Boldness rather than the Bank's advice
I'm worried by the mood music emanating from the Governor of the Bank of England.
Calls for fiscal restraint were what came out of the BoE and Treasury establishment in 1931 and led to the collapse of the MacDonald Labour Government once it became clear the only way to exercise that restraint was to make terrible spending cuts that made the Depression worse not better.
Unlike Ramsay MacDonald, Gordon Brown should thank Mr King kindly for his advice and ignore it and push ahead with reflationary measures.
We haven't had much of a fiscal stimulus in the UK so far - 1.5% of GDP compared to 4.8% in the US, 3.4% in Germany.
I hope the Budget will include bold measures such as Stephen Byers' suggestion this week that the 2.5% VAT cut should be diverted into raising income tax personal allowances by £1,520 to £7,995, taking 1.7 million low-paid workers out of paying income tax and giving everyone £304 to spend on boosting the economy.
posted by Luke Akehurst at 10:42 pm
14 Comments:
The hugely influential Governor of the Bank of England in 1931, Montagu Norman, was actually ill at the time of the 1931 crisis and did not participate in the events. It's fair to say that his influence was still felt - the belief that the budget should be balanced at all costs was accepted by practically everyone with the distinguished exception of Ernest Bevin and the TUC.
11:22 pm, March 24, 2009
Your analogy is flawed, Mervyn King did not ask for cuts, he merely stated the bleeding obvious. Britian cannot afford another round of fiscal stimulus. This position is also held by the IMF, the CBI and many others in Europe. Unless Gordon reigns in his spending the UK faces a much larger crash than the one we are currently in. There is a very real danger of credit default.
Perhaps if he stopped trying to buy the next election and concentrated more on resolving our current problems we would be in better shape.
7:17 am, March 25, 2009
Yes, but countries like Germany had save in the good years by running a significant surplus, meaning that they still have money left in the bank to throw at these problems.
Any comparison between Germany and the UK is therefore defunct because we started from entirely different positions.
9:47 am, March 25, 2009
The fiscal stimulus figure of 1.5% doesn't include automatic stabilisers (unemployment benefits, etc). Once you add these in I think you get nearer to 4%.
This number was used by Alistair Darling recently in a Commons statement as the level of our stimulus when comparing it to other countries
10:02 am, March 25, 2009
There was pretty good evidence for the VAT cut though - and that was that when the US provided a tax rebate, the money was saved rather than spent so it didn't stimulate the economy.
Is there any contrary evidence now?
10:52 am, March 25, 2009
Fully agree with Luke.
Matthew - even if the tax cuts are 100% saved it is no bad thing. If we increase public sector debt but pay down private sector debt, I'm in favour.
Less credit risk, equals less interest payment.
Despite this I'd still favour any new stimulus to be based mainly around spending rather than tax cuts. Although both have a place.
11:43 am, March 25, 2009
Unlikely that people would save the cash when interest rates are none existant.
2:22 pm, March 25, 2009
Luke - the worry isn't people saving - it's people using the extra cash to simply pay down debt. But as I say, I think that's not a problem.
Also, on a wonking note - raising the allowance wouldn't mean people paying £1,520 less tax. It would mean not paying 20% on £1,520 - or £304 back for every tax payer.
2:47 pm, March 25, 2009
Wonkish, not wonking...
2:48 pm, March 25, 2009
Duncan thanks for correcting me.
5:08 pm, March 25, 2009
If you want to stimulate me into spending, cut my tax at source.
The "stimulius package" that is being pursued is Gordon playing high stakes at the craps table with my money.
He'd better hope the numbers come up, otherwise, after he's blown all of our money and prospects, we'll be looking to throwing him and his "advisers" out on their collective arses.
5:11 pm, March 25, 2009
Reflationary measures?! Please spare me.
The Governor of the Bank of England might well be concerned by another 'fiscal stimulus'. The first one didn't work (VAT cut and slashing interest rates dramatically) - why would spending make any difference? Especially when it's not money we have! We are borrowing and printing more money than we have.
This is not responsible. This is precisely the reason why we got in trouble in the first place. We leveraged ourselves on money which wasn't actually ours to buy cars and houses we couldn't afford and NOW the remedy is that sovereign governments should leverage themselves and their nations by selling gilds and bonds and printing money so that they can spend it on public services which we can ill-afford to maintain at present spending rates.
Come on Luke! Surely you've got to be thinking to yourself - "Sh*t what am I leaving to the next generation to pay down?!" No amount of training, and no amount of skills learning is going to let the next generation believe they can earn the high wages their parents generation were accustomed to, without having a whacking great big tax leveraged on them to pay back your generation's irresponsibility!
9:43 pm, March 25, 2009
It is not so much what % of GDP and more to do with debt. The UK has far too much debt at the moment and it will in the end have to be paid back through higher taxes.
No one knows when we will see a recovery so to borrow more is simply mad. Not only that we could end up devaluing the pound even more and end up importing inflation. Interest rate rises so soon would be a disaster for many.
9:45 pm, March 25, 2009
Simply not true. The government of the day needed credit from American banks to service our astronomical debt. The only way that they could tap this credit was through cutting our deficit (thus reducing the risk of us defaulting).
Our economy - let along our currency - depended on cutting the size of the state. It didn't make the great depression worse because the option of enacting a fiscal stimulus simply wasn't on the table because we would have been unable to raise enough credit.
I guess the other option would have been to print money, but I recall another country that tried that in the aftermath of the Wall Street crask and it didn't go too well.
5:54 pm, March 26, 2009
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