Busted

FRIDAY, APRIL 02, 2010

Busted

http://burningourmoney.blogspot.com/

I dare you to watch (you'll need to keep a sick bag handy)

Do you remember 1997? 

Of course you do. Who could forget that brave new world? A new day had dawned, had it not. A new leader, a new beginning, and a new Chancellor. A Chancellor who admonished his debt-addicted predecessor thus:

"The Chancellor is first and foremost the guardian of the people's money."

Yes indeed, ladies and gentlemen - the People's Money. The money that belongs not to the selfish grasping rapscallions who earned it, but to The People.

"During the 1990s the national debt has doubled. This year alone the taxpayer will pay out £25 billion in interest payments on debt, more than we spend on schools. Public finances must be sustainable over the long term. If they are not then it is the poor, the elderly, and those on fixed incomes who depend on public services that will suffer most. So, as with our approach to monetary policy, so in fiscal policy: we will now establish clear rules, a new discipline, openness, and accountability.

My first rule - the golden rule - ensures that over the economic cycle the Government will borrow only to invest and that current spending will be met from taxation.

My second rule is that, as a proportion of national income, public debt will be held at a prudent and stable level over the economic cycle. And to implement these rules, I am announcing today a five year deficit reduction plan.

Together, these rules and this plan will ensure a historic break from the short-termism and expediency that have characterised the recent fiscal policies of our country. As with our monetary policy, our fiscal policy will be all the more credible for being open and accountable."

Yes, that really is what he said. 

And here we are 13 years later, with debt that has already doubled again, and which is set to double again by the end of the next parliament. And debt interest payments that within a year or two will again exceed the hugely increased schools budget. 

As for ensuring "a historic break from short-termism and expediency", he did that all right. Entirely disregarding short-term considerations such as red signals, and matters of expediency such as staying alive, he cranked the controls to max and slammed us into the buffers at speed. From where recovery will be a verylong-term undertaking indeed. 

Of course, Brown also made a number of other ludicrous pledges during those first golden months. And one of the central ones was to lift the UK's productivity levels up to those of our more successful competitors. As he put it in his 1998 budget:

"..over the next few years we must seize this opportunity - by challenging ourselves to lift our productivity in each and every industry towards the levels of the world's best...

Breaking free from old ideas of state control and crude laissez-faire, our new ambition for Britain must be... to implement for our country a medium term strategy for growth."

Not the failed Wilson National Plan, you understand, nor the failed Callaghan industrial policy with its National Enterprise Board. No, a medium term strategy for growth - something brand new and whizzo and totally 21st Century. Which is how we got all those incredibly complex and expensive arrangements like R&D tax credits.

So how do you reckon it's worked out? How do you think we've done in the international productivity league tables under Labour?

As it happens, the ONS has recently given us an update. And needless to say, it doesn't look good.

Here's the summary chart, showing UK output per worker relative to G7 average (ex UK). As we can see, despite all the huffing and puffing - and expense - there was virtually no improvement between 1997 and 2008:

Now, you might say thank God. At least Labour didn't make productivity worse.

But you should note that the ONS numbers only go up to 2008, and we know that UK productivity fell during 2009. In fact, according to the ONS itself, output per worker fell by 3.1% in 2009 compared to 2008. So watch this space.

It really is amazing how apparently intelligent people can still recall 1997 with such fond memories (eg Victoria Coren on last night's Question Time). 13 years of Labour deceit and wishful thinking have left Britain crumpled up in a busted heap. Crushed under a pile of debt and economically prostrate.

THURSDAY, APRIL 01, 2010

So Who Do We Trust To Get Us Growing Again?

Listening to Lord Mendacity's dismissal of Britain's top businessmen today, you get the authentic Labour view on the way economies work. Despite all the NuLab spin, they have never really accepted the idea that sustainable growth is delivered by private enterprise not by government spending.

As we blogged here, their plan to hike the jobs tax will be a disaster, costing up to 500,000 jobs. And George is absolutely right to make it his top priority for cutting (or at least rescinding the increase).

But Mandy clearly doesn't understand that. Instead, he comes up with the utterly preposterous idea that these top business leaders are whacking Labour policy because they have somehow been deceived by the evil Tories. 

Did Mand not read what they wrote? Just for future reference here are the key bits:

"In the last few years, the private sector has improved its productivity by around 20 per cent, while productivity in the public sector has fallen by three per cent. Savings can be made by removing the blizzard of irrelevant objectives, restrictive working practices, arcane procurement rules and Whitehall interference... As taxpayers we would welcome more efficiency in government.

As businessmen we know that stopping the national insurance rise will protect jobs and support the recovery.

Cutting government waste won’t endanger the recovery – but putting up national insurance will."

Spot on. In fact, it could easily be Tyler talking.

But it most certainly couldn't be Labour.

As we must all understand, the very biggest of the several big challenges ahead of us is how to get the economy growing sustainably. Under Labour, growth was fueled by a huge debt bubble and a crazy ramping up of public spending. But that has ended in catastophe, and we must now find another way. 

Next year, even on the government's over-optimistic numbers, public spending will account for nearly half our GDP (48%). And Labour believes that to be the essential prop supporting future growth. 

But there is a very different view, partly but not yet clearly, articulated by Cam and George. It is that continued high public spending and high government borrowing will soon undermine the very growth Labour say they want. It will happen via a number of different channels, but most dramatically via the impact on interest rates.

And most helpfully, Policy Exchange has just published some work on how big these effects might be. In particular, they have looked at the likely impact of our huge fiscal deficit on gilt yields and interest rates. 

There is a considerable economic literature on this question, and its conclusions are unambiguous - higher government borrowing pushes up interest rates. Quite a lot. In fact, the literature suggests that the current level of UK borrowing will have the effect of pushing up gilt yields by 2-4% over where they would have been without the deficit. 

Andrew Lilico and his Policy Exchange colleagues have also done their own analysis, and here's one of their pictures:

As we can see, countries with the biggest deficits tend to have the highest borrowing costs. And we can also see that our bond yields look low relative to the average relationship. 

Why? Well, partly because the Bank of England has artificially supported the gilt market by buying the best part of £200bn of gilts as part of their Quantitative Easing programme - a support that has now gone. And partly because the market still believes there will be a Tory government that will cut the deficit - a support that will go if Labour get back.

The chart also shows just what happens to borrowing costs when market confidence goes - look at where Greece is.

To bang the message home, Policy Exchange works out what their expected increase in borrowing costs would mean for mortgage costs:

"In the UK a rise of 1%-2% in mortgage rates would add some £700-£1400 to the average annual mortgage bill."

And that is precisely the kind of effect that would stop our anaemic economic recovery dead in its tracks.

Which is why Labour's policy of continued high public spending is so hare-brained. Far from supporting growth over the next few years it will undermine it. From higher jobs taxes to higher mortgage rates, it is a disaster in the making.