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Wednesday, September 15, 2010

Pinning the blame for the crisis in public finances

Labour politicians and activists are fond of arguing that the economic mess we are in is the fault of the bankers and/or a collapse in the global financial system and yet not every country suffered in the same way.

What is unarguable is that the coalition government now faces a £155 billion deficit and a £800 billion debt and needs to put in place measures to deal with that. And before Labour adopt their outright oppositionist approach we should not forget that they had planned £44 billion of cuts and their Chancellor of the Exchequer wanted to put up VAT as well.

In these circumstances the moral highground appears to be remarkably unoccupied and even more so when one takes into account this interview with former Cabinet Secretary, Andew Turnbull, highlighted by Iain Dale. Mr. Turnbull makes it clear that Labour were conducting economic policy on a wing and a prayer:

He suggested that spending was too high because of “optimism bias” in the growth forecasts: “It was a forecast error, but also by a process of optimism bias, not enough people were saying: ‘Come on, do you really think we are able to expect 2.75 per cent growth indefinitely?’”

Questioned on whether he thinks civil servants should have come forward, Turnbull – who was permanent secretary at the Treasury from 1998 to 2002 – suggested that they were scared to. “Yes, maybe Whitehall should have,” he said. “But it’s quite difficult when your minister is proclaiming that we have transformed the propects of the UK economy.”

When asked directly what prevented civil servants from telling politicians that borrowing was too high, he said: “The politics was that we had put an end to boom and bust.”

Turnbull added: “We had a sense of overconfidence; it happened all around the world, but it was a rather extreme form of it in the UK.”

The former civil servant goes on to identify the main reason why we are in such a mess:

Turnbull said that that excessive borrowing started to be a problem from 2005. “It kind of crept up on us in 2005, 2006, 2007, and we were still expanding public spending at 4.5 percent a year,” he said, arguing that the Treasury should have been putting more money aside. “You might have thought that we should have been giving priority to getting borrowing under better control, putting money aside in the good years – and it didn’t happen,” he commented.

Turnbull said that “there were some other places that had begun to accumulate surpluses for a rainy day; places like Australia.”

While Turnbull argued that the primary reason Britain is “in the mess that we’re in” is because “public spending got too big relative to the productive resources of the economy, by error” he added that a loss of output caused by the financial crisis has also contributed to the budget deficit.

No doubt Labour will remain in denial but in the face of such authorative evidence, even they cannot escape a considerable share of the blame for what now needs to be done to put things right.
Good digging to find that interview. I too have hbe my concerns regarding the balance of our economy for some time. We are far too reliant on the tertiary sector.
Our primary sector is forever diminishing so we are importing more and more say material rather than get it out the ground or grow it ourselves. Our secondary sector ie manufacturing has had its heart ripped out as well.
That leaves the tertiary sector where yep the bankers lie and other services are as well of course the retail sector.
Well some of these services are not geographically dependent. I myself am a victim of that scenario. I was working for a huge US conglomorate and they decided to transfer the work I was doing to their Indian offices in order to drive down cost. I do not bear a grudge at all however as the world is a global market place these days.
The issue then with UK plc is that our ability to produce our own goods and retrieve our own natural resources is shrinking. The effect it will have eventually is rising prices, a shrinking economy due in part because of our inability to keep our profits reinvested in the UK owing to foreign ownership and in time may lead to concerns that the governments credit worth may not be as safe as it once was.
Stephen Poole, South Wales
Peter isn't it interesting that the only person to pick up on this interview is Iain Dale. Not a murmur in the mainstream press.Hardly surprising given that Turnbull made virtually the same argument in an article in the FT on January 11th entitled 'Six steps to salvage the Treasury in straitened times'. Turnbull's thesis is that it all started to go wrong after 2005. A convenient date given that he retired in that year.Hindsight is a wondeful thing.It's easy to blame the politicians.Particularly when advice is given by individuals who are anonymous and who know full well that the odds are that no one will look at the briefing papers for another 30 years. It wasn't just politicians of all political persuasions in the western world with some notable exceptions who failed to question economic policy in the late 20th and early 21 st centuries. Before the collapse let us not forget that both Cameron and Osborne had promised to stick to Labour spending plans if they had won an election in 2007.Civil service advisers also fell into the same trap. The Treasury failed to spot the risks involved in the huge asset bubble price. It was Treasury civil servants as well as politicians who allowed the structural deficit to gradually accumulate in the boom years.

Everyone with hindsight again recognises that mistakes were made. The Labour Party was and is committed to reducing the deficit. The mistake that was made in my opinion was not to have a comprehensive spending review before the election which would have set out where the proposed cuts would fall. The argument now centres around the size of the proposed cuts proposed by the UK Coalition and the speed with which they intend to introduce those cuts. It isn't just labour politicians who believe that Osborne's strategy is wrong and could have disastrous consequences for the economy. You can't describe respect economic commentators such as Martin Wolff of the FT as Labour supporters but he along with others are asking where is the plan B if the Osborne strategy doesn't work. Inflation at over 3% and rising commodity prices suggests that there is a real possibilty of the UK economy experiencing the same problems that have dogged Japan since the late 1980s.

I an not a tribalist and I hope that for the sake of the millions of ordinary British citizens that the pessimists are wrong.After all the politicians making the decisions can easily survive the economic consequences if they are wrong. None of us know what will happen in the next few years. But when even Tory politicians are quoted as arguing that the last time the UK carried out a policy of such swift retrenchment was under Lloyd George's government with the implementation of the Geddes Axe then all of us who live in areas such as Wales should be worried. The time for political point scoring I'm afraid is rapidly coming to an end.
"Labour politicians and activists are fond of arguing that the economic mess we are in is the fault of the bankers and/or a collapse in the global financial system and yet not every country suffered in the same way."

"Could it possibly be" that Wales is not turning its IP into wealth creation leading to opportunity cost in terms of uncollected business rate taxes, etc.?

While the Welsh Assembly is so keen on cutting back on CO2, we remain happy importing goods from China where they are made in factories increasingly reliant on coal fire power stations, and from where the goods are transported on oil powered ships across thousands of miles of ocean.

TEe-tUm-tet offensive ...
I'm sorry, Jeff, it's not all hindsight. People were pointing out even before 2005 that there was a black hole in Brown's forecasts.

I have no quarrel with Brown's "golden rule", that borrowing could rise in the lean years so long as the country's finances were in balance over the cycle. The trouble was that he failed to recognise that the early years of his tenure as Chancellor were the top of the cycle, not the bottom.
Yes the government has got to make cuts on all those foolish labour
things bt it should not be treated as a whirlwind exigency

If the government think they can make cuts at the expense of the poorest they will be presenting an anti-Christian message and a message to the well off that they are untouchable
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