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Weighing the risks

Stephanie Flanders | 12:25 UK time, Tuesday, 23 February 2010

The most important risk hanging over the UK is not the scale of government borrowing: it is the pace of the recovery.

Mervyn KingThat was one important message that Mervyn King wanted to get across to the Treasury Select Committee this morning.

You might find this surprising, given the fevered debate of the past weeks over when and how to cut borrowing.

Hasn't Mervyn King played his own part in the debate - on occasion - insisting that the chancellor needed a "clear and credible plan" for bringing the structural deficit down?

The answer is yes. He wants the deficit to be high on the to-do list of the next government. And before that, he wants to see a "clear and credible plan" for cutting borrowing from the chancellor, in next month's Budget.

It's fun - I suppose - to ponder what, exactly, the governor means by a clear and credible plan, and how it would differ from the plan laid down in the pre-Budget report. He wants a "large part" of the structural deficit removed by the end of the Parliament.

So, is "half" a large part? If you took half of my dinner I would consider that a large part. But others say "a large part" actually means "nearly all".

Mervyn King didn't add light to this somewhat idiotic debate this morning. He talked about needing to have a plan to "bring down" the structural deficit in the lifetime of the Parliament.

The larger point is that the most credible plan you could imagine could still fail to cut borrowing, if the economy does not recover.

On the basis of his testimony - and that of other members of the Monetary Policy Committee (MPC) - it is the state of the recovery that is clearly their major concern.

We heard several times that "risks to the Committee's central view of a gradual recovery of output remain to the downside". Subtitle: we're not out of the woods yet.

Britain's banks, households and government all need to get their balance sheets in order over the next few years, and bring down their stock of debt. That has long been a reason to expect a weak recovery.

But, as King and his colleagues noted, the weakness of the recovery in the eurozone gives us another one.

Euro-sceptics may have been tempted to take some pleasure out of the travails of the euroland economies like Greece or Spain, who will struggle to regain their competitiveness without the option to devalue. But the state of our economy affords little room for schadenfreude.

The eurozone is by far our biggest trading partner: bad economic news in the eurozone is bad news for us as well.

We learned the other day that euro-zone GDP growth in the last three months of 2009 is estimated to have risen by just 0.1%, down from 0.4% in the previous quarter.

Germany seems to have had no growth at all, the Italian economy shrank by another 0.2%, and Spain by 0.1%.

Between them, those three countries accounted for 15% of UK exports in 2008. Exports to the eurozone accounted for about half.

As the deputy governor, Charlie Bean, pointed out, we haven't seen much of a bump to exports as a result of the unprecedented fall in the value of the pound in 2008/09.

That is partly because exporters have used the depreciation to earn bigger margins on the goods they sell abroad - rather than cut prices in foreign markets to boost sales.

This will come as no surprise to anyone who had studied the behaviour of the UK economy over the past 50 years: it's what our exporters always do. In an environment of collapsing domestic demand, it may also have been a handy way for such companies to preserve their cash flow.

But, even if we've learned to expect it, it's striking that UK export prices have fallen by little more than 10% relative to the sterling price of exports from other countries since the middle of 2007.

On a trade-weighted basis, the exchange rate has moved by 25% in that time. That's a lot of extra margin.

In theory, this needn't be a problem: if exporters are earning higher profits, that in itself should encourage those companies to invest and expand - and attract others to the sector. But that is unlikely to happen if the recovery in Europe disappoints.

Yes, the Brics (the burgeoning economies of Brazil, Russia, India and China) are growing at a fair clip - and so are our exports to those countries.

British exports to China were 53% higher last month than in January 2009. But they start from a very, very low base: just 2% of our exports went to China in 2008.

In total, about 12% went to the Brics - with about 75% going to advanced economies, primarily the the US and the EU.

Solid growth in Europe is a necessary condition for a healthy recovery in the UK. So the latest weak numbers from across the channel have given the MPC one more reason to keep the door to further quantitative easing wide open.

Comments

Page 1 of 3

  • Comment number 1.

    "The most important risk hanging over the UK is not the scale of government borrowing: it is the pace of the recovery. "

    Is it not the relationship between the two that is key.
    Given the scale of borrowing we need strong growth.

    Where will it come from.
    Creating a part-time job in a call centre rather than a full-time job in, say, engineering is not the answer.

    Outlook for growth over the next 5-10 years is not good.

    Also the relationship between gdp and sterling.

    Stagflation is coming home.

  • Comment number 2.

    The reason why exporters maintain their margin is because there is so much less revenue out there that this is only way to maintain profitability and cover their fixed costs.

    The interesting thing is that in a competitive market place this is very hard to do as everyone else is desperate for work too. so what tends to happen is you try and sell for your old margin but you end up selling to less people and at a lower margin otherwise they buy from someone else who is more desperate for work than you are.

    It's what happens in a recession I guess - the fit will survive and the weak will die or be bought by the fit - from a company point of view.

  • Comment number 3.

    Excellent news, the sooner the focus moves on then the quicker the necessary cuts can be implemented without all the hairshirts. But what are all the doom merchants going to do with their End-is-Nigh sandwich boards when their longed for meltdown doesnt happen.

  • Comment number 4.

    Honest George wants to borrow £200,000 from you. Will you lend it to him ?

    He is already mired in debt, although he is paying back what he owes very slowly in instalments, with interest. He is not the worst case on the block after all, others owe even more.

    What does he want the £200,000 for ? Oh, just to pay his household expenses (gas, electricity, food, rent, schooling for the kids, private health care, etc) as he is struggling to keep his head above water.
    Oh, by the way, George announced this morning that he overspent last month something rotten, and will have to borrow even more to meet this month's debt instalments and keep him temporarily solvent - but living is expensive you know.

    So will you lend to him ?

    Of course you would (if you are a credit card company, for example), but only at high interest rates where you make a killing fleecing George from the very high added interest on top of the loan he will have to repay to you,
    or
    No way would not lend to him.

    Of course, Honest George is really a Prime Minister. And the loan he is asking for his country this year is not £200,000, but one Million times bigger at £200 billion (remember, there are only sixty million people in this country).
    And then he needs to borrow the same again next year just to stay solvent, and then the year after, and ....


    Oh, and who has to repay the extra overspend plus interest whatever happens ?
    We do, and our children.

    But that's in the future, and we don't worry about the future, do we ?

  • Comment number 5.

    The argument against a return of stagflation is slack.

    In this recession what is the evidence that we have substantial spare capacity rather than capacity lost for good.

    We don't know. Among other things as a nation we are rather bad at collecting accurate and useful data.

  • Comment number 6.

    Talk of a recovery is to talk of an assumption which is not quantified as yet and is not even secure. So that factor is at best tentative.

    The structural deficit has to disappear because it is structural. It can only be reduced by changing the structure of the economy. I see no political will for that to happen. The word `change' is now nothing more than a slogan.

    The deficit is too large and too ingrained to be reduced to nothing within the life-time of one Parliament. It was take at least two to resolve it; more probably three. Where is the political party with a defined plan or even the strategic idea as to what needs to be done?

    In order to get the government's balance sheet and the banks' balance sheets in order has to be part of that structural reform package. At the expense of sounding boring we have to divide retail banks from the casinos and identify the precise quantity of septic debt there is on those balance sheets.

    How private individuals resolve their indebtedness depends on individual circumstances. There will be more bankruptcies and repossessions. There needs to be a popular recognition that to borrow for an investment with a perceived return is one thing but to borrow to consume is a nonsense.

    As for exports this is a very uneasy picture. I have had a long meeting on that this morning. European markets are as fractured and as lacking in confidence as ours. This is the first time for over twenty years when all of the European market is troubled at the same time. The real export markets outside the EU require more skill and ability to exploit. This is rather lacking in the UK but I note the Business Department - or whatever the DTI is called these days - is trying to do something about it but for the moment the potatoes remain small.

    I am sorry but I am not hopeful. Any recovery will be small, the deficit could easily swallow the economy, no politician has a clue and the banks are morally dysfunctional.

  • Comment number 7.

    A weaker Sterling has little effect on the value of exports as most raw materials are priced in US dollars. Its labour costs and some general overheads that become cheaper with a weaker pound but the raw materials go up. Most UK manufactured goods are probably low labour content, high raw material content. If the goods have high labour content they will be made in places like China where labour is much cheaper.

    So while a weaker sterling will help exporters a 25% fall in Sterling will not lead to a 25% fall in costs, it will be something much less.

  • Comment number 8.

    "That is partly because exporters have used the depreciation to earn bigger margins on the goods they sell abroad - rather than cut prices in foreign markets to boost sales. "

    Has this not got something to do with baseline margins being low anyway.

    And is this in turn not due to our inability to take the 'high added value' route in manufacturing

  • Comment number 9.

    The most important risk hanging over the UK is not the scale of government borrowing: it is the pace of the recovery.

    The most important risk hanging over the UK is the scale of government borrowing because of the pace of the recovery.

  • Comment number 10.

    #5 - We know from the unemployment figures that we have plenty of young people who have never wroked in their lives.

    We know that we have reduced our manufacturing to about 12% of GDP from about 35%? in about 1970's.

    We know we are now a service based economy

    We know we have closed the steelworks and sold many UK companies into foreign ownership where they will now control our prices.

    We know our oil is nearly used up.

    Therefore I conclude that we have spare capacity to provide a service but no requirement for the service.

    As regards spare capacity to increase our production of goods - I think most of our expertise is probably in the over 50's and in derelict factories which will require mega investment to restart - unfortunately that potential investment has been spent supporting the banking system.

    A weak pound is good for exports but it makes imported goods and materials and food more expensive - who is going to get their head out of the sand and propose a plan to deal with the solutions and way forward rather than rhetoric to wash over the problems?

    Review committee meeting anyone?

  • Comment number 11.

    "The most important risk hanging over the UK is not the scale of government borrowing: it is the pace of the recovery."

    Brilliant.

    A bit like say a football manager giving his players a half time pep talk and saying, the problem is not that you are 3 nil down but scoring 4 goals in the second half.

    Off course i say brilliant when i mean rubbish.

    Do you not understand that the two facets are clearly related to one another. Do you not understand that the more debt you have the more future earnings have to be spent to service the interest. This is money being taken either in tax, or cuts or in limits on future social projects. Spending to much is a problem and so is recession and the rate of recovery. What are you trying to say here that the national debt should not be considered a problem, a failure to plan and manage by government - a failure to predict by economists.

    Gosh you are a waste of money. You have so few supporters on your own blog.

  • Comment number 12.

    #6
    "I am sorry but I am not hopeful. Any recovery will be small, the deficit could easily swallow the economy, no politician has a clue and the banks are morally dysfunctional. "

    Well summarised. Though i feel you err on the side of optimism. :)

    Our democracy is also dysfunctional; no leadership, no vision, no courage, no sense of history or opportunity.

    Banking collapse versus a generation of debt and stagnant growth.

    At least the former would have been one hell of a catylyst for re-examining the way we organise our society and divide the cake.

    Do our politicians want change ? I suspect the only change they look forward is the latest John Lewis catalog.

  • Comment number 13.

    #3 ming-the-merciless. Good news? "I see no ships" Isn´t that a quote?

    Only a moron would long for meltdown, equally only a moron would ignore the evidence of their own eyes.

    Why do you think people with money would pay money to listen to this man opine as to the future?

    https://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7035913.ece

    Here is another warning voice.

    https://www.bloomberg.com/apps/news?pid=20601087&sid=aAd.sSfnhpTA&pos=6

    Take a look at the figures embedded in this

    https://www.moneyandmarkets.com/armageddon-10-37926

    If you think meltdwon to be avoidable then you do not believe in mathematics. It is that simple.

  • Comment number 14.

    The most important risk hanging over the UK is not the scale of government borrowing: it is the pace of the recovery.
    Hmmm, what if it’s neither?
    What if it’s:
    Abuse in the market, unclear ownership of economic risk, lack of transparency, and accountancy based on selling bad debts that should be written off (i.e. toxic debt)?
    The FSA has concluided as follows: "the risk of market abuse presents significant detriment to our statutory objectives with respect to the prevention of financial crime, consumer protection and, if not mitigated, overall market confidence. We will therefore maintain our focus on market abuse in the context of private equity transactions."

    FSA also admits (It seems rather arrogantly) -
    As for liquidity, lenders are increasingly repackaging and selling on loans via Collaterized Loan Obligation - a debt security backed by a "POOL" of commercial loans. and CDO's - sophisticated financial tools that REPACKAGE INDIVIDUAL LOANS INTO ONE PRODUCT that can be sold on the secondary market. These packages consist of auto loans, credit card debt, or corporate debt. They are called collateralized because they have some type of collateral behind them. CDO's were created to provide more liquidity in the economy BECAUSE CDOs allow banks and corporations to sell off DEBT, which frees up more capital to invest or loan.
    The creation of CDO's is one reason why the U.S. economy was so robust in the years prior to the economic collapse.
    Problems:
    1. allows the originators of the loans to avoid having to collect on them when they become due, since the loans are now owned by other investors; so there the loans sit, uncollectible, growing more toxic by the day, when they should be written off
    2. CDOs are so complex that often the buyers aren't really sure what they've bought, what they should write-off...
    3. CDOs are not transparent; they are the most opaque instrument you will ever come across
    4. CDOs are unregulated, not traded, swapped
    5. hugely subject to default, e.g. subprime mortages USA.

    Derivatives, credit default swaps, CDOs - all this crap directly caused the 2007 Banking Liquidity Crisis.
    Derivatives, credit default swaps, CDOs helped to bring down the economy of Greece.
    Other countries are pending, and from what I read (FSA), UK may be next...or later.
    What haven't we learned from the bank failures in the United States of America? These instruments should be regulated, or outlawed. We must have an audit trail; we must be able to trace and write-off. We must assign responsibility. We cannot just throw bad loans into the air and pretend they are profits.

  • Comment number 15.

    Bravo, stanilic - my sentiments exactly. The first essential step seems to me to reach a conclusion on the size of the structural deficit. Given that in 2006-07, at the end of the boom, we had a PSBR of over 2%, when we ought to have had a surplus of at least 2%, the minimum requirement appears to be to reduce the deficit by at least 4.5% of GDP, or about £65bn. Such reductions must mean that no programmes are exempt and that the role of the state in the economy needs a fundamental rethink; this scale of deficit cannot be reduced by "efficiency" programmes or public sector pay or pension reforms (although they must form part of the answer). I agree with stanilic that this process of reduction will take two Parliaments, if we want to avoid social and political unrest.

  • Comment number 16.

    Oh dear - no green shoots then. Hardly surprising and if the present Government is returned after the next election the position will worsen further.

    There are structural problems with the UK economy that will take years to correct such as over dependence on the service industries and a burgeoning public sector.

    Stronger measures are needed to build the SME sector and the Government needs to start by reducing the budget deficit this year. 'Large' in my reckoning means 66% or more.

  • Comment number 17.

    "Germany is also the world leader in mechanical engineering, holding about 20% of this global market. Core German exports include such engineering products as vehicles, machinery, chemical goods, electronics, shipbuilding and optics. The "land of ideas" is also among the world's largest and most technologically advanced producers of iron, steel, coal, cement, food and beverages and textiles." (WTO)

    The above is what a knowledge based economy looks like; it is not banking to the exclusion of everything else.

    In the last 5 years sterling has depreciated some 20% against the Euro and will fall another 20% in the next five.

    Sad that this country used to be the "land of ideas" in the Victorian era.

    I am often amused by a story of welsh steel makers in Germany in the 19th century teaching the germans how to make steel; one of them said they will never get the hang of it :)




  • Comment number 18.

    The UK has never exported it's way out of recession and never will. The lower value of the pound is always an inflationary problem for us. The very idea of more QE should fill everyone with dread. The election is looking more like a very good one to lose as the next Government will swiftly become the most unpopular in living memory as they will have no choice but to make unpallatable decisions which will stuff us all for years to come.

  • Comment number 19.

    Stephanie wrote:,

    "The most important risk hanging over the UK is not the scale of government borrowing: it is the pace of the recovery."

    I would like to add for consideration the lack of a genuine depression. Unless and until the positive effects of the depression that we should have had, are accepted there can be no recovery. The recovery will be prevented by the private debt overhang and the fact that assets that should have been liquidated at the price that they would fetch in the market are still being supported by vastly overvalued loans. This will cripple the country as these assets are not able to be put to productive use at the right price.

    So first we must have the depression, before we can recover! (This is I believe the catastrophic failure of policy that will cripple us for a generation. In the 30s we had the depression and (very importantly) the revaluation of assets and then we had the deficit financed recovery - but this is not what has happened now and I blame the deviantly education of economists!)

  • Comment number 20.

    3. At 1:11pm on 23 Feb 2010, ming-the-merciless wrote:

    "Excellent news, the sooner the focus moves on then the quicker the necessary cuts can be implemented without all the hairshirts. But what are all the doom merchants going to do with their End-is-Nigh sandwich boards when their longed for meltdown doesnt happen."

    ...says the man from another planet!

    So tell me how you're going to break the news to the public sector that they will be paying for the bankers excesses - I want to come along and watch that!

  • Comment number 21.

    Spending cuts and the recovery are linked.

    A public sector is a necessary part of a civilised society but there comes a point (and we have gone well past that point) where the public sector becomes too big with the result that the private sector cannot support it.

    We are already at the point where 47% of GDP is spent in the public sector who can not generate any growth in the economy because they do not create anything.

    Personally I do not mind whether our economy is manufacturing or service based the issue is whether any one will buy the goods and services we actually produces

  • Comment number 22.

    Recovery?

    Did something happen while I was at lunch?

  • Comment number 23.

    Nothing has really changed since we all found out that banks had been gambling our money away....except that banks were given a great deal of money from public funds. Much of the problem is about public confidence and since neither the governments nor the banks understand basic national economics, the path toward improvement will be slow. The current systems reward quick profits and questionable financial instruments. A national economic strategy requires some commitment to businesses operating within the borders and not equating money changing among bankers as "economic production." As long as the government is at the end of the rope held by the banks positive improvements in the overall economy are unlikely. Reverse who is at the ends of the rope and things can improve.

  • Comment number 24.

    Is too much emphasis being placed on every miniscule scrap of information that we receive from King/the BoE

    We need an improvement in the UK economy and we need it now - really?

    My god, the guy is an absolute genius!

  • Comment number 25.

    "Solid growth in Europe is a necessary condition for a healthy recovery in the UK"

    No, this is old economy thinking. There is just as much benefit to be had by displaing imported goods with locally produced ones. For example, if every VW or Citreon on the road was a Honda from Swindon or Toyota from Derby the manufcturing industry in the UK would be in a lot better shape.

    Local manufacture/consumption improves the balance of trade, reduces inflation and has added bonuses in terms of environmental transport costs.

    A so called export led recovery could equally be termed an import reduction recovery. That does not rely on the economic recovery of export markets.

  • Comment number 26.

    We heard several times that "risks to the Committee's central view of a gradual recovery of output remain to the downside". Subtitle: we're not out of the woods yet.

    I do feel sorry for you sometimes Stephanie, having to spend time listening to these guys. The image comes to mind of my teenagers doing the "Emo" wrist slashing action.

    Mr King and Co have only just released their latest wonderful (!) fan chart of estimated GDP growth, which you can see here:
    https://www.bankofengland.co.uk/publications/inflationreport/mktgdpfeb10large.gif

    Now this shows that the MOST LIKELY course is the thick green line, of solid and sustained growth of 3-4% over the coming years.

    Now do they believe this or not?

    What jokers.

  • Comment number 27.

    Governor King's mind must be conditioned by thought that in just over a couple of months time there might be a new prime minister or on the other hand there might not. For this reason he might feel that it is wise to maintain a carefully balanced position as far as politically debated matters are concerned, which is perfectly proper for a man in his position. As it should also be for alleged politically neutral BBC reporters, who seem to me to have given too much prominence to the Tory Party view that great austerity is immediately required.

    Many believe that exactly the opposite will be required for many months to come, and that threatening austerity is irresponsible because it is causing the public to put off spending plans, and therefore causing more business failures and unemployment. There is so much spare capacity at the moment that an inflationary spiral requiring increased interest rates is a virtual impossibility, even in the medium term.

  • Comment number 28.

    I don't know what all the fuss is about - every time there is dire economic news for the UK up pops an estate agent on the BBC News, makes some totally unsubstantitated claim about a rise in house prices and/or a rise in people seeking to buy a house... and such comments go unchallenged by whichever journalist or presenter who is doing the interviewing.

    It happened again today.

    All this worry about too much or too litte QE, the strength or weakness of Sterling, rising unemployment or whether we actually make anything as a nation to sell is pointless - as long as estate agents are allowed to constantly turn up on the BBC and sprout their unsubstantiated claims unchallenged then all must be well in the UK economy!

  • Comment number 29.


    Mr King is signalling that he is prepared to print money next year and continue buying
    government gilts via the back door, and thus keep the government funded.

    Irrespective of whether the reds or the blues get in power, or even if it’s a hung parliament, it will make no difference to the outcome, which will be cuts in government expenditure.

    The shortfall in the next fiscal year between expected tax receipts and government expenditure is predicted to be £200 billion, but ultimately this gap has to be closed, or sterling will collapse in value.

    The gap cannot be closed solely by increasing taxation, therefore severe cuts in government expenditure are coming.

    Based on the assumption that some are predicting a five year period to close the gap, and the BOE may have to print money to make up the shortfall between tax receipts and government expenditure during this period, it’s reasonable to conclude that sterling will fall in value by at least another 25% and possibly significantly more.

    In short we’re all about to become a lot poorer.

    Still at least we go forward in the full and complete knowledge that we have saved the financial sector, from suffering along with us.

  • Comment number 30.

  • Comment number 31.

    ... I really wonder sometimes...

    Of course he will not advocate a big 'turn-around' - he knows some of the blame will end up on him...
    Now he (and his colleagues and obviously Steph blame the Eurozone.... I mean who really thinks anything has changed in the 'eurozone' as a whole in the last year... Is it another glimpse to the 'unresolvable Greek/Doom of the Euro problem'??
    Once again those 'Mediterranean' economies need to adjust to the big lack of sudden 'investment' from the UK... But where it would have been disastrous on their own, they have the 'security' of the single currency... and can easily move to another more productive area for a few years.

    This has to be the very scary bit of the whole thing... When are they gonna admit where they got it wrong?? When will they be able to put us back on the right track?? The £ is about to go down the toilets... and not just 'as a blip'... And if you are tight up with any debt (even a small mortgage) - you are stock here.... paying for the wealth a the very few with a low standard of living...

  • Comment number 32.

    #18
    "The UK has never exported it's way out of recession and never will."

    Correct we don't do exports. We do bubbles.

    The sharp increase in personal wealth in this country over ten years from 1995 to 2005 was due to what exactly if not a illusion / bubble.

    Unless we make things the rest of the world wants a continual slide in sterling will not help us - it will just import inflation.

    In the very short term devaluation is a safety valve or suspension system against economic bumps.

    The appreciation of the currency against that of our trading partners over the LONG RUN is a measure of how well we are doing.

    In 1963 £1 purchased 11DM - in 1998 £1 purchased 3DM.
    In 2005 £1 purchased 1.44 Euro - in 2010 £1 purchases 1.14 Euro.
    Prediction for 2015: £1 will buy 0.8 Euro.

    This is a slide towards third world status.

    One final point the wealthy suburbs in New Hampshire and Detroit (30% unemployment) share the same currency and the same interest rate. The state of California is bankrupt. No talk about the USA being broken up.

    Only one solution. Join the Euro.



  • Comment number 33.

    Dear stephanie as a tv repair business I could not comment on the minutiae of the economy . However as a indicator of what,s happening we are very very in accord with the country as a whole.It.s largly because we deal with the poor, rich, young, old, married, single etc. etc This is our third big recession and it started for us in oct. 2007. Absolutely no indications of green shoots yet.Double dip? one has to rise to dip.Just very tough but of course we will get through cheers paul

  • Comment number 34.

    #20
    "So tell me how you're going to break the news to the public sector that they will be paying for the bankers excesses - I want to come along and watch that!"

    Unfortunately nothing will happen apart from the odd comfy cushion being thrown - national temperament.

  • Comment number 35.

    Steph

    this is all just contemplating their navel.

    On the global picture where is all the money going to come from for all of this growth?

    Roughly €560bn of EU bank debt matures in 2010 and €540bn in 2011. The banks will have to roll over loans at a time when unprecedented bond issuance by governments worldwide risks saturating the debt markets. European states alone must raise €1.6 trillion this year.

    https://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7294624/European-banks-face-showdown-over-1-trillion-of-debt.html



    If there are is not enough buyers long term for all of this debt the contraction is going to be eye watering.

    Forget growth we have to get our debt down.

  • Comment number 36.

    You did your usual bit shilling for this failing government when you added your supportive voice to the debate on R4 about the evolution of debt this morning, Stephanie. When one contributor said that debt in 1815 was 200% of gdp including unfunded commitments you promptly piped up with a current 55% of gdp, which of course as you well know excludes the unfunded commitments, which include the not negligible posts of public service pension deficits and PFI scams.
    Brown saw early that the debt/gdp ratio would be his lifeline and would allow him to dismiss adverse comments about the totally unnecessary doubling of debt between 2002/7, an increase which probably occurred when you were childminding as you appear to have missed it completely.
    The other point which a competent BBC economics editor should have made was context. As other, considerably better, commentators pointed out in the recent excellent BBC series on the Navy, the investment (REAL investment then, not like Brown's now) in the Navy allowed the UK to garner the fruits of its colonies and gave rise to an unprecedented ncrease in the wealth of the UK and immense and long-term growth. That growth allowed taxation to increase to repay the debt comfortably. Where is the required growth to come from now, other than in the fevered brows of the Treasury oarsmen shackled to a profligate PM's oars?
    We know that our economy will never reach its pre-banking crash status because we have been so comprehensively outpaced by India and China.

  • Comment number 37.

    A UK exporter who cuts his prices because of the fall in sterling has done it either because he has price agreements set in sterling (a good idea when sterling was strengthening) or because of severe pressure from his customers. The fact is that, if sterling doesn't recover, his costs will rise by more than the amount that sterling has fallen. The increase in costs follows imported goods and services, UK inflation, which will probably overshoot, and ultimately interest rates.

    Devaluation is like taking a strong opiate for a headache. Short-term it eases the pain; long-term it’s a disaster.

    An exporter (and everyone else) needs a stable currency, stable interest rates, a considerate banker and a government that can see beyond the next election. Two out of four is probably the most we can hope for.

  • Comment number 38.

    It is all well and good blaming other countries for UK economic car crash, or saying the passenger in the Toyota has sustained worse injuries, but from the tone of the previous posts, the consensus is the UK has written off the vehicle and the insurance company isn't paying out.
    Well UK things can only get better if we start walking from today or even running, cycling etc. Better for the environment, forget about cash flows. But first as you point out Stephanie, we have the election to decide. GREAT TIMING by the incumbent government. Is this what MK of BOE that great independent financial institution is daring to say? ..... that the present standard of government/civil service is so poor, lazy, inefficient, greedy etc etc. that decisions need to be made of which only a new government are capable?
    How about a REAL FISCAL STIMULUS, raising the lower tax bands so people who work get more money, more independence.
    And how about this non-PC comment.....UK should not pay people to have children. The cost of raising a child to the age of 21 is estimated at £20,000. Child poverty is just as bad as it was 20 years ago but now both parents have to work to provide this amount of cash. The wage levels of low earners have been depressed so much by the amount of benefit paid to people with children that childless people in this wage bracket REALLY ARE IN THE POVERTY TRAP. Employers know how to exploit all the weaknesses in the benefit system and this government has given it to them on a plate. And is it not sad that so many children now are trapped in benefit poverty. My wishes are for a UK where these children can grow up as independent, healthy, successful individuals not like many of their parents.
    I will never forget Gordon Brown's budget where he said that he was cutting tax. Yes cutting tax for the rich, but not for the people in the lowest tax band, they were paying more! And he still has not said sorry.

  • Comment number 39.

    #25
    "..Toyota.."

    :)
    :)
    :)
    :)

  • Comment number 40.

    @15, Philof1949 wrote:

    ".... this scale of deficit cannot be reduced by "efficiency" programmes ...."

    Large organisations, especially civil and public service, have a huge capacity for inefficiency (by that, I mean spending money without benefit to the end user, the public). With systematic changes, I'd claim that we could pay off our debt and have money left for some wise new investment. And, we could do this without reducing the service delivered to the public.

  • Comment number 41.

    I agree with BOE mostly.]

    However there are additional factors.
    January retail was dreadful because of the weather,and VAT but February has been a lot better.
    Valentine's was a big hit.
    The cinemas have lots of good films and even a few sellouts.
    HMV were mobbed this month.
    The property market has picked up after a bad weather disaster last month.
    A lot more people now planning holidays abroad, have you noticed?
    Builders are working a lot more now.
    Our Polish helpers are back in town.

    Things also to consider......the poor tax take in January .....many people were too skint to pay their taxes last month ,but will have to pay it sooner rather than later,and when they do the tax take will improve.

    Time for a rethink about the scrappage scheme ....it needs to carry on and even be extended, possibly to eight year old cars.

    The VAT HIKE WAS A BAD MOVE....THE TAKE AT 15% WAS GENERATING MORE THAN WE ARE GETTING AT 17.5%. ........
    ? TIME FOR ANOTHER 15% WINDOW UNTIL THE END OF THE YEAR.

    DITTO STAMP DUTY CHANGES, MOVE BACK TO OLD SYSTEM A LITTLE PREMATURE.

  • Comment number 42.

    £200 billion overspend is about £3200 per person.

    Our costs of production are too high. Land prices because of planning regs, taxation because of govt indebtedness and the large number of benefit dependent citizens, regulation that prevents business models common abroad from being adopted here, overly bureaucratic red tape, poor transport and communication infrastructure.

    These are the structuraL problems of the UK economy. At the heart of all sit govt.

    It is true that analysing 1 small area can illuminate the whole problem. So i'll address one area.

    Take Police interpreters attending courts and police stations in london. The local police authority is spending millions on a call centre based system staffed by police officers.
    But there is a website called summerberry that does exactly the same for the solicitors and barristers that attend courts and police stations over the entire UK.

    The website costs under £2 per week for each lawyer using it. The call centre costs over £40 per week per interpreter.

    Why isn't the metropolitan police authority using summerberry to facilitate and rationalise it's interpreting service. The answer is access. These small websites and their entrepreneurs don't have the contacts to offer their services to large orgnisations, particularly govt. We've all watched Dragons Den. Lots of great business' give away part ownership just to get heard by decision makers.

    It's not just capital that has become concentrated, also access to decision makers has. This has resulted in those with access being the ones who effectively make the decision. And they want either big money or prestige for it. Its not that dissimilar to the agents fees paid for saudi arms contracts.

    So there you have it. Our structural problems are the result of the concentration of access to decision makers resulting in decisions to the benefit of one group or person instead of the country. Whether it be unions, special interest groups, or private profit, decisions are not being made on rational basis.

    Even the gurkhas, who put their lives on the line for our country, needed Joanna Lumley to get heard. Such a situation would have been unthinkable to the Romans.

  • Comment number 43.

    Thanks for the update Stephanie. I think I get your message which is that we need growth and that you feel discussion of how quickly to reduce our fiscal deficit is a "somewhat idiotic debate".
    On the issue of growth one of the few places to come out with a plan for some has been notayesmanseconomics web blog, in terms of trying to improve our economy. I notice that most government plans seem simply to either spend more or borrow more or both. Or of course Mervyn King who's only plan seems to be buying more of our own debt. That's worked out well so far hasn't it?

  • Comment number 44.

    The truly frightening thing about King's stance is that he is basically conceding that 800 billion of tax-payers' money has not helped the economy at all, so he wishes to print even more money in some misguided belief, IMPO, that the extra money will work.

    Is 800 billion has not worked what will? Another 800 billion? What happens when that gives no recovery? Has King thought what we do then?

    The fundamental structual problems still exist and they need to be addressed before the economy recovers let alone flourishes. Throwing hundreds of billions at banks who then simply hoard it and give out large bonuses to each other does no good for struggling UK businesses nor for the rest of us.

    You do not need to be an economic genius to understand that!

  • Comment number 45.

    dempster #29 wrote

    'Irrespective of whether the reds or the blues get in power, or even if it’s a hung parliament, it will make no difference to the outcome, which will be cuts in government expenditure'

    Don't be so sure. Clearly the country NEEDS spending cuts whoever gets in power but what on earth makes you think Gordon Brown would implement what the country needs?

    If he did so he would forever be associated with painfull public spending cuts. Surely much better for him to go down as the man who resisted such cuts to the bitter end.

  • Comment number 46.

    32. Richard Dingle wrote:
    "Only one solution. Join the Euro."

    It is sadly too late for that (they would be 'stupid' to allow it...)

  • Comment number 47.

    Posting this from abroad, somewhere warmer where I now live and work.

    Sorry in advance if this looks a bit disjointed but I promise there is a thread.

    The Government here had a visit recently from an Indian trade delegation looking to sell them major solar generating capacity.

    I get to see lots of Indian children, many are at least as well educated and bright as many British children of the same age that I know.

    I just had a quote in the UK for labour for servicing my small single cylinder lawn mower of £80. That is three times what I pay here to service my 4WD Toyota at the manufacturers agent.

    Despite having a substantial balance of payments surplus the local government has set up a scheme to promote locally made goods and food, and has a stated aim to make the country self reliant on food within the near future.

    Through my job I have an opportunity to extend trade to UK companies and I do this where I can. I wrote to the local Embassy asking for some advice and I didn't even get a reply!

    What I'm trying to say is, that these illustrations show that unfortunately the UK is totally uncompetitive and is going only one way from here. I hope sincerely that I'm wrong!

    Onward Ho- Hey!



  • Comment number 48.

    This is the same rhetoric we hear on a daily basis from these counterparts.

    Irrispective of the anticipated level of ferocious public sector cuts which will undoubtedly occur in the second quarter of 2010, and most people with a sane mind, envisage a Canadian style 20 per cent sword across all sectors, The recovery and its ability to do so, ultimately rests at the door of the private sector.

    At what point does the penny drop on this issue? You can't have a dynamic and sustainable growth model when one in three individuals is technicaly employed by the state!

    The key is to diligently loosen the bank lending practices for robust private sector firms so they can grow and thus reduce the burden of the state.

    Put simply in Glaswegian terms, N.A.T.I.O.N.A.L.I.S.E


  • Comment number 49.

    #27. There is so much spare capacity at the moment that an inflationary spiral requiring increased interest rates is a virtual impossibility, even in the medium term.

    But you are only talking about short-term interest rates, which follow from the BofE base rate.

    Longer term interest rates that control the interest rate of Fixed-rate mortgages are more linked to the yield on government bonds, and this is highly likely to rise as part of trying to raise so many £billions over the coming years.

    I think their is a risk of inflation still, because of the weakness of Sterling and the amount we import, as well as through another VAT increase. However, massive depressionary forces are working in the opposite direction, so its hard to judge the outcome.

    threatening austerity is irresponsible because it is causing the public to put off spending plans

    I think you'll find many of the public are putting off spending plans as they have less cash in their accounts each month! And if they are delaying big money decisions because of job stability worries then isn't this an excellent and mature way to live your life?

  • Comment number 50.

    Richard Dingle #32

    'Only one solution. Join the Euro.'

    The arguments you put forward are exactly those put forward for joining the ERM. We all know how that ended up.

    Nor is it any use saying that the Euro is different because countries can't be forced out the Euro. Would you bet your life on Greece still being in the Euro this time next year ?

  • Comment number 51.

    Cut government spending.
    Abolish the tax credit system (Gordon Brown's edifice to bureaucracy with its helplines, forms, computer systems, overpayments, underpayments)
    this should save some money.
    Return that money to people in lower taxes.
    SIMPLE

  • Comment number 52.

    It is clearly the cut now v cut later debate in another guise, with the election starting to influence the comments by King

    I am in the cut the defecit, live within your means, get Brown out camp

  • Comment number 53.

    Ms Flanders today you wrote :

    'So the latest weak numbers from across the channel have given the MPC one more reason to keep the door to further quantitative easing wide open.'

    Ah Madam ! So this door has not been closed. And how can it be ? It is wide-open and stayed with a doorstop.

    Is it not better that we concentrate on the (a) REAL economy rather than (b)money, and prices, and monetary flows ?

    I suspect that Mr Darling somehow knows this, and Mr Cable too probably with his Teaching Experience at Glasgow Uni....but Mr Osborne probably does not fully understand the distinction between the two. Should this not fill the City and the Treasury with a little apprehension ?

    Why is the very likeable (IMHO) Mr Osborne appointed as Shadow Chancellor ? History at Magdalen and memebership of the Bullingdon may have been suitable qualifications in a NINETEENTH CENTURY Exchequer...but in 2010 ...?

  • Comment number 54.

    34. At 3:27pm on 23 Feb 2010, Richard Dingle wrote:

    "Unfortunately nothing will happen apart from the odd comfy cushion being thrown - national temperament."

    That's exactly what the Government is counting on - but can you explain to me how the following won't bring revolution?

    The gap between rich and poor was at an all time distance before the crisis
    The gap is going to increase as the rich (and I mean the real rich) will benefit disporportionately to the poor.
    The taxpayer will need to stump up extra cash
    The same taxpayer will see a 500 basis point jump in interest rates
    The same taxpayer will be asked to take a pay cut / face redundancy / forced into part time work.
    We will end up with a pathetically inept - or hung parliment
    We're already in an unpopular and costly war

    All you need is for someone to call 'Poll tax' and the tinderbox will explode.
    I used to think the British apathy would result in nothing - but is it even down to us anymore?

    Lufthansa strike
    Total strike in France
    Air traffic strike in Ireland

    All these are examples of unrest that will have a detrimental effect on the UK - it's called Globalisation and it has 2 faces.

    Go onto your local street - ask a few people - unless you live in central London (Belgravia) there are 3 things that will change ordinary folk into ranting, raging balls of anger:

    MP's expenses
    Bankers Bonuses
    Public sector cuts

  • Comment number 55.

    #11 Jeremy Silverstone

    More insults, more gratuitous criticism of Stephanie. It must be absolutely terrible for you having to read such inferior blog content. How do you put up with such a terrible waste of your time? Does somebody with your superior intellect and analysis abilities not have better ways to spend their time?

  • Comment number 56.

    16. At 2:11pm on 23 Feb 2010, ARHReading wrote:

    "Oh dear - no green shoots then"

    ...are these the green shoots you're looking for?

    https://news.bbc.co.uk/1/hi/uk_politics/7828549.stm

    ...now the BBC normally black what I say next - so I'll let them say it for me.
    What happens to ministers who make such baseless comments?

    https://news.bbc.co.uk/1/hi/uk_politics/8272623.stm

    I thought the bankers were bad for rewarding failure.

    Is that where I'm going wrong? Should I mess up some more in order to get an increase in pay?

  • Comment number 57.

    41. onward-ho wrote:

    "January retail was dreadful because of the weather,and VAT but February has been a lot better.
    Valentine's was a big hit.
    The cinemas have lots of good films and even a few sellouts.
    HMV were mobbed this month.
    The property market has picked up after a bad weather disaster last month.
    A lot more people now planning holidays abroad, have you noticed?
    Builders are working a lot more now.
    Our Polish helpers are back in town."

    This is all well and fine... but I have not notice any of that...
    4 retailers did close this month in my high-street
    and I would bet most pubs/disco/cinema are not happy at all - I did never see a more desertic town center last Friday... and the weather was not that bad...

    And then you go on with loads of extra spending suggestions...

    So let me me say it once more to you : we are broke!

  • Comment number 58.

    "The most important risk hanging over the UK is not the scale of government borrowing: it is the pace of the recovery."

    ????

    What about the possibility that they are directly linked. The soaking up of money to support an unproductive social safety net and the vast inefficient bureaucracies robs capital markets of money that could be put to use to invest in new profit making enterprises, sources of growth and jobs.

    Socialists never seem to get it. The deeper the hole they find themselves in the harder they want to dig. In Europe it's a way of life, a culture of entitlement. In the US a lot of people are fed up with it. They want to see an end to big government. That's what the Tea Parties are about, disgust with huge government deficits and big government with immense overspending by both major political parties.

    Re-reguation of the financial sector should reduce the chance of another crisis like the one we just faced but it will do nothing to correct the huge structural imbalances created by too much government, too much tax, too much waste and inefficiency. The need to bail out weaker EU economies by the stronger ones will only make matters worse for them. Germans don't seem amused by the prospect.

  • Comment number 59.

    Why doesn't Mervyn King print A TRILLION POUNDS, and get the UK public "off the hook""?
    Because the pound would be worth about 50 cents US, or 50 cents Euro, and we would owe the world DOUBLE what we now owe.
    That's the trouble with QE.
    QE is only really useful for the domestic market.....internationally, it is a sign of failure.
    QE is normally associated with the third world, or Central African republics.....need I say more?

  • Comment number 60.

    .......truly, there is no hope when the Govenor of the Bank of England of all places talks about the pace of recovery rather than the scale of borrowing. How can it be he must wonder that despite all of the borrowing, the printing of money and record low interest rates that recovery hasn't gathered pace? Could it be that there just hasn't been enough of it as Gordon Brown would have us believe? Or could it be Melvyn that you and your fellow Keynesian Dinosaurs are looking the wrong way up your telescope? As Jim Callaghan once said, "you can't spend your way out of recession", wise words indeed.

  • Comment number 61.

    #47
    I just had a quote in the UK for labour for servicing my small single cylinder lawn mower of £80. That is three times what I pay here to service my 4WD Toyota at the manufacturers agent.

    That sort of thing is exactly right, we have lost touch with the meaning of the word value.
    Have you had a "root canal" lately, paid your electricity/gas bill, filled up at a petrol station, bought kids shoes etc etc the average wage in this country does not come close to meeting all the day to day obligations people have along the way. We cannot exist without credit...think about that for a minute.
    For the rest of our lives we will be permanently in debt, and not just plain old vanilla mortgage debt, all sorts of debt.
    I remember reading years ago that in Japan they passed down debt in wills, on properties etc, thinking that's madness, they same cannot fail but happen here, so we get to leave our kids in debt as well, thats just great.
    I truly wish someone, some where would wake up too whats happening and lets all have a bit of honesty, down size hopes and aspirations and go back to trying to enjoy our short time on this planet.

  • Comment number 62.

    #50
    " joining the ERM. We all know how that ended up."

    We were forced out of the ERM because out of hubris Thatcher pegged us too close to the DM. We went in at too high a rate (DM 3 to the £).
    Remember how strong your currency is is a sign of how well hung you are as a country.

    There was something wrong with us not the ERM; who else were kicked out?

    However leaving the ERM was beneficial. No rules too follow and we created a bubble (1995 onwards).

    Bubbles are good are good are they not :)

  • Comment number 63.

  • Comment number 64.

    Joining the euro would be like the turkeys voting for Christmas, cutting their own heads off, then jumping into the oven

  • Comment number 65.

    #50
    " Nor is it any use saying that the Euro is different because countries can't be forced out the Euro. Would you bet your life on Greece still being in the Euro this time next year ?"

    Riots, strikes, blood in the streets. Fairly normal for Greece (a country I greatly admire). Par for the course - does not herald the end of the Euro.

    Over the past 3 weeks speculators have massed the biggest war chest ever against the Euro - no effect so far.

    Greece will still be in the Euro this time next year and £1 will buy just 1 Euro.

  • Comment number 66.

    #54
    "..that will change ordinary folk into ranting, raging balls of anger.."

    On this I beg to be wrong and that you are right.




  • Comment number 67.

    #59
    "QE is normally associated with the third world"

    Your point is ?

    We are rapidly morphing into a third world country.

    We already share some of the characteristics...
    1. Overly dependent on one inudstry (banking)
    2. An overvalued currency - soon to be corrected
    3. A ruling class intent on serving it's own interest
    4. Corrupt politicians.

  • Comment number 68.

    54

    When exactly do you see the base rate at 5.50%? What colour is the sky on your planet?

  • Comment number 69.

    @40, WolfiePeters makes the valid point that large organisations have substantial capacity for greater efficiency. Agreed, but the scale of such improvements could not alone meet the scale of savings needed. The last figures I've seen for the public sector pay bill were those of IFS for 2008-09, at £161 billion. The figure may be nearer £170bn. for 2010-11. The Civil Service makes up about one-eighth of that. The IOD/Taxpayers' Alliance paper on cutting the deficit reckons that about £16bn could be saved by a variety of measures to prune the public sector paybill. That is about a quarter of the total savings needed. We shall still need a thorough evaluation of what the State does, with real cutbacks in function and/or the end or substantial reduction in services that are free at the point of use.

  • Comment number 70.

    Stephanie

    King's message was and is apposite and timely, baring in mind the anaemic growth numbers posted in Germany and France and the rest of Europe recently. It seems that turning off the stimulus packages, including the car subsidy schemes has caused retrenchment. A risk to us all.

    The key priority for recovery is to stimulate aggregate demand for UK goods and services, both domestically and abroad.

    The EU is a very large market for UK goods, as set out above. The EU needs to stimulate demand and growth through a coherent strategy, which will need to be financed potentially through Quantitative Easing, unless the banks may be persuaded to part with some of the profits from the last year to help this growth. The public subsidy tap may be tightened as private sector demand increases.

    As you say promoting exports to BRIC economies and the Asian economies, which seem to have rebounded more quickly is another opportunity. Don't forget Australia, too, which has bounced back.

  • Comment number 71.

    The issue is not a simplistic one of whether we cut the debt now or wait for recovery. The issue is that the markets do not believe a Labour Government will cut enough even when it can, with some justification given the history on public sector staff numbers.

    As an apolitical Governor, King is not allowed to say that. And so he is trying to buy time for the Government to be changed by encouraging Labour to add some cosmetic detail to their stated plans.

  • Comment number 72.

    27. At 3:01pm on 23 Feb 2010, stanblogger wrote:
    Governor King's mind must be conditioned by thought that in just over a couple of months time there might be a new prime minister or on the other hand there might not. For this reason he might feel that it is wise to maintain a carefully balanced position as far as politically debated matters are concerned, which is perfectly proper for a man in his position. As it should also be for alleged politically neutral BBC reporters, who seem to me to have given too much prominence to the Tory Party view that great austerity is immediately required.

    Many believe that exactly the opposite will be required for many months to come, and that threatening austerity is irresponsible because it is causing the public to put off spending plans, and therefore causing more business failures and unemployment. There is so much spare capacity at the moment that an inflationary spiral requiring increased interest rates is a virtual impossibility, even in the medium term.

    ==========
    I would prefer people to tell me as it is, not how they think it will suit their boss if he changes in a few months, or not.

    The tax take for January sums up the issue, this is a disaster, and I'm working for the next 3 months to do nothing much other than pay off my tax bill, having had b****r work for months. So unless you make bread, milk and basic foods, I'm no customer. Now can you imagine what that may mean for next January's tax? I'd love there to be a recovery, but I see nothing, in fact it's getting worse. Maybe we are going to find out if the Public Sector does actually contribute, because the private sector is hanging on by the skin of its teeth, in fact I've just had bounced cheques I paid in returned to day, so someone else is in more trouble. Does anyone on here work outside the FTSE 100 or the Public Sector?

  • Comment number 73.

    #64
    "cutting their own heads off, then jumping into the oven"

    Not logical. If they cut their own heads off how will they get into the oven.

    Me thinks you have found a metaphor for current economic policy.

    A bit like racking up huge debt, requiring growth to pay it off, when debt is one of the better inhibitors of growth.

    Stuffed I think.

  • Comment number 74.

    Richard Dingle #67

    'We are rapidly morphing into a third world country.

    We already share some of the characteristics'

    To which you could add

    5. A meglomaniac bullying tyrant as our leader.

  • Comment number 75.

    65. Richard Dingle

    "Greece will still be in the Euro this time next year and £1 will buy just 1 Euro."

    Agreed on the strength/resiliance of the Euro - I just cannot imagine the £ will be that strong in a year's time... (October is the next 'crunch time'...)

  • Comment number 76.

    Britain join the Euro? Why not, its government has given away the rest of its sovereignty to Brussels, why stop when the job isn't complete yet? Once it joins, it will have a clear cut stake in the survival of the PIIGS. It can begin by helping Germany dig them out of their economic hole. It can do what France should be doing but won't.

  • Comment number 77.

    We shall still need a thorough evaluation of what the State does, with real cutbacks in function and/or the end or substantial reduction in services that are free at the point of use.

    It would be great if we could at least get some political debate on that. But instead the best the opposition can come up with is "there will be no impact on front line services" when they talk about cuts.

    We all know that we have a massive expectation of services from years of "you can have it all" Labour spin. I've been thinking recently of what I have already consumed that has actually been "paid for" by my teenagers, who haven't even joined the job market yet. This is the reality of living beyond our means, we have all benefited even if we haven't agreed to the policies.

  • Comment number 78.

    Stephanie wrote:

    "On a trade-weighted basis, the exchange rate has moved by 25% in that time. " (mid 2007 to now - the actual drop is 22%) {We are 23% poorer as against the Euro.}

    Just how bad is bad. (1967 vs 2010)

    I remind everyone that against the US Dollar we are over 20% poorer, yet our economy is not roaring ahead - why?

    I tend to think that the deliberate manipulating of the exchange rate by 'the good and the great' to make the British people poorer is not a good thing in either the short or the medium term. In fact I think it is a very bad thing indeed.

    What this means is that everyone (except bankers and footballers) has had their pay cut by over a fifth. And over a fifth has been swiped from your savings etc. Even after all this we are still in deep depression and no-one has had to come on the telly and do 'a pound in your pocket speech'! The British people are innumerate idiots! (So much fro the education system!)

    There was an outcry in 1967 when Harold Wilson came on the box and explained that the pound was now only worth 2.4 US$ when it had been worth 2.8 US$ - just a 14% drop - but today when the establishment have a far larger drop nobody says anything at all! Case proven I think!

    So you thought is was bad in 1967 but the reality is that it 164 % worse now! And what is worse the economy is still heading south and there has been 200 Bn GBP of extra funny money (aka future inflation) yet to hit the metal blades of the rotating air stirring device! (To say noting of the insanely low interest rate! - interest rates in 1967 were 'raised' to 8% not 'lowered' to 0.5% - this, by the way, is almost criminally insane!)

  • Comment number 79.

    RE: 41. onward-ho

    "Things also to consider......the poor tax take in January .....many people were too skint to pay their taxes last month"

    Yes. Exactly. Welcome to the real world.

    " ,but will have to pay it sooner rather than later,and when they do the tax take will improve."

    Why? Why do people who are "skint" have to pay tax? Or are you anticipating the day when Gordon's economic meltdown becomes so dire that he has to start taxing the income that people don't even have any more but would have had if only he hadn't trashed the public finances?

    "The VAT HIKE WAS A BAD MOVE....THE TAKE AT 15% WAS GENERATING MORE THAN WE ARE GETTING AT 17.5%. ........
    ? TIME FOR ANOTHER 15% WINDOW UNTIL THE END OF THE YEAR.

    DITTO STAMP DUTY CHANGES, MOVE BACK TO OLD SYSTEM A LITTLE PREMATURE."

    I can't believe you wrote that! You are telling us that tax cuts boost economic activity and increase the total tax take. And you are also saying that tax increases stifle economic activity and reduce the total tax take. Amazing. Is your real name Laffer?

    It's such a shame that we have a government that stubbornly pursues policies that are the exact opposite of what you advocate. But, looking on the bright side, you will soon be able to boot them out.

  • Comment number 80.

    #41. onward-ho wrote:

    "I agree with BOE mostly."

    May I suggest that you should have gone to [name of spectacle retailers deleted].

    You obviously do not live in the same country or even on the same planet as the rest of us!

  • Comment number 81.

    Sorry to be a dullard, but can someone explain why it would be so disastrous if we did default - wipe the slate clean so to speak. I would imagine this would also be quite an attractive option for the US as well.

    What domestic problems would it cause to the long suffering middle class taxpayers.

    Obviously I am not the sharpest tool in the box but for all the academics arguing on the blog I have not yet seen one workable solution that is both socially acceptable and changes the habits that have brought us to this point

  • Comment number 82.

    He wants a "large part" of the structural deficit removed by the end of the Parliament.

    You mean he wants the government to take ANOTHER 5 YEARS to remove only a large part of our overspending that we undertook BEFORE the banking crisis and recession even started?

    Stephanie, how you and the Conservatives haven't driven this point home to the Labour punters baffles me. Maybe the word structural is just too technical for some. I give up. Maybe Cameron and Co have given up too, realising that even a whole parliament will not have cleared up the deep seated overspending that occurred up to 2007. Let alone the Armageddon since.

  • Comment number 83.

    "The most important risk hanging over the UK is not the scale of government borrowing: it is the pace of the recovery. "

    Surely the biggest risk is the capacity for major private organisations to generate unregulated debts for private profits and then to transfer that debt to the public purse.

    Unless the Government puts checks and balances in place to ensure that shareholders are not mollycoddled every time they make a stupid decision then the risk will not go away. The value of private investments can go down as well as up.

    The biggest threat to the recovery is not the Government's role in repaying the debt but the Private Sectors role. Without a clear and effective plan for generating tax revenue - which will still be required regardless of any public sector cuts - the Private sectory is not going to do anything other than ask for another handout in a few months or years time.

    For too long the Private Sector has been living beyond its means. Toyota "grew too fast" - clearly failing to avoid the hazards of shoddy manufacture by not employing enough people to sustain the requirements of growth. The Banks created "toxic debts" by promoting dubious forms of growth. In the end, they are relying on what the Public Purse is good at: bailing them out. But why should the public repeatedly bail them out?

    The failure to plan the generation of taxable revenue will hinder the recovery. That is not something the Government can plan. Private industry needs to create jobs - not just part time and underemployed jobs but jobs that take people completely above the benefits system. Only then can they be assured that corporate profits are insulated from what is increasingly obviously necessary: huge corporate tax hikes.

  • Comment number 84.

    I cannot agree re the Euro..looks like I am in the minority with that view

  • Comment number 85.

    I know it's a tad early, but have you heard a cuckoo?

    Well you jolly well should of!

    Co's international corporate cuckoos are in every UK business and commercial sector nest: Cuckoos in the City, cuckoos in the utilities, cuckoos in the food sector and cuckoos in aerospace. More cuckoos as a percentage of corporate birds in the UK than in any other major OECD economy

    Such is the dominance of these overseas birds that when they whistle we dance.

    Three cheers for foreign investment I hear you cry; but free to select our own economic policy options? You must be cuckoo.

  • Comment number 86.

    Recovery! What recovery?

    I won't consider there is any form of long term real recovery on the go until most of our utilities are back in our ownership and we've started at least one major car manufacturing company..

    That would indicate not just a proper revival but a change of attitude in the financial services sector.

  • Comment number 87.

    Moderator Post #70, please?

  • Comment number 88.

    John from Hendon

    You seem to have a real problem with low interest rates

    Do you understand the prime task the BOE has is to control inflation?

    Which is extremely unlikely given the drop in demand

    Have you seen Japanese rates in the last 12 yrs or so?

    I imagine you must have

    QE cannot cause inflation if demand falls sufficiently..unless oil keeps rising, the recent spike in petrol will falloff in 11 months time

    Deflation is still the bigger threat, unless we lose control of setting our own interest rates

  • Comment number 89.

    41

    Your comments on the tax take are priceless..the tax take is lower because the tax is not owed, not because it has not been paid

    On what evidence do you base your comments concerning big improvements in retail activity and in the property market?

    Would love to know

  • Comment number 90.

    On the point of the current chancellor's plan to halve the budget deficit (to only approx 100bn per year!!!), it is worth noting that if the recovery occurs as anticipated by brown et al (fat chance) then in fact this can be achieved by doing almost nothing since a recovery would raise taxes to cut this amount anyway.

    Says it all really about the current perspective of HM government at moment.

  • Comment number 91.

    no point in spending even more money to stimulate demand when people have no money to spend

  • Comment number 92.

    Post 81. An interesting point and one that many people will in initially discount as stupid but on further review isn't perhaps as stupid as some might think.

    A number of countries have defaulted in the past such as Argentina not long ago and they are now trying to sort out the problems that occurred. No disrespect intended to any Argentinians out there but the Argentinian economy is very different to the UK and fr less internationally connected. For us the issues would be immense.

    The situation in Greece may well give us an example shortly of a so called first world country defaulting if it gets that far.

    Issues I can see with a UK default would be as follows.

    1) A not inconsiderable amount of the UK government debt is actually owed to UK citizens and companies. The UK life assurance and pension companies hold huge amounts of it to settle long term obligations such as pensions. A default would have an immediate effect on many people in the UK as their private pensions are partly paid by the UK debt repayments.

    2) UK interest rates would shoot up considerably which would have a huge impact on mortgage holders and UK companies that owed debts not just in sterling but also in foreign currency. This could well lead to a considerable drop in real UK income and cause many companies to lay off UK staff.

    3) Many foreign companies could pull out of the UK and we could well find that overseas holders of UK debt sought to seize UK assets overseas in order to recover losses.

    4) This would have a disastrous effect on the sterling exchange rate and cause an immediate problem in purchasing imports such as oil and gas and any other commodities bought either in dollars or Euros for example. Ths would help push up inflation considerably.

    I am sure people can come up with other examples as well but all in all it wouldn't be pretty.

  • Comment number 93.

    I think I must be going mad. The UK has an annual budget deficit approaching £200bn but people are still going on about how important it is to NOT derail the recovery. WAKE UP!!!

    Any 'recovery' is based on a massive public subsidy which cannot go on and people do NOT want to face the prospect of seeing the great giveaway ending because the KNOW it will be dire.

    How we can have a true recovery until UK plc has even the merest prospect of balancing its books is beyond belief. There needs to be a period of terrible retrenchment where the public sector is shrunk and businesses are given hep to start up and/or relocate to the UK.

    Welcome to the future.

    Hopefully it will be one in which we dont feel working hard to buy chinese made junk or other consumerist clap trap is worthwhile.

  • Comment number 94.

    #25 was absolutely correct -- if all vehicles on our roads were built here we would not only save the import costs of those but also have the volumes to get the costs down and maybe (perish the thought) export some. We have to have some way of getting the real economy going to generate tax revenues and reduce unemployment to stand any chance of repaying this humungous debt.
    Why wasn't the scrappage scheme only applicable to the purchase of cars built in the UK? It must have been for some politically correct reason which wouldn't have worried the French or Germans. Why can't our politicians and more particularly the civil servants who gold plate every directive from Brussels or the world trade crowd, put the health of UK plc first? Where is the sense in subsidising the purchase of new cars made in say, Korea, by scrapping an old car that is probably using UK-made spares? To keep a few salesmen jobs in the local dealerships off the dole? Meanwhile, they close (OK, they call it mothballing) the steel plant at Redcar and what is the primary raw material for cars.... steel.
    Have you also noticed that many products don't now say where they are made? If you don't know where a product was made, doesn't it restrict consumer choice which the governement is always banging on about? It should be a legal requirement that all products are labelled with the country of manuafcture, preferably with the flag of the country. We would be shocked by the number of red flags with stars in the corner that would suddenly appear in the shops.
    I don't call trying to buy products made in the UK protectionism. It's no different from buying locally grown food that sits next to imported food -- it's just exercising choice.

  • Comment number 95.

    King's position is Micawber's position of "hoping something will turn up".

    I will tell you why that is no longer good enough. We are facing a massive structural change in the global economy, not just the UK or the EU economy. Industrial power is inexorably moving to the rapidly industrialising countries of Asia - capital flows are now global and will seek out the cheapest workforce which can do the job - China is that par excellence - a strong unitary state with a docile and whipped into line, yet adequately educated workforce. Tonight on the Midlands news, they showed the former LDV plant in Birmingham being asset stripped and shipped, lock, stock and barrel to China. British workers cannot compete, Britain with its flatulent state cannot compete. We are borrowing like crazy to support a standard of living which is no longer viable. We are doomed!

    Labour wasted the last 13 years - I know it is OK to criticise with hindsight, but instead of blowing billions on non-jobs, the client state and happy, clappy rubbish, they should have been restructuring education for excellence and spending on the infrastructure to give us a 21st Century transport and power generation system.

    Wasted! Wasted! Wasted! Now living standards will drop, as surely as over-ripe apples fall from the tree. It will happen as real jobs are lost, as pay rises halt and inflation creeps up. We have a dire future of debt repayment and a hollowed out economy - what a combination!

    Gee thanks Gordon!

  • Comment number 96.

    #88
    "Deflation is still the bigger threat.."

    Not sure on that one.
    History has a habit of repeating itself and the current situation is similar to the 1970's with low growth, a sliding currency and a debt overhang, and probably another oil price shock.

    Mervyn King is of the opinion that the current spike in inflation is temporary and deflation is more of a threat. He is usually right on these things is he not :)

    I see stagflation. I cannot see where growth will come from and we will start to import inflation due to a sterling slide.



  • Comment number 97.

    90 well said..a nasty version of Mr Micawber

  • Comment number 98.

    #90 On the point of the current chancellor's plan to halve the budget deficit (to only approx 100bn per year!!!), it is worth noting that if the recovery occurs as anticipated by brown et al (fat chance) then in fact this can be achieved by doing almost nothing since a recovery would raise taxes to cut this amount anyway.

    Sorry to have to correct you. But the plan to half the deficit to £82Bn in 2014-15 does actually rely on the assumptions of 2% growth in 2010-11 and then 3.25% growth in each of the following 4 years.

    That is why some of us on this blog keep harping on. Just imagine the situation if we don't get 5 wonderful years of growth, which is the more likely scenario.


  • Comment number 99.

    RE: 81. The_Bongos_of_Doom

    "... can someone explain why it would be so disastrous if we did default - wipe the slate clean so to speak. "

    There is a lot of debt about. I'm assuming you are referring just to the British government part. If not, multiply everything I'm about to say by (roughly) three.

    This financial year the government is borrowing £170-180 billion. Next year may be a little less than that. If you believe Gordon's fairy tales, the annual borrowing rate may be as low as £90 billion in four years time. That means we will need to borrow something like £500 billion over the next four years (that's probably an under-estimate). If we use your proposal to "wipe the slate clean" we would not just default - meaning fail to repay a loan when it is due - we would actually announce our intention to not repay any of our existing stock of debt - about £800 billion worth.

    Two things follow directly.

    1. No one in their right mind would loan us any more money. We would immediately have to cut public spending by around £170 billion per year - and keep the lower rate of spending more or less permanently into the future. Since that represents about a quarter of current government spending you could start by scrapping the NHS, the Foreign Office, the MoD and foreign aid budgets and then check to see what more needed to be cut.

    Alternatively, the government could just print the money it needed. This devalues the currency (more pounds chasing the same pool of "things") and effectively steals from people with any form of cash. This is the same mechanism that Weimar Germany used just prior to the rise of Nazism and that Mugabe has been using for years in Zimbabwe.

    2. The lenders who don't get paid become a lot poorer. In effect they've been robbed. It's really no different to you lending me a £1,000 and then finding that I refuse to repay - you are then £1,000 poorer. Many of the lenders are UK pension funds, investment funds, banks and so on. Imagine what will happen to them when they are, in effect, "robbed" of hundreds of billions of pounds.

    "I would imagine this would also be quite an attractive option for the US as well."

    The US economy is 6-10 times bigger than the UK (depending on how you count) and owes China alone around $2 trillion dollars. Try to imagine the consequences when China discovers that it is $2 trillion dollars poorer than it thought it was yesterday. Plus of course, the US would have to either print money or slash government spending just like us (but on a far larger scale).

    "...for all the academics arguing on the blog I have not yet seen one workable solution that is both socially acceptable and changes the habits that have brought us to this point"

    Unfortunately, you have put your finger on the fundamental problem. Cutting spending would be painful; but repaying the debt will be worse. There is no political will to do either of those things, but running up huge debts now postpones the day of judgement - so that is what our government is doing.

    Great name by the way. Can I have it when you've finished with it?

  • Comment number 100.

    81. At 7:31pm on 23 Feb 2010, The_Bongos_of_Doom wrote:
    Sorry to be a dullard, but can someone explain why it would be so disastrous if we did default - wipe the slate clean so to speak. I would imagine this would also be quite an attractive option for the US as well.

    What domestic problems would it cause to the long suffering middle class taxpayers.

    Obviously I am not the sharpest tool in the box but for all the academics arguing on the blog I have not yet seen one workable solution that is both socially acceptable and changes the habits that have brought us to this point

    >>>>>>>>>>>>>>>>>

    I think the issue is not the enormous amount of debt we currently have as a country - if we defaulted on this it would make it impossible to fund our future defeicits (currently approx £200bn per year!) and so we would go cap in hand to the IMF for a bailout and would have to implement even more savage cuts than we need to at the moment or go for printing money and having hyperinflation (Zimbabwe here we come).

    So defaulting is not really an option especially that we NEED to earn more money by exporting and we would become something of a financial pariah state and the problems that would bring.

    Never mind that we have current unrealised liabilities to the semi-nationalised UK banks which might also have to be funded if the worst comes to the worst!

    Sorry to be so downbeat. Read onward-ho for some light relief.

 

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