Big difference?
The more closely you examine the gap between the Tories and Labour on the deficit, the smaller it seems to get. But the big message from today's Green Budget from the IFS is that the future performance of the economy is going to have a far greater impact on the public finances than the political affiliation of the party in power.
Consider the following key conclusions from the report: if the Treasury's forecasts for economic growth are right, then the IFS believes that borrowing will be slightly lower than forecast in the PBR over the next few years. But, say the IFS, the deficit would probably still remain too high, for too long, to command confidence in the financial markets.
That is why they recommend an additional £13bn in tax rises or spending cuts between 2011 and 2015 (they don't recommend any further tightening this year). That's on top of the £57bn already announced by the chancellor.
The Conservatives will be pleased to note that is very similar to the extra amount of tightening the IFS believes that a Tory government would need to implement over the period, to meet what the IFS deduces to be its target of eliminating the structural current deficit over the same period.
In other words, the IFS is saying that the Conservatives' plans, on the basis of current forecasts, would preserve market confidence in the UK.
However, the report notes that you can be a lot more gloomy about our economic future than the Treasury is. Specifically, the Barclays economists involved in the report think the permanent hit to GDP from the crisis is likely to be at least 7.5% of national income, not 5% as estimated by the Treasury. And they think our long-term potential growth rate after this will be 1.75% a year, not 2.75% as forecast in the PBR.
So much for the detail. What's the punchline?
The punchline is that, if the Barclays folk are right, the next government would need to find - not an extra £13bn, but an extra £66bn to fix the structural hole in the public accounts. The IFS doesn't think this would be feasible in one Parliament unless the markets had a gun to the chancellor's head so you would be talking more pain before and after 2015.
And remember, that's their "central" scenario. You don't even want to know about the pessimistic one.
More to say on this - but the IFS press conference is still going on and I don't want to miss any more gems.
I'm left with the following thought. Once you strip away the debate about timing and possible cuts in 2010-11 - which, as I have said many times, has always been about rhetoric more than a big difference of policy between the parties - once you strip away that debate, this election could end up being fought over a difference of around 1% of GDP in medium-term spending plans. That's more or less what the 2005 election was fought over as well.
As then, the winning party could find the economy has bigger things in store.
~RS~q~RS~~RS~z~RS~21~RS~)
I'm 
© MMXI
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Stephanie wrote:
"The more closely you examine the gap between the Tories and Labour on the deficit, the smaller it seems to get."
I agree, but isn't that just the same as it was when Labour took power. The reason for all of this similarity is that both parties are too frightened to do anything lest they scare the financial horses.
Neither of them have the bottle for the fight that is required to wrench control of the Nation back from the bankers and this is a very bad position for democracy and our Nation. Our only possible saviours are in fact the much maligned bankers and this is a tragedy. The Bank of England has proved itself incapable of moderating our financial decline as have the Treasury's permanent staff - indeed as I have argued before and at length they have accelerated our decline.
We will have to wait for the Bankers to decide that they actually need to reanimate the cadaver of the British economy - they may of course not bother and just leave the dried husk to blow away in the wind!
The economic political lack of bottle is a disaster and bodes very ill indeed.
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#1. Jeremy Silverstone wrote:
"So if it is all the same to you my suggestion is to vote Conservative and sack a load of public sector workers."
But... Jeremy they will not do it!!! They talk the talk but when it comes to walking the walk every policy is watered down and dissolves.
My view is that in this National Emergency we need a National Government. Suspend politics as normal for the duration of the recovery - then the economically correct decisions can be made without the rabid media being able to campaign against them. (And yes our economic position is that bad!)
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...and so we are debating whether the long term economic growth rate will be 1.75% pa or 2.75% pa. How interesting.
Of more interest (but only to the non delusional) is to understand where we may find an example of a developed economy continuing to grow should it have rapidly declining access to electric power
http://news.bbc.co.uk/2/hi/business/8494899.stm
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Stephanie, I look forward to your blog but please forgive me asking that you refer to IFS, GDP and PBR just once in full in the text to aid my understanding. I think I know what they all mean but I'm not sure and I am not an economic specialist just someone who is interested to know what is going on. Many thanks.
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Very good summary of the real situation in terms of cuts/tax/spending. I didn't bother to comment on your previous article as in reality there's so little of substantive difference between the parties on this. This post confirms that sentiment for me. The *real* issue is the amount of pain that is coming regardless of who is voted in. I see some very troubled times ahead for UK, and that's one reason I got out. The other was it was the only way I could think of legally not paying UK tax! Back in 2003 I saw this coming and said the country would be bankrupt in a decade, but I think it's apparent the country will go out with a long, slow, wimper rather than a big bang.
Of course cuts will lead to poorer services - that's a given. It will be interesting to see though what effects the tax increases will have on the economy. They could put a massive brake on the consumer's love affair with spending, or perhaps the demand for borrowed money will just grow apace, sending up the cost of debt? Who knows. I don't think either Labour or the Tories, or many of the so-called experts really do.
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If you are right and there is little difference between the parties on the deficit, then it comes down to a question of which party will actually deliver: the profligate, spendthrift, feckless bunch that have been in power for the last 13 years or the party that handed over a well managed, sensible fiscal inheritance which has been totally squandered.
That is the question the voters should be asking themselves and it is exactly the same question that the providers of finance to this country will be asking themselves.
I guarantee that if labour remain in any form of power / influence after the 6 May, there will be a currency crisis and IMF intervention within 12 months.
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It's the third forecast we are waiting for. Lots of respect for IFS but they can only produce forecasts on the figures they have available so no miracles there.
It's the unknowns that cause the upset so maybe they have included these in their worst case scenario.
At best we will have a government that knows it has a lot of damage to repair for doing what is necessary is going to cause a lot of civil
strife and hardship for those of us who do not come under the mantra of being well off.
Whether labour can shed their shackles from the unions to be able to do what they must I find very doubtful.
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We're witnessing a further pauline conversion of opposition predictions and prescriptions. It's useful that the Conservatives are gradually learning about the wider economics of nation states.
They got it wrong about Northern Rock: letting it go bust as Tories suggested would have precipitated ill-deserved runs on other small banks and lost thousands of jobs with taxpayers picking up the bills for bailing out depositers and more benefits for unemployed. They also got it wrong about B&B, Alliance & Leicester and HBoS. They also got it wrong about RBS: demanding shares in exchange for bail-outs means we have appreciating assets we can sell over the next five years.
We shouldn't mind their receiving an education about how to deal with a worldwide financial crisis. There may well be others in the decades ahead that'll need their commentaries. So learning about national economies is good.
But do we really want Tory learners to be in charge of our fortunes?
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Jeremy Silverstone & John_from_Hendon - why so keen on cutting all those public sector jobs? There are large areas of this country which depend very heavily on the government to provide public sector jobs and keep the local economy going (i.e parts of wales and the north east). So cut all these jobs and what do you have left, a collapsing local economy in these areas, 000's of people struggling to get jobs and failing and so no more taxes off these people. Many could potentially then end up claiming for unemployment benefits. So what looked like a nice 'cut n'save' might end up being rather costly in a different way. That however is the conservatives plan, in reality they would be better off using the scapel rather than the scythe to make these spending cuts!
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This comment was removed because the moderators found it broke the House Rules.
It is interesting that you think Stephanie that the two main parties positions are very similar. Although of course it is Labour and in particular Gordon Brown who has proved to be a rather profligate spender. So in reality a Labour government would probably spend more than the Tories.
I am interested in trying to improve the growth rate of the economy. I read about this some time ago on notayesmanseconomics who was suggesting we needed policies in this area.It seems as though by implication the IFS may be following this lead.
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you'll have to excuse me....i'm a bit thick when it comes to numbers...BUT.....if growth is forecast as between 1.75% & 2.5% with inflation running at 3.00%+ does that mean we're still in decline?
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"the Barclays economists involved in the report think the permanent hit to GDP from the crisis is likely to be at least 7.5% of national income"
as the bankers dole out bonuses and distance themselves from responsbility everyone should remember the above figure and vote for a government that will assess this to the banks. A sick and tired society that passively is robbed and has no expectation that the government will do anything about it except tax the public to replace the funds. The structure needs to be restructed as there is no escape in the present system. Asking an entire generation to suffer lost opportunities because some bankers wanted to get rich fast. No accountability in banking or government.
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Are the IFS amongst the experts who didn't see this coming? I get slightly bemused by the same people who encouraged unfettered free marketeering and globalisation and who never foresaw the economic crisis having all of the answers to how to get out of it.
Also: if I read one more Tory propagandist claiming that they handed over an economy in rude good health in 1997 I fear I will scream. They used to accuse the Soviets of rewriting history: well the Tories of this country can put them to shame on that score.
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#10 Ironside
I agree with the risks of swingeing cuts in public sector employment to certain regions.
Another even more worrying policy area is the dependence of other regions on other public sector related employment. I looked at a review of employment in the South East region recently, the largest and supposedly the most prosperous in terms of GDP and with the highest levels of employment overall. The sectors employing the highest numbers of people are health and personal care; hospitals, doctors, and retirement homes etc, both paid from the public purse largely, including the latter indirectly.
So, the economic challenge the whole country faces is wider and deeper than just the regions you mention, which are dependent upon public sector employment, it is about the fundamental hollowing out of the productive economy. Kraft's noises about plans at Cadbury do not sound very promising at all for UK jobs.
I also think there is some merit in a type of government of national unity to address this challenge. I have not heard enough yet to convince me that any of the single political parties have what it takes to produce the required strategy and plan to right the economy. It is a Hurculean task.
#1 Jeremy Silverstone. If you don't like the content of the debate in the articles and comments on this blog, then "blog-off" elsewhere. What good does it do telling Stephanie she should be sacked? I see your company Byron Communications works as "payment by results PR agency". Are you on payment by results to get Stephanie sacked. Dave Cameron an old buddy from the PR industry is he? What's your bonus on this one?
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It is a bit sad, but not too surprising that the politicians have not explained what they are really going to do about the economy. Hopefully journalists will be able to exert enough pressure to get more detail out of the parties before polling day. However I still fear that to a large extent the electorate will be 'voting blind' and hoping that they have guessed right as to how the rhetoric translates into reality...
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#4, the question of what the long-term growth rate of advanced economies is (for this century at least) is quite an interesting one. I've wondered whether the developing countries have high growth rates among other things because they can "copy" what the other countries have done before. If asked what they want their future to be, they only need point at the US or Europe. The developed economies seem to face a more difficult problem that they have no clear vision of what their future will actually be like in say 2050. And I feel that if you have nothing to work towards it's hard to make progress.
#13 nice user ID. I think GDP is always quoted as "real GDP" with inflation stripped out. Otherwise, as you say, it would be meaningless to say 0.1% was growth. It also shows that the 0.1% recent figure is sensitive to corrections to the inflation statistics (GDP "deflator") as well as the growth ones.
Re #1, I find Stephanie's blog the most interesting on the BBC news site, I'd rather it kept going!
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#10. Ironside wrote:
",... John_from_Hendon - why so keen on cutting all those public sector jobs."
I'm not so keen on cutting jobs - however I see little option other than cutting the pay of everyone - public and private sector either by direct cuts or large increases in taxes. The hole we are in is gigantic and we have, courtesy of the Bank of England been digging it deeper for a year and a half - and I also not saying that this was all entirely wrong in the circumstances. Buy we will be unable to avoid paying the price for QE and zero interest rates and we must start soon. The fools at the Bank responsible for monetary regulation got is terribly wrong throughout most of the noughties and I have no confidence or faith in them getting it right in the short or even the medium term.
My biggest concern is that none of the political parties singly has the bottle to do what is unavoidable and impossible to avoid and the longer it is delayed, until after the election in 2014/15 perhaps, the worse it will be. We need to get the pain started so it can be past as soon as possible - we are at present living on borrowed money in a fools paradise!
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If Brown wins this election I'm leaving.
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Ironside at #10.
You said: "There are large areas of this country which depend very heavily on the government to provide public sector jobs and keep the local economy going (i.e parts of wales and the north east). So cut all these jobs and what do you have left, a collapsing local economy in these areas, 000's of people struggling to get jobs and failing and so no more taxes off these people. Many could potentially then end up claiming for unemployment benefits."
Let me pick that apart one bit at a time. :>
"There are large areas of this country which depend very heavily on the government to provide public sector jobs and keep the local economy going (i.e parts of wales and the north east)."
You think that is a good thing? (I also suspect they are primarily Labour strongholds but let's leave that aside for a moment).
"So cut all these jobs and what do you have left, a collapsing local economy in these areas, 000's of people struggling to get jobs and failing and so no more taxes off these people."
Errmm, but the taxes they pay are irrelevant as their whole salary is paid by tax payers who are not in government funded jobs.
"Many could potentially then end up claiming for unemployment benefits."
True, but it would be considerably less than what they are currently consuming in tax revenue, so would in fact represent a saving.
However, I am not arguing that we do not need public sector workers. We do. What has however happened, and this government has been particularly guilty of it, is the creation of a system (that includes, in part, the public sector) that is unsustainable. UK is heading for a situation where the people who are still in private sector employment will be picking up an ever increasing part of the bill for the likes of the public sector, benefits, pensions ad infinitum. In a country where there is growing state dependence, that is simply a statement of fact.
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John from Hendon at #3. You said:
"But... Jeremy they will not do it!!! They talk the talk but when it comes to walking the walk every policy is watered down and dissolves."
You noticed that too? ;)
Britain does need some meaningful change. But I doubt it will come from either Labour or the Tories (or LibDems for that matter).
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Although the language the two Parties are using at the moment could be seen as quite similar, I think the difference between the two is actually quite substantive. The reason being is that we do not need to rely on words to judge the Labour government; the evidence is there. Thirteen years of it. In that time we have seen a structural deficit emerge and widen, private sector productivity fall in most sectors, and economic growth become more and more reliant on government spending, an over-inflated housing market and the City of London. I genuinely believe that if Gordon Brown is left in any position of influence after the general election then we will do well to avoid a sovereign debt or currency crisis. I would imagine that the probability of the Tories becoming the largest Party after the election is a not so insignificant factor in keeping gilt yields at their current level.
"you'll have to excuse me....i'm a bit thick when it comes to numbers...BUT.....if growth is forecast as between 1.75% & 2.5% with inflation running at 3.00%+ does that mean we're still in decline?"
Unless otherwise stated growth figures are always in real terms.
"Also: if I read one more Tory propagandist claiming that they handed over an economy in rude good health in 1997 I fear I will scream. They used to accuse the Soviets of rewriting history: well the Tories of this country can put them to shame on that score."
What exactly do you disagree with? Growth of approximately 3%, inflation low and stable, public finances almost approaching a surplus, unemployment higher than we would want but consistently falling: the fundamentals of the economy were in excellent shape.
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9) The government paid much more than the current price (approx 36p) for RBS shares. It is going to make an extremely large loss on these when they come to sell them, which the government probably will do for when it can to fund some short term initiative or bribe to their core voters. Although the government did take decisive (and necessary) action in bailing out the banks, this was forced on them by circumstances. The conservatives would not have done any differently.
The main difference between the parties is that the conservatives are very unlikely to have allowed the a deficit during the peak of a boom which would have meant that country would have much lower levels of debt coming into the recession.
The level of cuts required by either of the parties is going to be extremely painful. However, the trivial stimulus measures in place at the moment are not worth the risk of higher future interest rates under the status quo.
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The way out they will both take is inflation.
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Alan Howarth at #20. You said:
"If Brown wins this election I'm leaving."
LOL. :)
I remember people saying a similar thing back in the days of Neil Kinnock. He of course went on to stick his snout in the juicy, rich, EU trough, along with his lovely wife Glynnis (now Baroness Kinnock no less). No wonder the EU has become a socialist utopia.
But seriously, whichever way it goes, and I still believe we will see a marginal Labour victory, the reality will be higher taxes, poorer services, more state dependence, and even more government and personal debt. In a country that encourages ever more state dependence, lack of planning for the future, greater personal debt, less self-sufficiency, and less personal accountability, there is only one probable outcome - implosion.
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Tax on average.
When labour came in 1 in 5 people where public sector workers or for the average man 25% of his tax bill goes to public sector pay.
Now it’s 1 in 4 so the average man is now paying 33.3% of his tax bill for public sector pay.
That’s 8.3% more tax we are paying, we shouldn't trust politicians to run the economy, but how can we get them to change.
Why do civil servants pay tax anyway?
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Just a couple of thoughts here.
Cutting public expenditure was anathema to the Greek Government.. what's happening now, 20% reduction and threats of a General Strike in protest?
Someone else here argues that thousands of people would be unemployed in the Labour heartlands if public expenditure is cut, may I remind him of what happened to the miners, car workers, steel workers, it was acceptable for the Government of the time and the electorate didn't seem to care.
Doesn't make it right though.
We seem to be living through a dreamworld at the moment with nobody affected (indeed lots are better off at the moment than anytime in the last 12 years).
Everything revolves around our zero percent interest rate which will not be increased until the IMF loan is needed. Looking at all the parameters at the moment, I feel that we have all of the ingredients for the greatest Depression and untold misery in this Great countrys' history!
I also fear that Labour will be re-elected because the Opposition party couldn't get its act together (again). The Tory party are just not hungry enough for power.
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In the USA the proposed tax on certain securities transactions, H.R. 4191, expects to raise ~ $150bn a year. I'm not sure how this has been calculated but a part of it is a tax on trading Derivatives. I suspect that such trading is even more popular in London than NY so my question is how much could be raised for the UK treasury on the wild assumption that new bank regulations will eventually apply equally in both jurisdictions to avoid arbitrage games? At first sight a tax take of, say, £90 billion a year might come in useful as a contribution to closing the current deficit and helping with maintaining AAA rating for the UK.
http://www.govtrack.us/congress/billtext.xpd?bill=h111-4191
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When GB assumed the role of PM he attempted to put the right people in the seats for the work required. He tried, to cross party lines to achieve this but failed to get the support need to do this. I think that after the next election .. no matter the result that the cabinet should be drawn from across the spectrum bringing in those most suited to the hard days ahead than those who put politics above the well being of the nation.
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I very much agree with Stephanie that there is very little difference between the two parties. This bodes very ill for 2011 becsuse whether the British public like it or not. this country is in dire trouble with an enormous debt to repay. I thought at one time that David Cameron would actually improve the Tories' chances by telling voters the truth. After all, I thought, we are grown-ups, and we can take it on the chin can't we? After all we have done it before. But no, negative comments from Peter Mandelson, Alistair Darling and Gordon Brown together with some of the media have scared the Tories and reduced their poll lead.
Unfortunately the facts remain, the money still has to be repaid and putting it off now will simply make it more difficult in the future. For heaven's sake,you politicians, the Britsh people deserve the truth. We are in a deep hole and it will be a tough fight to get out of it.
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Stephanie, you imply there isn't much difference between Tory and Labour policies on the deficit. Probably true. But my reading of the Tory position is that the other side of the balance sheet i.e. growing the economy is different. Tory policies are to encourage the Private Sector, something of great anathema to Labour. Our salvation will be carrot and stick not death by a thousand minitax rises, which is the track record of this Government.
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We`ve not forgotten about yesterday`s sordid little business Stephanie!
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For goodness sake!
If you want to leave the UK then just leave. It really won't make any difference.
If you want to stay then just stop the naval-gazing and hand-wrringing. This country and all of our competitors are still in the grip of a worldwide economic crisis exacerbated by a global financial crisis. To make matters worse nobody is doing anything to fix it.
So it won't matter if Labour or Conservatives win the next election or how hard, fast, deep, etc. they cut. It won't matter if The City likes or dislikes the policies. None of them have any control or can accurately forecast what is going to happen - BECAUSE THEY DON'T KNOW.
This is one time when it is broke and nobody can fix it. The full effects of that haven't even been seen yet.
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#33 BiiBoidshateu,
What a silly person you are - nxt you'll be saying "we know where you live"
GROW UP
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the difference between the two, one has white hair and wears glasses, the other has brown hair, everything else is the same
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I love the way the Labour government is accused of profligacy in their time in office. No one seems able to remember how run down things were when they took office, in education, in the NHS, in the arts. So it wasn't profligacy; it was simply mending fences that had fallen into disrepair. The fact that debt accrued wasn't just a Labour fault; the atmosphere of Spend, Spend, Spend, had been running for some time. Everyone bought into it, so its spurious to turn round now and blame the spirit of the times that ran unbridled from Mrs Thatcher's loosening of the chains in the 1980s. Short memories, short memories!
But to the matter in hand. We are where we are, massive, crippling debt. My parents and their wartime and post-war generation would be spinning in their graves so careful were they to save and only spend according to their means. A government of National Unity seems eminently sensible at this juncture. At a stroke it would obviate the measly wrangling of party politics that does nobody - and certainly not our society or economy - any good. And the media would certainly not be able to score partisan points merely for the sake of the Great Game which is what it has now become. Point scoring. A blood sport of interest only to the participants.
So how to bring that about? A hung Parliament is perhaps desirable but almost impossible to guarantee. Suggestions on a postcard,please.
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35. At 5:53pm on 03 Feb 2010, foredeckdave wrote:
"#33 BiiBoidshateu,
What a silly person you are - nxt you'll be saying "we know where you live"
GROW UP"
Ohhhhh,I must have touched a nerve LOL
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The more closely you examine the gap between the Tories and Labour on the deficit, the smaller it seems to get.
Do you not see your part in that Stephanie? We have needed senior journalists like you from high profile organisations like the BBC to hold our politicians to account.
Instead the uneducated majority have been fed by the media that this government have done amazingly at keeping us from depression. With lower unemployment than expected etc etc. What about the other side of the story? That they have not done magic, but just borrowed from our future mind boggling amounts of cash.
So the Tories have now realised they just can't tell it as it is. Partly because they didn't say enough years earlier (when it wasn't so obvious) and partly because they know that the uneducated man on the street really is as simple to bribe as a child given sweets.
I have now seen 2 labour ministers on TV use the words "from 2011 we will start paying down the debt". And on both occasions they were not challenged that this was a barefaced lie. They only plan to add to our mountain of debt at a slower rate.
So I challenge you and your colleagues, Stephanie, to up the ante. Use your live interviews on BBC news to spell out to the uneducated Brits exactly how bad our financial situation has become, and help create a climate where both major parties have to be honest and open about what is needed to rescue our economy from impending doom.
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Being a financial whizzo, surely you understand that the markets do not trust Gordon's failed government, ideology & economics.
The markets would be far more active and beneficial for employment with a Conservative government.
It's a question of trust and background.
Would you sleep with someone just because they look like your partner and claim they will make you happier?
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There is a BIG difference between the Tories and Labour: Tories will cut more quicker and tax less, Labour will cut less and tax much much more. Under the Tories, we will face 2/3 very tough years, but will come out of that growing strongly; under Labour, we may suffer less immediate pain but it will be neverending worse in the long term . . .
But agree there isn't much difference between their rhetoric.
This debate is a phoney war anyway: whatever Labour's spin, the following will prove decisive for May 6th
- economic growth; will likely stagnate during Q1 2010
- updated national debt and budget deficit figures; bad news could spook the markets and increase interest costs
- end of QE; cld lead to massive increase in debt service costs, a gilts strike or run
- interest rates; inflation outlook very unclear but scope to surprise on the downside
- budget; will have to face up to the new reality
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So the position of those opposed to the tories is thus
1979-1997 they practically destroyed the public sector by instigating savage cuts
1997 - 2009 hooray to labour for the surge in public spending that has saved the public sector
2010 (when it's obvious to one and all we need a party that will cut public spending to rescue us from econonminc ruin) tory and labour?, there's no real difference
folks, you couldn't make it up.
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Gosh1
Here we go again Stephanie.
There's not much difference between Labour and the Tories line! (no doubt sent from central office?)
Actually there is. One has presided in power for the last 12 years and left the economy in a catastrophic state.
One could be forgiven to think that Labour have been in opposition all this time which of course they haven't. How on earth can you put any stock in what the current administration has to: say/do/act/spin/resay/deny/restate/non-act/pinch/spin/lie/confuse/respin etc
Most intelligent people know what economic mess we're in. Too many of the electorate are still in denial.
One suspects that you plus a number of contributors to this blog are effectively in denial. You so much want the current administration to succeed where in fact it has been a colossal failure on a number of fronts and don't want to admit it.
So instead misdirection is called on to try and forget the last 12 years and 'focus on the future' pouring scorn (or very faint praise) on the opposition.
At least there appear to be enough contributors here who spot a con trick when they see it.
The difference between the Tories and the Labour is that one has had power for 12 years with dire consequences and one hasn't.
A failing PLC or public sector enterprise (such as a Foundation Trust) repaces its top management. End of story.
People don't endlessly provide an argument for why the incumbent failure should stay on no matter the alternative because the alternative is given an equal opportunity.
This from a party and sympathisers who go on and on and on and on about equality............
Can we please get out of denial then we can debate the fairly known irrelevant economics anyway starting from a position that we are well and truly in a deep hole as an economy (to put it mildly) - see endless previous blog comments.
And go from there with a new administration who appear at least to understand basic economics and understand what true growth means (they at least have form in this area).
I would appreciate more Stephanie if you were a little more critical of the current incumbents as opposed to glossing over their record and presenting yet another new tablet of stone.......
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...the future performance of the economy is going to have a far greater impact on the public finances than the political affiliation of the party in power.
If this is true, then we really are doomed if labour stay in power. The report in the Sunday Times that found over 1997-2007 that 57% of job creation was state or “para-state” — dependent on government spending.
Worst still, it found that in the West Midlands, which should be a thriving engine room for our economy there was NO private sector jobs created overall.
When this sinks in, it does make you despair. This is the period of BOOM under labour up until 2007... yet there was ZERO growth in private sector jobs.
So please tell me why this isn't a major political issue separating the parties? Where are the plans to give wealth creating jobs back to the ex-Rover workers who currently are employed as diversity co-ordinators and global warming monitors?
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Lets add the Barclays figure of £66bn on to the announced savings of £57bn giving a total public sector required reduction of £123bn which is remarkable close to Vince Cable's quoted figure of £120bn (he gets yet another prize for being right)
£123bn is very roughly 20% of public spending in 2008. (someone will no doubt correct me if I have mis remembered the figures)
Now I grew up in NE England which is classic labour heartland. There are major parts of my area where 2 out of every 3 working people are either on benefits or working for govt (national, local or NHS). This is completely unsupportable - not only do they not generate any wealth but most of the schoolkids only aim in life is to get a job in govt, anyone with a bit of get up and go, does that and leaves.
Sure there are lots of public sector workers who will hate for this but your days are numbered. A combination of redundancies and not replacing people who leave means that a massive number of public sector jobs have to go. Both lab and tories will start with the easy ones (MOD civil servants, "5 a day" co-ordination outreach workers and similar non jobs) but they will quickly find that to implement a 20% reduction (and I do mean a reduction not simply a slow down in the rate of spending increases) requires a radical re-think of exactly what govt should be doing. At the moment I see no evidence of any such thinking from politicians.
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Interesting contributions again! We're are skint as a country; both in political guidance as well as a depleted pot. My penny's worth is the Tories are saving their ammo for the hustings else they will miss their best opportunity to boot New Labour into the annals of time. Are we scared of austerity or do we keep this credit mentality? We seem to have a public purse that we cannot afford and it's still on the increase so where is the hatchet man? The only thing that is turning me into a Doom and Gloom merchant is that the politicians defy logic and persist with spend, spend, spend as an economic must. There are far too many non-productives in GB and seriously big cuts have to happen. Growth does not come from spending. If it does then the investing / squandering fog remains. And no, I don't want to pay for "their pet projects" with higher taxes.
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So the cuts have been substantiated , sooner or later we will have to cut back public expenditure back 20 % , to what will be an affordable level. Many bloggers have been stating this for over 12 months, its simple maths...
In effect 13 years of Labour's initiatives will be rolled back....
Thanks for the third way New Labour, some how I don't think its been much of a success.
Wait until the Audit Commission starts reporting that all the new schools and hospitals have cost 20% plus more than they should of done , due to clever New Labour procurement procedures.
The money Gordon Brown has wasted is BILLIONS
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25. At 5:07pm on 03 Feb 2010, jimmyrotten cauli wrote:
The way out they will both take is inflation.
I agree they will both try but is it that easy?
I presume economic activity in sterling would dry up and the currency would devalue relative to what the dollar, the euro ?
On the other hand I suppose long term holders of UK debt i.e. future pensioners will just have a moan and then accept it in the usual British manner.
I guess it's time for anyone with cash to buy something that can hold it's value and is difficult to tax. Any ideas ?
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5. Chris
IFS = institute for stealing
GDP= gordons debt pile
PBR= porkies budget report
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Again we see reference to annual growth of 1-2%ish BUT the question I still have is that if growth is LESS than inflation then isnt it actually a type of inflated contraction.
Not being an economist It would be great if someone else could comment on this - am I right or have I missed something?
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37. heffalump wrote:
"I love the way the Labour government is accused of profligacy in their time in office"
Heffalump in 2000-2001 the dot com boom went bust. The UK amongst larger economies were largely unaffected. Why? Because the Chancellor at the time kept spending as the Tories planned, so we rode out the bust because of fiscal responsibility! Wind forward to 2008-9. We are bust. Why? Because that same Chancellor unleashed Public Spending increases like there was no bust likely tomorrow. They were in control of economic policy - no one else. That's why we accuse labour of profligacy.
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What a "Through-the-looking-glass" world we are living in. Six months ago it was "labour investment vs Tory cuts", now the Government is apparently criticising the Tories for being too soft on cuts!
Back to your post, Steph: in a narrow sense you are correct. There isn't that much between the parties. That's because there is actually only one possible course of action - cut the deficit dramatically. The parties can argue about the detail - more tax, less spending or a mix of both, but the basic philosophy is the same.
Interesting though that the IFS tells us that, actually, Labour is already starting to reduce the deficit even though, typically, it is telling us the contrary. How they can cut £500M off the universities' budget one week and tell us they won't start cutting spending until 2011 is beyond me.
BTW Steph, Labour has already started "choking off the recovery" by raising taxes (fuel duty last Sep, APD last Nov, VAT and Stamp Duty last month, NI & income tax going up in Apr). Next time you get the opportunity, why not ask a Labour spokesman how it is that Tory cuts will damage recovery but Labour tax rises won't?
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Wow. Reading down that list of comments is probably one the most sordid and depressing things it is possible to do.
The problem as I see it, is that as a nation, we're at odds with each other. Labourite vs. Tory, Old vs. Young. Many people who cannot see, or choose not to see, the blindingly obvious truth are simply voting or acting for the money in their back pocket.
A bit of post-war spirit is required. In many ways, the WWII aftermath dwarfs this "petty little recession and public expenditure crisis".
The reason both Tory and Labour policies are so close together? Perhaps it's because they're both judged to be damn-near perfect given the information and the predictions the parties have available. Perhaps it's because the government/opposition knows that many people are not as intelligent as the 50 above me, so don't want to scare them into wasting a vote on a fringe party who will turn the nation into a pariah?
That said, we're the butt of the international joke already, how could some frothy-mouthed fascist maniacs make it any worse?
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Re: #43. Rugbyprof
I think it is quite reasonable to take issue with your limited view of history.
Let me ask a you question?
Who provided the intellectual basis of the 'light regulation' that has prevailed for some years in British national management?
Now be honest... you know the answer don't you - of-course you do...
Yes, that's right, Margaret Thatcher (with the intellectual support of people including Milton Friedman etc...) That wasn't hard was it.
I remain un-convinced that the current Tory party has moved significantly away from this position. Perhaps the one-nation wing has, but the party is still in the vice like grip of the libertarian wing to judge by the comments and positions taken by the prospective candidates with whom I have had contact with or know the views of.
A vote now for the Tories is a vote for the Labour party policies of the last decade to continue, as was vote for Labour in 1977. We are being conned and the bankers will remain in control.
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19. John_from_Hendon
Right on the money John...
Many public sector jobs many "created" in the boom...bad news the boom is over,its time to stop creating and get real.
Cut the people filling a position rather then doing a job for starters.
A friend of mine went for a job as a part-time gritter/drive at a local the council depot a couple of years ago,he thought he would fill in a form, show his clean licence etc. they sat him down in a room with 6 people interveiwing him for over 1 hour!
He got the job but passed on it,talk about "to many chiefs not enough indians"
These people have a meeting about when to have the next meeting....
I know we need public services many are vital and business can not survive with out them but like any business when times are hard we need maxium efficiency to get through this bleak period.
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#43 rugbyprof
"A failing PLC or public sector enterprise (such as a Foundation Trust) repaces its top management. End of story."
This is not necessarily the case. Remember Cedric Brown, the Chief Executive of the privatised British Gas, under the last Conservative government? Did anybody resign, politician or director over the sale of Mersey Docks & Harbour Company, which from recollection was sold, according to an independent financial evaluation, at substantially below the market price by the then Tory government? Several people became multi-millionaires out of that one. What about that MP Neil Hamilton and cash for questions, did he resign, or was he booted out by Martin Bell at the General Election in 1997? Did all those bosses from the banks that could or should have resigned over the credit crunch and financial crisis resign in a timely fashion, or at all? What about the MPs and their expenses? William Morrison from the merged Safeway, Morrisons supermarket? Margaret Thatcher, even?
People in very well paid positions in the public, or private sector are usually pretty reluctant to resign, whatever the circumstances, which from the outside could give rise to their ending the employment relationship early. They have far too much to lose.
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Hi JFH #56
I wouldn't agree I have a limited view of history - quite the contrary I believe.
My essential point remains the same that we seem to be glossing over the very questionable record of the current government. Whilst I appreciate that it is common-sensical to question the opposition (or potential incoming government) I do believe too many 'doth protest too much' and I simply ask the question why?
There must be more deep-rooted stuff getting in the way of seeing current circumstance.
I'm not sure re your comment regarding 'light regulation' as you seem to imply that this is somehow the root of all current problems?
I presume you refer to the financial regulation of banking which seemed to operate ok previously (checking history sees that banking has always been well regulated certainly most of 20th C and still post '87).
Changes were made to regulatory responsiblity in 1997 which appear to have caused a classic 'nobody's fault' syndrome which I am afraid was the result of a decision made by our current PM as chancellor.
You will find research going back to 2001-2 that flagged up problems with emerging banking models that seem to have been conveniently ignored by those who should know better. I guess when you feel you've 'eliminated boom and bust', caution goes to the wind, and particularly when you have one eye on expected tax revenue to feed your ego. A Chancellor of supposed high intelligence, of all people should have been aware.
I have advocated in previous posts (see yesterday's blog) that maybe a return similar to the Glass-Steagall Act (http://en.wikipedia.org/wiki/Glass–Steagall_Act ) would be of benefit but that doesn't negate the fact which remains about regulators being asleep (or encouraged at least to sleep) at the wheel - reading the report into the FSA, for example, was highly enlightening - given the information at hand.
I return to my central tenet that a failing administration needs to be replaced with one that appears most able (from the choice at hand) and it is upto a well-informed (a key point) electorate to provide a barometer.
I try to argue from an economic management and pragmatic perspective rather than political one and I'm not sure with your last point what you are advocating given a looming election?
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# 58
Yes fleche_dor
But we've got a very important election coming up and the incumbents, however reluctant, can't by themselves remain in office - which is one crucial difference.
As much as I appreciate your various examples which I'm familiar with there are 2 other relative facts to consider:
From memory CEOs tenure of PLCs now on average in the UK I believe is less than 4 years and that's despite lethargy from fund shareholders. In NHS Foundation Trusts its less than 3. There are other examples. And I do stand to be corrected if anybody can find any recent published data on this.
Again, I would advocate a failing administration needs to be replaced particularly given the economic mess we now find oursleves in. Poor practice elsewhere does not mean that we should hold to the same low standard.
BTW USA, Iceland and Greece whose situations are not wholly dissimilar to ours have all changed their governments recently. I suspect Spain will do the same given its chance.
And as I said we as an electorate have a decision to make. However, in my view we appear to be glossing over the previous 12 years and I'm not sure what the driver is for this other than denial.
Feel free to provide explanations.......
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#43 rugbyprof
"And go from there with a new administration who appear at least to understand basic economics and understand what true growth means (they at least have form in this area)."
Is the "form" you are talking about the recessions of the 1980s or 1990s?
Conservative Party policy and in particular the budget of 1981 precipitated, exacerbated and prolonged the recession of the 1980s. Unemployment reached above 3m for the first time in the nation's history. The regime was also punctuated by other economic growth success stories such as the Crash of 1987 and Black Wednesday in September 1992.
Whilst Gordon Brown could not abolish the economic cycle and ban recessions completely, the "boom and bust" economomic policies of the Conservative years had some resonance with voters. The period between Black Wednesday in 1992 and the collapse of Lehman's in 2008 was a longer period of sustained economic growth than under any Conservative administration of the 1980s or 1990s. From recollection it was the longest period of continuous growth for more than 50 years. The UK economic growth record compared to any other country in the world's best efforts.
If David Cameron were so knowledgeable about economics, as you allege, then what did he recommend on Black Wednesday? As an advisor to the then Chancellor of the Exchequer Norman Lamont he was in a position to show his prowess in economics. £3.2bn of government funds were poured in one day in a failed attempt to shore up the £sterling from attacks on the foreign exchange markets and interest rates were raised overnight to 15%. The UK and its government lost all economic credibility with its European partners and the financial markets.
Cameron's most recent "form" and knowledge of basic economics is in opposing the bank bail outs and all the emergency finance package in the autumn of 2008. In a newspaper article of 14th November 2008 he argued angrily and forecfully against all the government measures and particularly against high interest rates. Was that a damescene conversion, following his experience on Black Wednesday? A complete policy U-turn was performed on bank nationalisations from January 2008 to October, at his party conference that year "in the national interests". He nearly cancelled the party conference out of sheer panic about the financial crisis! He seemed to completely forget he was out of government and power and so could not nothing of any use.
Cameron's experience of economic policy is of boom and bust and policy u-turns and flip-flopping.
In the light of the generally acknowledged serious economic situation that the UK finds itself in, it is only right and proper that people question the economic comptence of Cameron and Osborne fully, based upon their previous "form".
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'..the gap between the Tories and Labour ... , the smaller it seems to get.'
The current Labour lot are rubbish and the previous Tory lot were rubbish too, both sound likely to be rubbish in the future.
As was said above, 'None of them have any control or can accurately forecast what is going to happen - BECAUSE THEY DON'T KNOW.', no one knows.
The global economic system is in a mess, everyone knows that.
Stability is what people want.
Set the date of the 2015 and 2020 general elections.
A ten year, two term plan for where we want the economy and the nation to be.
A sensible and realistic roadmap to get there.
It would restore public confidence, at least people could then see where and why the sacrifices have to be made and accept that in the longer term it will be worth it.
The markets would like it.
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63)
Hi ClachDavid
Apart from your comments being almost completely incomprehensible, the 1993 deficit was only run for the period of the recession and some of the recovery, not for 5 years before at the peak of the economic cycle.
Is this year's projected deficit not 178 billion? Also, if you compare the 1993 deficit with with the 2010 deficit the figure would be smaller still as the economy has lost a permanent 7.5% (according to the IFS).
Borrowing costs of 4% doesn't sound that cheap to me on a projected total debt of 1.x trillion pounds under the government's optimistic projections. The point is that by not bringing the deficit under control, we will be extremely lucky if we can borrow anywhere near that cheaply.
61)
I wouldn't talk in such glowing terms about the longest period of economic growth for 50 years under Labour. The bigger the boom, the bigger the bust. We will be lucky if the deficit is brought under control by the end of the next 2 parliaments. This will be a painful process. Paying down the debt? I don't think I will see it in my lifetime. Labour have never had this long in power before. The long term debt they have piled onto my children (and probably my children's children) is unforgivable.
Slashing interest rates to historically low rates and printing money do not look like the actions of a government that is control of its own destiny.
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Markets put gun to the head of an elected Minister! Given the markets were rescued with funds from the public purse,are we to presume that we paid for the weapon? What a paradox!
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Stephanie,
Can you tell us what you think the UK growth rates will be for 2010,11,12 and what you think the size of cuts in spending and rise in taxation should be and where you think it should be targetted?
We know what other commentators think so what is your view?
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fleche_dor #61
As opposed to questioning the total incompetence of the current administration.
And if you're going to be critical of the 80s you need to consider and be critical of the administration in the 70s that left us going to the IMF.
Also consider whatever the merits of the early Tory administration to deal with the difficulties the country faced (and I particularly remember them) the administration was voted back in twice with bigger majorities which meant that support backed their strategy. It also shows the lengths that were needed to turn the country round from the precipice. We are in an even more parlous state this time round.
Black Wednesday was an experience we should never forget about trying to buck the markets. It seems that the current administration hasn't learn that much given the one-way bet on our currency and bonds that's been building up.
But going back to this blog leader what is Stephanie trying to actually say? What is her expectation? As an economist she should already know the very, very deep hole we're in and the constraints that any incoming party will face.
As I have already stated it seems that we've glossed over why we are in such a mess and the poor and reactive way in which we're being governed.
There's been no mention of the fact that Treasury forecasts haven't been accurate for about 8 years or more. We've dispensed with all targets that were set apparently in 'stone'. And the 'boom and bust' boast now looks pretty incompetent. At least previous Tory administrations never made any boast about eliminating boom and bust.
So if we want to critically appraise the Conservative approach - so be it - though I'd rather her slant be on why we should pick this current mob on the back of their very dubious record in an independent and objective manner free of personal bias.
It just doesn't seem equitable to me..........
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Gosh the repetitive attacks lodged on this blog against the govt, BBC and public sector workers generally is amazing.
Such comments betray a real lack of basic economics and economic history.
I haven't got all day to correct the tosh, so will just state a few home truths. Clearly some contributors either don't understand the subject or work for PR companies.
1. The present crisis was caused by the banking system, not the public sector. The role of the public has been to stabilise the failing economy while the private sector readjusts to the financial shock. So bloggers should be saying well done to public sector workers for keeping the private sector employed.
2. The Tories do not have a more successful record on econ management, unemployment, inflation or promises on exchange rates and taxes. So, don't pretend otherwise. And nothing they have said in opposition suggests that they would have been any better at avoiding the crisis or in handling the aftermath. In fact, their recommendations would have made the recession deeper.
3. No one seems to have a better than average score at forecasting. I certainly do not beleive the forecasting boasts of credit agencies, bankers and anyone on this blog. The best we can do is deal with the current situation and, currently there is not a problem funding the deficit.
4. The public sector produces wealth. Just because (public) services are not sold at the point of consumption/delivery, doesn't mean that the public sector workers do not produce wealth (value). To argue otherwise betrays real ignorance. Just think for a minute: you're saying that 100 people working in a privately owned fag factory (or PR agency) making cancer causing fags (propaganda) are producing real wealth whereas the same people trained as NHS nurses or state school teachers would produce nothing of value. [ie the same as people living on state benefits]. That is an argument that some marginalised Tories use to claim]. That is a ridiculous argument. But maybe you're arguing that all public services should be sold, so we could find ourselves paying (say) £300 per hour to see a GP. [Why £300? Well isn't that same rate for a solicitor (who has spent less time trainnig) or a financial adviser charges?
5. The grass is brown on both sides of the fence. To those people who have left the country (ha!) or are planning on leaving (ha ha), please let us know where you think the grass is greener and where the economy is more secure. I need to know, so that i can remove my investment funds from that offshore haven!
6. er that's it for now...
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I see the latest to undergo the 'rising bond treatment' is now Portugal.
So that's Greece, then Portugal, then probably Ireland, Spain with us next in line. The markets will inexorably close in on the next weakest link.
More comment on rating agency downgrade concerns re US which means we're very much in the firing line to lose AAA status as well with the resulting higher cost of capital, not forgetting potential funding problems.
Back to Greece I see their emergency measures are designed to bring GDP from around 13% to 3% in 4 years (mmm...).
Whilst they are a more extreme version of ourselves UK still projecting debt to GDP ratios of c. 10%ish in 4 years though its not clear how and based on very high growth scenarios that have already been questioned.
Perhaps Steph would like to comment on this as well from a current government stance?
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Big difference?
Please correct me if I am wrong SF. Unlike some of your colleagues you appear to conclude that there is little difference in responsibility between the current Labour Government and the opposition parties for failing to suitably supervise the banking industry.
Are you recommending voters to overlook or sympathise with a failure so big that it is almost beyond imagination? A failure that has cost the nation hundreds of billions of pounds and incurred debt that will require repayment over generations. If so it appears to be a most unusual pointer to wisdom.
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Why haven't Bond markets reacted to Cameron's prediction that UK credit ratings are about to fall? I asked that question here a month ago, and still the Bond markets are showing no change in UK Government debt.
It can't be because the BoE's still buying-up UK Bonds because they only had £5billion in their kitty in December - not much in such a vast market.
Moreover, opinion polls no longer predict a majority Tory win in May. Maybe international Bond dealers don't listen to Cameron's drivel about our nations' credit rating?
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#59. Rugbyprof wrote:
"I'm not sure re your comment regarding 'light regulation' as you seem to imply that this is somehow the root of all current problems?
I presume you refer to the financial regulation of banking which seemed to operate ok previously (checking history sees that banking has always been well regulated certainly most of 20th C and still post '87)."
I am arguing that the philosophical attitude to regulating natural monopolies and cartels is indeed on of the major caused of the present situation - accompanies by cowardice and almost complete lack of intellectual honesty and integrity by post holders. (I do not distinguish between elected and appointed persons.) This attitude to regulation is the root cause of the market knows best and will fix problems that occur.
"I return to my central tenet that a failing administration needs to be replaced with one that appears most able (from the choice at hand) and it is upto a well-informed (a key point) electorate to provide a barometer.
I try to argue from an economic management and pragmatic perspective rather than political one and I'm not sure with your last point what you are advocating given a looming election?"
We need change I agree. But I think that your belief is misplaced in that an 'opposition' party that shares the same beliefs and the incumbents with regard to regulation and markets (indeed is the source of such beliefs) and protests that it will not change anything for a few years will be capable of fixing things. It is like re-arranging the deck-chairs on the Titanic.
I do not share your belief that changing from Tweedledum and Tweedledee in the same establishment will facilitate the necessary change because they are both in hock to the same financiers and media empires. Thus further undesirable (and escapable?) economic consequence will occur. This is why I want to have a short term (5 year) National Government in this time of crisis. Rome did it and we have done it in the past and I believe that we should talk about doing it now in the hope that by doing so those who we pick to be responsible will be responsible in their actions. Picking the historical source of the philosophical error (i.e. the Tories) is not logically a sensible strategy. Those in power have shown that they knew there was a problem but have lacked the courage to do what is necessary to fix the problem. A weak gutless government is not likely to be any help. (c.f. Japan, Greece etc. etc. etc.) I believe I have evidence on my side of the argument.
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#68 stop the monkey...
1. Competely and utterly incorrect
2. Wrong again. Actually they do if you consider the past 60 years adminsitrations. It's far from perfect granted. But nonetheless true. The last two Labour administrations have resulted in 1 bankruptcy and 1 near bankruptcy as at the current time.
3. Wrong. Actually they do though you need to be precise on what forecasting you're on about.
4. Wrong again. Public sector contributes to wealth but does not directly create wealth as it uses redestribution of taxes earned off wealth creation. This is a basic economic tenet. However if NHS Trusts for example could export their knowhow to other countries this could be a viable wealth creation for the country but they don't at the moment.
Your example is a good (extreme) ethical one and I agree but you're right that one does create wealth and one doesn't the wrong way round but nonetheless. Nobody is advocating that you pay £300 to see a GP.
5. Correct though there are different shades of green and personal taxation is one of them. And people have a choice.......
6. Feel free to comment further...
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Arguments about 'uncertainty' can get really daft?
At the general election there certainly is not 1% difference between a Labour or Tory parliamentary administration.
All governments and all politicians make economic and other mistakes - but Labour tend to make more of these - but the significant difference is that our history shows us that when Labour have brought the UK to its knees - to the brink of economic catastrophe and disaster and now social ruination with a runaway knife, drug, terrorist and other problems fuelled by illegal invasions and millitary enforcment of traditional energy supplies.
WE LOOK TO THE TORIES TO RESCUE US AND APPLY COMPETENT ECONOMIC MANAGEMENT OF OUR UK ECONOMY
Labour is incapable of leading the UK out of recession - the UK and it's economy is on a downward slide as presented by and well explained by George Osborne in the supporting paper to his '8 benchmark economic model.'
That is not '1% difference' in my book - its the difference between 'sink or swim'.
How is it that the message is still not getting through?
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71. At 09:20am on 04 Feb 2010, leftie wrote:
Why haven't Bond markets reacted to Cameron's prediction that UK credit ratings are about to fall? I asked that question here a month ago, and still the Bond markets are showing no change in UK Government debt.
It can't be because the BoE's still buying-up UK Bonds because they only had £5billion in their kitty in December - not much in such a vast market.
Moreover, opinion polls no longer predict a majority Tory win in May. Maybe international Bond dealers don't listen to Cameron's drivel about our nations' credit rating?
>>>>>>>>>>>>>>>>>>>>>>>
Because the 'bond market' are hoping for a Tory victory to lift the UK and other markets and help pull the UK out of recession with lower debt payments.
The bond market issue will be tested late 2010 /2011 when the next government cuts public spending, raises taxes and if borrowings are too high and massive unquantified infra-structural costs start to bite - that is when the UK's credit rating will be tested.
At the moment, only George Osborne has a credible economic growth model to show the actions and government investment/priorities in order to argue that the UK economy is sustainable and able to service the massive and increasing UK sovereign debt mountain.
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#71 leftie
It's a little more complicated than that. See my comment at #69.
The bond markets are also waiting for UK's decision on QE which is distorting the said bond markets (artificially keeping low).
Markets will start to move as we get closer to election day.
My forecast:
If polls showing Conservative win then bond yields will probably not deteriorate and sterling should roughly hold its value relative to others (unless probelms with Euro and dollar). Rating agencies should hold AAA pending emergency budget.
If polls showing hung parliament expect bond yields to rise and sterling coming under severe pressure. Also Triple AAA status warning downgrade. Selling gilts will become more expensive (cost of borrowing goes up for everybody).
If polls showing marginal Labour win bond yields will rise more strongly and we may have a run on the pound as markets 'smell a killing' (1992 all over again). Government will have difficulty in selling gilts required to fund borrowing (cost of borrowing going up and probable national funding issues bringing bankruptcy closer).
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Country bond ratings are formed by the principal ratings agencies who look not only at the amount of borrowing but our capacity to repay. A susbstantial proportion of the 'structural debt' was created to finance the purchase of equity and provide other financial support to the banks. In due course those banks assets will be sold off and it is hard to imagine that much will remain on the UK balance sheet by 2015. It is conceivable that the equity will be sold for a good price as so much of the so called toxic assets will continue to appreciate in value as the housing market in the UK and the US recovers.
We are currently running a current account deficit because of the fall in tax receipts - that will recover as GDP rise back onto trend at around 4.5% (nominal), 2.5% (real). The ratings agencies are quite clear on all of this so the chances of the UK losing its AAA rating are low indeed. What could bring it about is if the recovery in the UK falters and we go back into another period of negative growth. It is the expectations of recovery which are crucial in maintaining the rating and if it became clear government support for the economy was to be reduced prematurely then all bets would be off.
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Onward-ho predicts that the government's growth figures will not only be reached ......growth figures will be better than predicted by the government.
The IFS need not worry about extra extra cuts .....the government are already cutting expenditure by more than predicted .
And yes there is a structural hole in the economy, but if there is money to be made there will be new growth ......think of the economy as having been pruned rather than savagely hacked.
You read it first,from onward-ho.
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Why has my post been removed.
Is it that I offended some government supporters out there with my view that taxpayers money could be better spent on nurses and doctors than quangos and economists.
Well i am not sorry. On Tuesday it was ok for you Stephanie to liken an apparantly honourable man (David Cameron)to Nixon but i am not allowed to hold my view. Shame on you all.
As for all of you harping on about public sector jobs in Wales. Shame on you too. What about our kids. We mostly had free university and a chance to own our homes even as council tenants. Now many of us sit in our ridiculously priced houses having completely marginalised an entire generation, demanding as a right, to be paid for doing nothing of value. We are robbing our kids and grandchildren of a fair crack at a decent standard of living. We have put back social mobility 100 years. Many of our kids will end up becoming economic migrants in China, India or Brazil.
Thanks Labour
So put my comment back.
I have said enough.
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#72
Hi JFH
Can't disagree with your thesis. But the pragmatism in me suggests in the near term they are better bet in getting the country back on its feet to some degree. I would say that it is attitude towards raising and spending taxes as much as any philisophical market approach (though the two are usually connected)
It is however up to us, collectively as an electorate to demand strong governing as against a weak one as you rightly point out.
It's where particularly perhaps I share your frustration in that the electorate and media are currently giving mixed signals in wanting their pie, cake and eating it as well which doesn't bode too well......
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Some points : the Treasury's growth forecast for 2011 was over optimistic, so the fiscal overdraft could be worse ( most forecasters) ; permanent lost capacity could have more serious implications ( Barclays) ; if the only driver for growth is a slowing in destocking and build up of inventories with flat consumer demand ( NIESR), tax receipts will be weak going forward and tax hikes only make the position worse; the banks will need to refinance £1trn of wholesale funding ( replacing Governmetn guaranteed borrowing) over the next five years ( BoE)
Bickering over small nuances between Conservative and Labour is getting up my nose! The issues are sufficiently serious to warrant a government of National Unity. The interesting thing coming from the IFS is the statement that there should be independent audit of public finances : Codes for Fiscal Responsibility arent adequate - the parties in government should not be trusted to give us the facts! This should be the headline.
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Moderators what's happening to the out of sequence publication of comments?
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Whilst I do enjoy reading the opinions expressed by my erudite fellow bloggers, I do think we could expand the search area of past experience beyond the past few years.
In the interests of so doing, I offer
http://news.bbc.co.uk/onthisday/hi/dates/stories/november/19/newsid_3208000/3208396.stm
Seem familiar? But who had left the mess at that time?
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75
Has the moderator gone to sleep?
Or is the post delayed by the BBC getting approval from Liberty?
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Free the Monkey at #68.
You talk about writing tosh. Well, let me take you to task on that issue. ;)
"1. The present crisis was caused by the banking system, not the public sector. The role of the public has been to stabilise the failing economy while the private sector readjusts to the financial shock. So bloggers should be saying well done to public sector workers for keeping the private sector employed."
Absolute poppycock! And sounds suspiciously like Labour propaganda. The crisis was caused by USA and UK following a set of policies that encouraged a bubble, that had to burst. It has. If you want evidence of this just look at Gordon's policies to try to keep the bubble inflated e.g. various scrappage schemes, printing money etc But granted, Labour did allow the banks free reign to grab as much money as possible.
2 and 3. I more or less agree with you on those, so I will let them go. :)
"4. The public sector produces wealth. Just because (public) services are not sold at the point of consumption/delivery, doesn't mean that the public sector workers do not produce wealth (value). ..."
I certainly would NOT argue that the public sector does not create value, and I said as much above. We need public sector workers such as nurses, doctors etc But the FACT remains that they are paid for by taxes produced primarily in the private sector, even that fag factory you spoke about. Further ALL taxes that public sector workers pay are effectively null and void, because they are simply returning money they received from the government in the first place.
5. The grass is brown on both sides of the fence. To those people who have left the country (ha!) or are planning on leaving (ha ha), please let us know where you think the grass is greener and where the economy is more secure. I need to know, so that i can remove my investment funds from that offshore haven!
I can only speak for myself. I maintain a house in UK. I was born here and return on occasions, and love this country. However, I objected to my tax being used in certain ways (e.g. Iraq, Afghanistan...the list is long). So I decided to withdraw my tax contribution from the UK government coffers. Yes a small protest I'll admit, and maybe extreme in some peoples eyes.
I have an Internet business based out of Dubai, but I spend most of the year in SE Asia, switching time between Thailand, Malaysia, Singapore, and the Philippines. I love the quality of life there, which is far beyond what I experienced in the UK. The diving is excellent, and the women beautiful. I tread very lightly, pay virtually no tax, but contribute by paying for services as and when I need them, such as health care, Internet infrastructure (far better than UK in my experience), and contributing expertise on a contract basis. This encourages me to plan ahead and be self-sufficient. Over the years I have paid a *considerable* amount of tax into the UK government coffers, and I still make NI contribs. Yes, SE Asia is not without its problems, but the governments leave me alone to get on with my life, and if I keep a low profile everything is cool. I am happy. I was not living in the UK.
You ask where there is more stability and security than the UK? I don't think you can get that from any government can you? Even public sector workers can be laid off right, or look at Eire where they have slashed benefits. Companies go bust. Workers get RIFd. I depend largely on my own hard work and efforts for my security, and save for a rainy day.
UK politics is something I am still interested in. I don't think my comments here will change anything. It's just for "fun". :)
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" Jimmy Cauli"
"The way out is inflation"
Probably the Labour/Lib Dem way out. Keep interest rates low, keep families thus in their homes and in their jobs even if it means taking pay cuts and continuing the decline of Sterling that has been going on this last 50years ( remember 10 Swiss Francs to the £, anyone?)
Very Humane.
Or the Tory/UKIP route. Attack the Working and Middle Classes, cutting 1M to 2M Public Sector workers. Who will then have less money to spend in McDonalds,M&S,Morrisons thus causing more hard pressed poorly paid Private sector workers to be sacked. A vicious deflationary downward spiral for all. ( Except the Elite at the top of the Pyramid).
Not very humane.
But will support Sterling as they will be sure to put Interest rates up.
Are you a Saver or are you a Borrower? Are you in the Black or are you in the Red?
If you have self knowledge you will know whch way to vote at the upcoming GE.
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As a private sector employee in an industry that delivers goods and services into the private sector I would observe:
1) we cut 30% of our work force last year and are now recruiting to fill the gap between our burgeoning order book and the available staff;
2) I have more money in the bank now, despite not having had a pay rise last year, than I have had since the days of Thatcher - the difference being that we live in a much better society than we did with Thatcher, with lower crime, less absolute poverty and more social awareness and concern for other people - we have low interest rates: which has enabled me to reduce my mortgage term by two years and counting by not reducing my mortgage payments; low inflation - which means that my expenditure is not experiencing contraction pressures.
3) I don't care about government debt - it is so mind bogglingly outside of my ability to do anything about it that I won't worry about it: learn from Dale Carnegie and compartmentalise you little chicken lickens.
4) Unemployment, even by the expanded ILO measure the government uses is lower than the peaks under Thatcher, who genuinely fiddled the figures (I know: I was a student banned from signing on under Thatcher but equally banned from getting short-term work as it all had to go to the long-term unemployed so they could fiddle those figures down as well) and only used the claimant count as the measure of unemployment - which horribly under-estimated the figure but still got over 3 million.
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Moderators
I must object to '76 not being published as it contains forecasts and an answer to #71 re bonds and QE. What exactly is the 'thoughtcrime'?
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I think the Labour government has a lot to answer for about the general decline of society rather than just the economy - the rise in no-win no-fee lawyers has led to our health and safety obsessed climate. The unconditional support of the feckless and lazy has created a whole underclass of people who's career is benefit. We are then surprised that women who had children to provide themselves with benefits dont care for those children well. IMHO a 'fair' society is not one where the lazy majority are supported by the principled few but where those genuinely in need are helped as much as possible and those who cant be bothered are not rewarded. To get to that society from here is a long, hard road though.
It will be a long time before AllNewLabour v2.0 get back into power, which isnt necessarily a good thing - we'll all be moaning about the Tories in ten years time!
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88. At 11:14am on 04 Feb 2010, Rugbyprof wrote:
Moderators
I must object to '76 not being published as it contains forecasts and an answer to #71 re bonds and QE. What exactly is the 'thoughtcrime'?
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Well said - there appears to be political bias in the BBC's moderation process?
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83. At 10:38am on 04 Feb 2010, HughOldham wrote:
Whilst I do enjoy reading the opinions expressed by my erudite fellow bloggers, I do think we could expand the search area of past experience beyond the past few years.
And for a bit of balance...
16 September 1992
http://news.bbc.co.uk/onthisday/hi/dates/stories/september/16/newsid_2519000/2519013.stm
Recall the famous phrase, 'anyone want to buy a house?' you'll be hearing it again if Osbourne becomes chancellor.
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"Matters came to a head in a clash between Lawson and Margaret Thatcher's economic advisor Alan Walters, when Walters claimed that the Exchange Rate Mechanism was "half baked". This led to Lawson resigning as chancellor to be replaced by his old protégé John Major, who, with Douglas Hurd, the then Foreign Secretary, convinced the Cabinet to sign Britain up to the ERM in October 1990, effectively guaranteeing that the British Government would follow an economic[3] and monetary policy that would prevent the exchange rate between the pound and other member currencies from fluctuating by more than 6%. The pound entered the mechanism at DM 2.95 to the pound. Hence, if the exchange rate ever neared the bottom of its permitted range, DM 2.778, the government would be obliged to intervene. With UK inflation at three times the rate of Germany's, interest rates at 15% and the "Lawson Boom" about to bust, the conditions for joining the ERM were not favourable at that time".
Anyone remember this, a £10000 MORTGAGE @ 15%, even interest only will cost the man in the street more than just a few hundred pounds extra.
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Thanks for the acknowledgement nautonier.
If ever there was evidence to suggest bias its contained in comment #76 which seems to have spooked the moderators.
In it I paineted 3 forecasts regarding UK issued bonds, interest rates, AAA rating potential downgrade and gilt funding difficulties leading to potential default.
These were linked to polls and the coming election and they were connected to:
i) a likely Conservative administration
ii) a potential hung parliament
iii) a marginal Labour win
There was increasing severity and the response was looking to explain leftie's comment at #71.
I'll have to leave commenters to join the dots understanding that it did not pass the moderators first time.
Trust this comment does which will prove that moderator action here is subject to bias.........
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I dont think they like what they're hearing
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93. At 12:25pm on 04 Feb 2010, Rugbyprof wrote:
Thanks for the acknowledgement nautonier.
If ever there was evidence to suggest bias its contained in comment #76 which seems to have spooked the moderators.
In it I paineted 3 forecasts regarding UK issued bonds, interest rates, AAA rating potential downgrade and gilt funding difficulties leading to potential default.
These were linked to polls and the coming election and they were connected to:
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
You could argue that our comments are commercially sensitive and significant to the stock and bond markets which could mean that we should have our own economic live debating slot on the BBC - but I'm more inclined to think its petit censorship and plain bias.
My comment set out that the 'bond market' issue would be an issue later this year and next year regarding the UK keeping its triple A rating and that only George Osborne has a credible economic plan to argue that the UK should not be penalised by paying more than it is doing now for servicing the UK debt mountain.
So DC's comments about the UK's credit rating are very significant and the point about paying higher bond market interest rates ie higher debt service costs is that this is an avoidable additional cost to the UK taxpayer, if the UK is managed properly in economic terms.
DC's comments are significant and if ignored I think will cost many thousands of jobs in the 'public sector'!
Good economic management costs 'nothing'!
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Remember this:
1975 24.20%(CPI)
Thanks Labour - Thanks a bunch - the most disgraceful stat in UK economic history ...
well almost - ask Goondog Trillionaire!
LABOUR IS INCAPABLE OF LEADING THE UK TO A SUSTAINED RECOVERY FROM 'RECESSION'
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Im confused, you are talking about reducing the deficit, but in the last week Darlin in every interview iv heard and brown on one interview stated that the plan is to half the debt?
Surley the PM and Chansoler know the differance betwen debt and deficit!
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#87
Here Here no 87.
We have a very short memory it seems n the UK.
All areas of life under a tory government were horendous.
I came into education at the end of that period. The school buildings were falling apart.
There was no funding available to buy materials, we as teaching staff had to scround around local businesses for donations of material and funding. Look at it now. Buildings maintained, technology properly funded with adequate resourse funding. It may not yet be perfect but its one hell of a lot better under Labour. Dont forget Thatcher took some 20 years to bring down the country to the level we ended up.
You could use the same analogy across any of the public service areas.
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When you are coming down from a mountain, the quickest safe route is rarely the shortest. The same applies to reducing the UK budget deficit. The most responsible approach of any government, Labour or Tory, is surely to try and keep the economy on the "optimal line" of deficit reduction. Cutting more severely than this line directs would lead to lower growth and therefore be self-defeating (as tax revenues would remain comparatively depressed and welfare payments would be higher, thus swelling the deficit).
The precise course of this optimal line changes day by day - in the same way as walking down from a mountain you may constantly adjust your route.
The party that states that its over-riding aim is to follow this line would stand the best chance of convincing the rating agencies, and the voting public.
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telw #91
Let's go back even further. To 1979, when the UK was an economic basket case and the 'sick man of Europe'. By 1997 it had the strongest economy of any major country in the EU.
So strong in fact it's taken Labour a full 12 years to wreck it.
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Lots to have a go at here.
#16 "it is about the fundamental hollowing out of the productive economy."
Absolutely! Any notion that the Public sector is "crowding out" the private sector is just moronic. As some posts have indicated, the public sector is stepping to provide employment that the private sector is failig to do. The problem is not why the public sector is doing this: it is why the private sector, despite all the handouts it has been thrown over the last thirty years, is still failing to generate any jobs or growth. Could it be that capitalism has indeed exhausted its potential for development and can now only impoverish through a "race to the bottom" of wages and social conditions? Yes it has.
#40 "The markets would be far more active and beneficial for employment with a Conservative government."
There are no such things as markets. there are only people interacting in an economic environment. What this actually means is that rich would be happier under the Tories. Popes and bears spring to mind...
#43 "A failing PLC or public sector enterprise (such as a Foundation Trust) repaces its top management. End of story."
Dream on! The latest example is that the good management at Cadbury's is being booted out by the mediocre management of Kraft because the shareholders want to cut and run. In any case poor management is the elephant in the room of discussions on the economy. British Management is by and large awful, with bullying rife and wild swings between under- and micro-management. Is is embarrassing how often US, European and Japanese firms come to the UK and get great results with workforces that British managers appear totally unable to manage. The laugh is that over the last twenty-odd years, as British firms have struggleed, their managers have paid themselves ever more (now many times the median in most companies) for increasingly poor performance. My geatest thrill in life is supporting and advising workforces to manage their enterprises without the huge expenditure on 2managers" that they have been conditioned to think of as necessary.
#62 "The current Labour lot are rubbish and the previous Tory lot were rubbish too, both sound likely to be rubbish in the future."
#72 "they are both in hock to the same financiers and media empires."
Quite! New Labour has suffered organisational capture by the banks, financiers and non-doms, and changes to their rule book (supposedly to reduce the influence of the left) have meant that ordinary members are totally disenfranchised within their own party (and have responded by leaving in droves).
The only solution as I see it is that we as individuals need to put our energy into developing a new economy, based on mutuals, co-operatives and genuine social enterprises (not the quasi-privatisations we currently see) to create enterprises that are genuinely democratic and therefore responsive to customer needs, environmental concerns, social concerns and employee needs: none of which are given any consideration by the money-driven sector. The dinosaur economy of the mega-rich can then be left to wither and dry as we cut off the real economy upon which it feeds.
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Rugbyprof. Interesting forecasts at #76. I think that looks about right.
At what point though would we say categorically that Britain is actually bankrupt? When it has to borrow from the IMF? When it loses its credit rating? What definition for bankruptcy would you use?
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Tyto alba #87 said
'I don't care about government debt - it is so mind bogglingly outside of my ability to do anything about it that I won't worry about it'
Nor anyone else still considering voting Labour.
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Stepanie
Since you mentioned the latest IFS report, I was surprsied that you reported in the way you have. See for example:
http://business.timesonline.co.uk/tol/business/economics/article7014187.ece
IFS predict cuts, cuts and more cuts. In fact its reported that departmental spending wil have to be cut consceutively for at least five years which WOULD REVERSE THE TOTAL RISE IN SPENDING SINCE LABOUR CAME TO POWER IN 1997.
WOW - its worth reading that again:
In fact its reported that departmental spending wil have to be cut consceutively for at least five years which WOULD REVERSE THE TOTAL RISE IN SPENDING SINCE LABOUR CAME TO POWER IN 1997.
Anybody out there that still doesn't get it?
However, that's the best scenario based on current rather dubious grwoth forecasts and rather dodgy debt reduction promises.
Greece has had it first round of mauling in the bond markets at 7%. Now its Portugal's turn approaching 5%. After Portugal, Spain. After Spain the UK.
The markets inexorably march to the next weakest link where they believe economic credibility is an issue.
Don't discount a run on sterling...
#98 Biggles - how we all clapped with irony feeling pleased with ourselves.....
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#101 co-operateordie
Acknowledged your reference but unable to respond due to rantings of lunacy......
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#67 Rugbyprof
I think the one thing that everybody that contributes to this site agrees on is the parlous and fragile state of the UK economy and that fixing it will not be easy.
".. if you're going to be critical of the 80s you need to consider and be critical of the administration in the 70s that left us going to the IMF."
I hardly think that management of the economy in the 1970's was a utopian ideal. It should be remembered that there was a Conservative Government between 1970-4, with a year of political uncertainty before the Wilson/Callaghan administration, which led to the birth of Thatcherism in 1979. The economic challenges that the country faced in 1979 could not reasonably be described as solely the product and responsibility of the Labour administration of the latter part of the decade. Arguably the swinging between the two administrations caused more damage.
Neatly dismissing the 1970's as all Labour and all disaster is a sleight of presentation that Conservative politicians have very successfully performed since the Iron Lady. Its over simplistic, and also wrong.
One of the most important causes of the economic troubles of the late 1970s had little to do with either government directly, but the formation of the OPEC cartel in 1973, Middle East war and resulting global oil supply shock, which resulted in massive price inflation. Any increase of 10%+ in the price of crude increases economy wide inflation and causes a decline in economic growth between three and four quarters later. Despite the discovery of North Sea oil, the UK was unable to isolate itself from the 1986 oil price rises, which led to the stock market turbulence and eventually the crash of October 1987. Anybody remember what happened to the price of crude oil in 2008? - Yes increased from c US$60 per barrel to cUS$147. Result? Yes, credit crunch, financial collapse and recession/depression.
The massive increase in oil price in 2008 has been so far massively underdone by all the economists, journalists and commentators as one of the major causes of the credit crunch, financial crisis and recession. It caused persistent rapid increases in inflation across the world. Apart from its use as a fuel for transport, it is an input element to so many goods and increase in the crude price is bound to effect the wider economy, especially essential items like food and heating/power.
So you could blame Ted Heath for not taking greater steps to resist the formation of OPEC, as a major cause of the economic travails, manifesting themselves under the subsequent administration in the later 1970s.
It would be unfair to absolve the current government of blame entirely, there are policy mistakes that have led to the current vulnerability of the UK economy. These go beyond just blaming the person driving the car when the crash happened, but require a more sophisticated view of the economy, than is usually undertaken by short term political considerations, particularly in the run up to elections.
Administrations on both sides of the spectrum have failed to develop sufficiently the manufacturing, science and productive capacity and underlying infrastructure of the UK economy for the last sixteen years or so. The UK's overall competitiveness has suffered considerably.
Hopefully, the potential closeness of the current election will force the parties to really put together some coherent policies. However, based on the evidence to date, I am not waiting with baited breath.
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#102 BBB
Good question when related to nations.
Some take it as when a handout is needed by the IMF.
This is normally when debt obligations cannot be fulfilled. This can be through inability to raise money through the markets (which would not be dissimilar to personal bankruptcy) which would precede IMF intervention.
However, debt rescheduling is another option that would in effect be the same thing.
Also, we have to remember I am referring to scenarios where the economic ground is not distorted with QE and various other ways in which inter-bank interest rates are kept low and gilt issuance is maintained.
There is an argument that if you extract QE assistance as has been, the UK could be technically defined as bankrupt already since QE's purpose has been to fund issuance of gilts and keep interest low on current borrowings.
If readers are having difficulty understanding this, think if you had borrowed up to the hilt with whoever and you could no longer meet your obligations.
To avoid your debts being called in you print a number of IOUs to friends in exchange for them to provide you with money to get by (allowing for their agency fee). It's just a delaying tactic in the hope that your income will soon recover and you can pay off the increased debt load. Most bankrupts will tell you you're just digging a bigger hole.........
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One thing I can't get my head around is how the shares the Government owns in RBS and Lloyds Banking fit into all of this. What assumptions are being made about the likelihood that some of these shares will be sold during this period. Obviously the Government could hardly dump the lot in one go & the banks are likely to remain fragile for a while, so it probably wouldn't be a good time to sell. But presumbaly at some time during the next Parliament it will be possible to reduce our debt by selling some of these shares off?
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Addendum in answer to 102.
Losing our Triple A rating will increase borrowing costs and will cause more problems in being able to borrow from the markets since there are better alternatives to invest. (BTW I note that a further warning was issued to the US yesterday regarding its rating. Where the US goes we're sure to follow).
Both increase threat of bankruptcy similar to that as defined according to Mogdiliani and Miller's work on corporate finance http://en.wikipedia.org/wiki/Modigliani-Miller_theorem .
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ahh - #76 was published after all - Thank you BBC moderators......(what was the hold up?)
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#105 "Acknowledged your reference but unable to respond due to rantings of lunacy......"
Well when you've finished your rantings could you please respond to the points ;-)
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#100
You seem to have overlooked that the oil price shock and rampant inflation caused began in 1973 due to the formation of OPEC and the Middle East war, under the previous Conservative government. There was a Conservative government between 1970 and 1974, in case you had forgotten.
It is well known that the only reason that Margaret Thatcher won the election of 1983 was the Falklands War. The date for the election was set immediately that Port Stanley had been retaken. If Mrs Thatcher had stood on the record of managing the economy, there would have been a Labour landslide in 1983. There were over 3m unemployed and the cause of this economic wasteland that the UK had become, was the Howe Budget measures of 1981. Do you not remember, the "People's March for Jobs"? Her government was one of the most unpopular ever - before the Falklands War.
Have you forgotten about the "boom and bust" era between 1979 and 1997? This may have been New Labour mantra, but it clearly resonated with the electorate. The last of the big Tory busts was in the early 1990s; a David Cameron inspired ejection from the European Exchange Rate Mechanism on Black Wednesday. A complete national economic humiliation.
The last of the cynical political upward manipulations of the UK economy for electoral purposes took place in May 1996, when Chancellor Kenny Clarke reduced interest rates by 0.5%, when all the economic data in the then Bank of England's Quarterly Inflation Report pointed to the need to raise interest rates by at least that margin to prevent the risks of inflation 12-18 months out. The purpose of that last "good economics is good politics" act? Yes the search for the elixir of the elusive and Maggie's fabled "feelgood factor" to attempt the re-election of the Conservative Party in May 1997. The result: rapidly increasing inflation in the second half of 1997, which the newly independent, sadly recently departed Sir "Steady" Eddie George, Governor of the Bank of England with his MPC had to step on smartly and squash by rapidly raising interest rates.
Take off the rose coloured or are they blue-rinse coloured spectacles and take a dispassionate impartial view of the facts.
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106. At 2:14pm on 04 Feb 2010, fleche_dor wrote:
excellent post fleche.
Too many people see the past, or selected past periods through rose tinted glasses.
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If Labour get into 'recession' - the economy stays in recession until Labour are removed.
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#109 Rugbyprof
The reference to M&M is helpful, though the information is rather detailed and complex to explain the point you wish to make, which is basically pretty simple.
If the government continues to borrow money and is not perceived by the market to have a reasonable plan or prospect to repay that money, then the market makers will attribute a higher level of risk to those debts and charge a higher rate of interest to the borrower, i.e. the government, as a counterweight to that perceived increased risk premium. The credit rating is a symptom and may affect the market's perception of UK government stock's risk.
Obviously, it is in David Camerons' and George Osbornes' as well as their supporters' short-term political interests to promote the likelihood of a UK credit rating downgrade. It would assist their campaign to get elected this year and give them a stick to beat the government with. They are clearly hoping for this with their idyl of a run on the £sterling and increased interest payments for the government and a consequent further deterioration in the fiscal position. Their attempts to create panic are irresponsible and certainly not in the national economic interest.
Other governments around the world are having to borrow large amounts of money to deal with the their own recessionary problems, this creates the potential for their credit ratings all deteriorating too. This is the reality of the global recession. The credit ratings agencies sensibly could leave matters where they are for the forseeable future to ensure that no further damage is done to the UK or global economy. Credit ratings were, after all, part of the cause of the recession, with their inaccurate assessments of risk at certain market players in the financial services community.
We have all agreed on this site that a credible plan is needed for addressing the UK budget deficit. However, making short-term political capital by attempting to call the markets in an adverse direction is not in the national interest and betrays a lack of economic capability to run the economy and manage the way out of recession. In Cameron and Osborne continue to try to promote market unrest they may become the "Recovery-wreckers" that was suggested in another place recently. If the political parties produced their plans, then the markets would not be in possession of assymetric information and they will operate efficiently. Panic does not make for efficient markets. If Cameron and Osborne continue to fail to provide details of the plan and the opinion polls still show in their favour, then their wish may become a self-fulfilling prophecy.
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Hi fleche_dor
Just trying to take in impact of QE being called to a halt. Note stock markets down around 2% but no discernaible change in bond market yet as such (around 4%).
Have transferred over to Stephanie's new blog entry on QE today.
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#100: The UK the most impressive economy?
Well the Conservative’s pre-election boom did boost the economy, which may have caused you the confusion, but the UK economy was growing unsustainably. But don't take my word for it. See what the IMF said at the time.:
“This favorable performance, however, is being threatened by emerging imbalances. The strong growth in domestic demand, boosted by consumer windfalls from stock market flotation of former mutual associations and by tax cuts, has been accompanied by a sharp rise in sterling--….
…[..]. likely to bring a substantial deterioration in net exports. [..]…a widening gulf between buoyant services and weaker manufacturing, which, after recovering somewhat during 1996, is looking frail again. Manufacturing export orders are at their lowest since November 1993, suggesting further slowdown over the coming months.”
http://www.imf.org/external/np/sec/pn/1997/pn9734.htm
rugbyprof, I see you are a major contributor, but you must leave your crystal ball alone. You cannot “see” anything happening to the bond market. Your wild speculations are nothing more than that.
Besides, why should anyone accept what you say when you confuse an illiquidity problem with insolvency. That is a basic error. QE (which is not "printing money") was successfully aimed at easing the liquidity problem when the banking system froze.
And your idea the UK was "technically" insolvent is utter nonsense. You don;t need to manufacturer a definition there is already one.
But the most depressing observation about your numerous contributions, is your unqualfied deference to the financial market. The logical conclusion of such devotion is that we should all forget about any politcial debate or choice and just let the teenage scribblers and barrow boys of the city determine what happens to this country.
You can fall down and worship at the alter of the financial market, but decent governments will ensure that their citizens are not the slaves of some irrational financial market or some fashionable economic dogma. Yes, all Govt can make mistakes at time, but the disruption is nothing like the disruption that free financial markets have caused.
Why should any sensible person get worked up about the scribblers of somebody in one of the discredited credit rating agencies? (What rating would anyone give credit rating agencies in the aftermath of the credit crunch and Enron?
Finally, anyone who doesn’t accept that the source of the current crisis is the unfettered financial system (favoured by both political parties) must have spent too long in cyberspace or on another planet.
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# 115 fleche_dor
Ah, I'm beginning to see the light. The economic mess we're in just now is all the fault of those swines Cameron and Osbourne. And to think they can do so much harm even BEFORE they've come into office.
Guess we'll have to stick with Brown who is the one man clearly blameless for the current state of UK's economy.
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#117 FTM
Actually I live in the real world with a real business like many.
I am not in thrall to any market but do know how the world unfortunately works. The markets can work both ways for you.
Remember that it is much better as a government not to borrow at all. But once you do you are no longer in control (notwithstanding QE which the markets factor in as a distortion) but at the beck and call of those who lend.
I think many would understand this principle whenever they have borrowed money from a bank. The more borrowed the more inspection.
If you have a business with borrowings you would understand that you have to get your figures right as if you don't the bank will stop funding (you're normally allowed 2 quarters before raising of borrowing costs and probably a year's worth before serious action is taken).
This current government hasn't got its figures right for over 8 or more years.
How much credibility do you think it has left - only with those who buy the current spin or support it because they prefer to bury their heads in the sands or (somewhere else) i.e. denial see comment #87 point (3) for example.
We're all having to come to terms with it..........
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Free_The_Monkey #117
Thanks for the link re the IMF. Here are some of the bits from that report you missed out
'During the past year, the United Kingdom's IMPRESSIVE ECONOMIC PERFORMANCE has continued. With the upswing now in its fifth year, GDP growth has accelerated to 4 percent, virtually eliminating slack, while inflation has declined close to the official target of 2 1/2 percent. Domestic demand has been the main driver in the pickup of growth. Consumer spending is rising at 6 percent a year; personal disposable income is growing rapidly, unemployment falling, and consumer confidence at a 10-year high. Investment has been more sluggish, rising only 1 percent between the second quarter of 1996 and the second quarter of 1997, mainly reflecting a sharp fall in public investment (by over one fourth since a year earlier to 2 1/2 percent of GDP); in contrast, private non-residential investment grew by close to 10 percent with buoyant demand and strong corporate profits.
also
'The labor market has continued to tighten, with unemployment falling to a cyclical low. It is now below the G-7 average and WELL BELOW LEVELS ELSEWHERE IN EUROPE'
I've capitilised some of the key statements in case your eyesite is failing you.
Any links to IMF reports re the state of the UK economoy in 1979 ? Or maybe they were too busy producing such reports due to having to bail us out of bankruptcy.
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fleche_dor #112
I hadn't forgotten Ted's Heaths government in the 70's and agree
they were almost bad as Labour during that period.
I didn't say anywhere in my post that our position in 1979 was all down to Labour. I was simply pointing out that in 1979 everyone agreed we were the sick man of Europe.
By 1997 most European countries envied our economy. If only the same were true today.
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jobsagoodin
get real, I couldn't dump the entire article here. I thought folks would understand what it was like to live thru a pre-election spending boost. Clearly you don't. But thanks for adding the detail.
Remember when the economy was on an unsustainable path as it was in 1997 (my main point) then your focus on a short temr upward pre-election blip is irrelevant.
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#118 jobsagoodin
If you had checked my and many others' contributions to this blog, you would have a broader understanding about the reasons for the current economic situation. At no point have Cameron and Osborne been blamed. However, questions have rightly been raised about:
(i) whether they have a plan; its content, clarity, coherence and realism, that will address the current recession, including the budget deficit
(ii)their competence in economics to manage the recovery, based upon their previous track records and their policy prescriptions for the credit crunch, financial crisis and recession as it has evolved.
The opinion polls have consistently shown and currently show a lead to the Conservative Party, within 6 months of the General Election, so market expectations in the City are set that way. In that position the words and policies of Messrs Cameron and Osborne take on greater significance amongst market makers, than would normally be the case for opposition MPs.
Either they are not aware of that changed position and responsibility with the markets, or are aware of it and deliberately try to exploit it for their own short-term political gain. The huge potential economic cost to the nation and taxpayers, in a very precarious economic situation, also discussed extensively elsewhere on this site could be incalculable.
To say that the jury is still out about Cameron and Osborne on (i) and (ii) above is a large understatement. My point at #115 was that they should be very careful with what they wish for on behalf of the nation, otherwise they may never be given the chance to illustrate their competence in managing a way out of recession for real.
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#121
Actually, if you ever spoke to Europeans, then you would have discovered that they were not that envious at all. Granted they would have liked our supposed, lower levels of headline unemployment. However, you had to take care to ensure that you were comparing like statistics; their treatment of the long term sick was often different for statistical purposes and if you added the UK's "incapacity list" to the unemployed then the UK record on unemployment is and was no better than any of the main European rivals/partners. The notion that Europeans were jealous of our economy is based on the British post-imperial, self-satisfied, self-serving, deluded arrogance. Ask Siemens or BMW if they were jealous of our economy, workers and managers? Is that the reason they pulled out, having spent £million,s if not £billions, investing in companies and manufacturing plants here?
There was a small amount of envy, particularly in France in the early 1990s, when their approach to promoting enterprise was more bureaucratic and costly, than our own. The green eyed monster was confined to that narrow point, not the wider economy. It was also driven by short-term exchange rate driven lower relative cost advantage, following Black Wednesday. However, there was absolutely no envy at all about the state of our public services in 1997. 2 year+ waiting lists on the NHS anybody? Why did the NHS send patients to France and Belgium for operations in 1997-8?
The Europeans have never envied our approach to the labour market. Indeed, the French introduced a 35 hour week in the late 90's to address the long hours culture and promote the family. Even Sarko has not completely abolished that! Both main political parties in the UK were happy to resolutely continue to insist on the UK opt out from the Working Time Directive.
Remember the German economy was the most successful in Europe up until the economic shock caused by post-reunification merger costs of establishing a free-market economy in the post communist GDR part of the country. The Germans maintained their very impressive post-war global export performance, throughout the 1990s recession and reintergration turbulence, up until today. They were and still are rightly very proud of their post-war "Wirtschaftswunder".
Nordic countries are very proud of their economic success over many years and one of the pillars has been a strong social security system.
Remove the rose coloured spectacles and take a hard, dispassionate look at the economic facts!
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You read it first here on Stephanie's blog (#106, paragraph 6). The article below, produced a short time ago today by the BBC perfectly illustrates the point about the significance of oil price rises in pushing up inflation. A 70% increase over the last year. It was bound to push up inflation. Hence, the nasty surprise for the BoE at the last release of inflation data.
http://news.bbc.co.uk/1/hi/business/8500224.stm
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Rugbyprof
You said:
"Remember that it is much better as a government not to borrow at all.".
It is that sort of bizaare statement that makes me doubt your ability to analyse the economic situtation correctly. Sorry, but your statement is totally wrong regardless of whether it is advice to a household, business or govt. Such a simple statement is rightly considered a fallacy.
The truth is that borrowing can often be better than no borrowing. The present situation illustrates that perfectly. Without govt borrowing, we would most likely be sliding further into a depression. Ultimately, whether borrowing is better depends upon: the context, terms, what the borrowing is for and whether the servicing is affordable.
You must be the only person arguing for zero govt borrowing....
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