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Saturday, 20 November 2010

Living in a parallel universe

Alan Johnson has been on the radio quite a lot in the last few hours, probably to knife his boss, but he manages to get a few words in to enlighten u with his view of the economy.  He does his job well, and his job is to get across the Labour spin, not that he understands a word he is saying because if he did, he would know what he was saying was guff.

First he comes out with the tired old Labour line that the budget deficit is due to the bank failures in 2008.  Not so the one time cash that the government put into the banks was of the order of £60 billion, whereas the recurring budget deficit is over £150 billion a year for the last 2 and the next 5 years. The other support through guarantees is a non-cash item, largely synthetic in that it tidies up the banks' capital ratios without ever being likely to trouble the government, and doesn't show up in the deficit numbers.

No the real reason there is a deficit is that under Labour government spending rose 100% from £350 billion to £700 billion, while receipts from taxation rose only 51% from £350 billion to £530 billion, while the private sector portion of GDP has only risen 23% from £525 billion to £650 billion. First we had more tax on the private sector (remember stealth taxes) which pretty much killed off investment and then we had the Gordon Brown GDP fetish whereby the Balls and Brown thought that if they could keep pushing up the headline GDP figure by borrowing and spending the media and thus the populace would be fooled into thinking everything was fine and dandy.

If the banks were at fault, the government and FSA were equally culpable not for a lack of regulation, but for a lack of supervision. You can have all the rules you like, but usually banking risks can be handled by common sense. Banks have an obligation to be prudent but they only see their own hand in the poker game whereas the bank supervisor sees them all.  The quid pro quo of the banks consenting to be supervised (and of politicians seeking to be elected) is that those with the bank supervisory powers are supposed to take their role seriously, and not turn the whole exercise into class war/banker bashing to protect their skins while abdicating their responsibility to the tax payers.

The reality was that the UK economy (and other economies) resembled one of those cartoon characters that had run off a cliff.  For a moment they run in mid air before plummeting.  The British electorate got wise to what was happening and are clinging to a rope trying to haul themselves back.  The Irish on the other hand have hit the bottom of the ravine.

But to compound the unreality we also heard Mr Johnson tell the Conservatives that they should learn from the lesson of Ireland, that cutting Government expenditure would lead to economic collapse.  For the umpteenth time, the UK government is not spending less year on year like the Irish government, but is actually increasing spending approximately in line with inflation.  All that is being cut are the Labour spending plans which were a continuation of the same fantasy economics of the last 13 years.

If the Conservative government have anything to learn from Ireland it is the same lesson that they can learn from Labour, that a government cannot sustain a large deficit indefinitely and the shyster economists of the Labour Party deserve to be kept out of power for a long time.

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