Dec 01 2008
Two Britains and public sector inflation
Interest rates are the price of borrowing money. When the private sector was borrowing too much, the Bank kept the price too low, encouraging many more people to pay too much for houses, and alowing businesses to pay too much for commodities and raw materials.
Then they decided to end the party, bringing down prices, damaging the banks, and disrupting trade and jobs.
Now the government is going to borrow too much. It looks as if the Bank is going to cut the price of money further, to allow the government to borrow more than it should - all the time the markets still allow them to do that.
Before the last round of interest rate cuts I suggested that the Monetary Policy Committee wrote to the Chancellor and said they would only cut rates if the government agreed to keep its borrowing under reasonable control. There was no letter, but the Bank and the government did start telling us they saw the need to have a clear pathway set out to return government borrowing to more normal levels, from the £157 billion bulge this year. The government also decided to talk about £78 billion borrowing this year - leaving out the money to buy bank shares and pay for the bank losses.
The proposed pathway back to sensible public sector borrowing still leaves us too much in debt. The Monetary Policy Committee should have another go behind the scenes to get the government to see sense. If it cannot, it needs to leave interest rates higher to allow for the government excess.
The problem is the Monetary Policy Committee is acting out of fear, folllowing several years of getting it comprehensively wrong. They failed to see either the inflation or the recession they triggered. Now they are likely to misread the government debt problem.
Huge amounts of liquidity are being built up. In the short term this will not be inflationary overall , as the broken banks are not passing it on to the private sector. It remains inflationary in the public sector, which lives in an unreal world compared to the rest of us. The money is being passed on within the state, allowing many quangos, departments of the government and some Councils to be overmanned, and paying many very high salaries over £100,000 to people taking little risk and in some cases making little useful contribution. The public sector still has huge advertising and consultancy budgets, still has a massive army of officials looking for new ways to check up on us and persecute us, and still churns out the forms, compliance manuals, consultation documents and bossy boots instructions as if nothing had changed.
We certainly have two Britains. The government has split the country into the hard working compliance ridden tax paying private sector, shivering without cash and awaiting the call of the well heeled state Inspector, and the overbearing, camera wielding, humourless, play by the increasing number of rules politically correct Inspector state where any amount of borrowed money can be channelled into more nonsense. This is why the state can afford to prosecute us for parking in the wrong place, for offering a client a glass of wine or for using the wrong words to describe people, festivals or religious observance with no sense of proportion.
There is a growing sense of injustice amongst all those who run businesses and try to make a contribution through the private sector, and growing sense of unfairness between the towns and districts where people mainly work in the private sector, and the ones where a majority now draw their income from tax and public borrowing.
In the longer term the danger is that the government will want to use the printing presses to sort out its huge debt, which will be inflationary when the banks are working again.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
Great piece John.
We have been working ( or not) up to this for 10 years. When you are my age its not unfamiliar. It takes us back to pre Thather.
It very sad that Labour have given away, and more, all that we worked for.
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“This is why the state can afford to prosecute us for…offering a client a glass of wine”
I missed this one, does anyone have the link?
reply: Norwich Council - hairdressers offering clients an Xmas glass.
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Its clear now that we need to look at new ways of quantifying inflation. Headline rates are simply no guide when it comes to factors like imported inflation or the inflationary demand for more money than already exists incurred by interest on loans. When the government was telling us that inflation was as low as 2.4% back in Jan 2006 I kept my own records and found that food inflation was already hitting levels of 8-9%. Since the devalution of Sterling these levels have hit 15-21%, mainly because so much food is imported, while the govts measure only shows 4.5%, a fall from 5.2%. We need to introduce far better measures of the various inflations that run through the economy. Aggregating the figures is not a good benchmark for setting lending rates or understanding cause and effect. One certainly has to be concerned how inflationary borrowing will prove to be in the long term.
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JR: “In the longer term the danger is that the government will want to use the printing presses to sort out its huge debt, which will be inflationary when the banks are working again.”
This dreadful government will use the printing presses and inflation will go through the roof ruining everyone on fixed incomes. Can we be assured that a Conservative government would not adopt that approach to relieving the public debt?
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Brian Tomkinson Reply:
December 1st, 2008 at 5:34 pm
I take it that since you have not replied to say otherwise that your party too would resort to the printing press and all the horrors of inflation that holds for the future.
Reply: I would be urging them not to. They also have stated they would spend less, which would be a good start.
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This year the bulge in borrowing?
My take is otherwise. Business in the UK started to sink in September 2008. Until then demand had held up to a reasonable extent. Only then did unemployment really start rising.
That means that government recession expenditure and falling revenues have only just started two months ago, and have, some estimate another 12 months to run, at least.
Brown’s deficit therefore has a long way to go before he can start hoping for it to start reducing again.
In the 1981 recession, government fiscal deteriorated by 8% of GDP. If this one is as mild as that one, Brown still has negative GBP 120 billion to go before he hits rock bottom. That is assuming he doesn’t need to rescue any other banks or institutions. If he slides by under GBP 250 billion deficit, he’ll be doing well.
reply: Yes, of course recession effects will get worse next year, but I am assuming he will not be spending so much on bank shares - then again, you can;t be sure even about that.
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I profoundly disagree.
“and paying many very high salaries over £100,000 to people taking little risk and in some cases making little useful contribution. ”
because IME, they take no risk (it would appear the loathsome Haringey(official-ed) will be paid off) and make no useful contribution.
Other than that, sums up exactly how I feel.
Had someone like that round our way, a woman put in charge of Social Services Children’s division. She was (not up to the job- stated in a much more dramatic way -ed). When the Council noticed (eventually) they first isolated her moving files around so she couldn’t do any more damage, then paid her off ; enough, apparently, to buy a house in Tuscany (so I’m reliably informed).
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Right, that’s my vote won.
And in regards to the MPC, two things. One, they were wrong on interest rates but they had been instructed to track the wrong index - the cpi - and had no mandate to consider money supply. Clearly Brown new exactly what he wanted from them when he drafted their terms of reference - compliance. And two, they have been spineless. They are clever blokes and must have known the problems so why didn’t they have a go at the Chancellor? A threat to resign en masse may have had the appropriate effect. Or have they all been bought off by glittering prizes?
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Thanks for the response, there are obviously a lot of ‘hairdressing maniacs’ out there. Thank God for the council or one might find oneself enjoying a nice glass of wine whilst at the barber. Will the terror arrests will follow? (Mr Wolfgang, Iceland, someone who puts their bin out on the wrong day, someone who wants their kid to go to a decent school, Mr Green and now someone in possession of peroxide and scissors ~terrorists all!).
Mercifully they didn’t offer a mince pie because I reckon they would be in breach of the following regulations:
~ Planning, not authorised for the sale or distribution of food under the use classes order
~ Health & safety, no properly trained staff on hand to serve food with appropriate hygeine certificate
~ Improperly insured, not insured to offer food
~ Health & safety again, inadequate sanitary provisons for the sale of food
~ Improper taxation declarations, Shops selling or otherwise offering food are subject to different rentals levels and therefore business rates, they are thus tax evaders
And I daren’t even mention government edicts on salt consumption, processed food and transfats, five-a-day fruit and vegetables, obesity etc etc ad nauseum.
Truly we need a bonfire of regulations and a culling of the useless state employees
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You have just come up with a great title for your next book JR; “The Inspector’s State”.
But MPs and Lords have made a large contribution to the proliferation of Inspectors. Mainly because you rubber stamp so many Statutory Instruments.
You criticise media pundits for not reading all the fine print in the PBR; but, how many MPs read the fine print of SIs? This is where all the liberty strangling detail is invented and coated with several layers of socialist bile. As a “Rt Hon” you have probably done more than the average via the Privy Council.
Reply: As a Rt Hon on the Opposition side I never am invited to Privy Council meetings, so I am not to blame for the last 11 years!
The Regulatory Reform Act 2001 and then the Legislative and Regulatory Reform Act 2006 have together, practically made the Commons redundant for revising legislation. And, nobody appears to apply the filter that stops Marxist cells, camped out in Quangos and local government, applying regulations, purely to disrupt and demoralise the populace at every opportunity. In fact, the Commons has not annulled an SI for thirty years!
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By taking control of the Bank of England with the FSA and the MPC, this government have, as usual, taken away all the checks and balances which they got from Ken Clarke. They have used their power to give what used to be called “jobs for the boys” and they continue to do this, as you show so clearly above, even now.
I had not realised that this would lead to inflation, I must admit, but of course it will - even if only because the productive people will be squeezed out, governmental income through taxes will fall and more and more money will have to be borrowed.
At the moment, melt down is, (while still very possible if Labour gets re elected or cannot resist nationalising more and more banks), seeming to recede, while a deep Japanese type depression seems much more likely.
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Excellent critique, it is about time you started writing David Cameron’s speeches. In common with others I have been “blogging” for several years about the true extent of the economic disaster that is Gordon Brown.The worst is yet to come and there is a real chance that he will go down in history as the man who bankrupted the country. No doubt he will blame the American war of independence for our demise.
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Is this Government, with its finger hovering over the civil contingencies button deliberatly trying to Provoke a civil unrest.
Don’t forget the Council that set up CCTV in acouples bedroom.
http://www.infowars.com/?p=6167
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Re. ‘The huge amounts of liquidity being built up.’ - The lack of inflationary pressure from this on the private sector may well be the case in the short term but as the performance of the pound on the international money markets shows, this term will be very short indeed. In addition given the dramatic fall in overseas earnings through the City of London, the appalling state of our balance of payments will be soon take centre stage. This is why George Osborne is going will be shown to have been absolutely correct in pointing out last week that: ‘In the end all Labour governments run out of money’.
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Not sure all this anguish about an “army of officials looking for new ways to check up on us and persecute us” is really appropriate in the case of Baby P.You would have thought the cruel people responsible for his death should have been checked up on and persecuted.Likewise OFSTED (are n’t they the people who do schools’ inspections?) should have persecuted the Haringey managers who left things in the same state,apparently, as they were in Victoria Climbie’s last days.
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I think it likely that central government will hang local governments out to dry when their cash inevitably runs out. The US federal govt did the same with New York and it took it a decade to dig itself out (and, in fairness, was eventually better for it). The crime has been by central govt allowing them to empire build in return for general election votes. It’s the vulnerable who genuinely require frontline council services who’ll ultimately pay the price.
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mikestallard Reply:
December 2nd, 2008 at 5:14 pm
Not necessarily. If all the top people in their plush offices, well out of touch with the Baby Ps of this world, are either sacked or else driven out to do their jobs, then surely, the front line services ought to improve?
In wartime, and even more in peacetime, the problem is that the Central HQ quickly gums up with smart young officers in white uniforms and strings of gold braid, while the front is starved of both troops and officers.
That is certainly what has happened in schools, probably in the NHS, probably in Social Services and probably in many other government departments.
Cutting back on the HQ staff may well be an utterly unmixed blessing.
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D BC Reed Reply:
December 3rd, 2008 at 5:06 pm
Agreed.But nobody ever concedes there is bureaucracy in large private sector concerns.
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Err….two areas concern me here.
One: Public sector over-manning at management and admin levels, PR specialists, contract ‘advisers’ and ‘educationalists’, trainers and the like - including but not limited to “Common Purpose”.
Two: Public sector pensions which are a ) Gold Plated, b ) Unfair, c ) Unaffordable, d ) Not worthy of paying, and e ) Not all spent within our own economy especially given the ‘early retirements’ of many of these people who appear to either be leaving these shores or returning to their own country and no doubt finding further work whilst being propped up by the British taxpayers.
There are indeed a few other concerns but those are the main one’s I think about as I wouldn’t like to lose focus by writing too big a list here of Labour’s crass stupidity.
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John - quite a lot to agree with. Would that your front bench grasp the nettle.
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I see the US National Bureau of Economic Research has revised its position and announced that the United States has been in a recession for a year.
This is not news for anyone who does not live in a sort of economic bubble, insulated from all the effects of the real world economy. I guess that would be Politicians.
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