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« on: 08 December 2012, 01:32:44 »
While Dithering Dave and Osborne fiddle the UK economy burns.
In 1997 when McRuin took the reins our public services spending was £250bn it is now £744bn. The UK GDP did not triple in this time and this is the crux of our current problems. The private sector has been squeezed so it can longer provide the level of growth we need. At best with an economic tail wind it will deliver much below trend growth, with our current economic head winds it can't deliver any growth.
The Balls and Millipede approach is to borrow to invest, all this would do is bankrupt the country more quickly as government investment these days mainly means giving free money to their client groups, so this would generate no new businesses.
The opposite would be to go all out to eliminate the deficit. This is what they are doing in the Eurozone with devastating results as the Government increases taxes and reduces spending (with taxes front loaded and spending cuts back loaded which is the easiest but very worst way). For every 1% of GDP rises in taxes, the economy shrinks by between 1.8 and 3.4%, so government spending goes up with unemployment and their benefits and the tax base shrinks, so they try to meet the target by another round of the same as part of an economic death spiral. This is where Greece, Spain and Portugal are and where Italy and France are heading. So this doesn't work.
The third route which Osborne is following is some tax rises and some cuts and a little bit of deficit reduction. But this isn't working either which is why we are heading for a triple dip recession and real wages have fallen by 13.2% since 2008 and will continue to fall for sometime.
Now I have argued for sometime that what we need is real public spending cuts especially with discretionary items like Overseas Aid and the money then used for tax cuts. This will start rebalance the economy and the desperately need private sector wealth creation and growth. Now the danger with this is that the tax cuts go to pay down debts rather than buying goods you won't get the private sector growth you require to kick-start the economy. But if the tax cuts were biased towards the lower paid by say increasing the tax threshold to £12,000, then I think you would find most people and families on less than £40,000 would spend it where they are currently financially stretched.
Well two countries have tried this approach Sweden and Estonia and guess what, the tax reductions have been more than paid for through tax growth where their economies have had some good growth.
We an unsustainable deficit we have had what is a closing window of opportunity to sort the deficit before the country has a financial crisis, this window of opportunity is rapidly disappearing. Without this rebalancing of the private / public sector, the UK on its present trajectory is going to have a very hard economic landing.
I said in the past that the Chancellor's Autumn would be the start of a tipping point for our own economic storm, with Fitch now leading the pack where the UK is overdue losing its AAA rating, this will lead to higher borrowing costs, to counter this the government will resort to QE which will raise inflation further, which will increase the UK's stagflation, falling wages etc, this spiral will lead to more QE to buy the gilts the market won't which leads to higher inflation until we have hyperinflation. At this point your currency is worthless, so you can't buy the foreign currency you need for fuel, food and raw materials. To sort this mess and to administer the horrible medicine, this will probably have to be applied by the IMF as part of our bailout terms.
Now with Dithering Dave concentrating of gay marriage, climate change, Lords reform and playing for hours on his kids DS and George Osborne on their strategy to get reelected at the next election. They are both relying on a bit of economic can kicking (this weeks budget statement) and hoping something will turn up, like a big drop in oil prices and massive growth elsewhere in the world! To me this is an abdication of their responsibility to sort out our economic problems which are the biggest threat to our way of life since 1940.
The only thing that might save our bacon is shale oil and gas, but sadly, I think like the unexploited Greek Med oil and gas reserves, this will be too little too late.
