Thursday, 21 July 2016


If the tea-leaves are being read correctly, it looks as though the world is soon to embark on a co-ordinated fiscal expansion. The UK arm of this is already being talked about, with Mrs May having ditched George Osborne's impossible timetable for balancing the books before she even became PM. The economic situation really has changed since 2010, in that even in the post-referendum mini-paddy nobody has predicted that the UK's public finances are in danger of running out of control - which was a genuine worry in the late-Brown-early-Cameron era.

The politics has certainly changed. While it is lazy to read general themes from the referendum numbers, it seems that a lot of people may have voted Leave because they were frustrated by economic stasis and they wanted to give The Establishment a black eye for having let things slide; and at least some of that is thanks to the big fiscal squeeze under George Osborne*. A more balanced UK economy is going to require some big investments. Not all of that has to be led by the public sector, but it seems inevitable that not all of it can or ought to be privately-financed.

BUT. One of the most important criticisms of public-sector investment is that it is so often misdirected. This is hugely important, because the efficient allocation of capital is the be-all and end-all of successful economic policy. Building the feted "roads to nowhere" takes capital away from the productive sector and allocates it less efficiently.

So how might we work out how to decide how much to spend and, crucially, how to spend it?

With borrowing rates as low as they are, it makes sense to borrow big and borrow now. The world's holders of cash are running around in search of yield and security. The government could gain a bit of confidence from the markets by hiving off bonds for infrastructure investment from day-to-day spending: Gordon Brown's Golden Rule in certificate form...

But UK politicians are notorious bad at spending money sensibly. Pet projects, vanity projects, pork-barrelling and general incompetence rule OK. But we can take advantage of the re-emerging diversity of decision-making in Team UK. For example, should more money be invested in London infrastructure or would the same money be better spent Oop North? Let the super-cities, combined authorities and monkey-mayors compete for the cash. In other words, auction the cash. Run competitions. Use tested multiplier formulas. Hold these local governments' accountability to the fire by making the availability of funds contingent of the area's ability to raise additional tax revenue. In other words, let a million projects be proposed, and only push the button on the best of them.

The buck will, of course, eventually stop at Westminster and its national tax-raising abilities, but we should avoid giving Whitehall itself the chance to go on a white-elephant binge. We can do better than that.

Also, the UK government should immediately give a decision on airport expansion in the South East. This should be relatively easy in the new political and economic environment. The simple answer is this: to give BOTH Heathrow and Gatwick permission to build new runways, but stating that the taxpayer's contribution to consequential transport upgrades will be auctioned off. Let the two airports effectively bid to take the least amount of public cash. 

* a wooden spoon prize to the first, second and third commenters who claim we have not had a fiscal squeeze in the UK. Please go and read David Smith.


Anonymous said...

Agree 100%

Was in the background to a M&A which collapsed in the last few weeks due to Brexit. Company has had a stellar performance. P/E ratio was measly 12. Fantastic cash flow and a protected market. But property backed.

Appears there is too much background noise going on that is dissuading people from taking normal investment decisions. There are some great deals out there for the early movers that can evaluate the economic horizon with a cool head.

A few deals like ARM should shake the torpor out of the market.

Roger said...

Not so keen on a free-for-all, so some sort of controlling mind that forces the dead hand of parliament/Westminster to become a thinking hand.

So, scrap existing pensions for all MPs and mandarins past and present - anyone on more than £60K right now and put them on commercial DC schemes - with NO contributions from lobbists etc etc. Something to concentrate the minds.

Cut down on democracy - if government wants to build a road, railway or airport or give permission for a factory or office complex it can - but good compensation without argument is payable. Cut out the lawyers and suits, concentrate on the job at hand.

Much of local government is minimally funded makework, made to look as if problems are being addressed - but not in actuality. Cut this out and be explicit - either it is funded to work properly and made to work properly or politicians axe it and say clearly why it is axed. The present system is a fig leaf and we need to get rid of fig leaves, clarity is needed however unpleasant.

Steven_L said...

it looks as though the world is soon to embark on a co-ordinated fiscal expansion

But I though the Mexicans were going to be paying for the wall?

Nick Drew said...

@ UK politicians are notorious bad at spending money sensibly

absolutely - and not just them: the old (and in some quarters much lamented) nationalised industries - CEGB, British Gas et al - were shockers, too, when given monopolies and freedom to do whatever they decided was 'best'

it's a rare old problem - unless, of course, we just want a Keynsian ramp, in which case waste rapidly becomes a secondary issue, however intellectually disgraceful

as noted before I have to think Hammond's knee-jerk support for Hinkley is in this category: "Uk is still Open For Business, look people are building things". But Hinkley is a tremendous case in point; a ludicrous project and all the money (bar some trivial contracts for site clearance - already spent) goes to France

dearieme said...

Put Hinkley and HS2 in the bin. If the money is somehow still magically available, a bit of road maintenance wouldn't go amiss.

Blue Eyes said...

ND quite right. They are obvious examples of projects which have been captured by momentum and vanity....

Demetrius said...

My guess is that the price of tulip bulbs may be about to fall.

Blue Eyes said...

Not quite sure what that has to do with this topic, but I wonder how that will affect me? I have just seen a stunning pad for sale on Rightmove which is only a little bit out of my current reach. Hmm.

CityUnslicker said...

make 'em a bid BE, 10% chip you never know if they maybe remainder panickers...

interest rates are set fair and low for yonks to come...

Blue Eyes said...

Agreed, but not actually quite in a position to move just yet. Got to finish doing up my current place first. This is why looking at property sites is a bad idea...

Steven_L said...

Got to finish doing up my current place first.

My old man has been saying that since he retired a decade ago. He gets to the end only to have to go back to the beginning and start again.

andrew said...

We have not had a fiscal squeeze.

Please post my wooden Spoon to...

Don't forget the spoon will up my production of cake

All good for the economy.

Blue Eyes said...

Production of cake or consumption of cake? Are we to expect a positive supply shock or positive demand shock? Or both?!

SL I know that feeling. I have replaced my bathroom twice while I have lived here! But, I really am nearly finished now, just got some final* decorating to do.

* comprehensive.

dearieme said...

Isn't it more sensible to let the new owners redecorate to their taste?

No, that wasn't quite a reference to the three Brexiteers.

Nick Drew said...


well you know Boris' policy towards cake, sound fellow that he is

Sebastian Weetabix said...

My salary went up only 2.5% this year. I am fiscally squeezed because I was planning on a 6% increase.

So I'll have the wooden spoon as well. Objectively government spending has gone up, in real cash terms, year-on-year every year since Denis Healey really did squeeze us all in 1977. A reduction in the rate of increase is not a cut and you have to be particularly stupid socialist (or 'cunt' as they are known in our office) to think otherwise.

Blue Eyes said...

You seem a pleasant chap, Seb, I do hope you make it to our Christmas drinks this year.

Laban Tall said...

Perhaps the first 'splurge' could be to restore bursaries for student nurses.

This is an insane move, because a lot of nurses (up to now, anyway) don't actually go into nursing for the money and could have easily made more elsewhere. Price of everything, value of nothing. Only a very clever man can be as stupid as Gove.

Still, the Tories (supported by Labour) started the destruction of nursing as a vocation with 'Project 2000' back in the 90s, when training switched from the ward to the classroom and a huge dollop of lefty sociology was added to the curriculum. Maybe they're just finishing the job. I blogged it here.

and here

Sebastian Weetabix said...

I'm afraid my veneer of civilisation is a bit thin.

Blue Eyes said...

Well at least you are polite while deliberatley mixing up nominals, reals, and proportins of GDP.

UK public spending as a proportion of GDP reached 49.6% in 2009, and was 43.2% in 2015. The 1973-2015 average was 44.0% .

Just thought that Team Wooden Spoon would be interested. The highest ever recorded was at the end of the 1981 recession, at 51.2%.

George Osborne planned to eventually bring spending down to 36% of GDP, below the level regarded as Peak Taxation, which as you all already know is about 38% of GDP.

So all in all, instead of spending your time unpleasantly exposing your utter ignorance, why not invest some of your internet time actually learning something?

Sebastian Weetabix said...

@Blue Eyes: That is very dishonest of you; I never mentioned spending as a proportion of GDP at all. If i may use an imperfect commercial analogy, you are drivelling about EBIT percentages when what actually matters is cashflow.

Mad Keynesians may witter on about govt spending as a percentage of GDP as much as they (or you) like; the FACT is the actual government spending has not reduced by one single penny. there has been one instance of real reduction in government expenditure in my lifetime, when Denis Healey was Chancellor. There has been no austerity.

I now unpleasantly consider you to be a bit of tricksy little shit.

James R. Carraway said...

We should know about hacking. College student should know about college life hacks. For all hacking is not a bad. Mind it.

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