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A Picture Of Gloom That Damaged Britain Even Before The Cuts Began

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http://www.independent.co.uk/news/business/comment/david-prosser-a-picture-of-gloom-that-damaged-britain-even-before-the-cuts-began-2111312.html

Let's nail one fib before George Osborne stands up to deliver the Comprehensive Spending Review today. The line parroted by the Chancellor andother Coalition ministers over the past week that not to adopt the cuts to be announced today will return Britain to the "brink of bankruptcy" just makes them look economically illiterate.

One can understand the desire to rewrite the narrative of the final years of Labour – and it would require an unhealthy dollop of revisionism to suggest that the previous government's record, particularly in its third term, was not one of increasing profligacy. Still, the claim Mr Osborne made on Sunday's Andrew Marr Show, that "before the election, actually people had a real question mark over Britain's ability to pay its way in the world", is plainly wrong.

Countries do not retain their AAA credit ratings from all three of the world's major ratings agencies if there are doubts about their ability to repay their debts. It is true those agencies had warned that Britain's top-notch rating might be undermined by a failure to take sufficiently robust action on the deficit. Standard & Poor's, for example, said in April: "The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory." But even it put the chances of a rating cut at only one in three (and the reduction would hardly have been to junk bond status).

Clearly, had the worst come to the worst, and S&P followed through on its threat, Britain's cost of borrowing would have risen. In fact, as Mr Osborne likes to point out, since the election, the rates paid by Britain for its debts have fallen. There can be no argument about that, or that the falls reflect the zeal he has shown in tackling the deficit. But if Britain's cost of borrowing is the only measure by which we should judge economic policy, why not swing the axe even harder today? The quicker we cut the deficit, the more borrowing costs will come down.

This argument is important because the Coalition has very deliberately sought to paint a picture in which there is no other choice but to take the most painful road towards deficit reduction – arguing that without cuts of the severity of those to be announced today, Britain will suffer financial meltdown.

Does Mr Osborne really believe that? The alternative strategy – to cut spending and raise taxes more slowly – would not automatically lead to a credit rating downgrade, assuming the deficit reduction programme was still credible, let alone to bankruptcy. And it would have allayed the fears of those economists, including at least two Nobel laureates, who fear the cuts will take us back into recession.

In truth, no one knows exactly what level of cuts we can get away with without stifling the recovery, just as no one knows exactly what level of failure to respond to the deficit would have prompted a downgrade. But Mr Osborne risks dropping us into the first of those soups with his insistence that no cuts that fall short of his would dunk us in the second drink.

It is rhetoric that has had dire consequences even before the detail of the cuts is known. For months now, all indicators ofeconomic confidence have been trending downwards. Consumers, increasingly fearful, have beensaving more (despite the pleas of the Bank of England's chief economist for them to spread their money around). House prices have been sliding as buyers stay out of the market. Businesses anticipate hiring fewer people over the next 12 months. The list of negative indicators goes on and on.

Genius article, lets argue we didn't cut as hard, we lose AAA rating and borrowing costs go up. Now is the writer of this article economically illiterate because increased borrowing costs means more taxpayer cash is diverted from providing goods/services to servicing debts. The likely outcome would be the govt would have to save money by cutting jobs/services to meet the new borrowing cost.

There is no pain free exit strategy from this mess. People are going to suffer, people will lose there jobs. It was far better to never get into this mess in the first place and for govts to run a balanced budget which would allow them never to have to worry over maintaining a AAA rating for the fear of triggering a debt spiral.

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http://www.independent.co.uk/news/business/comment/david-prosser-a-picture-of-gloom-that-damaged-britain-even-before-the-cuts-began-2111312.html

Genius article, lets argue we didn't cut as hard, we lose AAA rating and borrowing costs go up. Now is the writer of this article economically illiterate because increased borrowing costs means more taxpayer cash is diverted from providing goods/services to servicing debts. The likely outcome would be the govt would have to save money by cutting jobs/services to meet the new borrowing cost.

There is no pain free exit strategy from this mess. People are going to suffer, people will lose there jobs. It was far better to never get into this mess in the first place and for govts to run a balanced budget which would allow them never to have to worry over maintaining a AAA rating for the fear of triggering a debt spiral.

Actually the 'slower cuts, keep the stimulus' argument is a perfectly valid one in terms of Keynesian economics. It may be unfashionable to express these views here but they still have wide currency among both academics and real world economists who are out there making strategy for big companies.

I don't think anyone is arguing this can be pain-free, but equally the argument that a substantial element of these cuts is one of choice is perfectly tenable and quite demonstrable in terms of the pre-election positions of quite a lot of the Tory senior players. They can't wait to dismantle the state and fully act out the Thatcher project in a way she was never able to at the time. It will be easy to show that these cuts are ones of choice (and some - eg, the inequitable new child benefit means test, carriers with no planes - are totally inept).

I must say looking at the scale of these things - 500,000 jobs, the tax rises, the slashing of capital spending projects and so on - the drastic negative impact on aggregate demand is going to be huge and just the opposite of what common sense suggests is what's warranted right now.

There are two components to the deficit, one, yes we tend to focus on here, profligate spending under Bliar & Broon (and it's quite right to argue that it would have been better if we'd never got into this mess), but the other is the a collapse in tax revenues. Keep cutting and tax revenues can only continue to decline. Just because Labour was very wrong then, doesn't necessarily mean they are wrong now (hard as it may be to admit that).

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There is no pain free exit strategy from this mess. People are going to suffer, people will lose there jobs. It was far better to never get into this mess in the first place and for govts to run a balanced budget which would allow them never to have to worry over maintaining a AAA rating for the fear of triggering a debt spiral.

Absolutely agree 100%. Niue Leibbour were the biggest bunch of crooks EVER to run this country. Many - Brown, Balls, Cooper - should be in jail serving 40 year sentences. :angry:

Edited by eric pebble

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Actually the 'slower cuts, keep the stimulus' argument is a perfectly valid one in terms of Keynesian economics. It may be unfashionable to express these views here but they still have wide currency among both academics and real world economists who are out there making strategy for big companies.

If so then these people clearly know sweet FA.

Keynesian economics has two basic premises based on two different periods. We have been through the first period - and the premise was not followed. So you CANNOT just decide to follow the second premise and hope it works. It will not.

If the squirrel has not hidden any food in the plentiful autumn in readiness for the cold winter - they can hardly expect to find it when the snow arrives. It simply will not be there.

It really is that simple. I think these academics and economists try to make things more difficult & confusing on purpose. Simply to keep themselves in a job.

Edited by ccc

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Actually the 'slower cuts, keep the stimulus' argument is a perfectly valid one in terms of Keynesian economics. It may be unfashionable to express these views here but they still have wide currency among both academics and real world economists who are out there making strategy for big companies.

You are fundamentaly right on the Keynesian point, but you only focus on half the argument. The issue is the Ratings Agencies and the power they have (which is not calculated in Keynesian Economics). The fact is that the risk to credit downgrade is real, was real and that the former Government did nothing to resolve the issue which means the current Govt have to act quickly and more agressively. The cuts would be less if labour had reacted quicker!

Of course there is an element of reduce state under any excuse, which actually supports Keynesian thinking that Govt roles add no long term benefit.

N.

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Actually the 'slower cuts, keep the stimulus' argument is a perfectly valid one in terms of Keynesian economics. It may be unfashionable to express these views here but they still have wide currency among both academics and real world economists who are out there making strategy for big companies.

I don't think anyone is arguing this can be pain-free, but equally the argument that a substantial element of these cuts is one of choice is perfectly tenable and quite demonstrable in terms of the pre-election positions of quite a lot of the Tory senior players. They can't wait to dismantle the state and fully act out the Thatcher project in a way she was never able to at the time. It will be easy to show that these cuts are ones of choice (and some - eg, the inequitable new child benefit means test, carriers with no planes - are totally inept).

I must say looking at the scale of these things - 500,000 jobs, the tax rises, the slashing of capital spending projects and so on - the drastic negative impact on aggregate demand is going to be huge and just the opposite of what common sense suggests is what's warranted right now.

There are two components to the deficit, one, yes we tend to focus on here, profligate spending under Bliar & Broon (and it's quite right to argue that it would have been better if we'd never got into this mess), but the other is the a collapse in tax revenues. Keep cutting and tax revenues can only continue to decline. Just because Labour was very wrong then, doesn't necessarily mean they are wrong now (hard as it may be to admit that).

As noted above this is not a Keynesian argument. Keynes stated you save during the boom and then spend said savings during the bust. We deficit spent during the boom, although in some ways it wasn't officially a boom because boom/bust had been officially abolished.

Keynes also argued you can only borrow what the market will allow. It would be interesting to hear what the man himself would say during the current crisis, I don't think he'd be advocating massive deficit spending due to the problem of the debt spiral/compound interest problem.

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I thought we sent round some Spooks to have a quiet word with those people in the ratings agencies?

The ratings agencies should be abolished, end of.

As far as actually indicating creditworthiness, they have repeatedly failed on an epic scale.

So their only function ends up being highly political, since they can drive the economic policy of a country through threats of action. Not sure I like a bunch of demonstratably incompetent people forcing the actions of government. Market based interest rates are probably a better indicator, being harder and more expensive to rig.

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And the other towering economic expert has been silent ... Mr Brown. Labour had 13 years and instead of helping to stimulate 500,000 jobs in the private sector they created 600,000 jobs in the public sector which we can't afford. With the deficit of 150bn even with cuts of say 100bn the debt will continue to rise, as will the interest payments.

Also I expect to hear (from Osbourne).... by 2013 or ... by 2014, in other words not now, later and in time for the election to ensure Labour get back in with a massive majority.

Purely out of interest, what do you think would happen if the government ran a 2% deficit (on average) every year, and the economy grew by 2.5% a year?

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Let's imagine we make deep cuts and the private sector does not pony up the jobs the government 'hopes' it will. Let's imagine that tax revenues drop through the floor and let's imagine that spooks the rating agencies because less revenue = less ability to service debt.

I just don't see how anybody thinks cuts of this nature are the magic formula for maintaining a credit rating. They could be exactly the opposite. Rating agencies will react just as negatively if tax revenues dip sharply and remain subdued as they are likely to in a recession/depression. Look at Ireland.

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Purely out of interest, what do you think would happen if the government ran a 2% deficit (on average) every year, and the economy grew by 2.5% a year?

it depends how all the other countries are doing relative to you, and if your currency is appreciating or depreciating? Your economy could be growing by 2.5% a year, and a 2% deficeit but you could be suffering massive hyperinflation and a crashing currency? Most people will be very very poor, and small number of people will be ok...

Edited by AteMoose

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Let us also not forget that a deficit is the difference between tax revenues and government spending.

The first thing the new government did was lower the rate of corperation tax - reducing the tax take.

Event those who believe the arugments of the Laffer curve have to agree that it also has an upward sloping portion. There was absolutely no evidence of companies failing to invest because of excessively high rates of tax on their profits in the UK. In fact I'd argue that higher taxs on profits incentivise investment in the growth of the business rather than discourage it.

If I had to solve the deficit I'd be suggesting a new transaction tax on Sterling of something in the order of 0.001% - the technology to do this already exists - and it is of small enough a magnitude not to distort trade. Every time money joined or left a bank account if would automatically be deducted and wired directly into the treasury. If succsful other taxes could be removed altogether, particularly income tax.

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Let's imagine we make deep cuts and the private sector does not pony up the jobs the government 'hopes' it will. Let's imagine that tax revenues drop through the floor and let's imagine that spooks the rating agencies because less revenue = less ability to service debt.

I just don't see how anybody thinks cuts of this nature are the magic formula for maintaining a credit rating. They could be exactly the opposite. Rating agencies will react just as negatively if tax revenues dip sharply and remain subdued as they are likely to in a recession/depression. Look at Ireland.

That's the beauty of it. Damned if we do, damned if we don't. Thanks Labour for giving me this 'golden' opportunity to move straight to GO and collect my £200.

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If I had to solve the deficit I'd be suggesting a new transaction tax on Sterling of something in the order of 0.001% - the technology to do this already exists - and it is of small enough a magnitude not to distort trade. Every time money joined or left a bank account if would automatically be deducted and wired directly into the treasury. If succsful other taxes could be removed altogether, particularly income tax.

Hi-Ho-Hi-Ho, it's off to the Black Market we go!

Actually it's probably too small an amount for most people to worry about, but for the very same reason it's too small an amount to collect any serious revenue.

Edited by General Congreve

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Actually the 'slower cuts, keep the stimulus' argument is a perfectly valid one in terms of Keynesian economics. It may be unfashionable to express these views here but they still have wide currency among both academics and real world economists who are out there making strategy for big companies.

At it's heart, the Keynesian approach requires you to run a balance and save during the 'boom' period.

We chose not to do this - and ran a deficit during the last boom - so have no money in the pot ready to spend for 'stimulus' purposes. Borrowing in order to offer a stimulus is not Keynesian, nor is it logical.

As an earlier poster mentioned, we can't opt into Keynesianism now, halfway through the cycle. It's like sitting down to eat in a Michelin starred restaurant and changing you mind about what you want, halfway through the main course.

The scale of the UK's over-commitment was partially hidden when the money from essentially fradulent banking operations was rolling in, now it is clearly evident for the world to see.

Most of these cuts are phased in any case, with jobs being lost and departments closed between 2011-2020, so I really can't see what all the gum bumping is about (other than the end of a public sector gravy train that should never have existed in the first place).

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Hi-Ho-Hi-Ho, it's off to the Black Market we go!

Really, for a transaction tax of 1000% of the value of each transaction.

Avoidance would cost more than compliance.

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Really, for a transaction tax of 1000% of the value of each transaction.

Avoidance would cost more than compliance.

Looks like I was too slow! I modified my last post to add that actually it would be too small to bother most people, but therefore also too small to raise any serious revenue.

Edited by General Congreve

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And the other towering economic expert has been silent ... Mr Brown. Labour had 13 years and instead of helping to stimulate 500,000 jobs in the private sector they created 600,000 jobs in the public sector which we can't afford. With the deficit of 150bn even with cuts of say 100bn the debt will continue to rise, as will the interest payments.

Also I expect to hear (from Osbourne).... by 2013 or ... by 2014, in other words not now, later and in time for the election to ensure Labour get back in with a massive majority.

GORDON BROWN TO HAVE A NICE, LAZY DAY

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Looks like I was too slow! I modified my last post to add that actually it would be too small to bother most people, but therefore also too small to raise any serious revenue.

As with all taxes, you start them small and then slowly ratchet them up over time (see VAT / road tax / income tax for details).

If there is one thing we certainly don't need, it's another tax on citizens.

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At it's heart, the Keynesian approach requires you to run a balance and save during the 'boom' period.

We chose not to do this - and ran a deficit during the last boom - so have no money in the pot ready to spend for 'stimulus' purposes. Borrowing in order to offer a stimulus is not Keynesian, nor is it logical.

Agree. This problem has been created by the spending programs of the last 13 years. The idea that growth would increase for ever in a nice straight line. There would be no more boom and bust. Our fiscal policy was utterly delusional. The last two years seem to have been aimed at spending whatever is necessary in an attempt to hold on to power. Destroying our finances in the process, this is treason IMO and those responsible should face charges.

We are borrowing £400 Million pounds every single day. We are paying £30bn a year in interest, completely wasted. We complain about the defence & other cuts yet have been happy to vote for the destruction of our public finances that caused them.

The cuts are only phase one. We will have to run a surplus for several decades the bring the debt load back under control.

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As with all taxes, you start them small and then slowly ratchet them up over time (see VAT / road tax / income tax for details).

If there is one thing we certainly don't need, it's another tax on citizens.

I would see it ratcheting up and becoming a replacement for all other taxes. A few years of 0.001% to test the theory then crank it up dropping other taxes along the way

An American study showed that with a transaction tax of 0.57% on every deal in the economy (0.28% per transactor), then even allowing for a 50% drop in all transactions because of the tax then every other tax in the country could be eliminated.

No tax returns, no need for accounting etc etc

Sounds an idea worth exploring to me.

http://www.apttax.com/execsummary.php

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I would see it ratcheting up and becoming a replacement for all other taxes. A few years of 0.001% to test the theory then crank it up dropping other taxes along the way

An American study showed that with a transaction tax of 0.57% on every deal in the economy (0.28% per transactor), then even allowing for a 50% drop in all transactions because of the tax then every other tax in the country could be eliminated.

No tax returns, no need for accounting etc etc

Sounds an idea worth exploring to me.

http://www.apttax.com/execsummary.php

Wouldn't you need a cashless economy for this to work?

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Wouldn't you need a cashless economy for this to work?

They reckon cash is used 2.5 times on average before it is depositied in a bank so 2.5x the usual transaction tax would apply on cash deposits.

However we aren't that far away from a cashless society.

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The idea that growth would increase for ever in a nice straight line. There would be no more boom and bust. Our fiscal policy was utterly delusional.

Exactly, Gordon even said so directly on more than one occasion! :rolleyes:

The last two years seem to have been aimed at spending whatever is necessary in an attempt to hold on to power. Destroying our finances in the process, this is treason IMO and those responsible should face charges.

Those responsible never will face any legal action, although I agree, they certainly should do. Especially for the "scotched earth" approach to many major contracts they seem to have taken.

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If so then these people clearly know sweet FA.

Keynesian economics has two basic premises based on two different periods. We have been through the first period - and the premise was not followed. So you CANNOT just decide to follow the second premise and hope it works. It will not.

If the squirrel has not hidden any food in the plentiful autumn in readiness for the cold winter - they can hardly expect to find it when the snow arrives. It simply will not be there.

It really is that simple. I think these academics and economists try to make things more difficult & confusing on purpose. Simply to keep themselves in a job.

+1

If any of these geniuses were really Keynesian, I'd expect to find masses of evidence showing that they were begging Chancellor Brown to put money away during the boom years.

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  • 140 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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