Thursday 1 September 2011

UK Growth cut suggests Plan C needed

Let's hope September is a nice quiet month for once (my birthday apart of course).

The first pieces of major news though are at least now contradictory. China manufacturing is holding up, Australian business is expanding, US job figures are improving versus Brazil cutting interest rates and the BCC cutting its forecast for UK growth.

There is a real downside to these growth cuts though in the medium term. The UK is still some 2% short of where its economy was in 2008 (pumped on leverage steroids of a mad Government, perhaps this is no bad thing). However, this means that job creation and demand are going to be low for sometime to come.

With growth falling to anemic rates, this process will stretch out years. In fact on new figures it maybe 2013 before we get back to a 2008 size of the economy; this shows what Labour did, bringing forward 5 years of growth into 2005-2008 - and we all will have experienced the cost of that.

However, the situation is creating bigger problems for the current Government too. Firstly, they now need to dismiss the loons like Ed Balls and Adam Pozen who advocate yet more stealing from the future to cure today's ills. They also need to find a path through the challenge of deficit reduction. For as growth falls, so does tax income and therefore so does Government income. To reduce the massive deficit the Government needs to keep revenues high or to cut faster. If it was really bold, it would cut taxes and cut further into its bloated programmes.

Unfortunately this is beyond the comprehension of the media or a docile public who have been brought up to believe that the state is their carer and salvation. This is Plan C - further cuts, tax cuts and growth ignition in the private sector by showing the Government is serious - there are massive amounts on Corporate and Investments funds sat in the money markets waiting for a leader to show them it is safe to come back and invest- can Cameron be that leader?

Each .5% fall in GDP will likely lead to a 1% increase in the predicted deficit. It makes it hard to see how on the current course the spending deficit will be wiped out by 2015 - meanwhile gross debt is 148% of GDP and still slowly rising.


James Higham said...

further cuts, tax cuts

One kills the effect of the other.

Also, do you think the gold is in the vault or do you think it has largely gone to Hugo?

Does it matter, in terms of recovery?

CityUnslicker said...

James no it does not; tax cuts inspire investment of which there is plenty available. Spending cuts to some areas, like say foreign aid, have no effect at all on domestic demand.

Your falling into the Socialist trap.

re Hugo, however much gold we have it is not enough i fear.

Tony_E said...

We are going to need some outside investment in the British economy. This is where being an EU member is supposed to promote British interests, in that we can have a tax system which is ultimately more competitive for inward investment into the UK while having a tariff free trade into Europe.

Ministers must seriously think about reducing business taxes and making export into the EU countries a real strength again if we are to remain in the EU. If not we should shed all the regulation and get out as at present we have the worst of all worlds.

Sebastian Weetabix said...

We are not growing because..
1. people do not have much disposable income right now due to the wages squeeze
2. taxes are too high
3. the tax code is way too complex
4. hiring/firing people is a legislative minefield
5. the cost impact of the blizzard of regulations on business are simply astonishing
6. We have a government which presently takes over half our GDP (& then some)
7. walking dead banks which cannot/will not lend

Where is Sir John Cowperthwaite (or his disciples) when we need him? Smaller government, lower taxes, a less complex tax code are what we need.

My main gripe against the present shower occupying government offices is that they have not turned the clock back 1 minute.

Anonymous said...

How does QE "steal from the future"?

Why does a 0.5% fall in real GDP lead to a higher deficit? Tax revenue grows with nominal GDP, not real.

Old BE said...

Running a fiscal deficit and encouraging the build-up of private debt stole from the future.

The difficulty is that actually cutting spending is proving hard. I don't think Osborne can convincing cut business tax without also proving he can cut public spending. If the perception is that he is just following Balls' advice then all the good work he has done in convincing the world that Britain is not Spain will be undone in about a minute.

I fear we just have to accept the grind along the bottom for the moment.

alan said...

It will be interesting to see what excuses will be spat out by both parties when the UK gets its credit rating reduced.

The rating agencies where impressed enough by all clever words after the election, but those words were nothing more than hot air.

My conclusion is the UK is ripe for a downgrade.

The GBP exchange rate will drop, the costs of imported good will go up, inflation, inflation, inflation. Except the exchange rates will be factored out of the newspeak inflation figures and the lies will continue.

@Sebastian Weetabix
You missed one very important factor. The high cost of energy, which is sucking money from the economy. The Gov is committed (in their own words) to high energy costs which will only make matters worse.

CityUnslicker said...

re Anon - QE steals by building up the BOE balance sheet which will have to be reduced at some point, by selling gilts and pushing up future interest rates, which therefore restricts future growth. We get liquidity now but at a cost of reducing in the future (unless we monetise the debt, in which case we get an exchange rate shock instead/as well).

tax rates fall with any reduction in real or nominal GDP - perhaps I was over precise in my use of terms. With lower future growth we have lower taxes and so are less able to reduce any deficit.

Anonymous said...

That is bizarre.

Is there an policy position the Bank can choose where it can guarantee it will never have to "push up future interest rates" and "restrict future growth"?

42% interest rates are surely the answer! We must have 42% rates now - otherwise there is no guarantee we will have "steal" from future growth by raising rates later on.

Never mind what happens to the economy now, though. It'll be fine.