Back in the late seventies, Britain was headed for recession, and in traditional Keynesian fashion, Jim Callaghan threw money at the problem. It didn't work, and as a result we got several years of austerity under Margaret Thatcher with cuts in public spending, pulling the country from its headlong plummit into bankruptcy and an eventual balancing of the books.
Now we have turned full circle with Gordon Brown trying the same failed technique in the hope that it might work this time. Cutting 2.5% off VAT will get the nation spending again? You must be joking! Let's face it, the reason why we're in such a mess is because we've been spending beyond our means, not only in government but privately as well.
Unless people perceive their jobs to be safe then they will want to save more, not less, so what does Mr Darling do? Raise NICs that's what, meaning that employers will have to find more from their balance sheet to hand to the government.
This fiasco is going to cost us dear, no matter who wins the next general election.The NICS will be raised after the next General Election, as will the 45% on taxable income above £150,000. Labour will have to win the next General Election before they can do that.
If you look at the chart you will see that there were more years when the budget was in surplus under Labour than under the Tories. Under Mr Heath the deficit plunged. It is true that under Mrs T the deficits were reduced and turned into surplus, but this was only a continuation of a trend started under the Wilson/Callaghan governments. After a brief Thatcher surplus, the deficit plunged again under Mr Major. The Brown deficits have been relatively modest as a % of GDP compared with Mr Major's tenure.
I do not think there is very much to choose between the Tories and Labour when it comes to running the economy. I think a lot depends on how lucky they are with the economic cycle which, as has repeatedly been demonstrated, is beyond the control of politicians and central banks.
I agree with you about the VAT though, Eccs - it won't encourage people to spend, and it is too much debt that has got us into this mess in the first place.
Wergh.I recall the early 1980s and it was indeed a terrible time financially. There does seem to be a time gap between pulling the levers and feeling the effects.
The devil is in the detail of course and I have not yet taken in all the details of the new budget.
But on first glance , it looks as though I personally WILL benefit financially and NOT be losing to pay for the benefit so there is no benefit. As is usual , e.g. the 23p/20p/10p tax issue recently.
* The NI increase will not cost to employees as limits are being changed. * The income tax will not cost to those earning under 100K. * VAT has a very small change to prices but every penny saved etc, the pain will be felt by businesses (pretty much no one alive has experience of ever changing the rate of VAT as it has not changed since 1991) so is not a money cost to employees. * I don't smoke or drink enough to be bothered what they do there.
So it does not add up does it. This is impossible. I can't benefit. I never benefit.Well one thing that seems to be missing so far is the online Budget Checker.
The one where you put in your salary and lifestyle and it tells you how much better or worse off you are.
I suppose this Budget is just Too Much for it just yet.The austerity measures in the 80s worked. Then, however, the world economy wasn't in quite the mess it's in now, so there's no guarantee that similar measures would work this time with less bouyant markets for the UK to rebound into. But look at history: The current solution has been tried before and failed. Austerity measures have been tried and succeeded. And the latter measures didn't leave the country with 60% GDP dept.
The austerity measures in the 80s worked
In what sense did they work? What did they achieve? Post hoc doesn't always mean propter hoc.
The reason why I ask is because I have a contribution to the discussion lined up, but I would like it to be relevant.
Mike"The reason why I ask is because I have a contribution to the discussion lined up, but I would like it to be relevant."
Seriously looking forward to your astute comments [seriously]. It seems to me that nothing can be accomplished by spending fake money, in fact it worsens the situation. And the largest economies are astronomically in debt. And the lenders depend upon the borrowers for customers and raw materials.
Seems to me like a Gordion knot, and when it is cut, it will be by the violence of global war.I assumed they worked, simply because within two years of them being applied the country's GDP began to increase. I believe the books were in surplus as well. This continued until the UK's ill fated entry into the ERM, which precipitated a recession. This ended soon after our withdrawal/ejection from the ERM.
It's also worth mentioning that Alistair Darling doesn't expect the PSBR to get back under control until 2015/16. What if we get another recession before then? That date also assumes that we get out of this one as predicted by 3rd quarter 2009.Oh well, you're going to get my contribution anyway!
I think that in practice there is very little that governments can do to escape the vagaries of the economic cycle if they wish to provide public services and public security at a level that their people find acceptable. The proportion of National Debt to GDP, which is what I am interested in, depends far more on the underlying health of the economy and the level of tax receipts generated by the economy than any fiddling about by Government within parameters that, in practice, have been accepted by the major contending parties of Government.
Time for a link to a graph showing National Debt as a % of GDP from 1900 to 2000. You need to page down to Fig 3, just over 2/3 of the way down.
History shows that, under the pressure of wartime, the proportion of National Debt to GDP hit an all-time high of 250% in 1945. Since then, under Governments of whatever colour, that % has fallen - swiftly at first, even during the period of post-war austerity, and more slowly when you get to the mid 1950s and through to the mid 1970s. Even in the Heath years of budget deficits, that % fell. The graph only flattened in 1975/76 at 50% of GDP and went down a little bit to flatten along at just below 50% until the late 1980s. Then it went down quite sharply in the years of the Lawson Boom when some of us might recall that all the talk was about eliminating the National Debt entirely within 10 years, only to be followed by the Major Bust when the National Debt increased sharply and mini-peaked at around the time that Labour got back in in 1997/98. Then it came down a little and since 2000 has been edging up again during a period of alleged economic prosperity.
At the same time inflation was relatively benign until the wild stagflation days under the Wilson/Callaghan Governments (remember 27% inflation in the mid/late 1970s?) and even the first Thatcher administration had its moments of 20%+ inflation. Inflation today, whilst higher for particular income groups than RPI, RPIX and CPI suggest, is nothing like those dreadful levels of yesteryear. On the other hand, private debt - mortgage, credit card, unsecured loans - is at dreadful, astronomic, unprecedented levels compared with GDP.
So much for history - what lessons can be drawn from it?
First, it doesn't seem to matter which Party is in power, the % of National Debt to GDP seems to have a life of its own. Between 1945 and 1975 the % came down. Since 1975, apart from the Lawson Boom, the % has been more or less flat apart from a creeping up in the last few years. In that period there have been 2 big recessions, and they don't seem to have changed the basic picture all that much. It may be that between 1975 and the late 1980s the incidence of very high inflation might have played a part in reducing the real value of the National Debt (non index-linked principal) compared with the rapid inflation of GDP and tax receipts, but I haven't analysed that so I don't know if that idea is sustainable. However, I don't remember being particularly squeezed during Mrs T's early years, and I wasn't supposed to be sheltered from spending cuts in local government.
This time round we have had a period of low inflation accompanied by annual and increasing budget deficits during a time of economic prosperity. The budget deficits are both public (no budget surpluses when there should have been) and private (the shocking increase in personal debt as a result of the property bubble and the buy now pay later mentality that has been promoted as a good thing). It is the correction of the private deficits that is going to cause this country so much grief during the next few years, because the recession that will cause is going to be more prolonged and deeper than the Government dare imagine. The reduction in tax revenues occasioned by the recession is what is really going to jack up the % of National Debt compared with GDP to the level that Eccs has rightly mentioned. On top of that it would be quite easy for private debt to become public debt if some really big banks failed - that is what is happening in Iceland right now.
And this is where the Government could have acted. It could have made personal credit much harder to come by. It could have interfered with the housing market to prevent the property bubble. It could have regulated the banks so that they squandered less of their resources on dodgy securities - anybody remember the Corset? Of course, this would have run counter to the deregulation ethos of the Thatcher years but I think the Government should have challenged that ethos and regulated. In short, it could have tried to contain the excesses of the property and credit bubbles so as to reduce the effect of the downturn/recession that always follows a boom.
And the Government could have made a greater effort not to waste public money. NHS IT schemes, MoD procurement and Identity Cards are 3 areas which spring readily to mind.
The other spectre for the Government is a period of recession accompanied by deflation. That would have the opposite effect on debt that inflation has - it would make debt bigger as a proportion of GDP.
So I think that the big economic cycles are beyond the control of Government, and in the long run so is the state of National Debt. But there is plenty they can do to dampen the effects of boom and bust. The current Government has failed miserably in that regard.
You will note I have said nothing about the mini-Budget yet. For what it is worth, I think the Government and monetary authorities are absolutely scared stiff of the seizure in credit facilities and lack of circulation of the money supply. This mini-budget is a desperate throw of the dice to get things moving. In the end, things will get moving and recover, but the trigger will most likely be something nobody has yet thought of. We shall all have to wait and see.
Rant over.
Mike
the Government and monetary authorities are absolutely scared stiff
Yep, that's what it looks like to me too.
I did not like the austerity of the early 1980s one bit and it quite ruined my life one way and another, so I am not that keen on austerity for personal reasons. Also I feel that whereas my generation just put up with it for the most part that today's lot would just shoot their way into the lifestyle of their choice and it is bad enough on that score as it is.
The advantage of spending fake money is that you get lots of jam today and let the devil help us tomorrow. For those who have an escape plan before the devil gets here, it is worth it.Next Page...
