February 19, 2018 - Latest: In the wake of Carillion – how can investors avoid a ‘value trap’ and which fund managers do it best by Darius McDermott
29th February 2012
Business secretary Vince Cable requested the report, which also looks at "impact on company performance and governance," last June.
Yet many well-known economists and “think-tanks” still call for a postponement of austerity. So far as I can see, the only austerity has been cuts in capital investment – exactly the sort of spending that might be justified at this time to improve the supplyside of the economy – while welfare/entitlements have been maintained. The problem remains that there is very little that the government can cut that will not bring about howls of rage from someone or other – and the media will of course be there to ensure it is amplified and well-publicised. Perhaps one cut – a small one I grant you – would be the OBR, which has shown itself to be an utterly useless waste of time and money.
The howls of rage were in evidence yesterday. The suggestion that expensive properties owned by the taxpayer could be sold to provide more, but cheaper ones, somehow was converted into social cleansing by about 930 am.
Existing social housing stock has been built and – where it is occupied – being rented out at a social rent. On both counts it is not expensive. To the extent that the social housing stock is occupied then there is a prima facie case for saying that it has been built in the correct place.
Social housing stock needs to be valued as a physical asset fulfilling a need and not just as a financial asset.
Valuing and overvaluing bricks and mortar as a financial asset is one important aspect of the credit bubble.
I was suspicious of the OBR from the beginning and frankly it has added no value. As to such cuts as we have had they have indeed come from capital investment. Whilst this is easy to do it is also easy and likely that it will be regretted.
One problem about the way that the politicians connive with the press to ignore the deficit and focus on the cuts all the time is that:
1. hardly anyone I know thinks that we are borrowing year by year at all and think that we are somehow getting the debt down
2. This leads to an extraordinarily biased discussion of the situation, as every cut is seen as mean/targeting the wring people (ie those complaining)
There is simply no debate along the lines you discuss above in Parliament or the press.
I wonder how long it will take the mainstream media to cotton onto the fact that the deficit looks as though it has turned upwards and possibly substantially so. I notice that most articles today majored on the revenue numbers when in fact it is spending that is the problem. I guess after going on and on about cuts it is not so easy to talk of increases…
I think we’ve both know that for sometime our Government has not been following the Greek / Irish remedy but been following a looser path than them.
They’ve seen what happens and we are different in that we can print our way out ….
but for how long
all the old economic theories state we should be in Growth but we are not. Our balance of payments is dreadful but worse it to come – the north sea bonanza is fading – fast .
Keep blaming everyone and their foreign dog but that’s a diversion –
As Clinton said – “its the economy, stupid! ”
To the extent that what the Greeks and Irish are doing can be seen as a remedy.
If you don’t set out to reduce state spending, you won’t. Osborne was hoping that growth would sort the problems out with minimal requirement for cuts, and believed the OBR figures. Even they (first version) ended up with an increase in borrowings and as Shaun says, their growth estimates were absurd. Growth is an area that all Treasury related bodies get wrong, and never in the positive direction.
I’m afraid Osborne has listened too much to the wailing from the LD’s and he frankly has wasted 2 years. For him, it’s probably too late. We need someone who is prepared to reduce state spending, and not, please, by more PFI or similar deceits!!
I’m afraid its the death of so called “austerity”. George thought he could talk tough, raise VAT and then 2%+ growth would come riding back to the rescue in time for a few pre-election sweetners in 2013-2014.
We have no chance of real reform now – deficits are hard wired until we are way past the 100% debt to GDP (20% adjustment or not).
Its interesting how the new zero is a 3% deficit for a western economy.
We cannot afford our welfare state – we never could – it always was a ponzi scheme funded by current contributions. But you can’t take it away either, not in a democracy with our modern political class, So they will try to create ponzi growth to pretend they can pay for the ponzi state – just a big game really,
Its looking bad for George anyway – looks like we might get a taste of Ed’s growth strategy. If ECB prints to save the Euro and Ed starts to look like the next chancellor – then get ready for dollar/pound parity and get ready for double digit inflation (on whatever measure !)
couldn’t agree more!
As we are not a member of the EMU it is not a case of being unable to afford the Welfare State but one of affording the Welfare State not being a sufficient priority. There was the the report earlier this week regarding social housing, for example. The definition of affordable housing in London is now £750 per month. Even a requirement on developers to provide this so called affordable housing as a proportion of each development is likely to be scrapped. So even this low level measure is opposed.
Whether we can afford the welfare state is not related to whether we are in the EZ.
You are Gordon Brown and I claim my £5
Good article, the deficit has risen in the first 4 months
because of extra spending and one off losses of revenue like the £1bn from the North
Sea. There can be large variance between
July / August because of self assessment returns. Ex these factors the tax take
is still provisionally up 1.1% in the first 4 months. Of course there will be
further revisions throughout the year and for years afterwards as well.
Government expenditure will not necessarily match y/y, the
£7.3bn spent extra so far this year should now not need to spent in the next 8
months. It would be logical to expect
overall spending for the year to be somewhere near budget because as you mention
there is very little extra forced expenditure from benefits etc. Assuming
Osborne is actually trying to cut spending and tax revenues continue to rise
reasonably the deficit should be somewhere near target this year.
Thank you and welcome to my corner of the blogosphere. If we put aside possible erratic tax revenues this month then we both agree that there has been 4 months of real spending increases. The problem with the “Assuming Osborne is actually trying to cut spending” is why was he not doing that in the past 4 months -and you could take that further back as the uptrend began as the calendar year began-? And why will he do in the next 8 months what he has not done in the previous 4?
I think the government have tried to reduce public spending as do most governments when they come to power but it never seems to work. As I understand it, departments are supposed to reduce overall spending by a certain percentage which often means the bottom gets squeezed rather than the bloated top. Maybe the answer is to cut whole departments as well as internal efficiency savings. OK there will be howls of protest but its less painful to do it in one fell swoop then pussy-footing around. I’m sure there are many examples we could come up with where government doesn’t need to be. How about Culture, Media and Sport as an example?
i believe that Canada dug itself out of a mess not by cutting departments, but by cutting whole programmes in a zero based budget. Shaving at the margins does not work, it seems.
I agree that it would have been better to implement massive cuts very quickly. Two years ago there was a lot of support for ‘austerity’, but now we seem to get daily headlines over pretty minor cuts with constant howls of complaints from the unions (surprise surprise).
Many people have kept their jobs and house, so they now think that everything is OK and that any cuts are ideological. They make me laugh when they say that cutting public sector jobs leads to lower tax returns and higher benefits spending – WHERE DO PUBLIC SECTOR WAGES COME FROM!
I read a story yesterday about how Germans work a lot less, but are much better off – mainly due to their aversion to public and private debt. We could easily do the same and pay off our whole debt within a decade if our politicians had some balls.
I remember the episode of Yes Minister well where Sir Humphrey Appleby does indeed cut the number civil servants in his department by 10%. But only after increasing the number by 10% first……
Something along those lines appears to be taking place in UK government right now.
With credit creation sluggish in the private sector – understandibly so following the bursting of the bubble – economic growth is sluggish. Inevitable this has an effect on tax receipts. This will increase government deficits.
What the government will do is seek to cut expenditure at a faster pace than tax receipts fall. Cutting government expenditure will take money out of the economy and that will put tax receipts under pressure. With private sector deleveraging who will replace that money?
With respect to the OBR that its predictions are inaccurate could have been very accurately predicted at its inception.
Mervyn is replacing that money – but without increasing wealth
More money + less wealth = ?
Mervyn King is changing one private sector financial asset for another. It’s old news that monetary policy doesn’t work in these situations.
Best tell Mervyn then !
The truth is that he and an awful lot of other people should already know.
The OBR did provide one small service in that it did bring growth forecasts down from the former 3 to 3.5% that had been required to make the previous set of public sector deficit targets look “realistic”. In effect it has pretty much already gone the way of the Congressional Budget Office in the United States.
I understand that austerity measures are set to increase through 2013/14/15 and if that’s the case and government borrowings continue to rise we’ll be going the way of Greece/Spain/Portugal etc and digging ourselves further into the hole! It’s amazing that all these leaders seem to blythely continue waiting for austerity to work regardless of the evidence. Or do they just not have an alternative?
On the current trajectory such measures will be in place beyond 2015 and possibly considerably so
Can I be cynical to suggest that OBR estimates were derived from hoped for outcomes rather than known inputs!
According to MMT theory deficit will increase whilst private (non Gov) sector saving/deleveraging continues.
Any idea which Gov. spending still increasing as a clue to underlying problems?
Social security type spending was a major factor which is somewhat inconsistent with the unemployment/employment data. And debt interest costs were up which doing the maths in my head I think was probably partly to do with inflation overshooting costs for index-linked gilts. Whilst we have issued more conventional gilts they are these days very cheap to issue
As Chris says, it’s really important to understand in which areas public spending is increasing. Are there detailed statistics available anywhere ?
Could it be an increase in part time or low paid work which would make unemployment statistics look relatively good but increase government expenditure on “in work” benefits, tax credits etc?
Are people being shifted off the unemployment statistics and then claiming benefits ? (E.g. sickness or “no longer looking for work”)
Or is it higher than expected benefits to the pensioners because of CPI being greater than anticipated ?
Or a rising number of children leading to an increase in child benefit ?
Might I suggest that it is possible to get a clue about what is happening by understanding sectoral balances. These are discussed at
by Martin Wolf. The sum for the total for all the sectors has to add up to zero; Thus all sectors cannot be in surplus simultaneously; as this is derived from the National Accounting equations, its a given. There is no room for debate. As the household and corporate sectors are saving and we are importing more than we export, the government has to be in deficit. If they cut, and there is no change in any of the other sectors [at the macro aggregate level] the economy will decline and resulting in the government having to increase their outgoings on benefits, the deficit will increase. Whilst the household and corporate sectors continue to have little confidence to spend, there will be little change. Demand in the economy is needed to provide industry with the confidence to invest to meet the demand. Whilst large numbers of public servants are jobs are under threat, there will be a lack of confidence; remember most of the cuts are still to come! The lack of confidence is reflected throughout the non-government sector.
Hi John and welcome to my blog
The problem with equations that have to be mathematically true is that invariably we find that they break down when used in practical economics!
I still remember when the numbers for the £M3 money supply measure were manipulated in such a fashion (for younger readers this was back when we were trying to control inflation via the money supply and M4 and building society regulation were yet to come). Mathematically it had to be true and yet when tried it failed.
Many thanks for your response, I appreciate it. Yes, what you say can happen; that is why I referenced the FT article as it shows that the data obtained by Martin Wolf and plotted provides a summation to zero. Undoubtedly there will be some error, but from the graphs it looks small. I suggest it shows that the trends I pointed out are correct. The equations used come from the definitions for GDP.
GDP = C + I + G + (X – M) and
GDP = C + S + T from which it is straightforward to get
(I – S) + (G – T) + (X – M) = 0.
Analysing the economy into sectors in this way was, I believe, suggested by Wynne Godley and others and it has not been shown to be incorrect, provided the correct data is used, as you point out. It does show that the chancellor’s strategy is unlikely to succeed. Austerity will never produce growth. But I can concede that when austerity stops, growth can resume, but its from a much lower starting point.
From my viewpoint, if the data collected by ONS for these items in the national accounts cannot be trusted, then the UK is in deeper trouble than I realised and the country’s finances are truly out of control.
If I am correct in what I am pointing out, then I suggest it implies that the current UK economic policies are very unlikely to work, given the downturn in Europe and a weakening world economy, we will be unable to export our way to growth. The corporate and household sectors are saving (this is no surprise) ie they are in surplus, and we have a current account deficit. To balance all this, the government must be in deficit.
At the end of 2010, Gavyn Davies wrote a similar article in the FT
and provided similar plots for the US economy. I believe Godley’s ideas do provide a basis for analysis and prediction.
Usually I think your comments are with much slant on the “facts”, for instance using offical figures, you ofcourse rightly point out that you doubt them but still use them in your pieces. However today I felt that there was a major slant on the numbers you were giving.
e.g. You say that unemployment hasn’t gone up much so there shouldn’t be a major factor in the rise in expenditure however you have often pointed out for both here and the USA that although employment hasn’t gone down alot are who were previously in full time higher paying jobs are now in part time or lower paid jobs this would increase benefit expenditure (things like top ups) so they could be doing austerity but its not working as many suggested.
Also as you correctly point out that that expenditure is rising faster than inflation so we have real increases in expenture, making our position worse against debt/gdp however you then point out that tax reciepts have increase by 1.1% and are therefore takening most the strain, but you don’t mention the real figure, wouldn’tthe fact that this is below inflation mean that actually means a real reduction in tax reciepts therefore isnt taking the strain?
I do agree that the deficit hasn’t come down but I see it as the cuts were always going to increase the real benefit expenditure and that VAT rises were going to reduce real reciepts and slow growth. Its not necassarily that the government hasn’t cut its just cut and taxed things that were only going to make the situation worse.
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