David Cameron rules out fiscal stimulus to beat recession

David Cameron has just used an interview on Radio 4's Today programme to reject any big change in Conservative economic policy.  Conservative economist Andrew Lilico has led a number of calls for the Tories to offer large but temporary tax cuts in order for the country to be saved from a serious prolonged recession.  Mr Cameron could have used the changed economic environment to change his policy but he has now made it clear that he will not.

If Labour had not spent so recklessly during the boom years, the Conservative leader continued, Britain could have afforded lower taxation now but the cupboard is bare.  He said that it would be "quite dangerous" for the state to borrow even more because that would make it harder for the Bank of England to cut interest rates.

Mr Cameron has effectively handed over all recession-beating possibilities to the Bank of England's Monetary Policy Committee.

He questioned Alistair Darling's talk of accelerating capital projects.  It was very difficult to change the timetable for capital projects that required careful planning.

The Conservative leader outlined another measure to help small businesses: a 1p cut in NI contributions for very small firms.  Yesterday he advocated a VAT holiday for small firms and faster payments by local authorities.  He acknowledged that these were measures that would help businesses cope with the recession; they would not prevent it.  The Daily Mail launches its own eight-point plan to help small businesses.  The plan includes a 2p cut in small business corporation tax.

He also defended his decision to back Gordon Brown's recapitalisation plan.  Without it, he contended, the recession could have become a slump.  On his blog yesterday John Redwood came out against the recapitalisation strand of the Government's bank rescue plan.  The £37bn could be better used, he thought, and he repeated his call for a 2% interest rate cut.

Comments

[Andrew Lilico]

To clarify: I don't think it is possible to "save the country from recession" at this point. Recession is inevitable now. But how deep a recession? That's still up for grabs.

Given that "the cupboard is bare" and "it would be dangerous to borrow more", why was it okay to borrow some £37bn-£500bn for bank bailouts the effect of which is to protect rich people from the consequences of their mistakes?

[Malcolm Dunn]

My sympathies are with Cameron as I hate the idea of borrowing ever increasing sums on a wing and a prayer but I would be the first to admit that events have moved so far and so fast I can't fully comprehend their implications.

[Tim Montgomerie]

Thanks Andrew for the clarification. I'll amend.

[Malcolm Dunn]

What Andrew? Your comment about 'rich people' is unworthy of you. If the bailouts were only designed to save the jobs of investment bank workers they would not have happened. But they weren't. You probably better than anyone else on this board know that.

[Andrew Lilico]

Malcolm

The key effect of the bailouts has been to spare the debtholders of financial institutions from the losses that would otherwise have been consequent upon their errors. Shareholders and bondholders in other institutions that had deals with institutions that should have collapsed have also been spared. The overall effect has been to keep the rich rich, with money raised from everyone else.

Now, the cry of the rich has been "everyone else needs us, otherwise we'll all be poor". There's not *nothing* in this cry, but it is the cry of the vested interest throughout history and the world over. I had thought the Conservative Party had eschewed the protection of vested interests. It seems I was wrong. We have chosen to save capitalists at the expense of capitalism. That wouldn't have been *my* call.

[Blue Eyes]

All of you who are in favour of a Keynesian stimulus, can you answer where the money will be borrowed from? Unless it's from abroad, the money will surely be borrowed from people who would otherwise be investing their money in other things, or spending it. Do the readers of ConHome really believe that the government is more efficient at spending/investing money than private investors? Are we all socialists now?

[GB£.com]

"All of you who are in favour of a Keynesian stimulus, can you answer where the money will be borrowed from?"

Not borrowed at all.

It seems that everyone but government is trimming their expenditure to see them through the recession.

It's about time that the higher earners in the public sector were told what is now commonplace in the private sector; "It's a pay cut or the door."

What would cut the salaries of all public sector working earning over 4k by 5% save?

[London Tory]

Yvette Cooper MP says that we have to *protect* workers from the Labour recession, and to do so we will *create* jobs for them.

Assuming that it will not take long to insulate every remaining loft in this country, surely this approach gives us an ideal opportunity to attack, based on our 'sound money' instincts.

We do still believe in sound money, don't we............

[michael mcgough]

"a 1p cut in NI contributions for very small firms."
Is this piffling suggestion for real? This is 'peeing against the wind' and implementation would have little effect.

[James Maskell]

Im confused. What is the Tory policy now and which direction is it aimed at? At the moment Im hearing no Keynes and no fiscal stimulus packages save for the handful of tax cutting pledges. So what is he proposing and where has George Osborne gone?

[Malcolm Dunn]

The bankers may have been making their cries from naked self interest but the fact that governments of many hues throughout the world have listened to those cries has nothing to do with that self interest. But once again, you know that!

[Blue Eyes]

@GB£: if it's not deficit-financed then it's not a Keynesian stimulus! Your plan is a good one, it could be called "sharing the misery".

My question still stands: those who beg for "unfunded" tax cuts or "unfunded" spending are effectively crowding out potential private investment. Why?

[John Moss]

We should also come out strongly in favour of free trade measures to boost global trade and open up investment opportunities in developing countries.

Scrapping agricultural subsidies and tariffs from January with a bung to farmers to see them over the initial upheaval in markets would be a far better way of spending £37bn than buying bank shares and diluting the existing shareholdings (ie savings and investments) in those companies.

[GB£.com]

Hi Blue Eyes,
I just thought your call was a straw man, as I haven't seen anyone here actively calling for unfunded tax cuts, but quite a few people calling for a cut in government spending as an offset to tax cuts.

[resident leftie]

The way that Keynesian infracstructure borrowing works is thus: imagine two graphs, one where there is belt-tightening and the other borrowing for infrastructure projects. In the former case, the economy does not grow as much. In the latter, the borrowing is eaten up by the economic growth which is stimulated.

Mr Lilico would say that it's better to borrow for tax cuts, but that money is far less likely to stumulate the parts of the economy which need help, and could easily be spent on exports or squirreled away. The American example shows that this just increases debt. I left a more detailed version of this question dangling on another thread, but I'll dig it out if necessary. I'd like to read Mr Lilico's response.

So, Boris was right, partisan though his infrastructure suggestions were, and Cameron is wrong.

Now, Cameron's suggestions will do almost nothing to help small businesses. Delaying VAT payments for six months will save very few businesses from going down, but will keep some alive for an extra six months, and go down owing the Customs and Revenue. 1p on NI will make f*** all difference.

[Andrew Lilico]

I'm calling for unfunded tax cuts.

Another thing: Cameron is wrong to suggest that increased borrowing would restrict the Bank of England's scope to cut interest rates. Borrowing will be irrelevant to interest rates over the next two years.

[resident leftie]

Gordon Brown has already pledged that Whitehall will aim to pay its SME invoices within 10 days. Cameron's local authority suggestion is just a pale echo of this.

[GB£.com]

"I'm calling for unfunded tax cuts."

I stand corrected! :-)

[Blue Eyes]

Sorry to bang on about this but who are you borrowing this money from?

The long-term solution to this mess is the slash the size of the state overall to let the productive part of the economy grow again. The short term solution is for interest rates to be slashed and for taxes to be held down. Keynesian splurges haven't worked before, so why should we assume they will now?

[rugfish]

Sorry, but doing nothing is not an option Mr Cameron and it isn't what the country wants to hear either.

The government has taken action by bringing forward spending plans in order to attempt to stem the downward spiral of job losses.
It's asking banks to go easier on evictions which have doubled to 45,000 this year, and its planned a £100 million budget to retrain people who have lost their job. However what jobs will be avilable is anyones guess?

Further, it's 'asking' banks to start to lend to businesses but cannot force them and should instead be giving access to business loans through government or else reduce their taxes.

Whilst the governments intentions may be worthy and partly sensible, its current policies don't add up to 'action'.

It has to be said that a business cannot survive forever without customers and some will not be able to continue with diminishing or non-existent profits.
So stabilising the means for consumers to continue to spend is the main priority which will help the economy yet at the moment there isn't a strategy to stabilise their home asset values nor is there a strategy to help maintain their incomes beyond some of those who are employed in the construction industry.

But even that is a short-term offering as future jobs will be lost when those works are completed unless new jobs are created by the private sector which by then will be out of business.

Despite governments praiseworthy intervention to bring forward public works, sales in the high street will continue to slip and this will lead to more job losses as the real economy continues to nose dive to levels previously unseen.

One reason for this is because 40% of the remaining part of our economy is based on retail trade and the other 60% ( finance ) has taken a hammering which is still being counted, notleast in how much the effects of lost jobs, bonuses and big pay packets will effect house prices, and the buying of high value items which led to the consumer boom in London and other places, but also in terms of what capital banks have lost and will lose, which compels them currently to hold back the capital businesses need in loans and overdrafts.

Falling house prices as a result of our gloomy economy will remove the legitimate asset growth of homeowners which in turn will hit their spending habits along with the profits of many who invest in the housing market.

Pension funds for instance will lose significant amounts which will incur a greater future need for higher levels of public spending which in turn will require higher taxes.

Taxpayers will lose out somewhere along the line regardless whether they are homeowners unless public services ( QUANGO's ) are cut at that point, so looking forward, somewhat pessimistically or perhaps more realistically, one can easily see that the future may well hold a degree of social unrest, a greater amount of poverty and less ability of government to deal with many problems which could have been avoided and would have occurred in part only as an unnecessary consequence of its own failure to act sooner to stabilise the housing market.

Unless government acts or intervenes to save the housing market then much of our economy will be lost until the 'real economy' can be rebuilt again.
But even then we'd need more trade in exports in order to promote the growth needed for the economy to right itself as large parts of it would have declined.

Without consumers in the real economy there is no chance of revival because this is the lifeblood of our economy. Further, in order for spending to continue to sufficient, albeit lower levels, consumers need the means of money and jobs along with confidence that what they buy will hold value otherwise they'll have no incentive to buy.

People who were once prospective house buyers for instance faced with unsustainable falls in home values, would likely develop a "why bother" syndrome, and what will follow will be boarded up shops and other outlets and a loss of jobs in retail and manufacturing across the nation as we see big names disappear.

The building trade will all but perish all but for public works as private finance becomes in shorter supply and is depleted further as a result of less demand in both residential and commercial requirements, and manufacturing per se, will have less demand which will lead to increased foreclosures of supply businesses which will have defaulting customers on contracts which will increase bankruptcies further and lead to yet more job losses.

Unless government intervenes to stabilise housing then we could be in for a far longer period of recession which could well bring on many changes in how we run things too. Politics for instance might well take a right turn as people begin to see centre parties failing to grapple with 'real issues' such as protecting their jobs and incomes and helping to stem the fall in house values on which many rely for retirement since Brown took away much of their pension.
Immigration will be another public issue and so will repossessions, homelessness, poverty, waiting lists in the NHS and rising crime.

Naturally, there will be a tendency of more to look toward a more nationalistic and greater protectionist view of politics and this view will rise in precisely the way it is doing now unless some action is taken by government.

I think people could well start to question for instance the need of government to have levels of further government in Europe for instance, and they could well be asking soon why they're having to pay VAT on everything they buy. What's it for ? Why when a person is unemployed or living a meagre existence on a state pension, is the government charging VAT on the fuel the essentially need to keep themselves warm, or on the food the essentially need?
Wouldn't we all be better off if VAT wasn't charged at all on essential items?

I think there are many potential problems if government fails to see there is a real need to support the housing market, and one way to do this is to re-introduce MIRAS. Another way is to remove stamp duty which could just help buyers and homeowners enough to stabilise asset values if done together.

Placing stamp duty for instance on the seller would recoup duty from lenders which are repossessing homes. Also, I'm sure sellers would be more eager to pay duty at say 5% rather than see a reduction of 25% or more in the real value of their home which in many cases is the means to support their incomes in retirement?
MIRAS offering relief at the equivalent of tax base rate on an amount of £80,000 for example would see homeowners with some real money in their pay packets and it would help to stem repossessions, it would also bring more money into the economy for those struggling businesses and make it easier for First Time Buyers to get on the ladder especially if placing the burden of stamp duty on the seller instead of the buyer.

So whilst talking about helping the economy is good, I think people want something tangible in the way of action, and for that to happen, either government or the opposition must take the lead to save housing quickly.

[Umbrella man]

Borrowing will rise one way or the other Blue Eyes.

If we do nothing about recession we'll see lower tax receipts and higher welfare bills.

If we counteract recession with tax cuts we'll need to borrow to fund them but we will stimulate the economy and avoid the costs of a deeper recession.

[Andrew Lilico]

resident leftie

You seem to believe that the government can know which parts of the economy "need help". It cannot. All the government can do is to observe which parts of the economy are shrinking, but it has no good way to determine that there is anything improper about contraction in those parts. By spending in the wrong places, government will waste its money fighting structural change that is inevitable and appropriate.

I do not want to see the State take the opportunity of recession to increase its role in our lives. The argument for tax cuts does not lie here. It does not even lie in the thought that the government can, as a general proposition, borrow usefully to ease recession. The argument for tax cuts is specific to *this* situation, and predicated on the thought that the supply of private financial services may currently be impaired. The impairment of private financial services would lead to under-borrowing in the private sector. Government could ameliorate this by replacing that private borrowing that isn't going to occur with public borrowing. This would, of course, be inefficient compared to private borrowing, but when private borrowing is itself impaired, inefficient government borrowing could be the lesser of two evils (versus straightforward aggregate under-borrowing).

If tax cuts are saved, that just means that there is no private sector lending impairment - a good thing - and we can raise taxes later. No harm done.

[Mrs Campbell]

But who is going to get the jobs on Crossrail and the Olympics?

[a-tracy]

Resident Leftie, I read an article recently that said three quarters of sme's don't have any government work and have great difficulty finding and securing it.

[Andrew Bradley]

Cameron might have been ok on Today but did anyone hear Alan Duncan being interviewed by Sheila Fogarty on Breakfast on 5 Live about 7.15am this morning

Editor please try and get a copy of it - he was rude, arrogant, superior, belittling and pompous to use a few words - I stand by all these words It was a long interview for this programme, possibly because they enjoyed him digging himself deeper into the mire

She is a pleasant and fair interviewer but he asked her if she was a serious broadcaster and later added some questions were 'ridiculous' and crazy. It was awful and cringe worthy - PLEASE get a copy of it.

Yvette Cooper was on later - may be talking a load of 'BALLS'but at least she was civil and polite.

[rugfish]

If not doing anything in a crisis which will impact on every living being in the country and place untold numbers into grave financial difficulty is David Cameron's idea of "Mending Broken Britain", then he's ruining the chance of government and is failing to give leadership when it's needed most.

Unless he changes tact and comes up with a plan to mend britain then he's lost my vote and I guess this is why his poll rating is dwindling as fast as the FTSE.

[London Tory]

@ Andrew

Is this the same Alan Duncan who asked the BBCs Evan Davis last week if his nickname was "The Teddy Bear" - because 'you like being thrown around by young boys'.

The comment is a matter of public record, so I hope it will not be overwritten.

The guy is just not a serious politician.

[resident leftie]

You seem to believe that the government can know which parts of the economy "need help". It cannot. All the government can do is to observe which parts of the economy are shrinking, but it has no good way to determine that there is anything improper about contraction in those parts. By spending in the wrong places, government will waste its money fighting structural change that is inevitable and appropriate.

Well, you'll hardly be surprised I disagree. The choices governments make (even supposedly "small state" regimes) have an enormous effect on the mix of the economy. Thatcher's policies damaged our industrial base and promoted the service industry, while Germany still has a mixed economy. The Labour government were far too timid in challengin this model.

Spending on infrastructure will help a specific part of the economy - and every bit of it will generate or maintain jobs here in the UK, and the legacy will improve lives for everyone - new railways, power stations, and new technology. Unfunded tax cuts will not have this effect.

[Friedmanite]

Andrew Lilico @ 10:31,

Surely the point of the recapitalization plan is to normalize the supply of private financial services?

Since Cameron has backed the recapitalization approach it would thus be illogical for him to support tax cuts which are predicated on the supply of financial services being impaired.

[resident leftie]

Posted by: a-tracy | October 20, 2008 at 10:40

Resident Leftie, I read an article recently that said three quarters of sme's don't have any government work and have great difficulty finding and securing it.

Yes, this measure will help only the businesses who take the £8bn spent with SMEs.

The government has also set up a portal to help small businesses get local authority business which is apparently quite effective.

[TomTom]

Why didn't the BoE buy the PFI deals from the banks at a discount and relieve the taxpayer of leveraged lease obligations ?

Surely building prisons, schools, hospitals and military projects on debt-funded PFI is barmy when the taxpayer is then funding banks whose PFI projects are held in tax havens !

[True Blue]

I take it, no one here believed Mandy yesterday when he declared on the Andrew Marr show:

"One of the things we benefit from in Britain is having over the lat 10 years paid back a great deal of our debt. That means we are in a better position than other countries in Europe to borrow and spend more at a time of need as we are facing now"

Instead of attacking ourselves over alleged lack of policy, why don't we expose these communists for the liars that they are?

They have systematically eroded all the controls over our banking system, sat back while the system was allowed to spiral out of control, and now taken over and appointed their minions on the Boards of these banks. These are the same minions that allowed these banks to spiral out of control. Instead of city bonuses (which were not subject to pension benefits and annual increments) we now have to pay civil servants huge salaries that increase every year and pick up the tab for their cushy pensions.

Does anyone see a parallel with Putin's Russia here? We may add a sickle and hammer to the Union Jack.

[a-tracy]

RL - Indeed £8bn is an awful lot of money is this all spend directly with SME's or via Tier 1 (primary) contractors?

Also to put this into perspective what is the £8bn as a % of total government spending?

Does this include all the monies paid for legal services to solicitors for example?

I'm aware of the portal.

[Norm Brainer]

I'd already heard on another board about how good Duncan was in the face of a bad interviewer - listening now and I'd agree with that
On Iplayer about an hour in.

[Andrew Lilico]

Friedmanite@11:09

I agree that to some extent the tax cuts and the banking bailout were alternatives. But I believe that the banking bailout will not succeed in preventing lending from shrinking materially, and is far from guaranteed to prevent lending from disordely shrinking (and hence impairment). If you are saying that you believe Cameron believes that the banking bailout will be a success and is therefore convinced that there will be no impairment of lending, then I agree that the position is consistent.

As I said in my own thread-initiation piece yesterday, the tax cuts route is by no means guaranteed to do better, economically, than the muddle along route (though I believe it would have done materially better than the bailout-plus-muddle-along route). I don't pretend I have a magic bullet. But (a) I believe that there is a material risk of serious deflation, and that we should take all action available to try to prevent that in this scenario (deflation plus over-gearing could be a disastrous combination), and under-funded tax cuts are one weapon in that armoury; and (b) I don't believe that it is politically feasible to fiddle whilst Rome burns. We cannot allow the Labour Party to be, unchallenged, the party that knows how to manage the economy. That could yet be the road to defeat.

[ACT]

Blue Eyes: "Are we all socialists now?" Nooo, just Labour, the bankers, and, naturally, Cameron.

Bad banks should have been allowed to go bust. I'm sorry to get all Victorian, but this madness of the last month has been not too dissimilar to eg an idiot press lashing supine mid C19th governments into bailing out railway companies - "we *need* them! Our world-beating prosperity can't happen without railways! (The directors of this paper and the directors of the railway companies were at school together!)". Fortunately for Victorians, that didn't happen. Bust railway companies weren't kept needlessly afloat at public expense. And the system sorted itself out, with the pain doled out to those who, well, deserved to hurt (not least because, equally rightly, they had earlier deserved fully to profit).

I suppose, in retrospect, we can envy our Victorian forebears their political leaders that little more than we already did, and perhaps, even the quality of their press. Certainly as compared to Peston and Robinson, mid Victorian journalism suddenly seems positively apollonian.

[True Blue]

@norm thank you for the link.

I just listened to the Duncan Interview. Hurrah for finally giving a silly BBC interviewer a bit of their medicine.

They run rough shod over our spokespeople all the time. He would ot allow her to misquote him or to dhange the topic when it suited her.

Well Done!

[Friedmanite]

Andrew Lilico @ 11:37,

I agree that it would be wise to have a recovery plan in place if the scenario you sketch out (dysfunctional financial system, significant deflation, etc.) materialize. But it seems to me that there is a significant chance the scenario won't arise, and instead we'll face a situation no worse than 1990-92. What I think we need to avoid is the idea that the an economic downturn is a disaster which must be averted at all costs.

People have to understand that--contra Gordon Brown--the business cycle is not something that can or should be eliminated by government policy but is in fact a natural aspect of capitalism.

[Andrew Lilico]

Friedmanite@12:12

>What I think we need to avoid is the idea that the an economic downturn is a disaster which must be averted at all costs.

People have to understand that--contra Gordon Brown--the business cycle is not something that can or should be eliminated by government policy but is in fact a natural aspect of capitalism.<

I completely agree with you on this.

[christina Speight]

At the risk of becoming a bore on the subject I wish that everyone - including Cameron - would stop talking about altering VAT - payment rules, categories covered, rates charged.

VAT is a EU tax, Simple! ALL of this is precisely laid down in the relevant directives and cannot be altered in any way unilaterally. It needs the agreement of 27 countries as a first step,

If Cameron goes on ignoring the way the EU controls the laws of this country, very soon people will realise that he doesn't know what he's talking about. Please, Cameron and everyone, do your homework first.

[Malcolm Dunn]

Thanks from me too Norm. What a car crash of an interview! I'm not much of fan of Alan Duncan (usually sounds too pleased with himself) but he did well to keep his temper in the face of a succession of half witted questions.

[resident leftie]

Posted by: a-tracy | October 20, 2008 at 11:26

RL - Indeed £8bn is an awful lot of money is this all spend directly with SME's or via Tier 1 (primary) contractors?

Also to put this into perspective what is the £8bn as a % of total government spending?

I'm just quoting the Prime Minister's statement, which wasn't challenged. I can't find an independent source for that data. I would guess it does include money paid for legal fees to small firms and similar but I don't know.

£8bn is about 2% of government expenditure (I think)

[RichardJ]

I read in the Metro today that Darling is taking Keynes as his inspiration for fixing this crisis.

We're shafted.

[True Blue]

We may as well give our army red uniorms and get them sing hail to the republic!

[David Sergeant]

" just listened to the Duncan Interview. Hurrah for finally giving a silly BBC interviewer a bit of their medicine.

They run rough shod over our spokespeople all the time. He would ot allow her to misquote him or to dhange the topic when it suited her.

Well Done!"

Posted by: True Blue | October 20, 2008 at 11:47

Here here.

[Londoner]

I agree with Malcolm Dunn in taking up Andrew Lilico's comment at the top of the thread to the effect that this was all done for the rich bankers. Even accepting Andrew's premise that a main effect of the State equity injections into banks will be to avoid huge Corporate Bond defaults, has he looked at any pension fund's or insurance company's investment portfolio recently and does he really think it would be helpful for mass debt default all round to be triggered? Bonds are not just held by filthy bankers but are the lifeblood of the (relatively risk averse) investor. It's a cruel irony that the price for the debt splurge is not being paid for by most of the people who took out the debts and can't repay them (give or take the odd repossession of houses from people had took out 125% mortgages - sorry no sympathy from me for those foolish and greedy people who should have stayed in rented accommodation a bit longer as my generation did in the 70s and early 80s), but by investors who saved their money instead of spending it and borrowing more.

Both me personally, and the business I work for, are investors who don't borrow much. If everyone else had behaved like us, and if Government intervention had not encouraged the opposite, we would not be in the mess we are in. Does Andrew really think it would be helpful if ING, for instance, had been allowed to totter with a million UK savers with deposits in their web-based bank accounts, a market leader for the prudent saver with a reasonable cash reserve for the house repairs, the next year or two's school fees and an unspecified rainy day? Where does such a clever pro-capitalist as Andrew keep his money/assets? Or is he not so clever after all, adn perhaps he doesn;t have any? If he did, I suppose he would have tio think of himself as "rich" and presumably hate himself.

However clever Andrew may be, he tends to disappear up the back passage of his own analysis, where it is very difficult to see any wood for the trees, and as a result some rather unpleasant substances, such as hatred for "rich people" (i.e. investors and savers), starts seeping out.

Cameron may not have come up with any dramatic "solutions" to get intellectual economists excited, but I have a lot of sympahty with his measured and rather grounded approach. He strikes me as looking as though he is connected with the real world in the way that, frankly, Andrew L doesn't. Much better than trying to be "decisive" but ending up just looking panic-stricken. I paraphase in "Londoner-speak" some of the attitudes that I think I share with Cameron:

"There will be a recession. There nearly always is after a period of strong growth, particularly if it has been managed recklessly like this one. We need a banking system. We need to help some people selectively who are particularly hard hit and on whom the rest of the economy depends. We know that recessions increase the public deficit (the stabilser) and we are not going to try to sweeze that deficit at the start of the recession to make things worse. But we also know that State borrowing now is at the expense of more tax in the future - so we are not going on a splurge (a splurge which, even if it might make the immediate slow-down slightly less deep, would make it even more difficult to get the public finances back on an even keel later). We believe in sound money and we think that Brown has got into this mess because he didn't. We will restore conservative public finances but we do not promise the fool's gold of quick and easy solutions."

He could also have said (but, as far as I know, didn't):

"The Conservative Party is used to clearing up Labour economic mess. It's one of the things the Conservative Party is for. My distinguished predecessors did it in 1979 after they came in. It took them about eight years to produce a public sector surplus. I don't know whether we can produce such a surplus again, but that will be the direction of travel. It's not flashy and it's certainly not Gordon."

[Andrew Lilico]

Londoner@18:41

I am not interested in "hatred", and I have had no time for critcism of "greedy bankers" or any of that nonsense. Indeed, I've written against it. But it *cannot* be the proper task of government to ensure that the rich (which by any reasonable definition must include me) stay rich even when we've made mistakes.

I've explained in some detail what I think about deposit insurance and what we should be doing about it. And I simply don't believe that there was ever any realistic prospect of the majority of the population losing their savings (capitalism is a very stable system). Furthermore, I care also about *tomorrow's* rich and not so rich people, and also about the future growth on all those investments made today. And if (as we now will) we have massive over-regulation of banks and financial services - the inevitable concomitant of bailing out the banks - then future investments will grow much more slowly and both we and the people of tomorrow will be much less rich.

Also, I have never suggested anything other than that this is a very serious crisis, and I've suggested many many significant responses to it. I just disagree with the responses of governments so far.

Even if I'm wrong (and it has been known, strange as that may seem), I believe that the strategy I have recommended in response to recent events - trusting markets more, trying to seek market-oriented rather than market-replacing solutions to the financial crisis, using tax cuts rather than additional expenditure to ease the pain of recession, fearing deflation and aiming to have all reasonable measures available to address it - has deserved much more of a place in public debate than it has had. We leapt far too readily to a neo-Marxist analysis of the Crisis of Capitalism and then everyone picked a side - the side of the capitalists. I'm not a neo-Marxist. I do not believe that markets are fundamentally unstable and teeter always on the brink of collapse without government there to save us. I believe that markets are a creation of government - that they required, in particular, secure property rights, secure contract rights and a secure medium of exchange, along with a culture of truth-telling and promise keeping, if they are to be socially useful allocation mechanisms. I believe in a humble approach to regulation, wherein we believe that we might, in principle, improve upon market outcomes with regulation, but should always assume that we are seeking to improve on something that would, without government, be pretty good anyway. I believe that when regulation fails we should first question whether too much government was the cause before concluding that the problem was too little government. I believe that government macroeconomic policy can regulate the economy to the common good, limiting (but not eliminating) the ups and downs of the economic cycle.

I do not accept that my beliefs are "too clever by half" or otherwise impractical. Every day I work on the economic analysis of regulations that affect virtually all readers of this blog. My world is that of practical policy-making. I am not some blind ideologue distant from the practical realities of life. Indeed, I humbly suggest that I have vastly more experience of actual real-world policy-making than almost anyone on the Conservative front bench. If I make radical suggestions it is not because I cannot see the wood for the trees, but, rather, because good policy-making entails a sufficient consideration of all the realistic alternatives compatible with the standing political constraints. A classic policy-making error, which I urge against all my working days, is that of overly fixating on the first path that occurred to us and ignoring the potential merits of alternatives. That has been the damaging error of the past year, on the part of both government and opposition. We shall probably pay for it for a generation.

[Philip J Milton]

Unfortunately, whilst well-intentioned, I do not feel that the 1% National Insurance issue will have a great deal of effect or be well received politically. The VAT deferral issue could simply be storing up problems for later (a larger liability at that point) and there is interest to pay as well. There’s a big Income Tax bill due for many on 31 January too, based on big profits from previous years (why not ensure that people write-in to the Tax Office for a reduction in the payment on account if their ‘current’ year assessable profits are likely to be much reduced?).

I have some suggestions:-

1. Serious encouragement for a reduction in interest rates from the Bank of England. The BOE is being ridiculously slow in anticipating the inevitable. Inflation will not be a fear in twelve months – it will be deflation. Savage reductions will do something to boost the economy. It is much better than swelling public expenditure. It reduces repossessions because people/businesses are better able to afford the interest cost, cuts business borrowing costs, cuts Government borrowing costs, stimulates investment in enterprise and the markets as opposed to simple deposits, encourages the population contingent which spends (those with mortgages) to spend again, reduces the pressures on businesses and investments and boosts the value of bonds. Sterling could fall slightly as a result but it is likely to fall much faster if fears of Government debt take hold instead – in the face of inevitable plummeting tax revenues. Additionally, companies may be able to reassess investment for the future again – to generate enterprise and growth. Even the preference shares for the banks could have their coupon cut from the proposed 12% which would be seen as even more penal and profiteering then.

2. I have suggested before the establishment of a National Pension Fund. This would create the foundations of a British-based Pension fund which invests in the FTSE indices on a non-voting basis, underpinning the UK market and proving the umbilical cord between the success of the social system and its interdependence with a vibrant economy. A starter for say £25billion, backed by Gilt issue would have an exponential benefit to the whole system and start the process of making effective provision for the retirement of millions – shrewd and prudent at the same time. We need to help rebuild market confidence then things will start looking after themselves (again).

Politically it would state, amongst others:-

1. We want to help reduce home repossessions to save families from being thrown-out in the streets
2. We want to help businesses by cutting their direct costs and preserving jobs
3. We want to help hard-pressed homeowners who have suffered savage increases in their costs over the last year (and a cut in the 10% tax bracket)
4. We are helping to cut the cost of borrowing the Country pays
5. We are encouraging businesses to look forwards and consider borrowing to invest through the downturn
6. We are helping to make the values of peoples assets more stable – their shares, bonds and properties
7. We are anticipating a decimation in inflation (just look at the cuts in natural resources from metals to oils and foods) which will begin to impact the statistics
8. It’s better than a wage rise which is subject to tax and national Insurance if your costs go down instead
9. It could be connected to a policy to encourage savings again – perhaps with tax relief on some new form of term-based equity savings’ plan and share-save schemes expanded.
10. It could help people to reduce the impact of their debts – lower interest = more loan capital can be repaid
11. We should not fear to suggest interest rates should be used correctly in the future to dampen excessive rises in asset prices or rampant consumer borrowing, as opposed to such restrictive remits imposed upon the bank of England.

The negative of low interest rates is the impact on savers and potentially the lower returns for banks on ‘free’ funds but I regret, savers will be the casualties and the majority of these have incomes which have not been affected by the slow-down (pensions/state jobs). It will ‘force’ them to invest in alternative arrangements (better for their own long-term good0 to secure a better income and capital appreciation potential.

I am an investment manager with qualifications in economics, etc, financial adviser, self-employed businessman and employer – so I am reasonably well connected to the present realities of life!

There's my ha'penneth!

Philip J Milton