Belfast Telegraph

Tuesday 23 September 2014

Cabbie calls it right: unblocking cash flow is central to progress

1984 Chancellor of the Exchequer Nigel Lawson, holding the famous Budget Box.
1984 Chancellor of the Exchequer Nigel Lawson, holding the famous Budget Box.

It is of course another Budget tomorrow and one that the chancellor should not enjoy delivering, for this was not where we were meant to be.

We ought by now to be halfway through the coalition's deficit-cutting programme and we are only one third of the way through.

Not good; and made all the worse by the slight slippage this year, for after you make all the adjustments, it looks as though the underlying deficit this financial year will be no lower than it was last.

So we are stuck. There is no point in getting bogged down with the detail here, for there will be plenty of that later. What I think is worth doing is setting out where we are now and what we are doing in the global context – to catch some sort of feeling as to how much longer the present trudge lasts and how steep the path ahead is likely to be.

If you look back, there are not many budgets that stand out, like the 1988 one of Nigel Lawson, which cut the top rate of income tax to 40%. There are programmes that have achieved lasting resonance, but most of the stuff is forgotten.

Take for example the way in which pension rules and allowances have been chopped and changed from year to year. Set against this background, there are two broad areas of interest this week. In one, we are trying to get down to a deficit of around 2% of GDP by 2018. If that sounds a long way off, note that Germany is there already.

So there is a long, long way to go. Anyone who wants to attack the coalition for cutting the deficit too fast should be aware that, with the possible exception of Japan, we are cutting more slowly than any other large economy. This is not politics; it is maths.

The burden of keeping the economy growing will depend largely on home demand. What can be done about that?

That switches attention to the second thing to look for tomorrow: any hints as to ways in which the blockages to increased domestic demand are likely to be, well, unblocked. That is a monetary and financial issue, not a fiscal one, and we will have a new governor of the Bank of England whose job it will be to help improve the functioning of the financial system. Will Mark Carney be Mr Dyno-Rod?

Two people in the past week have given me rather similar explanations of the problem. One was the head of one of our largest pension funds, who felt that we had to find a way of getting purchasing power into the hands of people. He felt that there was a case for a cut in VAT, a policy incidentally advocated by Labour.

The other person was a London taxi driver, who put the problem more succinctly: "The trouble," he said, "is that the people who have the money don't want to spend it, and the people who want to spend it don't have the money."

Yes, indeed. Unfortunately, we had arrived by then and I didn't get his solution.

My own feeling is that the problem is more monetary than fiscal. Or put another way, the solution of unblocking financial flows, so that credit-worthy borrowers can get the money that is at present sitting around doing nothing or going into gilts, is a more appropriate one than any fiscal measures.

And that, I suggest, will be the main thing to look for this week. We won't get detail because budgets are about fiscal policy, not monetary policy, and in any case it would be sensible to wait until Mark Carney is in the post. But there are things to be done and the sooner the better.

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