I don't claim any great understanding of economics but how was it that labour made all these plans for grants, schemes and so an when there was no blooody money?

[moondog]

Eh?

Thanks.
Interesting points.
I wish I knew more about Economics.

Vesela I haven't seen it expressed anywhere that the UK can continue as it has done, or that it is "on angels' wings". What I have seen are a lot of very convincing arguments that we have to be very careful about cutting too deeply in a recession. Unfortunately these seem to have been largely drowned out by the coalition's headline-grabbing "no pain no gain" message.

Interesting article by Dominic Lawson in the Independent today:

'Yet the alternative to such cuts would only be more tax rises: why could not that also be described as "taking money out of the economy"?'

maybe there is a simple answer to his q btw - in which case hopefully someone will come along and explain it?

I don't buy it at all.

Just propaganda to get the population on side a coalition govt (which didn't actually get anyone's vote)

Riven - not if your using them to pay back the debt (or avoid increasing the debt).

I like this Bastiat quote from the Dominic Lawson article:

"If all things considered, there is a national profit in increasing the size of the army, why not call the whole male population of the country to the colours?"

Zephirine, I think continuing to insist on not cutting for a year is indicative of angels' wings... what is a year going to buy us, anyway, in terms of recovery? The OECD believes the budget is supportive of the recovery, FWIW.

I would go back to a point made by Longfingernails (at regular intervals ) GB began to increase government borrowing well before the credit crunch hit. So if income tax increases are such an easy method of raising money -why did he not do it then, instead of increasing our borrowing and putting us in this vulnerable position? Either increasing taxes was not a viable option then (so what's different now?) or he was being seriously incompetent. Either way he handed the decision making over to the Tories (and LibDems) and they get to run the economy their way....and if shrinking the state is a by product then quelle surprise!

I would go back to a point made by Longfingernails (at regular intervals ) GB began to increase government borrowing well before the credit crunch hit. So if income tax increases are such an easy method of raising money -why did he not do it then, instead of increasing our borrowing and putting us in this vulnerable position? Either increasing taxes was not a viable option then (so what's different now?) or he was being seriously incompetent. Either way he handed the decision making over to the Tories (and LibDems) and they get to run the economy their way....and if shrinking the state is a by product then quelle surprise!

It came out recently that Labour were planning £44 bn of cuts after the election. They did not announce it and no idea where the cuts were going to fall but they were cuts and would have to be done.

I violently disagree with Paul Krugman. The plain fact is that the international bond markets will simply cut off the supply of credit to the UK if we keep spending up and keep running a pulic spending deficit (i.e spending stays higher than tax income).

Prof Krugman is correct that in an ideal world we should continue with Keynsian stimulus but he has forgotten the international bond market will stop the spending for us if we dont do it for ourselves. Niall Ferguson is much better than Krugman on this subject - he has done a historic study right back to the Middle Ages of bond markets and sovereign debt default and he clearly shown deficit spending cannot continue as bond markets have far more power than Governments.

Keynes rightly pointed out that deficits and Govt stimulus spending should only be run in extreme recessions and as a last resort - not as a structural feature of an economy in good times. Every single Labour Govt in the UK has ended in a financial mess because they do not understand this point. Socialist Govts across Europe are facing the same issue.

Bond markets can literally bring down Govts and drive countries into famine and social breakdown if they decide to stop lending. That is why we have the IMF to bring about financial restructuring of countries. The alternative is millions of deaths through starvation and civil disturbance. See UK 1976 and Greece 2010 for details among many other examples in between.

What it comes down to is a judgement call based on timing and the predicted reaction of the bond markets.

Maybe Alistair Darling is right and the bond markets would have held at a reasonable interest rate for the next 12 months and cuts in a years time would have been less painful. I guess we will never know.

Instead of the Labour gamble, we have the Tory gamble, that cuts won't trigger a double dip recession and decreasing the deficit is the actually low risk option.

As far as I'm concerned - Labour proved their incompetence - though that doesn't mean the Coalition have all the answers (just crossing my fingers and hoping).

Longfingernails - my point is that in Labour's first term debt as a % of GDP reduced to its lowest level since the 2nd world war. It then increased again from 2003 onwards back to approximately the same level that it was at the end of the previous Conservative government. Then of course with the onset of the international crisis it shot up. (Though not - if you look at the Reinhart & Rogoff data - to historically surprising levels given the circumstances.)

When I read things like
"There was almost no welfare reform in the years when jobs were plentiful and the pain could have been easily mitigated. Now sadly it must be done when jobs are scarce."
it makes it abundantly clear that these cuts are part of a political project to reduce the size of the state yet further. Why did we need welfare reform? Govt. spending as a % of GDP was (and is) low by European standards, the national debt as a % of GDP was at a 50 year low - there was no reason to cut the extremely minimal levels of benefits offered yet further at that time.

(Its very hard to find easily linked figures for govt spending as a % of gdp, but this link here gives international comparison for 2007, and this chart here has a historic data series for UK spending. The IFS has a better chart here but only running up to 2000 unfortunately)

Ah, and jackstarbright - "I would go back to a point made by Longfingernails (at regular intervals ) GB began to increase government borrowing well before the credit crunch hit. "

Well yes, but only in the context of it having previously reduced to historically low levels.

There would be far more point in arguing about whether the money was spent wisely, and whether there was sufficient investment for the future. And indeed why we spend 2.5% of GDP on defence, whereas Spain, for example, spends only 1.2%, which is more typical for Europe.

BeenBeta, have you read the 'This time is different' book? Its definitely worth a read if you haven't. (Not that it would stop us disagreeing, but it is full of fascinating information.)

Takver As I said, previous governments, both Labour and Tory, didn't perform well on debt either.

The issue of debt financing is far worse after the credit crunch than before.

Luckily our debt has long maturity, we are not in the Euro, and Margaret Thatcher's labour-market reforms were largely kept by New Labour and make Britain more competitive and flexible than many other European countries. Most importantly, we are dealing with our debts while many of our European competitors drown under theirs.

All these factors make it easier to finance our debt than other countries - thanks to the Budget, Britain is now seen as a flight-to-quality country instead of a basket case. But debt now is still a bigger problem than debt 40 years ago. We need to compete for financing amongst more nations.

However the government's strong stance on reducing the deficit is already paying dividends. The interest rate on UK government debt has declined by about 0.5% - and that is largely passed on to companies by banks. What a brilliant stimulus a 0.5% cut in effective interest rates is! It will be far more useful than a car scrappage scheme, a new visitor centre at Stonehenge, or a loan to Sheffield Forgemasters, even if it is less visible.

As for shrinking the State and welfare reform - well, for me, it is both pragmatic, ideological and political.

Pragmatically, we have no money. If we don't cut welfare bills we have to cut public services even more.

Ideologically, I believe it is not compassionate to just give people money. Nor should people on average or better than average salaries have to depend on the State via tax credits - it isn't a sustainable model.

Politically, by weaning people off State handouts, it becomes possible to weaken the long-term prospects of Labour and their authoritarian, controlling, centralising mindset - which, in my opinion, is also better for Britaain.

Fair play then - its just this return to the TINA principle really, really annoys me. We (or rather the govt) are making political decisions, and there are alternative choices that could be made.

I would agree 100% with you though regarding not being in the Euro, it is probably the single biggest factor in our favour at the moment.

Not convinced that 0.5% cut in interest rates will balance out the negative effect of taking money out of people's pockets at this point in the cycle. (Though agree car scrappage etc. daft).

'Weaning people off state handouts' - find it hard to respond there without getting unhelpfully cross. Yes, of course there are some people who receive benefits who could be in work. There are an awful lot of other people who couldn't - either because they are not capable of doing the work available, or because there are no jobs where they are, and they don't have the social/human/financial capital to get to somewhere where there are jobs. Cutting welfare benefits to them just makes them poorer.

Takver Don't get me wrong - I acknowledge the car scrappage scheme was a success. It did exactly what it was meant to do.

I just think that in general creating these short-term distortions to small parts of the economy by fiscal policy is less important than getting the broad monetary policy.

However I accept there must be occasional exceptions and am not too dogmatic about it.

As for "state handouts" I obvious acknowledge that those in genuine need will need permanent state support. However, Labour simply cannot run away from the fact that the "benefits as lifestyle choice" is a reality for too many people. It is much less compassionate than trying to get to the root of the problem.

but isn't the route of the problem, low wages and lack of jobs

claig Lack of jobs, certainly. That is why lowering corporation tax and scrapping national insurance for startups in low employment areas are excellent ideas. Both promote private sector job creation.

Takver - no I haven't read the book but I see Reinhart & Rogoff often on CNBC talking about their findings which I think are consistent with what Ferguson is saying.

Meanwhile the European money markets are effectively closed to Greek and Spanish banks tonight. There is a deadline on Thusday when European banks have to pay back 442 billion Euro of funding to the European Central Bank.

No one knows if they can and how much funding they will have to roll over. No one knows if they can roll it over.

The credit crunch is stil here and stock markets were off a lot today.