The coming British recession

[Jason McCullough]

So the Brits are going to cut government spending by 9% of GDP (http://delong.typepad.com/sdj/2010/10/the-british-conservatives-have-no-theory.html). They have interest rates near-zero and near-zero inflation; get ready for a big recession, looks like. If you want yet another test case for vulgar Keynesism, this is it.

[Timex]

Aren't the Brits already in a big recession?

[Enidigm]

This "experiment" will be a guide as to whether the first world (well, the Anglo-Saxon First World in the Economist's sense) can ever balance it's budgets over the long term, or if default is just a matter of when and not if.

[Raife]

I read the title as "succession" and I was disappointed.

[Jason McCullough]

This "experiment" will be a guide as to whether the first world (well, the Anglo-Saxon First World in the Economist's sense) can ever balance it's budgets over the long term, or if default is just a matter of when and not if.

If you mean the core industrial powers, I think the only defaults in the last ~200 years have been revolution-induced. Not sure why you think it's an open question.

[Wisbechlad]

Various US states defaulted, tho' never the feds. The UK has had forced debt restructuring in 1932 & 1888/9 (making domestic bond holders switch to lower coupons, the "consols" and "war loans")

Italy defaulted 1940 just before they joined WW2 ISTR- but think that was opportunistic

I guess you would regard the Japanese/ German/ Austrian/ USSR defaults as "revolution" induced, even though they weren't associated with revolutions, but external wars.

[Jason McCullough]

Good point, I hadn't thought of the wars. I was thinking of the "lose the war revolution" ones as revolutions, yeah. Anyway, doesn't have much to do with the welfare state = bankruptcy argument Enidigm is channeling.

[jeffd]

I read about this earlier today.

At first I thought the 9% GDP number was maybe over ten years or something. But no, Britain's deficit (and thus, by definition, government spending) is well over 10% of GDP. That seems nuts, but I don't know all the details. How much of that is reduced tax revenue due to the shit economy?

It's a scary experiment, to be sure. Either Keynes is right and they are fucked, or...

Enidigm I'm curious - you seem to view this as a positive thing. How do you imagine the British economy will handle a sudden and immediate drop of nearly 10% GDP?

Anyone know - are the cuts being phased in? Or are they as of the next year's budget?

[Dan Lawrence]

The cuts announced so far are being phased in over a roughly four year period, In most cases though it's up to individual government departments and local councils to figure out exactly how and when to cut their spending to meet the reduced budgets.

I think most people over here know that at some point some cuts in services had to be made but personally I think there was definitely a case for waiting to see if the private sector was actually out of recession before trying to balance the budget. The opposition here are arguing that the cuts should start now but happen at about half the speed.

One of the things that we just don't know right now is whether domestic consumers are going to suddenly go on a spending spree or whether our currency will devalue so much that we will be able to rely on foreign demand from booming foreign economies. If neither of those things happen we'll probably plunge back into recession.

The second problem is that the Tories (and the Lib Dems) are the ones implementing the cuts and they have a specially irritating way of going about it. The talk loudly about how this is a 'fair' budget and that 'the broadest shoulders will take the most' and that the rich are paying their share. Then when the IFS (our long standing independent examiner of government budgets) looks at their figures they immediately reveal that this is the opposite of the truth and in fact the poor are going to be paying the most. This has happened twice now after each of the governments grand fiscal policy announcements and today they've decided that if they can't win the argument with flat out lying they are going to redefine what the word fairness means and attack the IFS instead.

One of the groups they particularly went after with welfare cuts in the spending review was the disabled. The chancellor kind of babbled rapidly through it as if hoping people wouldn't notice it too much but I think it might turn out to have been a political mistake. Yesterday, the prime minister and deputy prime minister went out in public to try and sell the cuts directly in front of 'ordinary people' as politicians often like too. Unfortunately their photo opportunity was ruined when a disabled lady in a wheelchair asked them directly why the government thought her benefits should be cut. This of course ended up being the image that the media ran with from the event, millionaires attacking people in wheelchairs never looks that good for the millionaires.

[Hunty]

This of course ended up being the image that the media ran with from the event, millionaires attacking people in wheelchairs never looks that good for the millionaires.

Indeed. Cuts and talk of "broad shoulders" would be slightly more palatable if they weren't coming from someone who I believe (though I may be wrong) has an estimated worth of around £5m, largely thanks to a trust fund, and if said cuts weren't punching disabled people roundly in the crotch. I also remain unsure of his economic credentials, which seem to have a lot of emphasis on grandstanding and ideology, even for a politician.

[Dan Lawrence]

Indeed. Cuts and talk of "broad shoulders" would be slightly more palatable if they weren't coming from someone who I believe (though I may be wrong) has an estimated worth of around £5m, largely thanks to a trust fund, and if said cuts weren't punching disabled people roundly in the crotch. I also remain unsure of his economic credentials, which seem to have a lot of emphasis on grandstanding and ideology, even for a politician.

Yeah, George has a lot of inherited wealth coming his way via a trust fund that his dad created with his shares in Osbourne & Little the upper class wall paper shop (http://www.osborneandlittle.com/). The 15% due to George is said to be a large part of his estimated £4 million personal wealth. This same story applies to much of the current cabinet, Cameron is estimated to be due to inherit around £30 million from various aristocratic ancestors while Clegg is the relative pauper with only £1.9 million stashed away.

There is somehow something extra distasteful about a cabinet of millionaires hammering the poor while telling us they are doing the opposite. A whiff of self and class interest, its a far cry from the days of greengrocers daughter Thatcher that's for sure.

[Calistas]

My dad, recently back from the UK (his home country) says the mood is quite bleak and that people are pretty pissed, especially with the city still giving themselves big fat raises.

He also mentions, and I don't know if it's true, that the money saved about equals the money given to the banks to bail them out - interest free money which they promptly invested in government bonds, from what he claims.

That kind of stuff could grate.

[Zak Gordon]

Lets say the economic downturn was manufactured, with the express aim of enriching the richest at everyone else expense, and say people on the ground were getting a 'whiff' of this in the breeze.

Where is the root source of this economic downturn, what political aims would such an event be hoping to achieve? Who's bad debt has britain picked up in it's financial sectors?

Your father is correct that there is a lot of growing anger in the uk, and i feel this current government just doesn't quite see that people know what is going on, or are getting to know. There could be trouble ahead.

[Dan Lawrence]

Well the one off cost of the bank bailout in the UK was between about £850 billion and £1.5 trillion which I guess the government had to borrow, but that amount of one off borrowing and the accompanying recession also worsened what is called the 'structural deficit' the difference between tax receipts and spending (which includes debt interest payments).

The total announced cuts so far are I think about £80 billion off yearly spending by 2015. So I guess by 2025 the current cuts would 'pay off' the cost of the initial bail out. Of course, we'd only be able to actually pay any of it off if we were running a significant structural surplus which I think would require either another £80 billion of spending cuts (assuming the economy stayed the same which it won't) or the economy to grow enough that tax receipts climb again.

The other factor is that government's can usually afford to hold onto debt for such a long time that the real value of the debt itself is reduced by inflation. And a further complicating factor is that I believe some of that initial bailout might be recovered by the government selling off the banks it nationalised and the large numbers of shares it bought in others. So its a complex picture but the current large deficit wasn't caused by some kind of huge public sector overspend. The current Tory chancellor in fact promised to spend exactly the same as the old labour government until the financial crisis hit (when he was also calling for more deregulation of course). The recent attacks on the public sector for having 'out of control' spending are pure right wing fantasy concocted on the hoof.

It's also true that the banks have returned immediately to paying themselves larger than ever bonuses all the while resisting every attempt to clamp down on their tax avoidance and they are still moaning over in the city about the paltry bank levy (that will be offset anyway by the reductions in corporation tax).

[Dan Lawrence]

Lets say the economic downturn was manufactured, with the express aim of enriching the richest at everyone else expense, and say people on the ground were getting a 'whiff' of this in the breeze.

Where is the root source of this economic downturn, what political aims would such an event be hoping to achieve? Who's bad debt has britain picked up in it's financial sectors?

Your father is correct that there is a lot of growing anger in the uk, and i feel this current government just doesn't quite see that people know what is going on, or are getting to know. There could be trouble ahead.

From the polls I'm seeing a lot of people still aren't seeing anything much. There appears to have been a widespread swallowing of the ludicrous spin that the public sector was riding some kind of fictional gravy train full of money hats and recklessly steering the economy off a cliff. Meanwhile the bankers and their allies are trying to airbrush the financial crisis out of people's memories as if it never even occurred.

[Calistas]

Lets say the economic downturn was manufactured.

Hmm, I don't think that's the argument, more that good money was thrown to save the banks and they turned around and used that to further dick the Govt. over by buying bonds instead of using it to lend to businesses and people. Word is that getting a business or housing loans in the UK right now is hard.

Then again, this is all idle gossip. I'm hoping an expert can put me right.

[Dan Lawrence]

Well the idea seemed to be that the government over here was going to go for some soft pushing against banks rather than any actual legislation like breaking them into two or any other serious regulation. Instead the government plans to be 'more watchful', tell the banks to lend, and take many 'serious looks' at the banking sector. One of these soft pushes was getting banks to sign a 'promise' to try to obey the letter and spirit of the UK's tax law (most banks have entire departments devoted to avoiding tax). After about a year only four of twenty banks had signed the promise.

Getting a mortgage has certainly got a lot harder, and from what I've heard so has getting a small business loan. Today however it's been reported that large companies are now able to get credit again and lending to business is positive for the first time in the last six months:



The central bank is concerned that a lack of lending to businesses to fund their expansion will hold back the economic recovery.

Lord Oakeshott, the Liberal Democrat treasury spokesman, said: "Britain's banks have turned banking on its head – these days they borrow from British business, not the other way around. What's the point of pumping billions into the economy through quantitative easing when the banks just suck it out again?"

He added: "Small business lending is going from bad to worse. The annual rate of contraction is approaching 5%. The smaller your business, the harder you're hit."

The report also provided further evidence of a slowdown in the housing market. Mortgage approvals made by major lenders fell for a fourth month in a row in September to the lowest level since April 2009. Most major lenders expected approvals for house purchases to remain broadly unchanged or to fall in coming months, the Bank said.


http://www.guardian.co.uk/business/2010/oct/21/business-lending-rises

[Tim James]

If you mean the core industrial powers, I think the only defaults in the last ~200 years have been revolution-induced. Not sure why you think it's an open question.I don't know what Enidigm meant, but partial/strategic defaults may be fairly common soon. By that I mean the governments going back on their promises, such as raising the retirement age from 60 to 62, or mass inflation. Lots of people will get stiffed, but the governments won't go bankrupt: more taxes, some broken promises, and inflation should be enough to muddle through. The US might even be able to just kick the can, depending on foreign investors.

Debating the economics isn't as important as how you prepare for this likely scenario to protect your family financially. Having a secure job is the first step, of course.

[Wisbechlad]

I was an acquaintance of Mr Osborne back at college, and then ran into each other at various weddings after. He's not a genius, but he's very solid. Standard modern UK conservative, in that he's socially liberal, fiscally conservative.

[dtolman]

Seems like a bold move to force ~2% of the working population into unemployment.

I don't think you have to be a Keynesian to believe moving your unemployment rate up 2% in a stagnant economy is a lousy idea.

[Anders Hallin]

Uppity colonial weighs in: http://www.nytimes.com/2010/10/22/opinion/22krugman.html?_r=2&hp

[Jason McCullough]

I don't know what Enidigm meant, but partial/strategic defaults may be fairly common soon. By that I mean the governments going back on their promises, such as raising the retirement age from 60 to 62, or mass inflation. Lots of people will get stiffed, but the governments won't go bankrupt: more taxes, some broken promises, and inflation should be enough to muddle through. The US might even be able to just kick the can, depending on foreign investors.

Debating the economics isn't as important as how you prepare for this likely scenario to protect your family financially. Having a secure job is the first step, of course.

Well, default (http://en.wikipedia.org/wiki/Default_%28finance%29) means a specific thing - a debtor not paying. A big unexpected jump in inflation (it has to be unexpected, or it'd show up in bond rates) qualifies, but that's just as rare in the industrial core as outright default is. Retirement age and whatnot is a democratic policy change; there's no lender/lendee relationship.

[Enidigm]

The real debate, as far as i can tell, is determining whether long term government liabilities, such as pension plans, are sustainable in the face of sustained deficits and growing national debts, and whether or not they should be (or can be) reined in because of the disproportionate stress reducing these programs will have upon the economically disadvantaged vs. the seemingly growing possibility of financial "collapse" (which can manifest in a myriad of ways and to various degrees of seriousness). This seems rather complex at first glance to me because the disconnect between government revenues and government expenditures seems to be growing into a permanent feature of fiscal policy, and i'm don't feel i understand the situation well enough to come to a conclusion or clearly predict the correct course of action.

This is why England's austerity plans, the basic need for which seems to be universally agreed upon by the Lib-Dems, Labor, and Tories, offers the possibility of a good test case in an economy which most closely mirrors the United States in many ways.

Honestly, complaining about a few million pounds is completely missing the point, and has no sense of scale at all, though i'll not dispute the good intent and wariness of watching the wealthy shift the burden upon the shoulders of the lower classes. That level of wealth is but a grain of sand amid a sea of Hedge Fund traders who make billions a year. Personally.

[Mark Weston]

An annual deficit at 11% of GDP is unsustainable. Demanding that the government have a theory as to how the economy will recover is hardly relevant. The costs of borrowing at that level will themselves cripple the economy. I don't imagine it's possible to model how long it will take for the interest rates to rise on government borrowing if the deficit isn't reduced, but they certainly will rise sometime soon. At which point instead of cutting spending to reduce the deficit they'd be cutting spending simply to keep up with interest payments.

You really don't have to be an economist or a politics wonk to understand that continually spending far more money than you've got is a stupid plan. I'm not sure where all this nebulous "anger" about the cuts is, but the polls have fairly consistently shown a solid majority agreeing that spending cuts are necessary (though being much more fuzzy on how to make them). e.g. here (http://today.yougov.co.uk/politics/unavoidable-cuts-story).

[Anders Hallin]

But there wouldn't be an annual deficit of 11%:
http://www.debtbombshell.com/images/uk-budget-deficit.png

[Tortilla]

You really don't have to be an economist or a politics wonk to understand that continually spending far more money than you've got is a stupid plan.


It's a stupid plan for an individual. Governments play by different rules.

Overspending is bad, but there's quite a bit of room to get away with it and there's often side benefits to doing so. The entire bond market is built on a foundation of sovereign debt, which wouldn't exist if governments never borrowed.

I would agree 11% deficit year after year could eventually get problematic, but the very worst time to fix that deficit is in the middle of an economically rocky period. That just makes a bad situation worse. I guess from a governments standpoint, they can only enact spending cuts or tax increases at times when the political will to do is available, so maybe it's now or never. It's still a dumb time to cut spending.

[Enidigm]

Well it's dumb on the unspoken assumption that everything is roses five years from now. If the world suffers another systemic financial breakdow during that time it will seem like brave genius to have cut now rather than later.

[Mark Weston]

But there wouldn't be an annual deficit of 11%:
http://www.debtbombshell.com/images/uk-budget-deficit.png

How is "there wouldn't be" a reply to "there is now"? What's more, how is that projected drop to around 7.5% in 2013 either a good thing or remotely sustainable? Where will that money come from? Do we imagine a revised version of the economic cycle (implied by that graph) where borrowing is at 11%+ in bad times and maybe "only" 4% in good times? And if so, who do we think will lend it to us?

[Tortilla]

How is "there wouldn't be" a reply to "there is now"?


You were speaking of sustainability when you cited the 11% so it sounded like you were implying there would be the same degree of deficit every year. Was that not what you meant?



What's more, how is that projected drop to around 7.5% in 2013 either a good thing or remotely sustainable? Where will that money come from? Do we imagine a revised version of the economic cycle (implied by that graph) where borrowing is at 11%+ in bad times and maybe "only" 4% in good times? And if so, who do we think will lend it to us?

That graphs does have dips below zero, so there is certainly an implied period of payback on some of the debt there. Also note that if inflation grows faster than government borrowing, the total debt shrinks in real terms even if not a single farthing is paid back. At least, I think that's the case. I'm a little fuzzy on what a farthing actually is, but I thought I should throw it in the discussion since we were discussing UK government debt.

[Mark Weston]

It's a stupid plan for an individual. Governments play by different rules.

Overspending is bad, but there's quite a bit of room to get away with it and there's often side benefits to doing so. The entire bond market is built on a foundation of sovereign debt, which wouldn't exist if governments never borrowed.

I would agree 11% deficit year after year could eventually get problematic, but the very worst time to fix that deficit is in the middle of an economically rocky period. That just makes a bad situation worse. I guess from a governments standpoint, they can only enact spending cuts or tax increases at times when the political will to do is available, so maybe it's now or never. It's still a dumb time to cut spending.

There's a tinge of strawman here; it's not as if I (or the Con-Lib government) have argued for some alternate world where governments don't borrow money. After all the plan we're discussing won't eliminate the deficit, it will reduce it.

While there's a good argument for governments spending to cushion a recession, we've been doing that for a couple of years already. At some point you have to slow down. The damage done by reduced spending has to be offset against the damage caused by increased borrowing.

[Mark Weston]

That graphs does have dips below zero, so there is certainly an implied period of payback on some of the debt there. Also note that if inflation grows faster than government borrowing, the total debt shrinks in real terms even if not a single farthing is paid back. At least, I think that's the case. I'm a little fuzzy on what a farthing actually is, but I thought I should throw it in the discussion since we were discussing UK government debt.

The point I was implying about the recent history described in that graph is that during the previous two major recessions government spending never approached today's giddy heights. If the cycle between 1989 and 2001 had borrowing peak at approx 7.5% and drop as far as -1.5%, what does it mean when borrowing peaks at 12% (at least from eyeballing that graph)? Can you realistically expect it to fall below zero, or does it in fact imply a permanent "structural" deficit?

GDP growth in the UK certainly isn't going to pay for a permanent deficit of 3% or more, and the problem with relying on inflation is a) we've been a bit too effective at killing inflation and b) high inflation is just another way of fucking over your citizens, not a legitimate tool of economic management.

Edit: A farthing was a quarter of a penny, back in the weird old days when we had 240 pennies in the pound.

[jeffd]

But there wouldn't be an annual deficit of 11%:
http://www.debtbombshell.com/images/uk-budget-deficit.png

thanks Anders! If that's a graph of the UK deficit, then it seems pretty clear that the case for austerity is ridiculous.

Does anyone know of a projection of the UK deficit under current policies assuming a return to normal growth levels?

[jeffd]

There's a tinge of strawman here; it's not as if I (or the Con-Lib government) have argued for some alternate world where governments don't borrow money. After all the plan we're discussing won't eliminate the deficit, it will reduce it.

While there's a good argument for governments spending to cushion a recession, we've been doing that for a couple of years already. At some point you have to slow down. The damage done by reduced spending has to be offset against the damage caused by increased borrowing.

The damage caused by increased borrowing is inflation. What is the current price on UK government bonds? Does that price reflect a market expectation of inflation?

[jeffd]

The point I was implying about the recent history described in that graph is that during the previous two major recessions government spending never approached today's giddy heights. If the cycle between 1989 and 2001 had borrowing peak at approx 7.5% and drop as far as -1.5%, what does it mean when borrowing peaks at 12% (at least from eyeballing that graph)?

What model are you using, that you are convinced these things are related?

[Mark Weston]

The damage caused by increased borrowing is inflation. What is the current price on UK government bonds? Does that price reflect a market expectation of inflation?

The damage caused by increased borrowing includes interest payments sucking up an increasing share of government spending leaving less to spend on useful stuff, and the redirection of available lending from the private to the public sector. And at some point bond rates don't just reflect inflation expectations, they start to reflect default risk as well. A British government that talked about the current deficit as though it was business as usual? My bet is they'd be seeing rising bond rates sometime soon.

[jeffd]

Bond rates always reflect default risk and expected inflation. What is the going price for UK debt?

[malchior]

Well it's dumb on the unspoken assumption that everything is roses five years from now. If the world suffers another systemic financial breakdow during that time it will seem like brave genius to have cut now rather than later.Except the cutting now makes that financial breakdown that much more likely. For some reason everyone is throwing out 70 plus years of economic theory and making the exact same mistakes as were made during the Depression. Heck we are repeating the mistakes made in Japan 10 - 15 years ago. Our own Fed Chairman wrote papers preaching against what we are doing now. It's madness.

[Enidigm]

Except the cutting now makes that financial breakdown that much more likely. For some reason everyone is throwing out 70 plus years of economic theory and making the exact same mistakes as were made during the Depression. Heck we are repeating the mistakes made in Japan 10 - 15 years ago. Our own Fed Chairman wrote papers preaching against what we are doing now. It's madness.

I know where you're going with this but can you be a bit more specific?

[Jason McCullough]

GDP growth in the UK certainly isn't going to pay for a permanent deficit of 3% or more, and the problem with relying on inflation is a) we've been a bit too effective at killing inflation and b) high inflation is just another way of fucking over your citizens, not a legitimate tool of economic management.

The only significant numbers for long-term debt are the GDP/debt ratio, the GDP growth rate, and the inflation rate. Of those, the GDP growth rate is almost always the dominant factor. A 3% of GDP yearly deficit is in line with the post-WWII US numbers and is perfectly fine. See 1.2 (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2009/pdf/hist.pdf) in the US historical tables.


My bet is they'd be seeing rising bond rates sometime soon.

We can only hope bond traders who assess this sort of thing for a living come around to your insightful views!

[malchior]

I know where you're going with this but can you be a bit more specific?It's not hard to imagine where this is going. First, the British government lays off 500K workers. These workers aren't going to find jobs awaiting them in the Private sector. This will lead to even more credit defaults across the consumer spectrum and the malaise that'll accompany this. It'll be especially nasty if the banks have any structural weaknesses that haven't yet been exposed. Generally speaking the UK will probably dip into recession within 2 years. The unemployment rate will probably be rising pretty steadily by then and pick up steam with Government receipts declining even more. That is unless Keynesian economics is wrong.

I personally wouldn't bet on it. The Keynesians have been calling all the shots pretty accurately these days.

In the US, we've basically hit the skids interest rates wise. Companies are either sitting on mountains of cash or spending it in increasingly marginally useless ways for the macro economy. Merging, buying back stock, etc. Bernake and company are probably hoping that Quantitative Easing is going to help, and it will but in a very limited sense. To be honest, I don't think the Fed can do much at this point. They are rudderless and not from a lack of leadership*, but just circumstance. They could look at a higher inflation target, but they've been flooding cash constantly into the market with little effect (except for possible new bubbles). They seem to be banking on what they have to know are unrealistic projections for economic activity over the next couple of years. It's going to get ugly.

* Bernanke is a smart guy, and he has wisely kept stoically silent. Considering his past authorship, he probably has a pretty bleak outlook on the future, but knows his influence is far too great to openly admit it.

[Nellie]

Strikes me that the Tories are in 7th Heaven at the moment, they've the perfect opportunity to go with their ideology all while looking apologetic and pointing fingers at the banks and Labour as to why they've got to make all these cutbacks.

Don't disagree for a second that spending is/was pretty much out of control and that there are huge swathes of efficiency savings and cut backs to pointless programmes like ID cards that were just starting to gear up and were due to cost billions that could have been made before the Tories resumed their war on the poor, disabled and single parents, but I still feel that a lot of the cuts, especially in the welfare system are more to do with ideology than cost savings.

I didn't think they'd have the guts to do it, but the writing looks to be on the wall for the NHS as a free at point of entry healthcare service. Future privatisation, insurance requirements and so on were all sneaked in as part of their health care reforms. Maybe I completely misread the potential of those reforms given the relative lack of shouting about them or perhaps they just made the most of the turmoil to get it through while people weren't really paying attention.

As for the notion that the private sector is miraculously going to fill the gaps I think it's laughable. With what? They're not sacking 500,000 civil servants to outsource the job roles and functions to the private sector they're simply being laid off and in many cases the layoffs look like they'll end up in areas where public sector jobs were concentrated to compensate for the lack of other employment opportunities to begin with.

Even before the spending reviews were undertaken the Tories were insisting that unemployment was going to peak in the UK around now, well before any details of the cuts were announced, and would then fall over the next few years and it was clear as day then that whatever they did there were going to be huge layoffs in the public sector.

Not being an economist, perhaps not for me to offer too much as an opinion when it comes to credit, but I have just started work for one of the major UK banks in its small business division and it's not rocket science to look at the balance sheets and see where all the cash is sat. The Credit's there and available but there are certainly a few mutters at the moment that many small (turnover <£15million) business are just sitting tight on their cash and waiting to see what happens. While they aren't taking credit, they aren't investing either.

[Tim Partlett]

Britain isn't like other nations: It's heavily dependent on its financial institutions. I think this makes it more sensitive to changes in the international markets, than internal matters like unemployment and government spending. If the world markets pick up, I think Britain will bounce back and be in a healthier position financially. If they don't, then Britain is going to be screwed whatever the government does.

[Tim Partlett]

Doom postponed: Britain's economy grows twice as fast as expected (http://www.bbc.co.uk/news/business-11624742). It's not strong, but growth is faster than in many previous recoveries. The BBC also points out, despite being very negative towards government spending cuts, that this growth is in spite of the fact that government spending has contracted more in the last 12 months than it will in any of the next four years of planned cuts.

[Timex]

It'll be interesting to see where this goes in the coming months.

[wahoo]

If UK is growing, then the govt spending cuts/tax increases is a very Keynesian measure.

[jeffd]

Is 1.5% GDP growth really good by UK standards?

[Tim Partlett]

It's better than expected, and more than other recoveries, so I guess: yeah, sort of.

[jeffd]

Weird. In the us 2% GDP growth is kind of a baseline, anything below that is slow.

[Tim Partlett]

Yeah, but it's only one quarter. Annualised that would be about 2.8% growth. I think that's in the same region as current US growth, isn't it?

[antlers]

Yeah, but it's only one quarter. Annualised that would be about 2.8% growth. I think that's in the same region as current US growth, isn't it?

I thought the 0.8% was already annualized. That's the way these things are usually reported.

[Tim Partlett]

Maybe in America. Perhaps that's the confusion. If you look at the graph then Britain would never have had growth higher than about 1.4% in 20 years, which is definitely not true :).

[jeffd]

That makes a lot more sense, if it's not annualized.

[tim edwards]

The problem I have with the cuts is that there's been absolutely no effort made to crack down on our chronic tax avoidance. In fact, the HMRC is facing similar cuts across the board. So they're forced into making stupid deals like this (http://www.guardian.co.uk/commentisfree/2010/oct/22/vodafone-tax-case-leaves-sour-taste) because they don't have the bandwidth and legal resources to land the big fishes. Prosecuting big tax cases is hard.

One of our local billionaire shopkeepers and occasional government efficiency drivers, for instance, Philip Green, routes all his tax affairs through his wife. Who happens to be a resident of Monaco.

[Erlend Grefsrud]

Even relatively low-earning self-employed people dodge taxes. I know at least one software engineer running his own little codeshop who earns around £100,000 a year and spends a surprising amount of time and energy making himself and his company foreign. Even a struggling minor TV personality of my acquaintance bothers, although his income can't possibly be worth it.

Maybe it's a status symbol in some circles? Like how some people can't bring themselves to say that they're skint and can't go out, instead dramatically bringing out their phones, checking their calendars, shaking their heads a little, before putting the phone back in, cocking their head ever so slightly and says "I'm sorry, my schedule is all filled up" with a slightly apologetic voice.

[cliffski]

The problem I have with the cuts is that there's been absolutely no effort made to crack down on our chronic tax avoidance.

What Tim said. Especially since both Google and Amazon do their ebst to avoid paying any UK tax whatsoever.
If I'm in wiltshire, and order a book from ana amazon warehouse in Slough, mailing it to jersey and back again, to avoid a tax liability, should eb fucking outlawed, yet nobody cares.
As a small one-man business, ti gets on my tits big time to know I'm contributing mroe to the government finances than amazon. Fuck that.

personally, I'm quite happy with the way the govt is handling spending cuts. I completely agree with cameron that paying a family more than £20,000 ($30,000) a year to live rent-free in some of the most expensive parts of the UK, when they aren't working, is just insane. Especially when I'm helping pay the bill.

Andrew neil asked a good question on the Daily Politics.
"What do people do in New York, in Manhattan, if they can't afford an apartment on their income? Does the state pay the rent then?"
I'm pretty sure it doesn't, but would welcome an answer from someone from the US.

[metta]

My dad, recently back from the UK (his home country) says the mood is quite bleak and that people are pretty pissed,

They've been like that since Agincourt :p

[Miramon]

Andrew neil asked a good question on the Daily Politics.

"What do people do in New York, in Manhattan, if they can't afford an apartment on their income? Does the state pay the rent then?"
I'm pretty sure it doesn't, but would welcome an answer from someone from the US.

In general in the US, no one pays your rent for you. There are shelters for the homeless that sometimes receive government funding, but these are hardly homes. In NYC some lucky middle-class dwellings have grandfathered rent rules that prevent steep rises, and there are also "projects" -- big old apartment complexes generally inhabited by the poor that were built long ago by the city government and even have their own police -- but rent isn't paid for by anyone but the renter.

So if you can't afford rent in NYC, you go to a shelter or out on the street. But there are fewer visible homeless people in NYC than in some other US cities like San Francisco.

[Jason McCullough]

Or you uh, don't live in Manhattan? It's the most expensive real estate in the country; apparently the other boroughs are nowhere near as bad.

[cliffski]

Or you uh, don't live in Manhattan? It's the most expensive real estate in the country; apparently the other boroughs are nowhere near as bad.

Makes sense to me. Although in the UK, we are told this is 'cleansing the poor' and is worse than nazi germany.
Which, as someone who has always had to pay his own rent, really fucks me off.

[Miramon]

Or you uh, don't live in Manhattan? It's the most expensive real estate in the country; apparently the other boroughs are nowhere near as bad.

What with the lowereastside and Harlem, there are plenty of places in Manhattan that are cheaper than the ritzier parts of Brooklyn, Staten Island, Queens, and I guess even the Bronx if you count Riverdale as being part of it, which I think Riverdale itself would prefer to avoid.

But Knightsbridge makes the most expensive parts of Manhattan look cheap.

[Zak Gordon]

Came across this, about a movie being made based around this crash:

'Film blames financial crisis on inside job':

http://www.bbc.co.uk/news/business-11642430

"Before 2008 a two-hour movie, however well made, about the intricacies of international banking would have found a niche audience at best.

But Charles Ferguson, the American director of Inside Job, believes that two years on from the worst financial crisis in decades people are angry enough to make his film a potential hit.

What motivates him is a very American concern with accountability.

"There's not been a single criminal prosecution of anyone for their responsibility in causing these problems," he says.

"These people have not been prosecuted - and they all still have their money too".

***************

That chimes with my theory it was a manufactured crash so it will be interesting to see what it has to say on the details.

[Houngan]

In general in the US, no one pays your rent for you. There are shelters for the homeless that sometimes receive government funding, but these are hardly homes. In NYC some lucky middle-class dwellings have grandfathered rent rules that prevent steep rises, and there are also "projects" -- big old apartment complexes generally inhabited by the poor that were built long ago by the city government and even have their own police -- but rent isn't paid for by anyone but the renter.

So if you can't afford rent in NYC, you go to a shelter or out on the street. But there are fewer visible homeless people in NYC than in some other US cities like San Francisco.

Huh?

http://en.wikipedia.org/wiki/Section_8_(housing)

Rent is absolutely subsidized in a number of cases. A friend of mine has eight different houses, all rented to Section 8 renters.

H.

[Calistas]

They've been like that since Agincourt :p

You raise an excellent point.

[Timex]

Huh?

http://en.wikipedia.org/wiki/Section_8_(housing)

Rent is absolutely subsidized in a number of cases. A friend of mine has eight different houses, all rented to Section 8 renters.

H.

That's probably why he said in general, in the US no one pays your rent for you.

Most Americans aren't living in subsidized housing.

[Miramon]

Huh?

http://en.wikipedia.org/wiki/Section_8_(housing)

Rent is absolutely subsidized in a number of cases. A friend of mine has eight different houses, all rented to Section 8 renters.

H.

Subsidized still means you have to pay the rent, just that the rate is not insane.

[Houngan]

Subsidized still means you have to pay the rent, just that the rate is not insane.


No, they set a FMR, fair market rent, but they also subsidize based on income up to that number. Plus HUD housing, vouchers, FHA loans, etc. There's quite a bit of dwelling subsidy in this country.

H.

Yay, chart:

http://en.wikipedia.org/wiki/File:US_Fed_Housing_Budget_Chart_1976-2007.png

[Miramon]

No, they set a FMR, fair market rent, but they also subsidize based on income up to that number. Plus HUD housing, vouchers, FHA loans, etc. There's quite a bit of dwelling subsidy in this country.

H.

Yay, chart:

http://en.wikipedia.org/wiki/File:US_Fed_Housing_Budget_Chart_1976-2007.png

I understand. What I meant was, normally the rent in Manhattan is insane, so when they pay a share, that makes it not insane.

[Houngan]

I understand. What I meant was, normally the rent in Manhattan is insane, so when they pay a share, that makes it not insane.

Ah, gotcha. Manhattan's a whole 'nother world.

H.

[drbob]

If UK is growing, then the govt spending cuts/tax increases is a very Keynesian measure.

Yes, but don't the cuts have to balanced against the growth to avoid damaging a recovery? The spending cuts involve laying off 500,000 government employees, and a projected further 500,000 jobs will go in the private sector as a direct result of reduced government spending. That's 3.3% of the UK workforce laid off in the next couple of years.

I'd love to hear an analysis by someone who really knows their economics as to whether 1.5% growth can sustain such cuts, especially as much of the growth is from one off building projects that were put off earlier in the economic crysis. My layman assessment has me brushing up on my German and thanking [insert deity] that Europe has free movement of workers...

[Kalle]

English go home!

[Tankero]

economic crysis.
Hah!


Yeah I don't have anything substantive to add.

[cliffski]

Yes, but don't the cuts have to balanced against the growth to avoid damaging a recovery?

I'd love to hear an analysis by someone who really knows their economics as to whether 1.5% growth can sustain such cuts,

I did a degree in economcis at LSE, if that helps, but I'm certainly not a pro economist.
As I see it, wether or not its unfortunate and bad news to lay off half a million people is, in practical terms, irrelevant. The UK govt has huge debt, that debt has huge interest payments, which have to be met every month. Right now, the interest rate on them is low because we have a AAA credit rating. The bond market is worried about the future of the UK budget, because for the last 10 years or some, we have made zero effort to get the deficit under control. There was a very real, definite possibility of losing the rating as a result.
If that happened, the rate would go up, our payments would go up, making the situation worse. Very quickly we would end up in a death spiral where having to fire just 500,000 people would seem like peanuts, next to the actions that would be needed.

If they had all played my politics sim, they would have realised this. I offered them all free copies, but they didn't want them.
(http://www.positech.co.uk/democracy2/politicians.html)

Naturally the idiots that got us into this mess, whilst waffling about 'prudence' are trying to pretend that this was not a concern. Given that the opposition economy spokeperson admits he needs to read a 'starters guide to economics', this doesn't surprise me.

[Tim Partlett]

The UK govt has huge debt, that debt has huge interest payments, which have to be met every month. Right now, the interest rate on them is low because we have a AAA credit rating. The bond market is worried about the future of the UK budget, because for the last 10 years or some, we have made zero effort to get the deficit under control. There was a very real, definite possibility of losing the rating as a result.

From what I've read, the UK isn't really at risk of sudden changes in credit ratings, because almost all of our debt is very long term. So any change now would take years to filter through to our economic situation.

That's very different to Greece, where the majority of bond debt is very short term, leaving them very sensitive to changes in their credit rating.