Will Government Listen?

Forget the City

The Blair governments’ strategy, which has persisted since he resigned, was to avoid upsetting the City at all costs. Favourable financial conditions (e g low taxes, the prospect of big bonuses, high returns on investment) would, it was argued, keep money flowing into London and support an expanding economy.

We now know where this strategy has landed us. Without government £ Billions, the banks would have collapsed – resulting in the collapse of the capitalist economy.

It is now clear that the position would have stabilised much more quickly if, instead of the half-cock arrangements we now have, the banks had been nationalised. The government could then have determined a level of lending (and interest rates) to save jobs and stabilise the housing market.

YouGov Poll (Guardian 9 March 2009)

This poll of Labour Party members found over 70% support for most of the measures advocated on this Blog over the past 3 months. There is support for:

A Windfall Tax on excessive company profits (e g the utilities);

Ending, or drastically reducing, bonuses;

Higher rates of tax on those earning over £100,000 a year;

Greater equality (through legislation).


The only major issue (which I regard as very important) not mentioned in the report is a large reduction of expenditure on defence.

The Budget and Economic Recovery

In 20 February Blog (Will April Be The Cruellest Month?), I predicted that there would be signs (green shoots) of the recession end April/May 2009. Significant recovery will follow, however, only if the government takes further action.

The action must include job protection/creation, taking at least a million out of tax brackets, increases in allowances and pensions - and, vitally important, a strategy for repayment of the necessary borrowing over a 5 year period.

The strategy for repaying the borrowing is a key factor in creating a fairer, and more equal, society.

My proposal, which the YouGov poll indicates would be supported by a large majority of Labour Party members (and, I believe, a majority of citizens) is for borrowing of £100 Billion to fund the above.

The repayment strategy, over a 5 year period, should be along the following lines.

Reductions of expenditure (mainly defence) £35 Billion

Windfall Taxes on Companies £25 Billion

Higher Tax Rates on Personal Income £30 Billion

A Wealth Tax £10 Billion


Without this kind of strategy, any claim that the government intends to create a fairer, and more equal, society will lack conviction.

The UK Banks and the Wider Economy

Banks With No Money

The UK government’s £200 Billion package, announced 20 January 2009, follows worries about the banks. Their shares appear to be in freefall. However, the Prime Minister, and the Chancellor, insist that the purpose of the package is not to bale out the banks, but to support the wider economy - by increasing lending to companies and individuals who need mortgages.

Is this convincing? Companies and people who need mortgages have been pleading for help for months, yet the action was not taken until it became clear that the banks were in difficulty. Even more important, will the £ Billions made available end the recession?

There will obviously be some easing in the lending market as a result of the terms which accompany the £ Billions provided for the banks. This will apply especially to the government controlled Northern Rock (which is nationalised), and the Royal Bank of Scotland (where the government has a majority shareholding).

It remains to be seen how far the other banks will keep their promises. Although they have an incentive to increase lending, because they need new profitable business, they will weigh this against other considerations (such as how to maintain their dividends).

A More Radical Approach

The fundamental problem is that the government fails to recognise that the old free market system has collapsed. This would have been more obvious if the banks had collapsed, which would have happened in November if taxpayers’ money had not saved them.

Using our money in this way is justified only if it is seen as an interim measure while a new system is created. There is, sadly, no sign of the intention to build a new system. The government appears to believe that, given Billions of £s, the old system will be restored to health.

Yet, every day, it becomes increasingly evident that this will not occur. The obvious message from the past 18 months is that economies cannot be left at the mercy of the financial markets. If governments had not stepped in, especially in the USA and the UK, unemployment would be even higher than the dreadful figures reported almost daily.


Obama and the World Economy

The most promising development is the election of Barack Obama as American President, with his commitment to take urgent action to save the economy. Unlike his predecessor, he is not reluctant about government intervention. He has promised over $800 Billion to create jobs, support householders, and move towards a more equal society.

Although economic recovery in the USA is the most important single factor, the challenges are global. Ending the recession requires other countries, especially in Western Europe, to follow the new President’s lead. And the importance of the involvement of Russia, China and India in economic recovery action must also be recognised.

Where Next For The UK?

For the UK, it is essential to match (in comparative terms) Obama’s job creation and householder support measures. As I have argued in an earlier Blog, there is no danger that too many jobs would be saved, or created.

However, fundamental to success is a co-ordinated approach to the government’s involvement in the economy. It will not be possible to end the recession unless the availability of finance (for companies and mortgages) is ensured.

This will occur only if the government determines that relevant financial support is available: this cannot be left to market forces. The obvious solution is to co-ordinate the state controlled entities so that they function as a state bank. A co-ordinated operation through the Royal Bank of Scotland, Northern Rock, Bradford and Bingley, The Post Office should lead the way.

With the prospect of competition from state controlled lenders, the other banks would be more likely to co-operate. To do business, and make profits, they would have to focus on consumer need, rather than dividends and bonuses.

A New Financial World

The reality is that financial systems are now inevitably global. The UK and other West European countries must work with the new USA President to restore order and lead economic recovery.

Policy must be determined by governments working together, not by market forces. Stability is essential for greater prosperity in developing countries, as well as for the wealthier nations.

Gloom and Doom: Kick It Out

In my last blog (Urgent Action To End Recession) I pointed out that most of the forecasts for 2008 were widely inaccurate. So what notice should we take of what they are predicting for 2009?

It is obvious that we are in a recession and almost all the news is bad: indeed, it sometimes appears that the media has resolved to report only bad news. So the forecasters join in, with most of them predicting that things will get either worse, or much worse.

The underlying belief is that market forces beyond our control will continue to cause havoc and hardship. Governments, most commontators believe, can do very little to end the recession.

When the government takes action, the standard response of the Conservative opposition, and in much of the media, is to claim that it will not work. What they do not explain is what will work.

The impression they give is that they do not believe any government action will work - so do nothing, and leave it all to 'market forces'.

'Doing nothing' cannot be regarded as an acceptable response of politicians who are elected to serve all members of society. It is likely that over 70% of the population will survive the recession largely unscathed: it is for the other 30% that urgent, and radical, action is required.

The relevant criticism of the government is not that it has taken too much action, but too little. What it should do is outlined in my previous blog: Urgent Action To End Recession.

Pessimism will continue to reign if it is believed that government will allow thr recession to take its course. The challenge is that the action required can occur only with radical policy changes; changes which not only stimulate economic recovery, but also create a more fair and equal society.

Although there is no objection to government borrowing in the short term, a convincing strategy for repayment is essential. As I have argued in previous blogs (see The Current Crisis: A Layman's Perspective) , the resources can, and must, be acquired from:

(i) a windfall tax on excessive profits;

(ii) closing tax loopholes used by companies and wealthy individuals;

(iii) progressively higher rates of tax for incomes over £100,000 a year;

(iv) heavy cuts in defence expenditure (including Trident), based on a policy of not getting involved in wars.

This is not only the appropriate and necessary action but it would, I am convinced, receive widespread public support.