Yes Sunny but this is in the context of a nation 90 % of whose citizens pay far less tax then we do here . It has a strong manufacturing sector and can sustain high debt if it has to . In its own terms it has not squandered for years and does not have a wasteful public sector riding on the backs of those us in productive work .
Monetarist and Keysnian view are both true but the later has little to do with the predicament of Brown who spent ten years talking about 40 % being the golden rule and has borrowing at 50% going into recession. In any case Keynesian pump priming is supposed to restart idle capital which is not where we are now.
One of your commenters did dig out a redistributive socialist in mainstream American Politics but he is as common as the unicorn . . Our circumstances are quite different and reading one across from the other , especially when you would be a a political leper amongst Democrats is comical .
Of the two Parties it is very clear which one has been the beficiary of the recession even if people know it is partly responsible New Labour , who have pulled back some 15-20 points . With a clear legislative programme a deferred tax give-away and suspiciously low interest rates it looks to me as if Brown is going to run for it before the bills come in. Next June when he hopes he may be able to claim to have turned a corner and before anyone remembers just how much they dislike New Labour . Sharp tacks right on immigration welfare and even the human rights act are other signs of a great wool pulling exercise.

Sunny,

I think you are despairing prematurely; I don’t see ‘Green-Gate’ as being a big doorstep issue. It’s obvious that it has attracted the Westminster village, the media and commetariat but we shall see what happens with the next round of polls……

The great unsaid truth is that Britain is more exposed to the financial crisis than the States or any other Western market democracy. So says the IMF.

The level of off-balance sheet borrowing by Brown is colossal – not to mention individual private borrowing. We’re incredibly ill-equipped to face down this crisis.

George Osborne isn’t ready. Not sure he ever will be.

Time for a war-cabinet incorporating Ken Clarke and Vince Cable. If Brown can swallow his culpability and shame, and finally lead this country.

Another unsaid truth is that a recession is necessary. It’s a market correction. The British economy has been on steroids (cheap foreign capital), and it has grown too big, too quickly. People have borrowed against their rising house values, but have now, in many cases, exhausted their equity and spent their available credit.

If they lose their jobs and house prices continue to decline, it will compound the issue.

A reduction in VAT is a strange idea. It designed to stimulate spending, when people really ought to be tightening their belts. I know this will starve the high-street and lead to manufacturing woes and further job cuts (in retail and production), but you can’t spend forever. We can’t continue to borrow for today, deluding ourselves that tomorrow will never come.

The government seems to want this profligate spending to continue. They’re depending on it for re-election. But it’s not in the interest of the country or its future.

We cannot avoid a market correction on this scale. But we do have a choice. To we put it off and create a bigger recession down the road, or do we prepare for the winter now?

[at a government level] If we had more wiggle-room with regard to borrowing, we could invest in infrastructure – creating jobs and equipping the country.

But I’m not sure we have the headroom.

“The level of off-balance sheet borrowing by Brown is colossal ”

This is utter rubbish. PFI liabilities are a couple of % of GDP, and public sector pensions are an issue faced everywhere. UK government debt, measured on a comparable basis, is about 20% of GDP less than either the US or the Eurozone.

not to mention individual private borrowing.

This is indeed higher.

We’re incredibly ill-equipped to face down this crisis

…is not something you can sensibly take from the IMF report, which predicts we’ll do slightly (ie a couple of fractions of a % lower growth) worse than the US and the eurozone for a couple of years.

Cameron is talking about Broken Britain yet if the Tories do favour a deep recession surely this will result in an increase in poverty which generally increases crime, social breakdown, ill health and vicious cycles of despair which last for years. I think the Tories should be pushed to say what they would actually do if they were in government to counter the effects of the economic crises.

The difference with the US is that, for better or for worse, Barack Obama has his own vision and doesn’t let his rhetoric (for now) and actions (when he enters the White House) be dictated by the Republicans.

Gordon Brown and his ministers are, whether they’re aware or not, constantly dancing to the tune dictated by others. Look about immigration. They are desperate to appease the Daily Mail and The Sun. The latest about Phil Woolas are exactly from the Mail hymnsheet.

And about the economy. Yes there’s the occasional sweetener to wink at their ‘traditional’ fanbase a-la Toybee (i.e. promising to increase the top rate to 45 p IN TWO YEARS TIME -most people seem to forget that) or the mortgage relief for up to two years. But everything else is done with an eye and a half on the Tories.

And this is so typical of the British centre-left. I’ve seen the Socialists (PSOE) in Spain in action in government for a while and they don’t suffer from such weakness. And make no mistake, they’re also under constant sniping from the local conservative press, the nationalists etc, but they follow their own agenda without feeling the need to apologise or to dress up their rhetoric.

Recently Zapatero was asking why he’s still pressing ahead with a state pension rise of over 6% in spite of the recession biting. His answer was, “social rights come before economic calculations”. How I wish he was British.

John , you said international comparisons gave our debt as 50% which seems reasonable . The whole reason a lot of PFI debt is PFI debt was to adhere to the golden rule , 40 % ( which you seem to be suggesting was pointless invention of Gordon Brown’s ? What are we to make of that ? ) . Quite clearly Public Sector Pension Liability is worse here than elsewhere in the Anglo-sphere and vastly worse than it might have been had we not had a government with a vested inertest in a client state . It is quite misleading to compare across countries are you suggesting we can run debt at the level of Japan for example?
The cost of borrowing has to rise and the rate of rise of national debt ie deficits ‘are’ internationally scarifying and interest rates inevitable will have to rise at some point higher than had debt been more sustainable
Surely even so swivel eyed a publics sector cheer leader and denigrater of private enterprise , would admit that it would be better if we had lived witthin our means and it would be better had the public sector now grown so large and it would be better had we enjoyed higher growth in a lower tax regime than we did . In other words it would have been better ,as it turns out , for everyone , had we never believed New Labour who promised

1 No tax rises –
2 A golden rule of sound money-
3 A pro business environment ( a an especially laughable promise in retrospect)

You seem to be saying something like don’t worry about just stuff it on the card and continue to treat people in productive employment as cash cows for endless progressive talking shops and their pensions .

John,

The “low by international standards” UK debt is bullshit.

Of comparable economies, only really Japan and the US are more heavily indebted. Of course the US’s reserve currency status makes it different.

And anyway, the more important statistic is private borrowing, which will strangle any stimulus package. Personal indebtedness is frighteningly high and this will have a knock-on effect.

You can cry “This is utter rubbish” and whatever else you’re preparing to throw, but we’ll continue to disagree.

A short, deeper recession may be preferable to a longer, shallower one at the end of which the government debt burden is much higher.
That is a pefectly arguable stance.
For example, why should those of us without mortgages bail out those who have imprudently borrowed 400k?
(Of course that won’t happen much – it’s just a typical Brown gimmick which is already unravelling – but you get the point.)

Of course you are right inasmuch as we don’t really know what the Tories want.
I doubt whether they know themselves.

I despair that the great helmsman appears to be getting away with it.

I think that if you look at our gross outstanding government debt then compared to some other European countries it is not so high, but we are running a large annual budget deficit and if you keep doing that then that gross figure keeps going up and up. If the PFI debt is so insignificant then that rather torpedoes the government’s argument that without PFI we couldn’t have had all of these shiny new schools and hospitals. Which was a rubbish argument anyway.

“Of comparable economies, only really Japan and the US are more heavily indebted. ”

Italy? We need to know what you mean by ‘comparable’. As for private borrowing, the fact this is sky high is indisputable (john b doesn’t try to hide this, note) isn’t exactly relevant, since Sunny is talking about proposed *government* borrowing in order to invest in infrastructure, which isn’t the same thing as slapping a new telly on your plastic without a care in the world.

There are problems with big infrastructure projects, though – in the UK quite a lot of otherwise useful ones are either complete (CTRL, WCML), completing (East London Line) or been scrapped (tram projects nearly everywhere, for which we must thank Mr. A. Darling, who needs a slap for that one, as well as ‘Good Old’ Boris Johnson, the most ill-timed electoral victor in history) or would take so long to become ‘shovel-ready’ that the recession will either be over or so civilisation-threatening that a few miles of new tramway, for instance, would be rather insignificant.

What’s happened so far is a bit of road-building being brought forward, which while counting as infrastructure spending is not exactly the world’s greenest thing. There’s also the Olympics and Crossrail, but that’s regional, while Scotland is having a gay old time with various railway projects and that’s about it. What’s needed is some form of infrastructure spending that can be brought in quickly, uses the skills currently being dumped, is applicable across the country and is sustainable, and the only one I can think of is social housing. It’s a great shame, in retrospect, that we aren’t a year sooner realising the benefits of mainline railway electrification.

We need to know what you mean by ‘comparable’. As for private borrowing, the fact this is sky high is indisputable (john b doesn’t try to hide this, note) isn’t exactly relevant, since Sunny is talking about proposed *government* borrowing in order to invest in infrastructure, which isn’t the same thing as slapping a new telly on your plastic without a care in the world.

It is relevant in that countries with high savings are a better risk so when you allow state debt to run out of control our profile is such that a run on the currency starts sooner and it has to be supported with interest rate rises sooner. This is only one of variety of ways in which countries are not like eachother which renders this silly business of “international “comparison a pretty worthless exercise
Can you explain by what mechanism throwing money at the problem is actually going to work cure what is at heart a speculative bubble. This is voodoo economics you are incanting magic formulas. The truth is that Brown needs some cover for the escalation of borrowing caused by reccssion .

As for private borrowing, the fact this is sky high is indisputable (john b doesn’t try to hide this, note) isn’t exactly relevant, since Sunny is talking about proposed *government* borrowing in order to invest in infrastructure, which isn’t the same thing as slapping a new telly on your plastic without a care in the world.

Errrr… I think it’s highly relevant, actually. Any Keynesian moves are likely to be heavily stymied by a reduction in spending in the real economy. Building public infrastructure will much less impact than back when personal borrowing was minuscule.

A £30k cc bill is much different to wardrobe bought on instalments. Fact

Sunny,

I know you’re no Brownite cheerleader but the title to this post really defies belief.

One of the most commented-on aspects of the current political situation is the way that the economic crisis has rejuvenated Brown (and Darling) and put Labour back in the game as far as the next election is concerned.

You don’t need to accept the line that Brown is “enjoying” the financial collapse to see that this plays well for the government – in the short term, at least – and makes switching to the Tories seem like a bigger risk.

Tories are not against spending their way out of this crisis because they *want* people to lose their jobs, but because they don’t believe that wasting even more government money, and thereby running up massive levels of public debt, is a sane way to ride out a recession.

Even if you believe that the Tories are evil f*ckers who are interested only in getting into office – which no doubt accounts for a few of the readers here – a deep recession makes the job of an incoming Tory government exponentially harder, and shortens the odds on that government “failing”. For selfish reasons, if nothing else, no Tory should be pleased at the idea of a prolonged and crippling economic slump.

Recently Zapatero was asking why he’s still pressing ahead with a state pension rise of over 6% in spite of the recession biting. His answer was, “social rights come before economic calculations”.

I cannot help but picture a plane falling out of the sky with the pilot reassuring people that “human lives come before aerodynamic calculations”.

[troll]
let’s face it Sunny (and John B) – every decision taken by the Government over the past few weeks has been a decision deliberately made with the purpose of poisoning the economy. If that is ok by your “liberal” standards then fine, but others might choose to disagree. In fact, if Brown were so immense an intellect as people claim, why is he trying to cling on to his poisoned legacy…he should cut and run to Paraguay where other incompetent politicians tend to flee, before the British electorate finally wises up and cements him into Crossrail… I quite like the thought of riding a train over Brown’s corpse, personally.

Diogenes,

How’s the barrel these days?

Are you somewhat of a renegade from nutty right wing web sites, flexing your staves?

It would take a 2400 year old idiot to assume that the point of a PM was to destroy the economy. But, there you go, just proves that length of time on this planet is wasted time, for some.

‘he should cut and run to Paraguay where other incompetent politicians tend to flee…’.

Well, who would that be? I do believe you are talking about Nazis. Which, pretty clearly makes you a complete utter tit.

I expect you polluted other sites and got your arse in a sling there too. Though the name Diogenes is probably shared by more that one idiot.

An unsavoury character posted under the “Diogenes of Sinope” handle (amongst others) on UKPol message boards quite a few years back (2001-2003), long before the advent of the blogosphere and very web 1.0.. Anyway, as I recall, he was an adolescent member of the BNP at that time, so if it’s the same individual then we can probably allow ourselves to take his opinions and analysis with a barrel of salt.

I believe “Julius Streicher” was another of his noms de plume. A very troubled young person was he.

Tories are not against spending their way out of this crisis because they *want* people to lose their jobs, but because they don’t believe that wasting even more government money, and thereby running up massive levels of public debt, is a sane way to ride out a recession.

Hi Mr Eugenides, no I don’t think the Tories deliberately want to wreck the economy, but I do believe they haven’t thought the economics through and are relying on the kind of Milton Friedman economics which is collapsing around us. This is of course the economist who famously advocated that the creation of the Federal Reserve was a bad idea because the market sustained bad players.

Now who is still clinging to the view that without the Federal Reserve guarantees the US economy would be in serious dire straits? After all, either you believe that companies work for their shareholders and need minimal regulation (which now even Alan Greenspan isn’t even sure about) or you can accept that entire sectors of the US economy were being badly managed and should go to the wall.

My point here is this. I’m very unconvinced that ‘wasting public money’ by offering guarantees to banks or supporting mortgages is a waste of time and money. It works and it got the US out of the depression in 1929. Keynesian economics may break down during stagflation but we’re nowhere near that. Right now no amount of interest rate reductions and avoiding state intervention is going to get things moving any time soon.

The only tory plan so far seems to be to ease the credit crunch by forcing banks to lend. They can do that either by nationalising them or offering debt guarantees (which would also be ‘wasting public money’ by their own definition). In other words – they have nothing to offer.

The Tories point is, I think, not that we need more unemployment and a bigger recession but that a fiscal stimulus won’t help very much and will be a huge drag on the restructured economy we are going to need to build.

As to the question of personal debt, I am no economist and so I may be about to do the wrong calculation but let me see if this works.

Personal debt is approximately £1.45trillion, up from about £600billion in 1997. Of that, 86% is mortgage debt which has a very long payback. The effect of deleveraging it is therefore a bit complex. However, the other 14% is other forms of debt, which have much shorter repayment periods. This makes for £202billion, up from a negligible amount in 1997. The majority of that growth happened in the last three to four years. So, let’s assume that, in each of the last 3 years, personal , non-mortgage debt grew by £30billion.

Since GDP is about the same as personal debt, at about £1.4trillion, this would imply that, over the last couple of years, a majority of the growth in the economy was attributable to personal debt. Now however, we have discovered that we are too indebted, and must reduce the quantity of debt we hold. Therefore, we strip out of the economy not only the 2% growth attributable to the growth of personal debt but also write off more money that would have gone into the economy as people pay down their existing debt.

And that takes no account of the money released to the economy by increasing their mortgages in order to pay for cars and holidays etc.

Therefore the switch from growing our debts to reducing them will, in itself, and without any other factors at all pluge us into a fairly deep recession – relative to financial year 2006-7

The current Treasury strategy is to keep current levels of personal debt about where they are by encouraging people to spend rather than save and to plug, the hole left in the economy by people’s reluctance to take on new debt with new government borrowing.

The Government position is therefore to seek to sustain the usustainable for a little while longer in the hope that this will give people sufficient room to restructure their businesses in a way that they have not managed to over the last ten years. Whether the restructuring succeeds or fails the “grace period” will come at the price of enormous burdens on the restructured economy of the future.

The Tory position says, in effect, the old economy was actually generating very little in the way of new value. The failure of the companies that weren’t providing new value will provide the impetus for the necessary restructuring. This will be very painful but, once complete, the new economy will be more efficient and better at generating new value (rather than paper profits from buying and selling houses) and more of your tax will be spent on new services and infrastructure.

The merits of these two positions are debatable. The Americans are better placed to try the former and the Germans are better placed than us to try the latter but for the Government to suggest, as it has, that the economy was entirely sustainable until very recently and that, if we can just get through to next year, everything will pick up where it left off is deeply irresponsible.

By the way, not only do we need to reduce our net debt levels, but all our pensions are massively underfunded, so we ought really to make yet further reductions from last year’s GDP in order to rebuild our pensions.

Mea culpa

I have just found annualised figures for debt

Actually, non-mortage lending stood at £217billion in 2007 and £218billion in November 2008 – so that the share of GDP attributable to personal borrowing over that period was in fact, only 1.5%. Still, strip that out and send the growth in borrowing into reverse for next year whilst at the same time stripping out all the growth attributed to re-mortgage spending and you’ve still got a hole in your economy to the tune of 3%+ of GDP.

And that’s before that contraction starts costing people their jobs and creating knock on effects.

but for the Government to suggest, as it has, that the economy was entirely sustainable until very recently and that, if we can just get through to next year, everything will pick up where it left off is deeply irresponsible.

I think this is a good point, and I don’t actually disagree with the thrust of your argument. But the Tories aren’t saying that… they’re not talking about long-term re-adjusting either, only that we just have to avoid adding to our debt because its bad for long term taxes.

As for whether fiscal stimulus work – I think it depends on too many factors. But I don’t see the evidence for huge projects not having any impact on consumption and employment.

After all, we’re told that raising txes will drive away the rich – clearly people are open to economic incentives… no?

All right, possibly I give the Tories too much credit. But the “do nothing” option has more intellectual credibility than the original post would allow and I think it is fair enough – when a Government proposes that the best or, rather, the only way to get out of a recession is by doing the same thing that created it – for the party of opposition to set out the alternative without being pilloried for failing to support hard working families or whatever the current Government line is.

This point is starker still when you consider that the debt the Government proposes to run up will be repaid with taxpayers’ money or, better yet, tomorrow’s taxpayers’ money. So Labour is happy to soak the next generation to protect the current one from its own follies – the Tories are not. That is a perfectly reasonable contention and would be wrong only if the cost of doing nothing now would be so high as to leave the future generations even worse off. This is far from clear and every time the Government steps in to support some sector of the economy (Buy-to-let landlords were in contention last week) it becomes harder to work out.

Even if you do assume that a fiscal stimulus is necessary, in the form of tax breaks, a slight reduction in VAT would seem to be a singularly daft one. If you are going to make a major tax cut, why not try and engineer one that reduces the cost of employing people – that might prevent some redundancies and even make it easier for the small number of firms who are hiring, to take on more staff.

I am not a Tory – I’ve never voted for them but if people spin stories that attribute absurd distortions of their motivations to the party of opposition than what you are saying to the Government is, in effect, however badly you screw up, we will always vote for you anyway because we have made the other lot into bogeymen. This is not good for democracy.

If an election were called tomorrow, I’d really struggle to decide but part of the reason for that is the amount of utterly unexamined guesswork currently masquerading as economic policy. So far the Treasury seems to have made no estimate of the size of the economy if the unsustainable elements of private debt were stripped out of it and it certainly doesn’t know (absent a highly innovative financial sector and an overpriced housing market) what the motor of the future economy will be. If you don’t know these things you won’t be able to lead the country out of the mess, you will only be able to address each problem as it comes along. But if you don’t have any big picture of the future, maybe the best thing you can do is to keep the public finances on a tight reign and give people and private companies the best possible chance to figure it out for themselves without the certain knowledge that they will be clobbered with huge tax rises in two years time.

NB, I don’t think anyone has suggested that the 45% tax rate will drive rich people away – that was the argument that they made about non-doms. What they did say was that the rich would find was around their obligation to pay the new top rate – just as they currently do with the current top rate.

I don’t understand this idea that it’s the job of government to somehow manage a recession away. Recessions are a necessary phase of the economic cycle, reducing over-inflated asset values (e.g housing in the UK) and factor prices (e.g wages, oil) to realistic levels, flushing out excess capacity and inefficiency and allowing the supply-demand equation to re-boot itself.

The arguments in favour of Keynsian investment are purely social, in economic terms it doesn’t help, and can actually delay full recovery. The problem is that the government has managed to convince itself (and a sizeable number of the population judging by the polls) that no problem is too big for them to manage and that the good citizen should just sit back and wait for Gordons medicine to protect them from the big bad world.

Derivative anyone ?