Nov 19 2009
It’s the deficit, stupid
Whilst I share the Opposition and majority media view that the Queen’s speech was mainly hot air and party spin, I think one of its features has decisively changed British politics, fundamentally and for several years to come. It is the core admission in the Speech written by this Labour government that our public deficit is far too high, and needs to be halved.
Their late espousal of this cause tears up all that rhetoric about Labour investment and Tory cuts, and has put paid to any idea that a re-elected Labour government could carry on defying the laws of financial arithmetic by spending and borrowing as much as they pleased. What is remarkable is that many MPs and commentators have not woken up to the magnitude of what was said. Even this government, a lover of spending and borrowing, has said before an election that it at least needs to halve this deficit in four years.
The deficit is estimated to be running at between 12% and 14% of national Income. It is, as David Cameron reminded us, double the level of deficit relative to the size of the economy that the UK struggled with at the time of the IMF loans in the 1970s. It is massive, growing too rapidly, and out of control. Today’s figure for October confirms that the Treasury was not for once overestimating it when they forecast £175billion of borrowing for the year. Some forecasters now think it will be £200 billion. This surge in borrowing is an interesting backdrop to the decision to print another £25 billion.
Halving it means either cutting spending or raising taxes, or some combination of the two, to the tune of 6-7% of National income. That is around £100 billion of annualised spending cuts or tax increases. Yes, almost £100 billion. £100,000,000,000. £2,500 each for every adult.
All my political lifetime I have watched as political parties have fought over the odd few hundred millions. In more recent years they have battled over a few billions. As I write this the main political row is about £700 million of spending on the disabled. Suddenly, if UK politics is to rise to the challenge, we need to be discussing tens of billions to make any difference.
I asked the Prime Minister in the debate yesterday how he recommened we did cut the deficit by around £100 billion a year. He gave me three proposals, all of them tax increases, all of them announced, all of them tiny in comparison to the magnitude of the task ahead. He did not mention a single spending cut.
When I set out these broad numbers to the House, Labour MPs looked alarmed. Their front bench had not told them how big the cuts will have to be, or how huge the tax increases if that is their preferred route. Nor did anyone say to them that even if you confiscated the income of all the rich who remained behind to let you do so, you would come nowhere near sorting out this massive deficit.
Whoever wins the next general Election, curbing the deficit is going to dominate the Parliament. The next government is going to have to reduce spending in a way no government has ever done before in this country. They will have no choice. If they decide to tear up this deficit Bill and carry on spending, the markets will rise up against them. Any recovery will help mend the deficit, but the recovery is needed to start to curb the other half, the half of the deficit that may be cyclical, the half that the government’s Deficit Bill would otherwise leave untouched. The sobering thought is that even if this Deficit Bill were implemented, without economic recovery the remaining deficit would still be as large as the one we had when we went to the IMF in the last big spending crisis.
23 Responses to “It’s the deficit, stupid”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
It’s fiat currency and fractional reserve, stupid
I know it’s not funny really, but I couldn’t help laughing at this I found on the interactive “The Inflation Map” on the Bank of Englands website here:
http://www.bankofengland.co.uk/education/inflation/map/map.htm
“”Argentina 1980’s
* During the 1980’s inflation averaged 750% a year, reaching a peak of 4,924% in December 1989.
* The main cause of inflation was a persistent government budget deficit.
* This was financed by the country’s central bank that led to high inflation.”
So I did a bit more reading up on Argentinia’s problems on wikipedia and I found out that rom 1976 to 1981 the Argentinians were ruled by a bloke called Jorge Rafael Videla Redondo who largely left economic policy to his mate José Alfredo Martínez de Hoz, while he kept himself busy starting a dubious war (with Chile).
Again, according to wikipedia, this Jose bloke had policies such as:
“… deregulation of the financial markets, removing checks on banks and transferring responsibility for any bad loans to the state, which took charge of their debt as needed. Short-term financial speculation flourished and budget deficits (increasingly “off the books”) skyrocketed.”
I bet you can’t beat that for irony?
There are quite a lot of debt deniers in the leftie ranks. Swivel eyed Polly Toynbee is perhaps their leader. She just wants her public parks and lovely gardens to continue for ever because they make her life worth living – as she said on Radio 4 while I was making my Kriegslok (Modelik) the other day.
We out here are ready for the onslaught. Slashing the quangocracy is going to prove impossible. What we expect, and I speak here for myself only, is the revolt of the Public Servants – Police, Traffic Wardens, Prison Warders (lots of these at HMP Whitemoor), Post Office Staff, LGBT outreach personnel, East Coast Mainline Workers, Local Radio Workers, FireFighting men and ladies, Refuse Cleansers (“Fenland – Cleaner, better, brighter!”), Tourism Advisors, People on Probation, Teachers, Criminals of all stripes, Classroom Assistants, Dinner Ladies, Ancilliary Workers and Nurses from the Coal Face in the hospitals, our newly elected MP….
Meanwhile, serene and smiling, the EU Regional Government and the Quangocats will still be dining off their big square plates in the best restaurants and sipping their Chablis with insouciance, accompanied by the newly ennobled Labour MPs under the aegis of Lord Peter Mandelson and President Tony Blair.
Canada did it in five years, though. So, really, we could too. Start at the top!
Iain Dale reports that Emily Thornberry believes that growth will solve all of the financial problems.
http://iaindale.blogspot.com/2009/11/what-if-theres-no-growth-emily.html
If that is what the average Labour MP genuinely believes, it’s no surprise that the Executive has been allowed to run riot with the finances. I wonder if she has worked out that the negative growth we currently suffer is not considered to be a good thing.
What that worries me is whether the new crop of back-bench MPs to the Speakers right after the election is going to be any better educated or informed than the current mob. It might be that Mr Browns “divide and conquer” tactics have simply confused the existing batch, and the (presumably) Conservative replacements will be a breath of fresh air. However, although there are some shining stars in the Tory firmament, there are many others so anonymous that they could represent any party.
The Treasury Shadow on the Daily Politics today made a reasonable fist of things, even though I can’t remember his name….
Halving the deficit from £175 billion is too little, too late. It is the equivalent of being in a hole and just digging more slowly.
We must encourage growth to increase tax revenues and reduce total Government spending significantly over time.
Holding spending at the cash total for 2010-2011 for the following three years, will “save” £104 billion over four years, reducing total spending by £56 billion per annum by the end of this period.
Add to that the scrapping of a number of New Labour programmes, changes to others to make them more efficient and deliver more for less, plus tax cuts to increase growth and generate higher tax revenues and you can, just about, see light at the end of the tunnel.
Labour seem to be deliberately setting up the Conservatives for a nasty fall in about 2 years when all this borrowing will have to stop and unemployment rise.
The strategy to fight this is very difficult due to the short memory of the average voter.
I wish you luck in the future. I can’t see an easy way out of this financial impasse.
Seems to me we need to be really ruthless about cost cutting while helping small business by cutting their punitive costs. Mostly these are from greedy local authorities. The council tax is much hated, it is paid out of already taxed income to incompetent self-serving local nabobs.
Pay schools from central government per head of pupils. Same for police/fire etc.. Pay them an allowance per head of population protected.
Get rid of the endless ranks of middlemen.
We productive people are swamped by hangers-on and jobsworths.
Once again, good luck
G Jones
They have not admitted the need for cutting spending. As you say, half the deficit is cyclical. What makes you think that the half they will remove to meet the requirements of their new Deficit Bill will be the structural half?
Their promise to halve the deficit is not qualified by saying they intend to cut back the structural deficit. They intend to wait for economic recovery to halve the deficit, and then will say they have met the requirements of the Deficit Bill.
ManicBeancounter Reply:
November 19th, 2009 at 9:01 pm
Well said. Labour will then turn this into an election promise, in the hope that they can win. The half that will be left after 4 years is the legacy of Labour’s spending spree since 2001.
It will be interesting to see the penalty for failing to live up to this bill. To fine the government of the time? To ban that party from standing at the next election? Whatever the punishment, it will be anti-democratic unless it is agreed by a bipartisan (or tri-partisan) consensus. Perhaps it should be enforced by a referendum. Cutting public spending will have a lot of resistance from interest groups – particularly the public sector workers. Maybe the question should then be about balancing the budget over the business cycle by 2020 – with an independent audit to define what this means. The Prime Minister could hardly disagree.
Halving the deficit isn’t good enough. It has to be got rid of within one parliament; nothing less will do. That means government borrowing must be reduced by £40bn pa for five straight years.
Don’t think that Alistair Darling will even begin this task. We already know the type of budget for 2010/11 that will be outlined in the pre-budget report.
“Of vast proportions and painted red,
And tied with cords to the back of his head.”
['The Dong with a Luminous Nose' - Edward Lear
The Faber Book of Nonsense Verse - hoe appropriate]
Did anyone point out that it would have made more sense to have had this Fiscal Responsibility law back in 1997, when everything was fine with the public finances?
As far as I see, this law is the admission from Labour that they spent too much in the years leading up to the recession. Had they exercised responsibility before, we wouldn’t need this law now.
I fear that no democratic politician has the b@lls to do what is required, as the howls of pain throughout the country will be so high that the govt will cave under the pressure. There is only one way this deficit is being resolved and that is via a catastrophic failure of funding, and the forced imposition of tax rises and spending cuts by some outside body (IMF, EU ?). Then the politicos can wash their hands of it and claim it was out of their control.
The public is so wedded to the current levels of high spending, and largely unaware of the sheer magnitude of the cuts/tax rises required to square the circle, that any voluntary attempts to impose them will fail.
It is neccessary to virtually have blood on the streets before the penny will finally drop with Joe Public.
And whoever wins they have to realise that not only is raising taxes not possible, but cutting them on incomes and sales (income/corporation tax and VAT) is the only way that we may have a slim chance of getting some growth in wealth creating private business to speed up the repayment of Brown’s debts.
I would like to see the Tories explain to the public, brutally honestly, the necessity, nature and scale of spending cuts. If it loses them the election, so be it, if they win then no one can say they were not warned and they will know where the blame for the resultant pain lies. The public might even appreciate being treated as adults.
“When I set out these broad numbers to the House, Labour MPs looked alarmed. Their front bench had not told them how big the cuts will have to be, or how huge the tax increases if that is their preferred route.”
The thing that really amazes me is that Labour MPs appeared not to know how bad the figures were until you spelt it out. Are they really so economically unaware? Do they live in hermetically sealed conditions and read nothing but the Guardian?
Most of the rest of the population have know for a year or more (and some of us knew the direction in which we were headed more than 5 years ago). It beggars belief that Labour MPs still didn’t realise the situation. How do these people get to be MPs?
Cuts can start by leaving EU, eliminating 99% of quangos, reducing all public sector “managerial” weeks to 4 then 3 days at lower pay, reduce manning levels to private sector standards. Pause for breath.
Repeal all laws passes under nu labour, pull out of ALL foreign military adventures, cut RN carriers, reform defence, benefits, health service, sell banks, ban consultants, publish all public budgets in their entirety, eliminate the Big Brother state, reverse immigration policy.
Big breath
OK that’s the 1st year planned and tens of billions saved. 2nd year we’ll get serious.
backofanenvelope Reply:
November 20th, 2009 at 7:10 am
I’m with you Captain! But Mr Redwood is a “managerialist”. He thinks we can manage our way out of this. You and I are “Gordian Knot” people.
So we are about to enjoy another 5 years of the current crap.
I listened to your speech, an excellent one. One channel BBC Parliament that IS a public service.
I was irritated at the odd interruption by those MPs who clearly didn’t understand finance. Then I thought, well atleast they turned up.
Many MPs will have been too pre-occupied with securing their own expenses to worry about the reckless profligacy of this maniac Brown. He now proposes legislation to halve the budget deficit in four years but at the same time promises more spending next year and his pal Balls has said he wants another extra £2,600,000,000 for education. Just what the legal sanction will be for failing to achieve this legal target is unclear; a jail sentence? Most of this dreadful Labour cabinet, along with that charlatan Blair, should be imprisoned for the damage they have inflicted on this country which will take not four years to correct but decades. If your party has the real desire and policies to seriously tackle this crisis then it must make very clear the scale of the problem in the way you did. A failure to adequately warn the public of the shear scale of the atrocious state of the government’s budget deficit and escalating debts will lead to a public backlash when the necessary measures are implemented.
What a shame we cannot see you in a TV debate with either The Chancellor or the Prime Minister, when you can come back and ridicule their answers to your very sensible questions with more facts and figures.
John you have a very clear and simple way of explaining what others over complicate.
Keep it up many of us are listening, I hope DC is as well.
Tax rates are already above optimum levels. Any tax increases from hereon in will be counter-productive. Higher income tax=people leave the UK or work less. Higher Business rates = businesses move or close. Higher VAT/fuel tax = people travel and buy less. It won’t work.
The only way is to work through all of this deficit is massive public sector spending cuts to save money, then use that to free up taxes on businesses to take on and train those released from public sector employment.
I am totally shocked that we have NOT had a run on the £. I expected it to have crashed by now, can only think “CB” invention at hand.
I feel for “DC”, i wonder if he understands the size of the job the he is going to face when he gets to number 10?…the inflation “Hare” will be out & running, i wish it had all crashed on Gordon’s watch………..now sadly most of it will wash up on “DC”’s watch
“Bloody Torries”
“Tory Cuts”
My great fear is that Mp’s simply don’t understand the anger thats been building since the Iraq war. I can recall the riots here in Liverpool in 1981 (I was there!) It was mosty a backwash of failed “Prop it up/ don’t try to fix” Labour polices from the 70’s.
Whatever “DC” has to do John, i strongly advice you leave cars alone. Yes Up road tax & fuel if you must but motorway sales or worse still GPS “Pay as you go” will make the Poll Tax riots look mild.
Cheers
Mike
Ross J Warren Reply:
November 20th, 2009 at 9:51 am
“I am totally shocked that we have NOT had a run on the £.”
I believe if we had a referendum on Lisbon, we have seen just such a “run” on the pound. As it is with a Conservative Government on the way, hopefully, and sense finally being talked even by labour, regarding the deficit. That we are starting to look a lot less dodgy to the financial world.
“Bloody Torries”
“Tory Cuts”
Indeed the first three years will be very difficult indeed, and I don’t even imagine we will be in a position to sweeten the pill much, until our 2nd term. Labour have stitched us up good and proper. As it is Labour should never have been allowed 12 years to do their worst, but sadly we were split over the E.U. and as a result some blame must fall on our party as well.
“My great fear is that Mp’s simply don’t understand the anger thats been building since the Iraq war. I can recall the riots here in Liverpool in 1981 (I was there!) It was mosty a backwash of failed “Prop it up/ don’t try to fix” Labour polices from the 70’s.”
One of my friends was imprisoned as a result of the riot in London. I do not recommend Rioting under any circumstance, The State cannot rightly allow the mob to get away with such behaviour.
“ Yes Up road tax & fuel if you must but motorway sales or worse still GPS “Pay as you go” will make the Poll Tax riots look mild.”
Personally I am no fan of the car, but I do recognise that it is the wellspring of our current wealth. I am not in favour of selling the motorways off either. However I note that Labour have left us in a very difficult position, and if it was to reduce the National debt by a significant amount, and access was reasonably cheap, we might have little choice, but to at least consider the option.
Frankly I would not like to see the BBC sold off, but if its public service duty, was maintained and a fair and reasonable price was forthcoming we would be wrong not to at least look at the proposal and consider it. I would be less in favour of ending the governments and tax payers hold on the Tote, as I believe vice, when allowed must contribute to the over all well being of all of the public.
Frankly using the current control of drugs legislation, to make Cannabis available OTC, would bring in a very large tax benefit to the tax-payer. We should at least consider it, although I imagine it will not happen anytime soon.
Labour have spent all our treasure and then have borrowed as much as they could in our name. We will be able to blame Labour for a while but of course we must get our house in order. That will certainly involve difficult decisions, some of which will cause some people to question our motives. I can assure you our chief concern is getting our economy off its knees, and back to work, and of course getting our budgets to balance.
Those who imagine that we cannot manage our way out of this are wrong I believe.
Of course Fiat Money is itself a great deal of the problem we face. I wish as an example I could pay my bills from the monopoly money box, but I cannot. To move back to the gold standard at this point would effectively end our economy overnight as our current reserve is a joke, when compared to the size of our economy. People often forget that we do indeed hold a lot of US fiat money and Euros. The truth is we are stuck with this system for a long time to come. However it is not asking to much that we run our finances in a balanced and responsible way. By bringing our national finances back into the real world of balance and profit, we can indeed manage our way out of this mess. I would ask those who imagine otherwise, exactly what they would do, that would be different? It the deficit stupid being my line of choice.