too much debt, then someone else is saving too much. "

    Unfortunately that is where it all went wrong, money was lent that was not savings but money secured against other debt, so the debt was other peoples debt not savings.

    It is never prudent to lend out money to people secured on money lent to other people, especially if that other lending is high risk.

  • Comment number 33.

    Geoff Berry @28

    Hi Geoff

    had a quick read of a precis about freefall and looks interesting. Unfortunately I'm too dim to come up with any opinions about any new texts until I have read them for some time (could be re-reading 3 or 4 times as I'm completely stupid). The Baudrillard texts were written in 1970 & 1973. For me what is so amazing is how he zones in all our current obsessions and misconceptions. The Baudrillard texts are hard in so much as they are French postmodernism and hyperbolic, but anyone with a genuine economic interest should pick up the essential points. I look forward to reading your recommendation anyway.

    Cheers

    IBID

  • Comment number 34.

    I think the strategy to cut the deficit is absolutely right, and I'm pleased that it is to be cut significantly and as quickly as possible. We can't have the UK at risk of the same problems that have troubled Greece and Eire...

    As for the detailed plans, that's another matter. It doesn't seem right for instance, that we've scrapped the Harrier Carrier and the Harriers. Much better to pull out of Afghanistan and let Pres. Khazi sort out his own problems...

  • Comment number 35.

    17. At 16:56pm on 29th Mar 2011, GPWC wrote:
    Well, I won't. In fact, it is time commentators stopped talking about cuts being "bad" and government spending being "good". After all, I presume you wouldn't say more tax is good and less tax is bad?
    =================
    I agree that we need cuts, but there are people who will say that more tax is good, especially when someone else is paying it?

  • Comment number 36.

    What should be of more concern than UK GDP growth is the UK balance of payment figures as announced today and which show that in the last year, Britain has imported more goods than at any time in the last 55 years.

    This is awful news for the UK economy and while we all, well some of us, like a good rant about politicians and vested interests and the establishment ... much of what is wrong with the UK domestic economy is down to us... our weakness for the consumerist bling that is thrown at us through advertising 24/7 and 365/365 ... the things that we thing we all need and we have a credit card to prove it.

    We are all the victims of our own spending habits and choices ... our UK domestic economy is weak and our UK average personal debt is high ... and we buy far too much from overseas without trying to find a British made or grown alternative.

    This is big money here £100 bn a year which is lost to the UK domestic economy ... and the Chancellor, well no Chancellor has ever had the guts to intervene here and cause pain here and bring us to our senses ... so that we buy only what we need and is good for the UK domestic economy.

    Moreover, this is more a matter of education and mindset rather than govt intervention ... but IMO ... the govt has to take a lead here ... there is no plan for short or medium term sutsianable output growth ... of the kind that will create new UK jobs by the hundreds of thousands for British citizens of all skill levels... and reduce UK import inflation ... and boost real net disposable incomes and average UK living standards.

    This is and was an opportunity lost in the budget to make some progress here ... but we should all accept responsbility here ... as the likelihood is that the British trade gap will continue its trend in recent years and get worse and worse.

    This means zero real growth, high unemployement, high inflation, lower real net dispsoable incomes and living standards ... but successive UK govts fail to even recognise the problem ... because they either do not know how to tackle it or can't be bothered. Talk of higher exports reversing this imbalance ... is just that ... 'talk' (so far).

    This is our elected govt and our recompense for buying too much foreign stuff ... we all reap what we sow.

  • Comment number 37.

    Perhaps a more useful projection, rather than looking backwards, would be to look at the potential impact that freeing up and increasing mortgage and commercial loan funding would have on Confidence ,GDP and Public Receipts..... let's call that one Plan C, and comparing it with the impact on these factors of a drive to increase lending regulations and tighten ratios.
    Such a comparison could skirt the cuts issue by focusing on growth without implying a climbdown on spending.
    It would be apolitical and very popular, and therefore it could be possible.

  • Comment number 38.

    Most people caught with their trousers down like to pull them up quickly ... but not everyone. [The world recession caught the UK economy with its trousers down]

    As well as running alternative models there are previous publications that can be looked at. Two points that arise are; once an inflation threshold has been passed (about 3% in Europe) every 1% increase reduces GDP growth by about 0.5% (on average), in developed nations there is also a government debt to GDP threshold above which growth drops (about 90%) - so not ideal to be within another world slowing of that. (Apologies to all economic authors did not intend to plagiairize, just don't have refs handy.)

  • Comment number 39.

    Good post, Stephanie!

    I still wonder. With household debt at its current level, might an interest rate rise on top of all the tax rises not be the one thing that forces employees to ask for more wages? In other words, could the Tory austerity measures be the trigger for a bout of inflation rather than preventing it?

    Do the OBR's models allow for this possibility?

  • Comment number 40.

    Thanks for a post that stands back far enough for us to be drawn to the wider, and more interesting picture, Stephanie.


  • Comment number 41.

    A new plan "A" - giving SMBs (Small/Medium Businesses) the "CAN DO" atttitude.
    The British People seem willing to put economic recovery in the hands of new businesses; therefore, they call upon the Government to facilitate SMBs.
    One poll has found that a whopping 93% of British adults see themselves as having a significant part to play in Britain’s economic recovery while only 8% believe that the economy is unable to support new businesses.
    In fact, the way things stand, this lowly, rather hopeless 8% is very likely right.
    An environment supportive of SMBs must
    - have independent retail banking without any exposure to the gambling of investment banks (i.e. split retail & investment banks);
    - business ideas that are mentored (i.e. Most pigeons can't fly until you push them out of the nest and they see: 'YES YOU CAN!")
    - set in place a financial activities tax on all transactions of investment banks. Even a lowly 1% across the EU could raise mullions providing start-up money for SMB, as well as assisting needed social programs and/or apprenticeship training.
    Mervyn King has warned that the deficit cuts inflicted by The Coalition Government will leave scars on the public imagination for years to come; whereas, the public is looking for optimism, a plan wherein they can see thie own little success.
    Mervyn therefore is demanding that The Coalition Government prioritises a methodology to assist those who would very much like to start up a new business.
    Over a quarter of the persons that were polled believed that the way to improve the economy is for more people to start their own businesses rather than wait for jobs to appear - from somewhere - and nearly one in three agrees that people should be spending less time seeking profits from house prices and more time making money from "real" work that is needed by the economy.
    It's clear to me that the British public know there is hard work ahead and they are prepared to roll up their sleaves and get it done; however, they need the support and encouragement of their leaders =
    - solid retail banks (no hanky-panky),
    - mentoring
    - FAT (Financial Activities Tax).
    I believe that the future sucess of great countries, like China, rests upon undiscovered entrepreneurs. So, can The Coalition Government harness this enthusiasm for entrepreneurship with logical, integrated polices which offer help and advice for people willing to step out of the nest and try to fly?
    By the way, the Labour Party is lagging (only 19% of Britons say that they would be the best party to nurture new tnerpreneurship, and only 7% put their trust in Nick Clegg and the Liberal Democrats to stimulate recovery).

  • Comment number 42.

    re #38
    Interesting.

    If GO doesn't bring inflation down there will be a monthly reminder of it. Even if the big unions do not get bolshie on behalf of their members, the red top newspapers will not be so coy and eventually you could see the N.Labour front bench just sitting there all tight-lipped and foldy arms, just staring at him.

  • Comment number 43.

    #32 iselworth "Unfortunately that is where it all went wrong, money was lent that was not savings but money secured against other debt, so the debt was other peoples debt not savings."

    True, securitisation made things worse. But a large part of the problem was that the banks and others had such easy access to "savings" funds that there weren't any low-risk places they could lend to any more that would get the expected rate of return, so they had to make more and more high-risk loans, using securitisation to mask the risk involved.

    Everything is still backed up by somebody's savings though, be that a Russian Oligarch's or an Arab Dictator's or the Chinese Government's or just the pension funds of the relatively well off over here. Securitisation just spreads (hides) the risk.

  • Comment number 44.

    IBID, I like your logic and agree that the measure of inflation and hence our true living standards is woefully inaccurate and misleading. All economic commentators that I listen to such as Stephanie can't seem to accept or even consider any situation medium term or relative long term that does not assume exponential growth. I conclude that this is because it is all we have come to know for the past 200 years and so we assume it is a permanent and inevitable feature of human civilisation.

    However, if you consider the basics of our finite planet it is a totally false assumption. We have been enjoying a bounty of non-renewable energy and mineral stores supplied by our finite planet and which we have utilised in our own ingenious ways. However, we have reached a point where our demand for them (exponential growth) is bumping up against our finite planet's ability to supply them. Therefore without a breakthrough in science and technology larger than any we have ever made in the past such as harnessing nuclear fusion cheaply we will be limited by our ability to grow further by shrinking energy and key resource supplies.

    This fact is coupled with the perfect storm of rising population, particularly rising affluent upwardly mobile populations in the BRIC's and OPEC countries. This puts intolerable demands on the supply of energy, food, water, and key minerals which the planet can not meet from it's shrinking and ever more difficult to extract and lower quality sources.

    Plan B needs to consider the what if scenario that medium and long term growth in energy and resource consumption is henceforth not an option. No economist is putting this worrying but true scenario at the forefront of all their pontification and hypothesising and they need to urgently.

  • Comment number 45.

    I am a bit mystified by this - what makes you think there isn't another plan A? Do you really belive a politician who has staked his (little) credibility on his current plan would trumpet an alternative scenario - it would just give the markets etc the jitters. Better to stick to the plan and change it when the economy hits the buffers.

  • Comment number 46.

    Some good points here. Only thing is the only way to escape this recession is to work hard. There's always money to be made you just have to be prepared to work harder than some one else. Don't have the attitude that the world owes you and don't think you're above certain jobs.

    Also, don't dwell on all this stuff. Assess the situation and come up with a plan. None of us can change any of this. Just adapt and succeed...

  • Comment number 47.

    christopher_bell wrote:
    Stephanie, I think the "Alternative plan A", in which the confidence of the markets is lost, is already being played out for us in real-time ... in Ireland, Portugal and Greece.
    .
    .
    .
    We are actually following the path of Ireland. Previously they increased VAT, which had led to a mass cross-border exodus while Britain reduced it in 2009 before Osborne's daft decision of rising it again in January 2011 when inflation was starting to fuel problems. They delayed a bank bailout for months which has contributed to unemployment rising above 9 per cent. We are now up to 8% I beleive and rising. They have savagely cut public spending and gone through two rounds of austerity. If things continue to stagnate, it won't be long before we have to face the same predicament. Equally worrying now is the rise in UK inflation. The fall of real household disposable income between 2009 and 2010 marked the first annual fall in real household disposable income levels since 1981. Businesses are still not investing.

  • Comment number 48.

    "The government doesn't need a Plan B - it needs an alternative Plan A. That is the conclusion I have come to, observing the economic and political debates of the past few weeks.".............A bit late in the day to have reached that conclusion, anyway an "alternative Plan A" is much the same thing as a "Plan B", as by definition only one "plan" can be implemented at any one time, even if it turns out to be the wrong one!

    "Just so we're clear, I'm not suggesting the government should change direction on the deficit. But ministers would be a lot happier if there were an alternative scenario out there for voters to compare and contrast with Mr Osborne's.".............As would many ordinary men & women up & down the land but, again, this is not a new suggestion.

    "You can see why they would be bothered. If the choice is between no cuts and these cuts, the public will take no cuts every time."..............Doubtful, as self-interest as can be witnessed with posters on blogs & rhetoric in many tabloids appear to prove........Many promote an "I'm all right Jack approach", either or until it effects them.

    Meanwhile "Plan A", according to last week's budget, appeared to show,

    That inflation continues to come in ahead of forecasts,
    That the government is borrowing more than it had planned to,
    That tax revenues have come in lower than expected (mainly due to the weakening British economy),
    Meanwhile unemployment rises,
    Living standards fall,
    An obsession with fast cuts prevails,
    Any or all plans for growth appear limited, illusory or wishful at best,

    This on top of the government's, real or at best (giving them the benefit of the doubt) perceived, inability to regulate & deal with the banks & with the real problem of tax avoidance,

    Has resulted in a projected growth figure for this year, being revised down to 1.7% from 2.1%, and growth forecasts for next year being nothing to get excited about.

    The chancellor stubbornly hanging on to his deficit reduction goals, despite a lack of growth, now effectively meaning It will take far longer to balance the budget.

    Apparently it has been suggested that cyclical factors will actually increase annual borrowing by about £10 billion a year for each the next five years.

    Much pain for minimal economic gain, what with tax returns likely to be falling, the welfare bill likely to be rising.

    Many commentators suggest that public investment has been cut too much & too fast & therefore add to the British economy's own vulnerability at a time of great uncertainty for the global economy as a whole.

    Britain is not far away from a return to recession damaging "Plan A" deficit reduction & even the, already, unimpressive growth forecasts.

    The much heralded 'budget for growth', has done little to change any of this.

    The opposition, should be more vocal & put their ideas out for public consumption, standing up for the disenfranchised voices they should be there to represent. It is shameful, that they don't & therefore, it is clear, that people cannot rely on them.

    However, more shameful is the way political commentators, journalists & those who back "Plan A" continually use the oppositions inabilities, in this regard, as being a valid excuse to defend "Plan A" even though it's not working. Most successful organisations in business, sport or even the theatre of war have more than one option or "Plan" & switch as & when necessary. The "gamble" of not having, at least, one is at best foolhardy, at worst incompetent or negligent with the likely scenarios that will play out with failure.

    Journalists & commentators should be taking Osborne & the government, far more to task for it's failings & lack of alternative plans, not making excuses for them.

    So Stephanie, it's actually time for a number of different plans, in fact they should have been formulated BEFORE embarking on this course of action. Whichever letters of the alphabet are to be applied.

  • Comment number 49.

    #46 "Some good points here. Only thing is the only way to escape this recession is to work hard. There's always money to be made you just have to be prepared to work harder "

    You are Boxer from Animal Farm and I claim my five pounds. On 2nd thoughts make that £50, you don't get much for a fiver these days..

    As for the government they have upset the public sector but that isn't enough. Whatever they do (even if they do nothing) they have to upset a lot more people before the next election. All they have is a choice: who and how much.

  • Comment number 50.

    #22 IBID "We need to explain why the UK private population is £1.4 trillion in personal debt, and goverment debt at 0.9 trillion? If everyone's standard of living had actually doubled why have we been forced into debt and collectively living beyond our supposedly prosperous means?"

    Well for a start private pension wealth in the UK is around £3.5 trillion (2008 figures so it's probably more now), most of which is owned by the richest 10% of the population (and I think a third is owned by the richest 3%). It has to go somewhere. It's not really needed for net capital formation as this is mostly covered by State spending or companies' depreciation charges on their balance sheets. So it's lent to the Government, individuals etc getting them into debt.

    It's not just growth that matters, it's the distribution of wealth and income.

    Having said that, I entirtely agree with you regarding how misleading inflation figures (and hence growth figures) really are.

  • Comment number 51.

    The Government cannot control the economy because:

    1. Government cannot control the quantity of money, unless they control the amount of interest bearing debt.

    2. Government cannot control inflation, unless they control the quantity of money.

    3. Government cannot control the nation’s direction unless they control where credit is extended.

    I believe the following to be true:
    If the state (which is us) does not control the creation of money and credit, then the state (which is us) can only ever be at the mercy of those who do.

  • Comment number 52.

    47. At 21:50pm on 29th Mar 2011, modest_mark>>>

    The big difference between the UK and Ireland is that Ireland is locked in to the Euro. This is a clever exchange rate mechanism that benefits Germany by giving it an exchange rate that is way too weak. Ireland cannot print its own money (QE anyone) and so has no way of effectively devaluing. What the UK is doing is devaluing through higher inflation and the exchange rate will reflect this. The negative effect of this on us is that imports are more expensive. The positive effect is that exports are more competitive but it will take ages for this to feed through (if at all). My own gut feeling is that the sooner the PIIGS get out of the euro the better for them.

  • Comment number 53.

    49. At 21:58pm on 29th Mar 2011, inacasino wrote:

    You are Boxer from Animal Farm and I claim my five pounds. On 2nd thoughts make that £50, you don't get much for a fiver these days..


    Not quite. I'm too cynical and I'm not dim but not super intelligent either.

    My thoughts on the deficit and cuts...

    There are cuts that can be made in the public sector. I've seen these possibilities myself. They don't include job cuts, however.

    The only way forward is to be more productive as a country. Cut some of this wealth redistribution via benefits (Socialism). Make working always pay over staying on benefits. Labour's brand of socialism (Benefits and Public sector bloat) was a method for breeding inefficiency. And that's what our country has become and still is. However you look at it, cuts or no cuts, its productivity per head of population that counts.

  • Comment number 54.

    22. At 17:48pm on 29th Mar 2011, IBID wrote:
    “The whole point here is that as much as all government policy is based upon the CPI - and once one acknowldges that the CPI is a strategically manipulated figure - one can realize that all government policy and our perceptions of growth, prosperity and affluence - are all based upon the wrong figure. “

    Yep.

    “…It also explains how the government deficit rises beyond 'expectations'. If they calculate their expenses based upon their preferred rate of inflation, then they cannot escape experiencing inflation at the real rate which may be 4-6% higher. Hence their budgets will always be structurally guaranteed to have a 4-6% shortfall - simply because they used the wrong inflation figure to begin with. It is not the country that is in deficit denial, it is the government that has been in real inflation denial and that is the source of all our problems.”

    Ibid

    And then when companies are scratching their collective heads about the extra 4-6% increase they pumped into their company and realise they are still failing, good money after good money after bad…

    Inflation needs to be considered at about 11-13%

  • Comment number 55.

    I hate to say it but no plan on this earth will ever get things back to the pre slump era, every ounce of faith and trust vaporised when the magnitude of this financial mess came out in the open. To this day I think the scale & size of this cock up has not been fully revealed.
    How do you get people spending again when a huge debt load has gone onto their backs, any fool who says he has a plan is using smoke & mirrors to try and con people into their old spending habits.

  • Comment number 56.

    "The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and withdrawal of money, shall be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine what is sound and what is unsound ...Government should adjust its rates of expenditure and taxation such that total spending is neither more or less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is deficit, greater borrowing, "printing money," etc., then these things in themselves are neither good or bad, they are simply the means to the desired ends of full employment and price stability. "

    Abba Lerner (1943) on Functional Finance

    But what did he know?

  • Comment number 57.

    56. At 05:20am on 30th Mar 2011, EconomicsStudent wrote:
    "The central idea is that government fiscal policy, [...] are simply the means to the desired ends of full employment and price stability. "

    Abba Lerner (1943) on Functional Finance

    But what did he know?

    _____________________________________________________________________

    Define the borders, rethink the goals and all falls into place.

  • Comment number 58.

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

  • Comment number 59.

    Oops I think MoreQthan A was about to place Lerner in Steph's Unreasonable category.

  • Comment number 60.

    which is where, by her definition, he should be

  • Comment number 61.

    I am getting a bit fed up with comments like #15 about what the Labour Party did wrong. Yes, they got it wrong and Yes, that was because they were involved in a vain attempt to stay in power. It was quite obvious that they needed to stop spending though I do not recall vast numbers of couch potato experts being so certain of the dangers in 2007. The issue is politics and getting re-elected.

    No party would have done what was needed - cuts and tax rises before the election. Those who say that other parties would not have been in in such a position, although there is an element of truth in what they say, seem to ignore the fact that it was a global crisis. Some fiscal adjustment would have been necessary whoever was in charge. The politics are that being tough now, if things go to plan, will allow an easing in the run up to the next election. Gradual cuts will not be able to promise a new dawn in time.

    In other words, the reason why Brown didn't do anything is for exactly the same reason why Osbourne has to do things quickly.

    #55 amuses me when they talk about a 'cock up'. This implies that there is a correct way to run the global economy and ours in particular. There may be (are) better ways to run an economy. The abiding result of any study of the history of economies is that many countries have had 'booming' periods of growth and near full employment. But ALL countries have eventually failed to recognise and take the appropriate action when the fatal wobble started to make its earliest trembles. Given the 10 economists have 11 opinions, there will always be someone who can claim to have been right and predicted the future, but that doesn't mean that they will be right for the next 20 years and be able to carry a large number of people with them. Until you get such a position we should reduce 'cock up' to 'got it wrong this time', recognise that running an economy is not a perfect science and become a happier people, recognising that part of living is to experience ups and downs. Though we can still complain about their size.

  • Comment number 62.

    We do know what Labour's projected numbers would have been from Alan Budd's pre June budget OBR projections. These were based on Labour's plans to halve the structural deficit over 4 years (and presumably remove over following 4 years).

    Looking at that report and comparing to Osborne's post March OBR position we have the following by April 2015:

    Debt: Tory £1314bn versus Labour £1376bn
    GDP: Tory £1814bn versus Labour £1802bn
    Deficit: Tory £46bn versus Labour £71bn

    The Tories deficit is apparently all non-structural by then, but put lipstick on a deficit - its still a deficit. It still adds to our debt, there's no get out clause because its deemed to be non-structural.

    What this shows that with a following wind both plans would potentially remove deficit by circa 2018/19, but by employing different rates of cuts, with associated impacts on growth at different points between 2010 and then. The Tories foolishly thought they could talk down the economy to the extent they did last year, and announce the scale of cuts, with no impact on growth in the near term. Now thats not something you can put true economic theory or indeed hard maths to, but surely sentiment is crucial in all of this.

    Steph - you can be behind Osborne's plans all you like, as can his (diminishing?) business and economic pals, but each time he stands up (budget 1, autumn spending review, budget 2) the grwoth predictions take another dive. If he doesn't watch out his numbers will show absolutely no difference from Darling's before much longer.

    A final thought on the borrowing cost point. We're borrowing at about 30-40 basis points or so more cheaply than last year at the 10-15 year point. Now yes that may be partly due to Osborne's stated deficit policy, but I really doubt the market is pricing the full amount on the basis of £60bn less debt build up over 5 years. At least some will be to do with continuing Euro problems, making even £ debt look more attractive. If we say 20bps is the Osborne effect then on the £60bn extra at 2015 we will be saving £120m per annum of interest.

    Hmmm, all in all there is really not much between Plans A, B, A+, A-, etc, etc.

  • Comment number 63.

    This is all tinkering and self-indulgence by a redundant group. What is actually necessary is a total revolution in governance and financial frameworks.

    The current system is game-over. It's just a delayed end to the cold war. Since Reagan and Thatcher the policy has been borrow to fund an illusory quality of life. The Soviets went down and the West just came a decade or two later.

    This blog has been blathering about recovery now for THREE YEARS. See you in another three when the same idiots are rearranging the same deck chairs.

  • Comment number 64.

    If anyone want to know where Labour policies would have lead they need look no further than Ireland, Greece and very soon Portrugal. Sure we can argue the situation wasn't as bad and we had more wiggle room. But we were calculated to spend far too much money and hence the amrkets would have doubted that we could credibility have repaid it. From their the spiral is vicious, more interest is demanded, which make it still less credible we could pay and hence yet more interest would be demanded. 7-8% of 200+bill and we're bust.

  • Comment number 65.

    An alternative plan A would be much deeper tax cuts and massive public spending cuts. Hearing the Arts Council on R4 his morning bleating about a few million in cuts tells me that GO is not really trying. Georgie, I can spend my money far better than you can, and it won't be on ballet.

  • Comment number 66.

    Who will read me?
    When there is so much else?
    Why will they read me?
    When I write too much?

    Where is my Plan A,
    When Plans B to Z don't exist?
    What is my economy,
    If I only manage it fiscally?

    Monetary,
    Fiscal,
    Quote Keynes and run away,
    When you don't know
    what the system is
    And you have to wait for a genius
    To re-design the whole damned Global Thing.

  • Comment number 67.

    #20 Random thought

    "All debt is someone else's saving".

    I have always assume this to be so, but just lately a nagging doubt has crept in. AS I understand the fractional reserve banking system, something over 96% of the money around is "created" as debt by the banks (recycling lent money over and over). Logically, therefore, only 4% is someone else's saving.

    Please correct me if I'm wrong, but this vehicle appears to let the banks (who are able to self-assess their tier I etc capital) go on lending more and more to Government without any real connection to someone else's saving - unless and until there becomes a rosk of default that the banks can't ignore.

  • Comment number 68.

    Thanks Steph for some precise, plain English, right on the 'Ball' stuff.... more please!

  • Comment number 69.

    65. At 09:30am on 30th Mar 2011, Libert_arian wrote:
    An alternative plan A would be much deeper tax cuts and massive public spending cuts. Hearing the Arts Council on R4 his morning bleating about a few million in cuts tells me that GO is not really trying. Georgie, I can spend my money far better than you can, and it won't be on ballet.
    ------------------------------------------------------------------------------------------------------------------------------------------

    Going by your pseudonym, I guess there isn't a lot we would agree on, but this post is absolutely spot on. I listened to the same interview this morning, and was almost physically sick at the thought of what we are cutting in terms of useful public sector jobs, while these luvvies moan about a minimal reduction in their bloated budget. But you can bet your socks that GO and Mrs GO simply love the Ballet, and an odd night at the opera, so these self-servers will actually get a hearing. Austerity Britain? All in this together? Don't make me laugh.

  • Comment number 70.

    54. At 00:22am on 30th Mar 2011, Remantled wrote:

    Inflation needs to be considered at about 11-13%
    --------------------------------------------------
    Interesting. I think Disgruntled of Gloucestershire will be marching with the TUC about 3 to 5 points before that.

    8% the trigger point? Could be wrong of course ...


  • Comment number 71.

    On the Invissible bond vigilantes:

    From above, "But, as Mr Osborne will tell you until he is blue in the face, that is a false choice. He and most economists would say the real choice is much less appealing: we put up with these cuts, and run the risk of a slow recovery, or even a double dip, or we cut more slowly, and run the risk of a major debt crisis."

    Who are these most economists, and how do you quantify their number? My impression is that most economists do not support current government policy - it would be nice to see the BBC do a survey of economists on this issue. I'm puzzled how you can say that the concept of a liquidty trap, despite being in undergraduate textbooks certainly since 1948 in the US (and before for UK? - Cairncross?). The saltwater / freshwater divide in US economics in well-known, and only the saltwater side would believe in the Tory-Lib Dem 'solution'.

    With due apologies to Swift, I see this as a new battle of the books and indeed a new battle of the bureaucracies - is it the public sector which is crowding over the private sector recovery, or has large parts of the IMF and central banks (and the journalism profession) become staffed by those who feel they can ignore Japan Dec 1989, the Asian crisis 1997, and Alan Greenspan's 2001 acceptance that tax cuts don't create deficits?

  • Comment number 72.

    re #51 Points taken, Dempster, but you could have added:

    Government cannot control its taxation because it cannot control itself. (!)

    (Property PS: As part of keeping an eye on things I note one agent suggesting flight from London to new builds outside the capital has started.)

  • Comment number 73.

    Boilerbill@61


    Sorry to make you fed up with the last Labour government mate.

    Whilst retaining political power at any cost and ignoring the potential gravity of our economy is not what I and millions like me expected or deserved from our elected representatives in the last Labour government.

    Please explain this global excuse you offer on their behalf.

    Which part of the global world forced the Brown-Balls Axis of Incompetence to borrow these enormous sums of money that is currently costing us £148Million per day in interest repayments?

    The evidence is there, on three separate occasions during 2005/7 the IMF and CEB warned Brown about the potential of the UK governments economic borrowing policies, which were ignored of course.

    Remember this coincides with Brown standing in front of the Despatch Box telling the world he had personally put into place measures to abolish the cyclical boom and busts of the global economy. What an ego charged up incompetent.

    On the financial side, the accountability must be shared by some nasty greedy Bankers, their stockholders and the Brown-Balls Axis of Incompetence but do not forget the extension and abuse of personal credit was silently blessed by Brown in the attempt to 'con' the nation that all was fantastic under the Labour Axis of Incompetence. We never had it so good, that is until 2007 and for the next twenty years.

    I make my point again, if Labour were honest and had any real feelings for our nation they would pitch in behind our new and struggling government and offer support for cost reduction policies in the public sector in the nations interest.

    Integrity in politics is not just about not fiddling expenses but more than all other how a politician accepts his responsibility to the electorate and nation they serve,
    to witness Balls and Co innocently pontificating on TV is an insult to the victims of their incompetences.

    How I wish we had the equivelent of a Nuremburg for political criminals.

  • Comment number 74.

    #64. At 09:18am on 30th Mar 2011, ayshf_m wrote:

    "If anyone want to know where Labour policies would have lead they need look no further than Ireland, Greece and very soon Portrugal"
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    I think you'll find that's the direction current policies are taking us not Labour's intended plan.

    What worries me is the examples are all out there that austerity is crushing the PIIGS yet we follow so I'm thinking there must be an agenda. Additionally I would say it doesn't really matter where we go austerity or impetus we're in deep doo doo, the consequences of both are probably equally harsh, unemployment and no income or employment and insufficient income to meet inflation. In the longer term probable sovereign default and currency collapse.

    I agree the UK has a slight advantage being outside the Euro but too many commentators now describe us as a "Basket case" for my liking as we try to debase our currency to export stuff we don't make. Like the US we're going downhill but on a dfifferent route, PIMCO and a few other big players are out of US treasuries and this should tell us a lot about what's coming from the West.

    The of course there's Spain.

  • Comment number 75.

    3. At 15:23pm on 29th Mar 2011, Charles Jurcich wrote:
    GO's new Plan A should be greater public investment, and a larger deficit. If the bond market don't like it, he should simply stop issuing govt debt in response to the deficit.
    -------------------------------------------------------------------------------
    And how would you finance the deficit ? Increase in taxes? Congratulations, on your plan to kill the economy

  • Comment number 76.

    Why do so many people repeat Gordon Brown's 'this was a global crisis' mantra? The UK did badly, the US did worse - but what about Canada? What about Sweden? What about Germany? 'Global crisis' is just a lazy way out ...

    Nor was it a banking crisis - see AIG and the hedge funds.

  • Comment number 77.

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

  • Comment number 78.

    75. At 11:41am on 30th Mar 2011, vlasko wrote:
    3. At 15:23pm on 29th Mar 2011, Charles Jurcich wrote:
    GO's new Plan A should be greater public investment, and a larger deficit. If the bond market don't like it, he should simply stop issuing govt debt in response to the deficit.
    -------------------------------------------------------------------------------
    And how would you finance the deficit ? Increase in taxes? Congratulations, on your plan to kill the economy

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Same way as the US perhaps.

    But like I said earlier this is not the answer. One poster has mentioned we need revolutionary thinking here and I think this is spot on. Global debt amnesty is my only solution but too many with perceived wealth would lose out, unfortunately those same people make the rules so we'll continue to beat global populations up trying to keep the wealthy wealthy.

  • Comment number 79.

    Bit of a non-point. Whenever you take a course of action, you cannot with any certainty say what would have happened under an alternative.

    The government does not need to spend its time being kind to the economically illiterate. It needs to know what effect the things it is doing will have, not the things it is not doing. As mentioned by other people, we can quite easily see the risks of not cutting, through Ireland, Portugal and Spain.

    There's better things to spend time and money doing than producing silly reports that have no benefit but to sooth the tempers of people who don't understand economics.

  • Comment number 80.

    76. At 11:41am on 30th Mar 2011, Sid wrote:
    Why do so many people repeat Gordon Brown's 'this was a global crisis' mantra? The UK did badly, the US did worse - but what about Canada? What about Sweden? What about Germany? 'Global crisis' is just a lazy way out ...

    Nor was it a banking crisis - see AIG and the hedge funds.

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    It was a debt promise crisis accelerated by liquidity or the lack of. Too much borrowed short and lent long with nothing to back it up.

  • Comment number 81.

    74. At 11:13am on 30th Mar 2011, NorthSeaHalibut wrote:

    I think you'll find that's the direction current policies are taking us not Labour's intended plan.

    What worries me is the examples are all out there that austerity is crushing the PIIGS yet we follow so I'm thinking there must be an agenda.

    ------------------------------------------------------------------------------

    Except that's an incorrect analysis of what has happened in those countries. Their austerity measures haven't caused their problems at all.

    In Portugal, the government could not get austerity measures passed. As you can see, the markets didn't like the lack of consensus, and so they have a shortfall of cash.

    Ireland has a huge debt problem and can't find the money they require to fix their banking system; they're off to the IMF and the like. Now, why would they be going to the IMF for a loan if they could simply get the money without the austerity measures? They wouldn't, which should tell you that they have to resort to IMF loans as they can't raise the money elsewhere.

    Continue with looking at what is actually happening, and you'll find the problems are lack of confidence of the finance markets in these economies that they haven't been able to fix, that has caused their current situation. Not austerity. Austerity measures would have helped market confidence, not hindered it.

  • Comment number 82.

    Why does the government need another plan A? Is the current path of economic suicide not fast enough?

    There is good deficit spending and bad deficit spending. Providing economic growth out paces the deficit, the deficit does not matter. If however, the deficit out paces economic growth then we have a problem.

    Throwing people out of productive work to then pay them less in benefits to try and cut the deficit is bad deficit spending.
    Propping up house prices with mad schemes on the existing house supply is bad deficit spending since it is not encouraging the building of new houses.

    Deficit spending should be about primary investment. Build new houses. Build high speed railways. Develop alternative energy sources. Develop the technology to resource mine landfill sites. Develop the technology to go to the moon and mars and back. The moon is a good source of fusion fuel!

    The private sector needs something to do. Deficit spending should be feeding it so it can grow.

  • Comment number 83.

    44. At 21:36pm on 29th Mar 2011, Sage_of_Cromerarrh:

    Dear Sage

    I entirely agree with you. Current politics is stuck between an ideological marxist rock of production and a looming hard place of ever increasing debt, wars to secure access to resources and and end game of inevitable environmental catastrophe.

    Politics in the meanwhile does nothing but remain fascinated by established yet highly problematic 'indicators' and becomes obsessed with watching markets move up and down, interest rates move up and down. GDP move up and down, inflation move up and down, trade deficits rise and fall, unemployment rise and fall etc etc.

    Behind all of this lies the rather massive assumption that governments or central banks know what they're doing or that they are somehow in 'control'. Ultimately this relies upon the the naive public assumption and consensus that there is such a thing as real 'power'.

    All of this is largely a side effect of the democratic principle of equality or any politics that derives its force from a liberal humanist discourse that is teleologically orientated on economic and social parity. Neither Feminism, Marxism or Socialism are ever revolutionary or critical as such - as their arguments are merely the plea for an equal or fair stake and shares/rewards in the system as it currently is. All of these critiques are not critiques at all, in as much as they are consensual with the underlying logics of the system, they have merely brought about a complete ideological closure around the modernist model of political economy and its system of production.

    Any alternative now is apparently unthinkable. Even the Green Party tries to sell its 'counter pollitics' in terms of the jobs and growth it will create by proposing more development in the production of environmental and recycling industries (which may in themselves actually be rather wasteful). In order to become a viable proposition the environmental agenda remains essentially commited to production and waged labour in principle. Instead of a radical critique, all we have is kind of gentle tinkering which changes nothing.

    We need a radical new form of politics and it will require radical new perspectives.

  • Comment number 84.

    Just how many major companies have decided that owing to new punitive tax measures they've either halted or cancelled sizable manufacturing investments in the UK......Way to go Mr Osborne won't be long until UK economy flat-lines...

  • Comment number 85.

    Obviously what you are saying is correct Steph but I think that we are in the midst of the politics of fear ramped up by a destructive mainstream media spotlight to such an extent that both parties are afraid to do anything really revolutionary. Shameful spinelessness by the political parties reduced to childish point scoring.

    Even focussing on investment opportunities outside the banking sector would help. In the meantime we are falling ever further behind a cast iron growth sector of renewable energy:
    http://www.bbc.co.uk/news/science-environment-12895157

    We are actually investing half what Brazil is and nearly as low as China per capita. That is pitiful.

  • Comment number 86.

    78. At 11:54am on 30th Mar 2011, NorthSeaHalibut wrote:

    "But like I said earlier this is not the answer. One poster has mentioned we need revolutionary thinking here and I think this is spot on."

    No, what we need is the correct economic policies. We have them. You can keep searching for an alternative, but quite frankly, economics has already produced all the available solutions, and we have chosen the one that makes the most sense.

    Let's face it, you're only searching for a revolutionary alternative because you don't like the cuts - well, neither do I, but that doesn't mean we should waste our time trying to avoid the obvious.

    By the way, America is now cutting, too. They're not directly comparable to us, but the myth that they just spend more needs to be rejected.

  • Comment number 87.

    I think perhaps some of the posters above have misunderstood the thrust of the blog.

    It is not that the Government need to establish an alternative Plan A, it is that there is nothing coming from Labour to explain what their version of Plan A would be. Time and again we hear the 2 Eds standing up against each and every policy from the Coalition, but without saying where they would find the necessary savings. This has worked for a while, but already their credibility is slipping away. Flatly saying 'no' is no longer an option, now they must say where they would make up the difference instead.

    Perhaps it is our own fault as we actively discouraged our politicians from having an open and honest debate on the subject. Cast your mind back to the Tory Party Conference of Autumn 2009, when we were warned of tough times ahead. Previously they had a seemingly unassailable lead in the polls which disappeared overnight as soon as they mentioned the 'A' word (Austerity). Following this all 3 main parties shied well away from any substantive talk of cutbacks, to the extent that the Coalition are now breaking election promises that in their hearts they never intended to keep but that we were unwilling to hear otherwise.

    So we get what we deserve, instead of having a strong collective effort steering us out of the mess that successive parties have landed us in, we have party politics and opportunism leading the way. By taking the decision of not setting out their own Plan A, or contributing constructively to the Governments actions, Labour are just perpetuating the situation, but I guess it takes bigger men/women than our current Opposition to face up their responsibilities. I for one will remember this when it's time put my cross in the box in May 2015.

  • Comment number 88.

    Hi Guys

    #32, #43, #67

    Actually it is worse than that

    Most debt is created against the borrowers future earnings (not savings), with the asset that the loan has been provided for as security. Think mortgages, car loans etc. Both banks and borrowers have over-estimated future earnings potential and this has helped to create asset bubbles like the one in the UK housing market.

    There is going to be a long, slow and painful unravelling, no matter which "plan A" we choose, or which government we support. We are three years in, and I predict another four years to go before we can see any form of normality.

    One thing is for sure, normality will not be return to the debt fuelled prosperity of glory / gory days of the noughties.

    My guess is that even when the recovery comes, it won't feel like one to most people. The "recovered" economy will still be judged as feeble compared to those heady times in 2000-2008.

    #22 IBID
    Great Rationale - I agree wholeheartedly, the danger with models is that we tend to believe them as reality, even when there are obvious faults with the model. If you are interested "Black Swan" by Nassim N Taleb makes a great read. The biggest risks in terms of consequences (not necessarily probability) invariably fall completely outside of the model.

  • Comment number 89.

    71. At 10:59am on 30th Mar 2011, ntp3 wrote:

    "Who are these most economists, and how do you quantify their number? My impression is that most economists do not support current government policy - it would be nice to see the BBC do a survey of economists on this issue. I'm puzzled how you can say that the concept of a liquidty trap, despite being in undergraduate textbooks certainly since 1948 in the US (and before for UK? - Cairncross?). The saltwater / freshwater divide in US economics in well-known, and only the saltwater side would believe in the Tory-Lib Dem 'solution'."

    And only the Saltwater side would have grown the deficit they way they did in the US under Bush, with ridiculous, unnecessary tax cuts to the rich. When the Tories ran deficits, it was to get out of recessions, not just for fun.

    Don't compare Republicans with the Coalition. Anyone with a basic knowledge of American and British politics knows that that's a ridiculously simplistic claim to make.

    As for the economists, you'll find you're wrong in thinking there is a significant majority either way. That's what happens when half of the economists still can't get over Monetarism and Classical doctrine. The Keynes-Friedman debate really split opinion in two.

    The fact is, the economic best solution for dealing with a recession is to spend. The problem is, we don't have any money to spend, so that's irrelevant. We don't have another option in practice, whilst theoretically we would have an alternative had Labour not run deficits for 7/8 years before the recession.

  • Comment number 90.

    51. At 22:05pm on 29th Mar 2011, Dempster wrote:

    The Government cannot control the economy because:

    1. Government cannot control the quantity of money, unless they control the amount of interest bearing debt.

    2. Government cannot control inflation, unless they control the quantity of money.

    3. Government cannot control the nation’s direction unless they control where credit is extended.

    I believe the following to be true:
    If the state (which is us) does not control the creation of money and credit, then the state (which is us) can only ever be at the mercy of those who do.

    -------

    I agree. In a fictional reserve banking system, the banks can create credit money to infinity. The government has no control over the money supply. And a fictional reserve banking system is exactly what we have.

  • Comment number 91.

    87. At 12:09pm on 30th Mar 2011, Im_alright_jack wrote:
    So we get what we deserve, instead of having a strong collective effort steering us out of the mess that successive parties have landed us in, we have party politics and opportunism leading the way.
    -------------------------------------------------------------------

    There will have to be complete collapse of the economic system before we get open political unity rather than the homogenous pretend politics of division we currently enjoy.

    I would consider a government by dictatorship just as honest. Reverse spring of discontent anyone?

  • Comment number 92.

    82. At 12:05pm on 30th Mar 2011, EconomicSlave wrote:

    "There is good deficit spending and bad deficit spending. Providing economic growth out paces the deficit, the deficit does not matter."

    That is dangerous nonsense. Economic growth must be of a certain type for that conflation to be true. If we borrow a load of money, then spend that money in the public sector yet see no improvement in services from it (as we have done), then it appears in GDP figures. Problem is there's no actual growth from it, and interest is discounted. Now, unless you think we could have growth to outstrip that interest coming from public sector spending, you're misunderstanding economics. If you do think that, then you're insane.

    "Throwing people out of productive work to then pay them less in benefits to try and cut the deficit is bad deficit spending."

    No, that shores up the gilts markets and allows us to continue borrowing as we require it for the next 4 years. Our reliance on the bonds markets is unfortunate, but it's a fact. Fail to respect them at our peril.

    "Deficit spending should be about primary investment. Build new houses. Build high speed railways. Develop alternative energy sources. Develop the technology to resource mine landfill sites. Develop the technology to go to the moon and mars and back. The moon is a good source of fusion fuel!"

    None of those things produce any tangible return in the short term, which is when we need it. Shame you weren't shouting this louder whilst Labour used on 6% of their total spending on investment.

    Investment is simply not quick enough. You're right, that's what it should be used for, but too late now. Do that when we've recovered properly.

  • Comment number 93.

    #86. At 12:08pm on 30th Mar 2011, Marnip wrote:

    "By the way, America is now cutting, too. They're not directly comparable to us, but the myth that they just spend more needs to be rejected."

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Does Bernanke know about this, from his latest commenst he doesn't seem to be aware. Additionally congress can't agree on policy so any cuts are state affected not national, policies seem to be somewhat erratic at locla and national level.

    So, the UK implements austerity with a AAA rating, now two ratings agencies have put us on "watch", you may say this is bacause we may not be able implement enough austerity so the markets are getting twitchy. Who's working who here? I'll wager the PIIGS austerity measures was never going to be enough to satisfy the market vultures and in effect it was all hyperbole to push implementation.

    No I don't like the cuts, every western governement for the past 60 years has had a budget deficit, we have historically low deficit to GDP ratio so it's all ideology with a credit card angle to sucker the ill informed and appease the agenda subscribers. Sorry the manipulation doesn't wash with me.

  • Comment number 94.

    92. At 12:34pm on 30th Mar 2011, Marnip wrote:
    82. At 12:05pm on 30th Mar 2011, EconomicSlave wrote:
    ..."Throwing people out of productive work to then pay them less in benefits to try and cut the deficit is bad deficit spending."


    No, that shores up the gilts markets and allows us to continue borrowing as we require it for the next 4 years. Our reliance on the bonds markets is unfortunate, but it's a fact. Fail to respect them at our peril.
    -------------------------------------------------------------

    This just goes to show how illogical the whole sovereign lending game is. You are implying that unemployment is seen as good by the bond markets (I can see this as true to a very small degree as unemployment should keep wages down) but if nobody works then there will be no willing lenders.

    Where is the equilibrium and just how do these markets know they are right when they were obviously so wrong in their lending decisions of possibly up to the last decade or more?

  • Comment number 95.

    1. At 15:14pm on 29th Mar 2011, JohnConstable wrote:
    "The gruesome story of Weimar taught us all the ultimate lesson in fiat currencies - never trust them, or more precisely, never trust the Governments behind them."

    Jens O Parsons book the Dying of Money looked in great detail at the Weimar experience. It is not well know but the Central Bank, rather than the Government were to blame for excessive money printing. In that respect, it was remarkably similar to the present situation where we have the Federal Reserve carrying out QE. Sure the German government had a part to play, but no more than the US government does to day.

  • Comment number 96.

    Plan A, Plan B whatever. The bottom line is there are only 2 options being presented. Cut hard now, or cut less, and more later. Both are based on the assumption that growth will return. And both will fail as a result. Growth needs demand, demand needs consumers with money to spend. But inflation and debt are putting paid to that. The solutions require radical options, which the mainstream economic thinking are unable to stomach........yet.

  • Comment number 97.

    #27 George Obsorne Young & Gifted?!? - if Cameron had been ruthless enough and in touch with the polls, he would have ditched him for Ken Clarke, and wouldn't have had to endure a coalition (but then Ken likes europe too much - ironic when you think they ended up with the lib dems).

  • Comment number 98.

    "Ed Balls blames the government for the slowdown in the economy, even though most of the coalition's spending cuts have yet to come in. His claim is that consumers and businesses have lost confidence and cut back spending, in expectation of the larger spending cuts and tax rises to come."

    Well - he's right, certainly for the consumers anyway. The majority of the public sector are avoiding any large purchases.

  • Comment number 99.

    82. At 12:05pm on 30th Mar 2011, EconomicSlave wrote:
    Propping up house prices with mad schemes on the existing house supply is bad deficit spending since it is not encouraging the building of new houses.
    Deficit spending should be about primary investment. Build new houses. Build high speed railways. Develop alternative energy sources. Develop the technology to resource mine landfill sites. Develop the technology to go to the moon and mars and back. The moon is a good source of fusion fuel!
    ++++++++++++++
    I think you will find that the price-prop scheme only applies to new houses.
    A lot of money is being spent/wasted on 'alternative' energy sources. We have had Photo Voltaic cells on our roof fot two months now. The daily amount generated has ranged from 1KWH to 21 KWH and we are in south west England with the roof facing almost due south. Wind power is also very variable. Sadly the events in Japan will probably hinder the investment in reliable carbon-free energy i.e. nuclear.
    I agree entirely about mining land fill sites - they are a rich source of metal etc.
    And I am very intrigued to hear that the Moon is a good source of 'fusion fuel'. I thought it was just a big lump of rock; please enlighten me.

  • Comment number 100.

    #3>GO's new Plan A should be greater public investment, and a larger deficit. If the bond market don't like it, he should simply stop issuing govt debt in response to the deficit.

    What a brilliant plan !! And when the rest of the world refuses to accept the devalued pounds caused by a lack of funds to support that currency, we can all starve and freeze together !! Or were you thinking of invading the Ukraine to get at their food supply ??

 

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