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Civil Servant

Government Spending To Be Reined In

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There are increasing signs within Government, oft reported in the media of late, indicating that Gordon is now attempting to pull the purse strings a little tighter with regard to public expenditure.

My own department has been feeling this for a number of years now as the overall increase in Government spending has failed to keep up with the increase in spending on education and health, with the result that my own department and others have seen falling budgets. Signs are that future spending rounds are going to get even tighter as Gordon seeks to bring overall spending increases better in line with the UK's economic growth. The day when Gordon will be party leader is getting closer and he appears to view his chances of seeing off Tory Blair (sorry, David Cameron) at the next election as highest if public expenditure is under control.

However, if as many people on this site argue, UK plc is about to encounter some rougher economic waters (and I agree with this analysis), at the same time as Gordon is pruning public expenditure in the run up to the election, then we might see declining public expenditure being added to a shrinking or stagnant economy. Whatever the pros and cons of big Government (and I'm no fan), declining public expenditure at such a stage in the economic cycle is unlikely to give a short term boost to the economy and may add further difficulties to what was going to be a difficult patch for the UK economy anyway.

I'm not positing a view on this, just observing the fact. Any economists out there who can apply numbers to what is essentially an anecdote above and give us any views on how this might pan out?

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Civil Servant

A lot can be said for New Labours Keynesian economics. Now the

important thing one should remeber there is no smoke without a fire

and the bigger the boom the bigger the bust.

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GBs plan to rein in spending is too little, too late; it is little more than an attempt to ape conservative policies to political advantage and I doubt if he will be able to control expenditure as he has planned, especially if the economy starts heading south.

Slowing public spending at the same time as raising taxes will of course damage the economy, during lean years this will be even more apparent.

Perhaps the most damning thing to note is that at the top of the economic cycle, when the public finances should be at their healthiest, the budget defecit is enormous, even before we factor in the PFI projects, public sector pensions and any other off balance sheet liabilities. Having spent profligately at the top of the cycle, there is nothing left for the lean years except higher taxes and lower spending.

Finally, does anybody believe that the extra spending has been worth it? I see little evidence of improvement in public services, certainly nothing on the scale that the extra resources should have generated. It looks to me like the money has been spent on higher salaries for public sector workers and tax abuser non-jobs.

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....errr, I'm not trying to start a 'is the public sector worth its salt?' discussion. I'm trying to get a handle on what the likely effects of future public sector expenditure tightening are going to be upon an already slowing economy. Dull, I know, but then I am a Civil Servant....

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....errr, I'm not trying to start a 'is the public sector worth its salt?' discussion. I'm trying to get a handle on what the likely effects of future public sector expenditure tightening are going to be upon an already slowing economy. Dull, I know, but then I am a Civil Servant....

Anecdotal from past times.

Mrs. Mushroom is an Headteacher and has often had to "cut the coat", a process she is very good at.

Often this has involved redundancies as of course salaries are the largest cost in a school.

That I feel is where the effects will occur. On the "shopfloor".

A marginal increase in the pupil teacher ratio can be reluctantly accommodated in the schools and waffled away by the Minister.

No doubt other areas do the same.

Will this lead to lower numbers in the Public Sector?

Hmm. If so and unemployment continues up that isn't going to be a good time to become PM is it?

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GB has to close the defeicit, £11Billion.

So he will do it from both ends tax more spend less, unfortunately he has already taxed alot, and the growth he was planning on has been wiped out. GB needs to find £11Billion, and fast because the bills are mounting.

Put yourself in his shoes, decisions made by you cost your firm £11Billion... You need to put this right before the shareolders AGM (election) or your out on your ****. To boot there's a much talked about younger guy (Cameron), who is free to shout abuse from the sidelines.

UK treasury policy will be all about closing the defiecit for the coming year or two.

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UK treasury policy will be all about closing the defiecit for the coming year or two.

The appearance of closing the deficit at least.

Edited by Young Goat

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Thats the problem with when you run a defecit during a boom, come the recession and any keysenian management options you have completly disappear.

As unemployment rises you get a double affect. More unemployed people paying less taxes and more welfare payments. To make the books balance you have to drastically cut spending unless you want bigger defecits. This can only mean one thing, firing all the people that have been recently employed - or at least cutting the recent large wage increases.

We shall see. Brown's got a hard job to maintain the economy to the next election, and we all know that UK elections are only ever about the economy.

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....errr, I'm not trying to start a 'is the public sector worth its salt?' discussion. I'm trying to get a handle on what the likely effects of future public sector expenditure tightening are going to be upon an already slowing economy. Dull, I know, but then I am a Civil Servant....

The economy will improve if public sector spending "tightens". It will mean that we have to support fewer nonproductive people who harm the economy.

That's if it really happened. More likely the higher-up civil servants will get huge bonuses for 'cost-cutting' the lower-downs will get generous redundancy packages and the work will get outsourced to well-connected but expensive consultancy companies. Spending will rise, tax won't be able to keep up, and we'll beg the IMF to bail us out.

House peices will go down though.

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The economy will improve if public sector spending "tightens". It will mean that we have to support fewer nonproductive people who harm the economy.

A ) Doctors, nurses and teachers etc are not "unproductive"; who do you think keeps the UK's workforce healthy, educated and able to work (and hence creating wealth)?

B ) The economy will only improve if taxes are cut to reflect the reduction in public sector spending; given Grabber Brown's history in office, do you really think this is a likely proposition?

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govt ependiture reined in???..............don't make me laugh........a million new public sector jobs created since NewLabour came to power in 1997!

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Are you being serious?

Essentially, thats exactly what they are doing already, thats what inflation is - although its not so much the government but also banks that do this (controlled by the Bank of England which is the government, well sort of).

Why don't they do it more? Because if inflation goes up because the money supply is increased (dropping money from helicopters) then savers will demand higher interest rates for such things as government bonds.

So there is only so much governments can get away with. This is one of the reasons the US government is ramping up interest rates to dampen inflation quikcly. In the US, low inflation is even more important for the US to keep the dollar as the global currency. If inflation starts going high places like Ecuador that use the $US as their currency, or people in the middle east who put it under their beds, or Asian banks will dump $US. The government there does very nicely on 2 or 3% inflation eroding the value of their paper debts to people who hold $US, but there is a limit to how much people will put up with. This is already happening, the $US is not such a trusted store of value, hence the price of gold.

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Can't the government just print sh!tloads of crisp tenners, Weimar style, and use that to pay off the deficit?

If not, why not?

frugalista

hyperinflation, for one.

It happened in Argentina recently. If you print £11Billion tenners all the current tenners are worth a lot less because the are less rare. So your currency collapses and all foreign investors pull out and then your f*cked.

When it happened after WWII it was cheaper to burn a wheel barrow of money than use the money to buy fire wood (you needed two wheel barrows of cash to buy one log)

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Apparently the government don't print the money for themselves anymore.. they borrow it and the interest is paid by the tax payer.. billions of pounds worth of interest by the sounds of things.

It is all in an argument that I saw someone on this forum post yesterday. I have pulled the link from my history, but I can't find the original point. Anyway, read this link and it gives you a bit of an insight into the problems incurred with the current banking system if they do print a whole lotta money (on top of the usual hyper-inflation arguments etc. that other people will post)

http://www.honest-money.com/talk.htm

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Apparently the government don't print the money for themselves anymore.. they borrow it and the interest is paid by the tax payer.. billions of pounds worth of interest by the sounds of things.

So, I think what you are saying is that the BoE print it for themselves, then lend it to the govt at interest. Is that right?

frugalista

hyperinflation, for one.

It happened in Argentina recently. If you print £11Billion tenners all the current tenners are worth a lot less because the are less rare. So your currency collapses and all foreign investors pull out and then your f*cked.

When it happened after WWII it was cheaper to burn a wheel barrow of money than use the money to buy fire wood (you needed two wheel barrows of cash to buy one log)

Ah, the quantity theory of money!

What if you actually *want* a bit of inflation. Isn't it possible that the government wants wages to increase even if HPI is static) in order to deflate the housing bubble in real terms?

frugalista

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....errr, I'm not trying to start a 'is the public sector worth its salt?' discussion. I'm trying to get a handle on what the likely effects of future public sector expenditure tightening are going to be upon an already slowing economy. Dull, I know, but then I am a Civil Servant....

I wouldn't worry about Brown, he makes these sounds every now and then to give the right impression but his heart isn't in it, last year he promised to eliminate 80,000 of your brethren but has only succeeded in hiring more people. Same goes for those savings, many deptartments succeeded in saving £0 this year and hope to repeat the same sucess next year.

Let's hope all that old MOD and NHS property can bring in a few quid, there's not much left to flog off apart from QinetiQ... apparently even their soul was auctioned a while back.

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Hey perhaps,

But wages have a long way to go.

Mine would have to triple to put me in the same position I would have been in, five years ago.

The government can't afford to triple everyones wages

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What if you actually *want* a bit of inflation. Isn't it possible that the government wants wages to increase even if HPI is static) in order to deflate the housing bubble in real terms?

Well you gernally do want some inflation (2 to 3%) because deflation and even zero inflation are actually bad (sticky prices). What you don't want is high inflation.

I am not sure there is much evidence that the government want to pop the housing bubble, but even if they do pushing up inflation is a very risky way to do it. Far easier would be lots of talk about falling house prices, rising interest rates, reducing tax incentives etc.

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Compare the stewardship of UK plc with that of Australia. There they have seen the same sustained period of economic prosperity. However, their government has been frugal with spending and pushed through reforms to make more people contribute to the economy. The result ? In the last budget the treasurer had no choice but to make tax cuts across the board. Why ? The government had not just removed the deficit but had over the previous years built up such large surpluses that they decided the only option was to give the money back to the population. They rationalised that during times of prosperity the government should be attempting to erode debt in order to prepare for the future. With that task complete, they decided to cut back on the tax levels to return the spare cash.

Contrast this with the UK where everywhere (private and public sectors) we hear of large debt levels. Why after a record x number of consecutive quarters of growth should the economy be straining under the weight of debt ? :unsure: As padders pointed out there are plenty of good reasons to avoid running a deficit during a boom. So hopefully, GB will not rely on inflation to erode the debt mountain but will instead slowly cut back on expenditure while the economy is still ticking over.

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That's interesting, Durch.

I suspect the reason the Israeli death rate is dropping short-term is because treatment often causes death in the terminally ill. E.g. operations go wrong and people die, or more commonly, the terminally ill are prescribed high doses of morphine to relieve pain, but they end up dying from a morphine overdose.

For most people dying of cancer, this is regarded as a blessed relief. So in Israel right now there are probably a few thousand people in unbearable pain, who would otherwise have been put out of their misery by pain killers.

So, I think what you are saying is that the BoE print it for themselves, then lend it to the govt at interest. Is that right?

frugalista

I'm amazed you haven't seen the huge number of posts concerning the money supply on HPC!

As has been said, printed money is largely irrelevant - mostly it is in electronic form.

Money comes into existence when the government borrows from investors (via the investment banks who handle sales of new govt. bonds). The government receives cash, spends it into the economy on salaries, buildings, roads, NHS etc.

This money then ends up in the banking system, where it is lent out via the money multiplier, resulting in 10 times as much cash as the govt. originally borrowed circulating in the economy.

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In Keynsean terms to quell inflation you simply remove G - government spending, and increase T (Taxes).

Problem solved in thier world. Even though in the real world it simply means the economy didn't feel the full destructive effect of Browns spending, and now it will. By thier own identity T doesn't remove money - it redistributes it.

In the real economy the spending splurge on the public sector, and the mass immigration 'experiment' of low skilled bodies who need resources making landlords rich, adds a mass of tax liabilties out of a shrinking real incomes, soon to be under an ID card burden and central register.

If you consider the 1.2 Trillion £ debt mountain - 85% represents houseprices continuing to grow, then a deficit of 1/30th of this - 40b or so isn't much to get worked up about.

Higher taxes - yes, or higher private sector borrowing rates?

But voters seem to be happy to see thier taxes rise, and thier home rise. If houseprices grow by 4% then they obvoiusly won't even feel it!

Edited by brainclamp

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I'm amazed you haven't seen the huge number of posts concerning the money supply on HPC!

Yes, you're right, I have been lazy.

As has been said, printed money is largely irrelevant - mostly it is in electronic form.

Money comes into existence when the government borrows from investors (via the investment banks who handle sales of new govt. bonds). The government receives cash, spends it into the economy on salaries, buildings, roads, NHS etc.

This money then ends up in the banking system, where it is lent out via the money multiplier, resulting in 10 times as much cash as the govt. originally borrowed circulating in the economy.

So, let me get this right.

A private, commercial bank, say ABC bank, offers to lend the government £1m at 5% interest.

The government / BoE agrees to this.

ABC bank goes into a database somewhere and changes some entry so as to add £1m. i.e. creating money electronically from nothing.

This £1m is then transferred to the government's account at the BoE.

The government spends the money on stuff, setting the money free to go off and do stuff in the outside world. But obviously the government has to pay the interest etc.

Mr. Joe public sells a warehouse full of widgets to the government, pocketing the £1m.

Mr. Public puts the money in a commercial bank account (say ABC bank) for safe keeping.

Now that ABC's deposit figures are higher, it can now lend more money to the government (or a mortgagee). But, not only £1m more, but actually £xm more (where x is the money multiplier) by creating £(x-1)m electronically from nothing.

Have I got it right, more or less?

Are you sure it is not the BoE which does the electronic fiddling?

frugalista

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  • 301 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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