Wednesday, 22 April 2009

No stimulation please, we're broke

Cast your mind back a few weeks. Gordon Brown was touring the world (at our expense) in advance of the G20 meeting in London, trying to drum-up support for his plan to "stimulate" economic activity by even more government spending than had already been announced. He had a partial ally in President Obama who believed in the same barmy idea and is now facing difficulties getting his proposal through a Congress dominated by his own party. No one else seemed terribly interested. The French and Germans said they had already spent enough and weren't prepared to throw more in any more until they saw how their first efforts had fared. Still poor Gordon toured on plugging the same message, hectoring anyone who was forced to listen that massive further "stimulation" was needed. Then he got to Chile, whose diminutive but feisty President echoed the sentiments of the Czech leaders that spending money you don't have causes problems for the future and that providing a cushion against the effects of recession could only sensibly be done if you had saved during the good times.

When the G20 summit ended there wasn't a single new penny of international money to throw into the furnace of recession, each country decided it would do what was best for its own economy. Those who could afford to do so would spend more as and where they thought it might help and those who could not afford to do so would ride out the storm as best they could. The single brilliant scheme by which Gordon was to save the world was lying in tatters around his ankles, other world leaders saying, in effect, that he could throw good money after bad if he wanted to but he shouldn't expect them to commit economic suicide with him.

While he was on the road his Chancellor, Mr Darling, grew a spine almost as sturdy as his eyebrows and made clear there simply wasn't any more money. Since then he has been printing a some more but not with a view to using it for a so-called "stimulus", it is being created to inflate-away a bit of debt and provide cash he needs for current spending plans.

Mr Darling will make his fifth Budget speech later today. There used to be one a year in the Spring, now we have a second in the Autumn but last year was exceptional and there was an extra one squeezed in between the two scheduled events to try to sort out the mess caused by eliminating the lowest tax band and thus doubling income tax rates for the lowest paid. So after less than two years in office he will have delivered an average of one Budget every eighteen weeks.

It used to be rather good fun looking forward to the Budget. Strict secrecy would surround the Chancellor's plans to prevent people seeking to gain an advantage by arranging their affairs in a way that would be most beneficial to them and most detrimental to the Treasury's coffers. The weekend before the Budget would see the newspapers and television news programmes featuring pictures of the Chancellor relaxing in his constituency before his annual big day. For some reason they always wore very bad trousers. Not now. The trousers are still bad but secrecy has gone. Now it is all leaked in advance to get a view of how proposals will go down with the media and to allow last minute tweaking to counter any criticisms made. No longer is the primary focus of the government on making the right decisions for the country, today it is on making the right decisions for their position in the opinion polls.

There is often one measure hidden in advance, something the government thinks will be a guaranteed vote winner. In the Spring 2007 Budget it was poor Gordon's cretinous decision to abolish the 10% starting tax rate with effect from 2008. We know what a brilliant move that was from the need to cobble together a set of remedial measures in an emergency Budget when the full damage it would do the most vulnerable was exposed. Mr Darling might have a surprise for us, but the majority of his major measures are already in the public domain. Indeed, they feature on the lead article on the BBC web site.

It is noteworthy that poor Gordon's brilliant plan for a further "stimulus" is not included. I wonder why it is no longer needed when just a month ago he told us it was the necessary central plank of anti-recessionary policy worldwide. The answer, of course, is that everyone else was right and Gordon was wrong as usual. If you seek to boost an economy by increased government spending you cannot do so with borrowed money otherwise you are applying a brake to future economic growth in return for the hope that current spending will cause economic growth in the short-term. For reasons I have given before I don't believe government spending can make anything other than a minor difference to the rate of recession and to seek to do that by incurring debt that must be repaid later is dangerous, not least because repayment might have to start before there is any actual growth.

I believe that what we are seeing in this country is the little people doing what must be done to extract fictitious wealth from the economy and thereby place it on a firmer footing. New debt is being avoided where possible and existing debt is being repaid where possible. Those who were living beyond their means are adjusting their spending. This was always going to happen because Mr and Mrs Ordinary are far more worried about their own financial position than about the government talking in numbers too large to be understood. The result, unfortunately, is that many have lost their jobs and many more will follow suit; this is simply unavoidable because jobs that depended on people spending beyond their means will be exposed. And as people cut back on "normal" spending in order to repay debt yet further jobs will go. Once the credit bubble has deflated and the millions of Mr and Mrs Ordinarys establish the new level of "normal" spending many jobs will return.

It takes time for people to repay debt but they will do it whether the government likes it or not. Mr Darling seems to realise this, hence both his rejection of poor Gordon's plan while the latter was glad-handing globally and his continued refusal to incorporate it into his Budget plans. Stimulation is off the agenda, and about time too.


james c said...


It is always interesting to read your economic opinions after reading Nouriel Roubini and Paul Krugman.

Surely a 10 % budget deficit and the Bank printing money counts as stimulation?


James C

TheFatBigot said...

I know obfuscation, diversion and rewriting history are favourite exercises of the political left, Mr James, but you could at least try to answer the point I made.

Gordon called for additional so-called "stimulus", not just that which was already announced and underway.

james c said...


I think you will find that the ever increasing budget deficit is providing an increased stimulus. Likewise, the scale of the various initiatives to provide liquidity and 'encourage' banks to lend is also increasing.

That is why I disagree with your title. Now, you may reject with my argument, but I hardly think it is based on obfuscation or the rewriting of history.

Pete said...


It amuses me Mr FB that in your most useful, self updating sidebar, you note that the Great Simpleton moved 4 months ago but you have not updated your link to where he is merrily posting away...

TheFatBigot said...

Ah, Mr Pete, you assume I know how to change it. It took me several months of bewilderment to find out how to create such a list in the first place, my knowledge of matters computery extends only marginally beyond knowing where the on button is.

TheFatBigot said...

I beg your pardon, Mr James, I failed to answer your second comment.

My point is that Gordon was arguing for something completely different in scale to what Mr Darling has put forward.

As for saddling us with massive debt being a stimulant, I am doubtful on two fronts.

First, the additional borrowing is not needed because of massive additional spending plans but to pay for those already in the system. In other words, it is holding the fort rather than adding anything new. The IFS suggests things have been jiggled so as to inject about £5billion not previously earmarked, so I'll give you that. But what overall stimulus is provided by £5billion of additional government spending when there is interest to pay on £150billion-plus?

Secondly, the mere fact that the government is borrowing so much is bound to have an effect on the behaviour of the little people. It is almost certainly not possible to measure that effect because you can't measure something that has not happened. By that I mean that I would expect people to tighten their belts even further because of the threat of future additional taxes and the obvious need for future reductions in government spending. In addition I would expect people not to invest for fear that the burden of repaying the government's debts will rob them of any realistic chance of making a gain.

Both these things will reduce economic activity, and I defy anyone to show that any positive result from maintaining (or expanding slightly) government expenditure will not be outweighed by the stifling effect the enormous debt will have both in the short and the long term.