Osborne v Redwood on today's interest rate cut

George Osborne: “The fall in interest rates is welcome and necessary, given the increasingly bad economic news. However, it will inevitably hit hard millions of savers and pensioners, who are the innocent victims of Gordon Brown’s recession. That is why the Conservatives are calling for the tax on basic rate savers to be abolished and the tax free allowance for pensioners to be increased at the Budget.”

John Redwood: "What is it that makes the MPC hate us all so much? In 2006-8 their decisions meant lots of people would be sacked in industry and commerce by keeping rates too high, despite warning. They did that well, as forecast. Now they want to bash the savers, by almost eliminating interest on deposits. They are doing a great job on destroying the savings culture and pushing prudent pensioners into poverty. The savings rate will of course go up, as people borrow less and it is a net figure. That will merely conceal the pain and anger of true savers. Why don’t we put them onto performance pay? That way we could avoid paying them anything, as their performance has been so poor."

Comments

[Tanuki]

Osborne gets it wrong again: surely if we want to recapitalise the banks we should be raising interest-rates to draw in deposits from savers?

This is a bad day for the Pound, and a bad day for the prudent. Pensioners, retired people who rely on income from investments - it's hurting them like hell. We need to rebuild the savings-culture in the UK - cutting interest-rates does exactly the opposite.

You can't borrow your way out of debt - unless you're 'Captain Cyclops' Gordon Brown.

[YMT]

At this rate I would better off to take all my money out and buy thousands of bottles of wine as the return on them maturing would earn more money than leaving it in a savings account...

[Shaun Bennett]

Absolutely, I'm with Redwood on this one. I have today received my interest for the previous year on my savings account, and it is absolutely laughable. Next years interest will be even WORSE!

And yet I see that they're not at all as eager to lower the interest on mortgages are they! Its about time the government took action to force mortgage rates down correspondingly with interest rates.

Because lets be quite clear, when the interest rates start to go up again, the news will barely be received before the mortgage rates go up correspondingly.

[Tony Makara]

Interest rates can't stay low indefinitely and little thought is being given to interest rate policy post-recession. We are likely to be raising rates at the very time when our economy needs to grow. It appears that the government and the MPC only have their sights fixed on May 2010, on obtaining an artificial and unsustainable spurt of growth to get Labour through the next election. Where is the economic strategy for the long term?

[Caroline Strafford]

If interest rates fall, surely this means borrowers are being rewarded for their folly in many cases where they have extended themselves too far. Why should savers be penalised for others' folly?

The Conservative Party would be well rewarded at election time for remembering that many of their supporters are also savers.

People who now have their mortgages reduced have cash in hand, whilst prudent, and probably older people, are finding their income reduced.

We know banks are anxious as a first priority to repay the Government. This surely is why the banks are still not keen on lending money.

[Deborah]

Osborne has lost the plot.

What bl..dy good does abolishing the tax on basic rate savers and increasing the tax free allowance do when the interest rate is virutally nil and no-one is earning
any interest to pay tax on??? Is this guy numerate?

Somebody should ask him why "The fall in interest rates is welcome and necessary". What good does he think this one will do?

John Redwood might be less popular but at least he understands logic - I think that could be useful in a shadow chancellor.

[Iain]

1% rates aren't going to fix what 1.5% couldn't.

Redwood has it right again.

[The Bishop Swine]

This interest rate costs me directly. It even impacts the savings of children, what sort of message does it send them? I will take the painful medicine because I have no choice. However G.O. is right to highlight that the tax on our savings is also far to high. I would not agree with abolishing it outright, simply because it will not last. Better to reduce it in line with the lowering of interest rates. Of course savings could attract a tax credit, but what chance is there that Labour would be so generous? On the plus side G.O. is getting better at his job, when are we going to get some clear blue water policy announcements?

[John Broughton]

These last interest rate reductions should be seen as acts of folly whereby the profligate are subsidised by savers.

To reiterate it is not the base rate that hurts so much as the rate over base that corporate borrowers in particular have to bear. In some cases this will mean the rate over base being an additional cost of 300% to 1,000%. Madness!

[Sam R]

John Redwood has been proven right, time after time, in his analysis of the financial situation. And he is right here once again.
We know what would happen if a substantial number of savers removed their deposits - it used be the case that it took ten savers to support one borrower.
Then there is always gold; if the world's saviour and last person to admit that we are in a recession (or is he still in denial?)had held on to all our gold reserves, how much more would they be worth today?
DC says he has the strongest possible shadow cabinet - did he ask either David Davis or John Redwood to join.

[Martin Cole]

Redwood should join Libertas!

[GB£.com]

Osborne weasled:
"That is why the Conservatives are calling for the tax on basic rate savers to be abolished."

So to summarise Gids policy, it is to reduce interest rates down to the level where savers earn no interest, but to 'offset' that by charging no tax on the near-zero gain? LoL.

You've got to admit, Osborne has been good comedy value during this credit crunch. Imagine if he was actually in charge. Oh shit...

[Eveleigh Moore-Dutton]

The interest rate is ridiculously low and so the expectation will be that the cost of borrowing will be low BUT the money the banks received in the big bail-out was at 12%. What incentive is there for the banks to lend at low rates when it would pay better to repay the money they got from the government?

It becomes more and more obvious every day that the cut in VAT was a waste of money that could have been used far more effectively! I certainly haven't bought an single extra item because of the VAT cut.

[Another Brown Porkie Pie]

A little of topic but well worth it. Spotted on another blog from another poster:

"Had a phone call from a client who is in trouble paying her mortgage following her husband taking a hike with another woman. Usual problems, negative equity so can't sell (even if she could) so has a few very difficult options.

Just spoke to the lender, a well-known nationalised bank that was at the forefront of ridiculous lending (you know 'em!), to see whether she could take advantage of the scheme Brown announced at the end of last year. That one where, if your income had reduced dramatically, you could take a 2-year paymnet holiday? You remember it?

Well, apparently, it's been 'scrapped'!! It never got off the ground, dead, kicked the bucket, deceased, no more, six foot under!

And remember, at the time, Brown announced that ALL the major lenders were 'on board'.

So another Brown promise up like a puff of smoke. Just another headline.

[Just another Brown porkie pie]

Compeletely O/T but spotted on another blog.

"Had a phone call from a client who is in trouble paying her mortgage following her husband taking a hike with another woman. Usual problems, negative equity so can't sell (even if she could) so has a few very difficult options.

Just spoke to the lender, a well-known nationalised bank that was at the forefront of ridiculous lending (you know 'em!), to see whether she could take advantage of the scheme Brown announced at the end of last year. That one where, if your income had reduced dramatically, you could take a 2-year paymnet holiday? You remember it?

Well, apparently, it's been 'scrapped'!! It never got off the ground, dead, kicked the bucket, deceased, no more, six foot under!

And remember, at the time, Brown announced that ALL the major lenders were 'on board'.

So another Brown promise goes up in a puff of smoke. Just another headline."

[Steve Foley]

Apart from using a Bank as a safe and convenient place to keep one's money there is no point in saving given the very low rates of interest these days, and on which Tax is still levied from the majority of people. One may as well spend the money, enjoy the goods or services this purchases and help some business perhaps saving some people's employment thus allowing them to earn and spend with similar effects. When one is unemployed, and I have been there, one is taking and not contributing to the Economy, keep someone in a paid job and they can at least contribute by spending and hopefully get us out of this current depression, not to mention pay Income Tax and National Insurance.

[Sam R]

"Redwood should join Libertas!" (17.37) Why?

[Richard Calhoun]

It has to be said that to the lay person it does seem rather perverse to reduce interest rates when banks are desperately short of cash.

Of course we all know the problem, but the BofE dare not go public -- we need to radically cut public spending and the benefits system and reduce taxes to enable the economy to grow.

Brown et al are desperately trying to avoid taking such action until after 2010, they are dishonest, duplitious and despicable.

[Phyllis Crash]

It turns out that Osborne's call on the stimulus wasn't just his bravest decision (as The Editor wrote) but his only correct decision.

He just keeps getting it wrong.

[Robert Eve]

Redwood is the man!!

[Norm Brainer]

Even not considering what they have said, just how they say it, Osbourne just seems wrong.
People are angry at the current lot be it gov't or through the BoE who are making a complete mess of it, and Osbourne just seems to say "meh, whatever"

[Deborah]

Norm brainer - you are absolutely right. Osborne's seemingly lackadaisical attitude gives entirely the wrong tone.

[George lees]

It would seem that cutting interest rates is like pushing on a string, so why hurt savers. Perhaps "quantitative easing" should be tried? We also need to think about how we come out of the recession without either killing the recovery by raising interest rates to fast (such as happened in japan) or creating an inflationary bubble. It will be difficult to avoid these oopposites?

[Ross Warren]

"Redwood is the man!!" What do you mean Robert Eve. Should it read Redwood is a man, or did you mean to add something more, but had to go.

Teasing aside Redwood is often right, maybe even is usually right, but he lacks the common touch. At least that is the popular consensus. I have always found his awkwardness rather appealing. The trouble is the media crucified him. This often happens to the more sensitive and intelligent at the hands of the Jealous. You can bet your boots that if somebody comes along who makes sense he will quickly attract a number of detractors. He, and I mean generically, will be attacked for wearing hush puppy shoes. having an accent, having not gone to Ox-bridge, in fact just about any chink that the inventive critic can find to throw at the person. It's usually motivated by a type of jealousy, that has more to do with the playground than the grown up world of political science. Of course these attacks sometimes stick and they are meant to be very hurtful indeed. Redwood was the victim of the press equivalent of the forum troll, a breed that is rare on this board, but still present in some numbers. So rabid did the attacks become the nice shy and devilishly intelligent Mr Redwood was forced from office. Maybe John should have learned the national anthem of Wales, but that one mistake should not have been enough to ruin his promising career. Of course by now the trolling press has moved on, and as you say John Redwood is the man. I would say he is the man that the party most needs to rediscover, the man that will one day be very important again. Maybe John will never be PM, he isn't really the right type, but he should be an very senior minister indeed. Watch out George Osborne, the party faithful have their own champion. Should you fail to up your game there will be increasing presser for the Nice Mr Redwood to replace you.

[Tony Makara]

The economy is going nowhere until debt is ironed out of the system, if that means lay-offs and write-offs then so be it. The bad business and bad borrowers who have been kept afloat by credit have to be allowed to drown. Once this happens the leaner and fitter economy can emerge.

The government's attempts to resuscitate debt in order to give the economy a temporary buoyancy is shameless short-termism, putting Labour's re-election ahead of the national interest. This is the line the Conservative party should be taking to attack the government. Yet, instead all we get is the most appalling compliance, a readiness to do Brown's bidding by backing everything Labour and the MPC do.

For god's sakes think about the long term picture, the economy over the next five years, we need to kill the debt and encouraging borrowing isn't going to do that.

[DerekM]

I've just taken all my saving out, brought a new fireproof safe, and wont be re-investing. I mean 1% (some kind of joke?).

[David Sergeant]

I have frequently critisezed Redwood and defended Osborne but this time Redwood is right and Osborne wrong. However, given the hysteria at the moment I would suggest Osborne is playing it politically safe, as opposed to technically correct, in agreeing the interest rates while asking for savers protection.

I wonder if anyone is noticing price rises because of the falling pound yet, that's sometimes called inflation. And just a point re the non existent mortgage holiday, if true it is amunition for a devastating attack on Brown with his gimmick a week so he looks as if he is doing something. Don't expect the Tories to make anything of it though, they make a living from ignoring open goals.

[Yorkshireman, Yorkshire]

Redwood 1 Osborne 0

[griswold]

For heaven's sake, Mr Osborne cutting interest rates is a dead end. Do you understand what the credit freeze is all about. It has nothing to do with interest rates.

Tax relief on zero interest is not the answer.

What about those who need to buy an annuity?

[Bishop Swine]

What about those who need to buy an annuity?

It's criminal isn't it. There should be some mechanism to defer retirement during the current economic difficulties, or better still, some help for those caught by circumstance. The problem with people putting off retirement is that it means even fewer new Jobs to go round.

[Yet Another Anon]

Abolishing Employer National Insurance would do far more for the economy than any number of Interest Rate cuts, all that Interest Rates falling towards 0% is doing is actually fostering the very culture of easy loans that got the Banks into difficulties in the first place.

Better to have lower taxation on business, lower public spending and higher interest rates to encourage people to safeguard their futures.

[jamie]

Good! It's about time savers had the rug pulled from under them. Quite why anybody - myself included - with £x in an account should expect an additional x% back each month/year simply for possessing that £x has always been a mystery to me. When that interest comes on the backs of the poor and indebted it is also immoral. 0% rates now!

[another richard]

Comment of the day
David Bean: "John Redwood is right: the idea that the ones who've behaved in precisely the opposite way to the irresponsibility that caused all of this mess should be the ones to pick up the tab by having to suffer historically low interest rates on the money they've wisely saved is mind-bogglingly unjust."

Spot on.

Osborne really has no understanding of the situation. We need people in the economic roles who have personal experience of wealth creation and how so often government (of any party) hinders it. Anyone who knew how hard it is to genuinely create wealth would not support unlimted bailouts of the banks like Osborne does.

The problem is debt. The solution is repayment not borrowing more.

The underlying concept should be (and Thatcher would have fully supported this) YOU CANNOT SPEND MONEY YOU DO NOT HAVE - YOU HAVE TO LIVE WITHIN YOUR MEANS.

[John Prendergast]

Redwood would be an excellent Chancellor. Osborn would be good if he ever had a job and 20years real work to grow up with. Odborn and Lord Madleblot are Bilderburgers both, so must be equally supect. If Cameron cannot work without GO then Cameron should go. Messrs Coulson Hilton and Whetstone cost each Tory party member £3 each year - for what? I see no policies exept dilute socialism. I see no alternative to EU offered either from this lot.

[Yet Another Anon]

Quite why anybody - myself included - with £x in an account should expect an additional x% back each month/year simply for possessing that £x has always been a mystery to me. When that interest comes on the backs of the poor and indebted it is also immoral. 0% rates now!
Because it's an investment, the money is then reinvested in the form of loans that people use to buy houses, fund expansions in their companies, lifestyle choices. In just the same way, shareholders in companies usually invest for a return on their money.

[Essexboy]

Well done John Redwood.

Nice to read the statement of a serious politician once in a while instead of the ones made by the Soviet Left weirdos now running the Conservative Party.

[Cat in the Hat]

"Quite why anybody - myself included - with £x in an account should expect an additional x% back each month/year simply for possessing that £x has always been a mystery to me. When that interest comes on the backs of the poor and indebted it is also immoral. 0% rates now!"

We might say £n and n% back, but lets not be over picky what you say is perfectly clear, If totally wrong. If you lend a person £n, it will lose value due to inflation, the longer it is lent out the less it will be worth on its return.Of course its less easy to justify an interest rate above inflation but its an important concept in capitalism that money should return a profit. In some religions it is utterly forbidden for a man to lend a member of his own faith money with interest, but that doesn't stop then lending to outsiders for profit. 0% interest will only apply to a very little lending from the bank of England to other institutions. You will never get a bank loan with such a low interest rate, it will not happen. Banks have overheads, share holders and employees. They would not last very long effectively giving money away.

[T. England]

Amazing how they both seem to talk for me, I’m humbled by their greatness!

As for the bank of England!
Thank goodness for that! Thank you Bank of England, What a hero you are!
Do you know what? This rate cut means as much to me as the other cuts you gave, & lets not forget that amazing vat cut that our unelected leader gave us, it’s made so much difference to my life I’m going to go straight out & by that bigger TV & that new car I wanted!
I can’t wait to borrow some money, to make some only thinks of itself bank, even richer, & as for what I spend it on, I am almost falling over myself to buy some products made abroad & see the profit go overseas! Oh diddumes! Have I said something not politically correct? HOW DARE I want to stick up for, & worry about my own people, that’s just not ALLOWED any more is it?

Mandelson was talking tonight about how Britain was the heart of the industrial revolution, it’s a good job we didn’t have Labours PC world in place back then because it would have had to have been shared around the world & all on sundry would have been invited in to take advantage of our technology, how great would we have been then?
Let’s think back further to Britain setting up trading posts around the world, we did that because Britain was a great powerful, proud country & what the people did with the technology it had was for the good of Britain & that’s just how it was, there wasn’t xenophobia or protectionism, just a love for your country, we are now told we have to love the world, pass me the puke bucket.

I can hear you thinking, I’m just some little Englander, yes! I suppose I am!
But don’t get me wrong! I want to trade with everyone around the world, I want their stuff, but I want to trade with things us Brits have made ourselves & improve the life style of the nation with the profit we have made from those products.

The new capitalist thinking has to be look after your own first, because there isn’t enough wealth to go around the world & life is hard enough without some do gooding MP making me share the little I have, I only have to look around to see how well those do gooding ideas have been so far!

Yes I’m inward thinking & can’t see beyond this little box I live in, the thing is I don’t want to work to save the world & if the powers that be are basically telling me I HAVE to except that the are others worse off than me in the world & I should be prepared to start giving most of what I have away now, then sod that!
If the powers that be want to give away mostly everything I have then they don’t really want me or Britain to do well in the world do they?

I give up!

[Mark Fulford]

This is a bad day for the Pound...

Except, Tanuki, after the announcement the Pound gained more than a cent on the dollar. A really bad day for the pound was 2$ back in the summer. That screwed anybody trying to export.

You can't borrow your way out of debt.

Except, Tanuki, that's just a soundbite with no substance. You can borrow your way out of debt, provided that you’re spending your borrowings wisely. Otherwise (and by your logic) banks would never lend.

Unfortunately for the Conservative Party, Gordon Brown is handling the recession quite well.

It is wise to keep people in work, where they remain productive, rather than ultimately paying even more (and borrowing even more) to see them fall unemployed and reliant on state handouts.

Compared to the variations that business copes with, the contraction in the economy is relatively small. The contraction can clearly be mitigated by increasing people’s spending power. The reductions in interest and VAT rates undeniably gives people (and home-owners in particular) more disposable income.

The low interest rates force savers to look for other productive uses for their money, i.e. investing in business. It is a good time to have a good business model because investors need you.

[Cleethorpes Rock]

This rate cut won't make a damn bit of difference. Does George Osborne think we can all walk into the Bank and get a £20,000 unsecured loan at 1% as a result of this?

Osborne needs to start giving it to the British people straight. The whole country needs to grow up, stop thinking we can have whatever we like on the never never, stop expecting the state to look after them from cradle to grave, stop throwing money around we don't have, stop pretending the government can solve all our problems and start FACING FACTS.

Why can't we just give the brutal truth to the British people? Namely:

- We are £1 trillion in debt.
- We can't afford to pay the pensions of government employees.
- The state pension in a giant Ponzi scheme that most of us will never get our money out of.
- Taxes are too high.
- Borrowing is too high.
- The pound is becoming worthless.
- Government is too big.
- We need to live within our means.

Why is John Redwood the only one telling the truth on this?

[m dowding]

You cannot beat the trend. The trend is awful. The only way out is sensible money. Which equals high interest rates. Osborne has lost my confidence. This is stupid and I just might need to defect.

[The Bishop Groans]

"The low interest rates force savers to look for other productive uses for their money, i.e. investing in business. It is a good time to have a good business model because investors need you."

Not little old lady's on limited funds. Please don't suggest moving their funds to derivative trading, spread betting or something else risky. For the vast majority of savers a risky investment would be a bad investment. I think the dream of a shareholder society has taken a very big hit indeed. I have a fairly good idea about how the stock market works and maybe I could spot a few good investments, but if it went wrong I would be in real trouble. People really should only invest money that can afford to lose. If you follow that rule nothing is going to destroy your nest egg. Even so the current interest rates are slowly sapping our savings its a real problem to those of us who are not rich by anyone's standards.

[The Bishop Swine]

T. England good post made me L.O.L.

[Guy]

All the people complaining about Osborne on this topic have missed some basic facts.

1.0% vs 1.5% makes very little real difference to savers so Redwood "defending" savers at 1.5% is laughable.

The tax saving in removing the basic rate makes up most of the difference between 1.0 and 1.5% therefore savers are not that much worse off whilst borrowers save money. It is not an ideal situation but stop bashing Osborne on this.
I like Redwood for his principled stands but he is not in a leadership position for a reason - we would not win a GE.

[Mike]

I cannot see how people equate Osborne comments with socialism. Lets not get the Republicans (GOP in the US) disease of hyperbole and gross exaggeration. The Conservative party will be a much better Government than Labour and the general thrust of their policies will be Conservative in nature. Lets not get hysterical and all calm down.

[John Broughton]

Guy @ 22:33

You completely miss the point; JR has defended savers from rates far higher than 1.5%. AND if you are a saver it certainly is not laughable please THINK!

[pp]

Osborne clearly seems to be wrong.

He needs to explain his logic if he is to get any support.

In my view rates should have gone *UP* - they make no real difference at the moment, so they should be pitched at the right rate for when they become effective again...

When your TV suddenly goes quiet, you first turn up the volume - when you realise that isn't making a difference, you reset it to a normal level and fiddle with the other controls...

[Philip]

While George Osborne's tax proposals to help savers and pensioners is right, I think John Redwood basically has it right.

While 'saving for a rainy day' when one's money could be used to benefit others may be questionable, saving and spending what one has is acting responsibly, compared to borrowing to spend what one doesn't have and can't repay. (Labour of course spends what it doesn't have...)

It is regrettable if those who have done the right thing are being penalised.

[The Bishop swine]

!"1.0% vs 1.5% makes very little real difference to savers so Redwood "defending" savers at 1.5% is laughable."
Yes but 4.5% was already a very low rate in historical terms. We have never been here before , not once. The Brownies are taking a very big gamble, with all of our money. Look at the Pound v Euro our money is weak and getting weaker.In this situation you would expect far more of a biting attack from G.O. and its not happening. He just sits there looking half asleep. I am starting to have very grave concerns about our leadership all over again. Are their "outside" interests clouding their judgment, or are they completely wrong footed and unable to offer any alternative. Redwood at least has the courage of his convictions and is starting to look as necessary for victory as Clark. If for no other reason than to balance the wets in the shadow cabinet. A 10% lead will be nothing if the party faithful lose confidence in the partnership of G.O. and D.C. For the moment I am reading between the lines and assuming that they are true blue Conservatives but this ominous silence on such issue is starting to undermine that feeling. Winning alone isn't much use, if Mclabour is swapped for mctorys.

[Mike]

You completely miss the point; JR has defended savers from rates far higher than 1.5%. AND if you are a saver it certainly is not laughable please THINK!

Posted by: John Broughton | February 05, 2009 at 23:16

John - I do think, 0.5% (0.4% after tax) is not that much of a difference. That is a fact at these levels of interest rates. I completely agree that JR and others supported higher rates and as a saver of course I would like 4.5% etc. But we are where we are and what good would have been had if Osbourne came out against this cut. It makes very little difference in the real world. I think a lot of Conservatives on here do not always live in the real world. A Conservative Government in 2010 will make a huge improvement on this current one in many areas. Lets not get hung up on something like this that has little relevance. There are 8-10 million Conservatives out in the country who want good governance and I don`t believe they are best served by excitable people in here getting overwrought on this one, small issue.

[Mike]

If interest rates went upto 4.5% now the economy would suffer - every industrialised nation has cut rates. All those who support higher rates sound like they support the ECB which has been the central bank most reluctant to cut rates.

So when people mention higher rates please think through the consequences because I don`t believe anyone in business (IoD, BCC etc) wants markedly higher rates just now.

[GB£.com]

Gideon takes his maths exam:

A pensioner on the basic rate of tax has £10000 in the bank. Consider these two scenarios:

a) Savings rate of 5%, tax on interest of 25% leaving the pensioner with £375 gain at the end of the year (500 interest less 125 tax).

b) Savings at 1%, 0% tax, leaving the pensioner with 100 pounds.

Question: Would the prudent pensioner saver prefer scenario a or b?

[Malcolm Dunn]

I too side with Redwood. This was the last base rate shot left and I really doubt it will make a difference. I wonder if the BoE is being pressured to drive sterling even lower? We will pay a price for that eventually.
George has to concentrate on his role as Shadow Chancellor 100% and give up his election co-ordinator role. He should also do what he believes is right not just electorally popular. People would respect him more if he did that.

[John Broughton]

Mike @ 1:25 and 1:26.

Some very significant points are being missed here and I'll give three examples.

My elderly mother relies (relied!) on her savings income which has now been reduced by something of the order of 80% effectively reducing her to penury. Net effect is a reduction in her spending on essentials which will not help the economy.

What matters about banks and the loans they have outstanding is the rate over base that is charged. In most cases I know about (personally through my work) the margin over base has increased as base rate has declined. Net effect no benefit to the borrower. NB there are extreme cases reported to me where rates over base in excess of 20% are being proposed.

So far as mortgages are concerned where people remain in employment there is a reasonable expectation that higher rates may well be manageable although possibly uncomfortable. If one loses one's employment clearly any amount is not manageable.

Finally my advice to anybody finding themselves with additional disposable income following reductions in mortgage payments is to reduce any other outstading debt - particularly credit cards.

I see the above as reasoned and sensible and the only conclusion to be drawn is that base rate reductions disadvantage savers for little (if any) overall economic benefit and thrift can be seen to benefit the profligate.

[pp]

Why did the government give a penny of our money to the banks for them to sit on when they could have cut our taxes and let us put it directly in to things like this:

www.zopa.com

Put up your money, set your rate - job done.

Banking distilled to its essence, all the expensive middle men are the first waste product to evaporate... Along with government interference.

Migrating responsiblity, control and taxes away from the government to the individual is exactly what the tories should be shouting from the roof tops.

[Cllr Jim Craw]

I am APPALLED that my income from savings will be wiped out by the cut in interest rates. I might as well just spend it! Who would that help?

We have a saying in Yorkshire, where I grew up. You don't get owt for nowt. Now you don't get nowt for owt. SHAME.

Jim Craw, Glossop

[MikeA]

Two thoughts:
1. Of course it's right to cut interest rates now. We need people to spend, not save. Duh!
2. The Tory savings tax proposal is, in effect, a higher interest rate, reached at a cost. It's deeply stupid now.

It's not really possible to think that both are a good idea. Ergo 'Guy' works fir George Osborne.

[GB£.com]

". Of course it's right to cut interest rates now. We need people to spend, not save. Duh!"

Well right now we have savers who are not spending, and spenders who have no money to spend as the banks won't lend them any money.

So if you encourage savers, more will save, and thus the banks will have the funds to lend to the spenders.

The low base rate is not being passed on to borrowers anyway, so cutting it simply punishes savers. Great policy...

"Two thoughts"
Duh! MikeA, I really think you should have limited your thoughts to just one, as having two of them stretched your capacity somewhat.

[Joanna]

Almost everyone on this thread has it 100% wrong. Osborne is in line with almost all serious economists. low interest rates are painful for some but exactly what is needed to reduce the pain for overleveraged companies, individuals and banks. they are a logical step towards further quantitative easing. Redwood is a populist with very little understanding of economics

[The Bishop Swine]

"Osborne is in line with almost all serious economists. "

That isn't my personal concern about G.O. I believe he should be a deal more aggressive when there is an open goal in front of him.

"Redwood is a populist with very little understanding of economics"

That is poppy rot.

" low interest rates are painful for some but exactly what is needed to reduce the pain for over-leveraged companies"

And we should not mind that they got themselves into a hole? We should, it seems, spend our savings to prop up these incompetents.

"a logical step towards further quantitative easing" Which means printing money. Maybe its inevitable but its not a "good thing" in itself now is it?

Low interest rates impact people who have relatively small amounts of savings. It hits the old who saved for their old age. It penalises the prudent, those who save up rather than get a loan. Maybe we have no choice but to lower interest rates but we should be apologetic rather than arrogant.
G.O. should be at least paying lip service to those who are suffering for no fault of their own.

[Patrick Harris]

A bit of education for the Tory dinner money monitor.
If the base rate reduces to zero, which you would seem to support. there will be no interest to tax and therefor your stupid idea falls flat and we, the prudent savers of this country, still get shafted. - see me later.

[Mike]

People are again missing the point. As a saver I would of course love 4, 5 or even 6% interest. That is not the point here. The situation were are in (lets deal in reality people) is that the cut was from 1.5% to 1.0% - that make svery little difference to a saver. Lets take Gideon's example :

GBP10,000 - 1.5% interest = GBP150 a year and with 1.0% interest you get GBP100 a year. I do not think GBP50 a year on 10000 is going to make a huge difference (doesn`t cover a weeks food spending at Tesco)

The recession will get deeper if people do not spend. There are logical reasons not to spend - losing your job, worried about your financial situation etc but the bottom line is that because people lack confidence they are not spending, not buying things therefore companies cut back which means higher unemployment and lower confidence. This is a vicious circle.

[Mack]

Osborne should really give up his day job and let someone who knows what they are talking about - John Redwood - handle the economics portfolio. A cynic could be forgiven for suspecting that, maybe, "Dave" has a cunning plan: he doesn't want to win the next election and have to make the touch decisions necessary to sort out Brown's mess. If a hung parliament is what the Tories want then Osborne is an ideal Shallow - sorry - Shadow Chancellor

[Robert]

MarkFulford - please digest the following -
Corporate bonds are now at multi decade lows in relative and absolute terms. In the last four global bear markets, extreme valuation lows for corporate bonds have always resulted in rising equities. We expect the relationship to hold. In contrast, the most
risky investment is “return-free” government bonds. Supply of government paper is ballooning. The projected double digit budget deficits do not take into account the colossal contingent liabilities of a
bankrupt national banking system. For example, the UK’s banking assets are 5.3x the government’s budgeted revenue, and 117x foreign reserves. This is why we continue our mantra of ‘ABS’: Anything But Sterling. Internationally, relative to both corporate bonds and equities, government paper has
never been more expensive.
A fixed exchange rate means the currency cannot be devalued; Ireland must simply implode, the more so as a quarter of all exports head towards the UK, where sterling has depreciated by over 25% in nine months. World budget deficit numbers for 2009 do not take into account the colossal contingent liabilities of bankrupt banking systems; again, Ireland stands out as a basket case. The ratio of banking assets to budgeted revenue is 26x, versus a much lower 5.3x and 5.9x for the UK and the US. Worse, the ratio of Ireland’s banking assets to foreign reserves is a staggering 3,117 times.At present the Fed is the most noisily aggressive in terms of balance sheet expansion (+129% in under a year) and growth in money supply; yet despite cautious mutterings, the prize for playing fast and loose falls to the Bank of England, whose balance sheet has increased by 150% in the same period.The monetary base of the BoE has risen by 35% which is unprecedented. Governments and their treasuries will do whatever is necessary to unlock credit markets, with the principle purpose of creating inflation.The greatest fiscal and monetary stimulus in history must have major consequences (some unintended). These include budget deficits growing like mushrooms, private sector borrowing being
crowded out and large increases in taxation. Thus when lending starts to grow again, it will stay anaemic. Another cause for weak consumption will be rising unemployment, with the most borrowed western economies being the worst affected. We expect British unemployment to exceed 10%, as in the 1980s. By definition, people without work cut expenditure. On top of this, the beleaguered
individual will suffer price rises in many sectors. As strong companies gobble up the weak - whose slow death throes through lack of credit will be like a B horror movie - so they will cease discounting or even selling below cost and start to push through price increases. The consumer has had a bonanza
this century - being able to choose to buy from many sources (think of the myriad budget airlines). Industry concentration and the natural urge of companies to fix prices means this holiday, sadly, is over. Consumers will be the loser as pricing power shifts from them to the corporation.Indebted industrial countries have a similar reliance on the consumer. Thus there is a structural shift from the pattern of the last two decades where the West consumed what Asia produced. Basically we can the orthodox route favoured by all those economists who missed the artificial leverage or we can cut back Government expendure to focus on real economic improvements - eg infrastructure, education and low employment taxation to encourage entrerprise otherewise the picture I have painted on anaemic growth - high taxation , high interest rates and basically depressed economy for the next 5, possibly 10 years is a done deal. The real price of money if market forces were allowed to operate would be 5-6%, which would be a better hurdle to price risk. All we are likely to see is a huge inflationary bubble which will wreck our economy again.

[GB£.com]

Mike @13:25,

You are the one missing the point.

Spenders will spend when they can borrow money from the banks.

The banks will lend to the spenders when they have access to cheap funds to lend on for a profit.

So the missing link is to encourage people to put their money in the bank to enable this all to happen.

How do you do that? Um, by offering people an attractive savings rate!

Your idea of somehow turning people who are natural savers into spenders to help the economy is about as likely as Cameron claiming to be the Heir to Thatcher (unless Brown happens to do it the week before - see 2007)

[Mike]

GB.com - do not insult either Margaret Thatcher or david Cameron. You do not sound like a loyal Conservative.
I agree you need to attract savers. So please tell me of a single country (in the indutralised world at least) that has a good savings rate, say 4+%? Not the Euro zone, not the US, not Canada and not us. So this is a purely academic argument that misses the real world of what is happening. We can all agree on the theory but do you advocate the Bank of England raising rates to say 4%? Simple question.

[Patrick Harris]

Simple answer - Yes

[Steve Foley]

The reason people are not spending at present even with "fire sale" prices and almost zero interest is fear of unemployment. Every news programme brings the sorrowful information that hundreds if not thousands of people are to lose their jobs from well known household name companies.

Now I have a few thousand in savings earning far less than 1% in a deposit a/c and that is subject to tax. In a normal situation I would have bought myself a new Desktop PC as my old work horse has come to the end of its upgrade path and I really could do with a new one. Fear of being thrown onto the Dole makes me keep the old Computer and use my more modern Laptop as back-up although it has its drawbacks.

That is why many people will not spend during this Economic Depression.

Brown/Darling's VAT cut of 2.5% was doomed to failure as one has to spend at least £10k to make it worthwhile, far better to have raised the Income Tax and NHI Threshold to £10k which would have put money straight into people's pay-cheque.

Unless you are speaking in sums of £100k plus it simply is not worth saving at present. Also the double whammy comes when you are an OAP and then miss out on the Benefits you have paid for and are entitled to as your Capital is taken into account. I know an OAP in his late 80s who is in that situation now owing to the prudence of his late wife. They went without and saved and now he is suffering for that with a peppercorn interest from his savings but having to pay for home helps, meals on wheels etc which his equally aged next door neighbour who enjoyed life when younger with little luxuries , overseas holidays, etc gets for free from the Local Council as he has no capital.

[Mike]

Patrick - at least you are honest even if no reputable economist agrees with your proposed course of action. The Pound would strengthen choking of exports even further, mortgages and loans would be more expensive. Yes banks would probably have more deposits (not a guarantee though) but they would have to loan the money out at a higher rate than they paying in savings (thats how they make money) so you would be loaning out at 5-6%. I don`t think that would help house sales or any other consumer activity. Yes excessive consumption has caused a problem but choking of what consumption is left will cause unemployment and further the recession.

[Mike]

Steve - I completely agree with you. The VAT cut was pointless and cutting income taxes were the best route. You make a very valid point that fear of unemployment (even if unfounded) is causing reduced consumption which then increases unemployment. As I said earlier a viscous cycle which is hard to break.

[JM]

Given that the Givernment is storing up tax rises for the future, might one way of mitigating this be to direct that the whole of the public sector takes a 10% pay cut or face large-scale redundancies instead? At the moment the public sector is insulated from the misery that those of us in the private sector face whilst we look forward to paying their gold plated pensions in due course. By cutting their pay now we save money both now - thereby assisting with payment towards the flawed bank recapitalisation project and reducing our liabilities for the future.

[Joe James B]

As John Redwood put it on Wednesday, this is violently yanking a slow responding shower to extremes, and getting alternately scalded and frozen.
Unfortunately, it's now broken.

[Mike]

I agree with JM about reducing the public sector wage (and pension) bill. That is the only sustainable way we will get a lean, efficient Government with an acceptable level of tax and debt. It is disgraceful that the public debt is going from 40 to 70% of GDP in just 3 years.

[Midnight Blue]

"might one way of mitigating this be to direct that the whole of the public sector takes a 10% pay cut or face large-scale redundancies instead"

Even those earning less than 20k per year? Surely rather than clobber everyone in the public sector regardless of what they do or how much they earn, it would be better to eliminate completely all the ridiculous non jobs that seem to have appeared from nowhere (Climate Change Partnership Regional Programme Managers - I'm looking at you!)

[Matthew Reynolds]

As usual John Redwood the genius is right and George Osborne the over-promoted light-weight is wrong. Osborne vs Darling is just a dull score draw - Redwood would take Darling apart big-time.

It just shows you that John Redwood is the right choice for Shadow Chancellor ( with the excellent David Davis as Shadow Chief Secretary). That combination would scare Labor to bits - those hard-working right wingers would knock lumps out of the government.

We need to oppose the government - supporting their economic policies since 1997 has not done us much good. The Tories are ahead because people want Brown out rather than because they love Cameron. Jeff Randall is right about that - the old Thatcher adage about oppositions not winning elections but governments losing them is I think about to be vindicated when Labor lose the 2010 general election.

The question is that are enough of the shadow cabinet tough enough and experienced enough to rescue UK plc from this Brown inspired malaise ? David Davis , John Redwood , Sir Malcolm Rifkind , Lord Forsyth , Lord Saatchi and Iain Duncan-Smith could make a positive contribution to any Cameron Cabinet. The voters are right to say that the shadow cabinet are lightweight. This could yet cause a hung parliament as however much voters hate & blame Brown for this crisis they may fear the inexperienced and light weight Cameron-Osborne duo taking over when they have yet to offer an economic recovery plan that involves substance not slogans.

While I am pleased about Mr Grayling , Mr Pickles and Mr Clarke getting promoted along with Mr Hague Peter Riddell is right that the shadow cabinet is to big. If we want smaller government then let us prefigure that in opposition by streamlining the front-bench. We should start as we mean to go on - a smaller shadow cabinet promoting the virtues of thrift would be a good start ! If interest rates are this low then no one will save and banks will not have the funds to lend while the bank rate reduction will just hurt savers instead of being passed on to people with a mortgage. There are more savers than people with mortgages - I thought that democracy meant that the will of the majority prevailed ?

Could someone tell Mr Osborne that it is the government spending plans that he & his predecessors pledged to match and the Bank of England regime that successive Tory shadow chancellors accepted that have caused this mess ? John Redwood knows that spending what you do not have is madness and for that reason that great man ought to be shadow chancellor.

[Mike]

One basic fact people have missed. It is irrelevant what Osbrone, Darling or Redwood think about the rate cut. The independent Bank of England sets rates. They (who are more trained in these matters than any of us) decided to do this on their own.

[Mark Fulford]

Robert, I digested your extensive comments, thank you. I’m afraid I can’t see how they’re relevant to the points I made.

[Patrick Harris]

Mike,
a) Name a reputable economist?
b) If the UK were offering the best interest rates in the world where would all the money be deposited??
I would hazard a guess that it would be lodged with the UK institutions, U(ha ha)K - loads-a-money = no unemployment.

[Mike]

Patrick if it wa sso simple then why has no other industrialised nation taken the course of action you suggest.
Sometimes seemingly simple answers are not correct.
Also John Redwood is a great Conservative but some people on here treat him as God. He is sometimes wrong (not necessarilly on this issue).