LibLink: Vince Cable: It’s time to tackle the UK’s dangerous addiction to debt

One of Vince Cable’s claim to fame is that he accurately predicted the 2007 financial crash. Ten years on, he recently wrote an article for City AM in which he said that our economy was again at risk because of high debt levels.

Debt, in itself, isn’t bad. He talks about his own experience:

Indeed, my own youthful borrowing included buying my late wife a grand piano on an overdraft, a decision that underpinned 33 years of happy marriage. (And I paid off the debt after a struggle.)

The issue with debt is one of limits and sustainability, for both the individual and the wider financial system. The same, clearly, applies to government debt and corporate and financial sector leverage.

What the 2008 financial crisis and its aftershocks have taught us is that those limits may be closer than we think – and, once crossed, can lead to rapid and painful corrections.

He looks at the current situation in which we are seeing high levels of personal debt again:

Optimists would accuse me of scaremongering, given the asset side of the household balance sheet looks healthy. Mortgage debt accounts for around 90 per cent of the total, and asset prices have boomed such that the housing stock is worth roughly five times mortgage liabilities. No problem, then?

Well, not quite. As is usually the case, the problems are on the margins rather than in the averages. Recent Bank of England figures show unsecured debt (credit card spending, personal loans) growing at four times the rate of mortgage debt, while the household savings ratio has fallen to its lowest level on record.

Within mortgage debt itself, the IMF has picked up on a worrying number of new mortgages with high loan-to-income ratios, leading it to conclude that “such high leverage significantly exposes households and banks to interest-rate, income, and house-price shocks”.

What should we be doing?

The key risk we face is that growth becomes almost wholly dependent on debt-driven spending, rather than intelligent, long term investment. Although unemployment is historically low, and growth (until recently) has been respectable, the UK faces deep problems reflected in low and falling productivity, stagnant real wages, and regional inequality.

By artificially propping up consumer demand, debt has kept our economy going while delaying the urgent need to boost investment and innovation.

This cannot, and should not continue any longer – it is time now to put our economy on a more sustainable footing.

You can read the whole article here.

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  • Michael Cole 13th Aug '17 - 12:29pm

    As ever, Vince’s analysis is logical and realistic.

    The problem is that a majority of people don’t want to hear it. They prefer to listen and vote for Corbyn’s empty promises or the Conservative mantra that the economy is ‘strong and robust’.

    Heaven knows what it will all look like post-Brexit (if it happens).

  • People prefer illusions rather than reality, that is a given. Reality however has a way of intruding and making us face up to it. At the present time the majority of the population is indulging in a wish fest. We have the brave Brexiteers chanting all is well and faries must live as reality rolls over them. We have the Corbynites thirsting for Lexit, whatever that is, but lacking the resources to fulfil it. All this wishing based on hope and an overdraft, this will not end well.
    Worth pointing out that the lights have been flashing red for a recession for quite awhile tis only cheap credit that has kept that wolf away and it can’t last forever. However as someone once said the market’s can stay irrational long than you can stay solvent.

  • Michael Cole 13th Aug ’17 – 12:29pm: Heaven knows what it will all look like post-Brexit…

    Any change to our terms of trade, actual or anticipated, is likely to be reflected in the exchange rate. The decline in sterling is already helping to rebalance the UK economy…

    ‘Mervyn King on Brexit, crisis supervision, economic rebalancing and reforming the IMF’ [August 2016]:

    The UK economy has to be rebalanced one way or another, ‘Remain’ or ‘Leave’. We need a level of the exchange rate of sterling much closer to the level we had in the middle of 2013. The fall in sterling we’ve seen since the vote has merely brought the effective exchange rate of sterling back to its level in mid-2013. That rose by over 16% between the middle of 2013 and late 2015, and was very unfortunate in terms of our ability to rebalance the economy. We are now in a better position to rebalance the UK economy.

    ‘Manufacturers report strong output growth’ [July 2017]

    Rain Newton-Smith, CBI Chief Economist, said:

    ‘Output growth among UK manufacturers is the highest we’ve seen since the mid ’90s, prompting the strongest hiring spree we’ve seen in the last three years. Cost pressures are easing and firms are upbeat about the outlook for export orders.

    ‘It’s great to see the benefits from the decline in sterling for UK exporters feeding through. But the flipside is the broader hit to consumer spending power across the economy from stronger inflation, which is likely to have fuelled the slowdown in the economy in Q1 and is expected to pull down growth in Q2.’

  • Steve Trevethan 13th Aug '17 - 1:42pm

    “It’s time to tackle the UK’s dangerous addiction to debt and food banks!” would be a more accurate title.

    When people with such important and skill requiring jobs increasingly use food banks to feed their chronically hungry children and because they are starving there is something fundamentally wrong with our socio-economic policies and/or practices.
    To blame poor debtors for the problem is both inaccurate and a diversion from detailed analysis.

    The crunch was caused and not just triggered by the banks abusing the repeal of the Glass-Steagall Act under Mr Clinton and our banks’ abuse of Mr Brown’s “light touch regulation.”
    Those in inappropriate debt are the unfortunate, the unwise, the ignorant and the poor. The lender is the party with the power and the knowledge. They have, at the least, a responsibility for this so serious problem. Their responsibilities and actions need highlighting and addressing too.
    For a person of Sir Vincent Cable’s education, knowledge, experience and positions of relevant power to state, “I personally SUSPECT that , after more cautious regulatory policy since the financial crisis, the banks are safe.””is, at best, most disturbing. Does he not KNOW what the current safety of the banks is?
    Perhaps he, or anyone, could explain in “ordinaryspeak” how the banks have been made safer and how this greater safety appears to be ineffective in dealing with this so serious problem?
    To what extent are banking policies, not least interest rates, affected by the derivatives market?
    For those who would like more detail on this so serious matter and the related problems resulting from “Austerity” aka. “Financial Consolidation*” let me recommend two books.
    “J Is for Junk Economics” by Michael Hudson
    Can we avoid another financial crisis? by Steve Keen

    *What about economic consolidation?

  • Bernard Aris 13th Aug '17 - 2:11pm

    Again, the LibDems and Dutch D66 point o the same kinds of risks.

    In the Netherlands, we’ve had the dual problem
    *) first of legislation from a previous era (the post-1945 Reconstruction, at the height of the Second Industrial Revolution; now we’re in the middle of the succeeding ICT Revolution with a “flat world” as Thomas Friedman called it), and
    *) second of Neoliberal “Light touch” regulation of the mortgage and banking sector.

    Part of that bygone-age-legislation was fiscal mortgage interest relief, meant for the aspiring Mondeo Man working his way up in the world, but most profitable for the people with the biggest houses and highest mortgages.
    As a result of light-touch control on what mortgage lenders were doing, it was possible for house buyers to get extra mortgage (more debt) to refurbish and expand the house you had bought. And banks tied other products (Insurance policies) to your mortgage to make that mortgage more profitable for the bank.

    D66, the Dutch LibDems, strove to lower and finally get rid of mortgage interest tax relief from 1998, but were solidly rebuked by our then (bigger) coalition government partners PvdA (Labour, for Mondeo Man) and VVD (NatLibs, for big homeowners). We kept hammering away at it, but only after the 2008-’10 banking crisis the other parties saw the sense of this. Now we’re lowering the amount of interest relief you get in stages.
    Dutch governments also introduced a maximum ratio of your income to the amount of mortgage premiums banks were allowed to offer. One bank with especially egrerious “Christmas treeing” with insuraces and suchlike of its Mortgages, DSB (17% market share in private credit), was allowed to go bust to scare off other banks from such practices; see:
    TV News coverage of people losing their house because of those added insurances (DSB not always told you they were doing it; their premiums just were remarkably lower) also helped.

    Companies like the British “payday loan” sharks never got a foothold here; do they still contribute to widespread indebtedness in the UK?

  • Bernard Aris 13th Aug '17 - 2:14pm

    Oops typo

    I meant: ratio of your income to the amount of mortgage you can get (but that workt through in the amount of premiums you pay)

  • The problem of personal debt is also caused by
    governments not creating enough well paying
    jobs. Government does have have a responsibility to create secure highly paid jobs
    for those who want them.
    Very many people get sucked into debt due to low or stagnant wages not keeping up with living costs. This is a point which we must hammer home.

  • The basic problem is that everything now goes through banks and banks are designed to produce debt. In the past people had wage packets with actually money in them so there was less borrowing. If you wanted a loan you went to the bank, now the banks are constantly pushing loans. If you wanted to reduce debt, you’d go back to physical money and make it more the business of government. However, people have grown used to hefty loans, governments too reliant on the “success” of the banking sector and the pressure to reduce the role of physical money is increasing. So there will be more debt.

  • LibDemer- government isn’t there to create jobs; businesses do that.

  • Sue Sutherland 13th Aug '17 - 3:04pm

    I realise that Vince is looking at economics policy with an expert’s eye and trying to have an economics discussion at the highest level but I can’t help agreeing with much of what Steve Trevethan says and Glenn too. Current economic policies are not just affecting people who can choose to go into debt in order to buy a bigger house, or improve their homes. They are forcing many to choose between debt, charity and the sort of poverty that eventually leads to death from starvation. People are actually going hungry in our country in 2017. Food banks provide food that doesn’t have to be cooked because people can’t afford to pay for the gas and electricity to cook a meal. It’s no longer the choice between heating and eating, it’s whether you can eat at all and many of these people are in work.
    Ours is a sick society and I’m praying that Vince can find a solution and lead us all back to health.

  • As a Trustee of a Food Bank, I would add that

    a) the public sector wage cap,
    b) the savage austerity welfare cuts, and
    c) the massive increase in student debt

    – al imposed by the Coalition Government of which Sir Vincent was a part – have exacerbated the personal debt situation and were entirely predictable.

    It doesn’t need an abacus or a trained economist to work it out.

  • Peter Martin 13th Aug '17 - 5:06pm

    Q: I think we all agree that there’s too much debt in the economy. But why?
    A: Because if the UK runs a balance of payments deficit, someone in the UK has to borrow to fund it. That can be either Govt or the Private Sector or a mixture of both.

    Q: If there was too much debt prior to the 2008 GFC why was the Base Rate sharply reduced from 5% to 0.5% in 2008/2009 and further reduced to 0.25% last year?
    A: That’s so that the Private Sector can borrow more and enable the Govt to borrow less.

    Q: So is the solution to devalue the pound and reduce the trade deficit?
    A: Its either that or we don’t worry so much about debt. Especially Government debt which very rarely has ever been repaid from one year to the next in any case. Private debt does have to be repaid. When everyone stops borrowing and starts saving/repaying simultaneously we end up with a crash.

  • Bill Fowler 13th Aug '17 - 5:18pm

    IMO we are about due for another Asian crash which will hit Western markets in turn and wreck most pensions schemes… so that will leave a UK govn with a massive debt and no way of balancing the books facing a deep cut in tax receipts just as they are trying to convince us of the merits of Brexit. Interesting times. It also has to be remembered that when you interfere with the markets by the huge fiscal stimulus of the last nine years (printing money like there is no tomorrow) then the next crash tends to be even deeper than it would normally be because the market is the market, bites back when interfered with.

    On personal debt, an awful lot of people in the UK own their house mortgage free and don’t have credit card debt… so those averaged out figures hide the reality that between a third and a quarter of the population have exceedingly high levels of mortgage and credit card debt and. would be in deep trouble if they lost a month’s income let alone their actual job.

    My only solution to all this has been to remodel my house so that I have a one bed apartments plus rooms to rent out if it all goes pop!

  • Bill Fowler 13th Aug '17 - 5:23pm

    BTW, the interest rate cut and printing of money was supposed to give the government enough time to balance the books but they never had the electoral authority to make the cuts so they just muddled their way through the mess, creating an even bigger mess as a result.

  • Everyone will remember that Vince Cable was Minister for Shafting the Young from 2010-2015. He personally presided over the trebling of tuition fees plunging two fifths of young people into a life-time of debt. Unlike him, they won’t have a grand piano to show for it! Thank goodness the SNP government protected Scotland from his policies.

    All Dr Cable’s hand-wringing about debt now does is reinforce in people’s minds that Liberal Democrats are people who say one thing to get your votes and do the opposite when in office.

  • Michael Cole 13th Aug '17 - 6:40pm

    Jeff 13th Aug ’17 – 1:30pm: With respect, you are completely wrong when you say “The decline in sterling is already helping to rebalance the UK economy…”.

    This misconception was made infamous by Harold Wilson’s ‘…the pound in your pocket…’.

    A decline in a country’s currency is a sign of a weak economy and a lack of confidence in it by foreign markets. The exchange rate is merely the mechanism which reflects this.

  • Peter Martin 13th Aug '17 - 7:17pm

    @ Michael Cole,

    “A decline in a country’s currency is a sign of a weak economy”

    This is generally the thinking in the UK. We’ve always tried to keep the pound as high as possible to keep imports cheap. A high pound also keeps our exports expensive. The result? We always run a trade deficit and have high levels of debt in our economy.

    On the other hand the Germans have always liked to have a weak currency. The Bundesbank, in pre euro days, was always willing to create extra DMs so that German exporters could sell their products competitively. Now, the euro is too weak for their economy. The Germans don’t complain. The result is a large trade surplus.

    Countries should be encouraged to keep their currencies at a level at which trade balances. It is trade imbalances which are at the root of our economic and political problems. Including Brexit.

  • @ Ian Sanderson “Scotland is, however, the home of the Student Loans Company for the whole UK. Err, no, not quite, yes Head Office in Glasgow, but also offices in Darlington and Llandudno.

    In 2014 in Coalition days, the Government sold off part of the loan book to the Nationwide and also interestingly to Deutsche Bank. Yet another twist in the Brexit tale and maybe somebody out there can tell us whether the pounds nose dive is a good or bad thing with the Deutsche connection.

    When (if?) Charles becomes King, will Benson & Hedges sponsor the Coronation ?

  • So many people argue that devaluing the currency helps exports. Well it might for the producers of reed baskets from Norfolk or Sussex trugs but for more advanced products the reality isn’t quite as convenient.
    If they ever leave their University Common Rooms and visit an actual factory (be quick they’ve nearly all gone) they will notice that our exports are made from imported raw materials, energy, components and these days complete sub-assemblies.
    The Germans are serious at engineering and manufacturing and any currency suits them. We are plagued with armies of spectators and passengers who say we should put more effort into engineering and manufacturing when they, themselves, wouldn’t lower themselves to touch either.
    At least Cable has spotted the debt crisis. he needs to look now at the nation’s debt.
    No problem for nation’s running a budget surplus but we don’t and by a huge and uncloseable gap. I ask again and again “When does our economic turn round come and how?”
    Cable talks of investment in innovation. Does he mean more white elephants like Crossrail, Hinkley Point C, HS2, GWR electrification etc etc which, of course, are huge gravy trains for the contractors involved – (that’s what they are for).
    Brexit generates a lot of passion hereabouts. It may make things worse (maybe better) but, IMHO, either way,it is actually a trivial consequence compared to the deep malaise in our national performance with all the attributes in place for the mother of all recessions.

  • Peter Martin

    “On the other hand the Germans have always liked to have a weak currency.” That’s news to me.

  • Dave Orbison 13th Aug '17 - 9:29pm

    So personal debt is bad? Too many people are borrowing? Could this have anything to do with austerity,?pay freezes, benefit cuts, benefits sanctions, zero hour contracts and student debt?

    It’s not as if people volunteered or preferred to be in debt. Government policies, yes, including the Coalition got us there.

    I doubt many have got into debt over a grand piano though. As for what can be done? The article seems to say little other than don’t borrow anymore. Sadly not a realistic option for far too many living in the real world.

    Is this the best offering Vince Cable can come up with? What next the Health spokesperson telling patients to stop being ill so as to help the Government created NHS crisis?

  • Vince’s position on debt is downright silly. He is wrong about government debt, which in the UK is sustainable and has been much larger than now in the past.

    Vince has no solution to rising debt. It is just not good enough pointing out a problem; a solution should be set out. Until he comes up with a solution he should stop going on about rising debt. As he himself states after the 2008 crash demand was decreased because people reduced their level of debt and spent less. I expect many people have increasing levels of debt because they spend more than they earn and reducing access to loans will just force them over the edge. There does not seem to be an easy solution. Also as liberals shouldn’t we trust people to decide for themselves?

    I suppose the government could pursue policies to reduce the availability of labour and other measure to increase wages, as I think the only way to decrease what someone borrows is to increase their income. However there are no guarantees as people might just spend even more.

  • Reduce the value of the pound to sort things out, doesn’t that sound good until you put it in layman’s terms. In layman’s terms it’s reduce the value of peoples wages so the goods and services they produce cost less and they can’t buy as many things thus increasing exports and decreasing imports; the side effect is it impoverishes even more of the population.
    Reduce government debt as tried by the coalition and the current one. Problem is they tend to cut the wrong things with no thought of consequences. In layman’s terms it is like trying to reduce your weight by cutting off a limb, yes you weigh less but your not in anyway healthier.

    Of course what we should be doing is investing in skills and upgrading our people, but that takes thought and money and there is dammed little evidence of any desire to do that.

  • Michael,
    Whether the UK’s debt is sustainable or not is only a matter of opinion. Economists exist to argue over why the past happened. The future provides them with as many surprises as it does everyone else. No one knows and I accept your opinion.
    I have my own reading of the nation’s performance graphs and business news. I see what are, in effect, a series of profit warnings and a relentless loss in revenue generating capabilities which the Board seem unwilling, or incapable of reversing. The Balance Sheet has already been stripped of assets and the creditors line is at £1.7 trillion.
    Ask as I might of those who say this is OK I get no answer. Where does the turnround come from? A boom in manufacturing, services, agriculture? And why?

  • Al the benefits students in Scotland get are due to Barnett and very little to do with the government there. without Barnett no goodies, tis not fair but it is how it is for now at least.

  • Michael Cole 14th Aug '17 - 12:37am

    Peter Martin 13th Aug ’17 – 7:17pm: It is the international market which determines the exchange value of any currency; it is not for any one country to decide that level. It was achievable in the long-gone days of fixed exchange rates but it’s no longer the case.

    Therefore it is not possible, without massive market intervention, that “Countries should be encouraged to keep their currencies at a level at which trade balances”.

  • Jeff,

    the detailed interview with Mervyn King from 2016 covers a lot of ground and very well articulated.

    Steve, in ‘Debunking Economics’ Steve Keen puts a lot of emphasis on private sector debt (as Vince does here) and in particular on Minsky’s financial instability hypotheses which gained a lot of credence in the most recent financial crisis. Keen advocates a debt jubilee (a tool used in ancient times) when every 50 years or so as a new ruler ascended the throne farmers debts would have to be written off to restore productivity as virtually everything they produced was eaten up in rents and interest on debts.

    To some degree there are mechanisms for this with personal insolvency and in the US non-recourse loans on real estate.

    In the UK, we have a massively inflated housing market, where land values and the associated lending for housing have been driven to levels where mortgages and rents take an ever increasing proportion of the disposable income of the working population and housing benefit support payments have grown in tandem.

    That is a dangerous situation for the economic and financial stability, productivity and our external trade imbalances. Housing booms and bust have preceded almost every serious economic slump in modern times and as Mervyn King notes Monetary policy will not get us out of the next crash.

    We need to take the heat out of land inflation and start to redress the domestic imbalances that it creates. That does not mean making it harder to get mortgage finance, but making housing more affordable with tax and housing supply policies that work in concert to achieve these ends.

  • Bill Fowler 14th Aug '17 - 7:42am

    Forgot to mention that we are approaching an interesting moment in monetary lunacy, namely if the UK decided to suspend debt interest payments it would actually balance the books but would not be able to borrow any more money… but, hey, no problem it would not need to borrow.

    My brain isn’t up to the knock-on effects of this action on pensions, currency etc and subsequent government tax receipts but then I doubt if many in gov can get their head around it.

    Agree, Sir Vince should have offered some solutions to the debt problems, the only one I can think of is complete benefits/tax reform re citizen’s income etc whilst increasing the tax receipts by 20bn and decreasing benefit spending by the same amount but getting the tax rates yet lower for those on low incomes.

  • Arnold Kiel 14th Aug '17 - 8:21am

    Sir Vince is right and has already provided part of the solution: Exit from Brexit.

    People are indebted because their productivity does not support their cost of living. There are two ways to improve peoples’ productivity: skills and/or capital. Brexit deprives Britain of the latter and, consequently, from funding for the former.

    Outside the single market and the customs union, British manufacturing (nothing else than a productive bundle of skills and capital) will be largely diminished and the UK’s productivity-crisis will accelerate.

    Sterling devaluation does not help, because the UK exports very little physical local content. The successful exporters of intellectual local content (bankers, musicians, advertisers, lawyers, etc.) are not the subject of this debate: they do not depend on personal loans.

  • Bill,

    You really don’t like the old Brexiteers do you!

    “Agree, Sir Vince should have offered some solutions to the debt problems, the only one I can think of is complete benefits/tax reform re citizen’s income etc whilst increasing the tax receipts by 20bn and decreasing benefit spending by the same amount but getting the tax rates yet lower for those on low incomes.”

    Pensions £108bn 42% of the Benefit Bill and rising. You’d have to kill that sacred cow to make 20bn of savings, never mind breaking triple lock you’d have to drop their pensions by nearly 10% to make your figures.

  • I’d advise anyone looking to cut the benefit bill to look at

    It may well change your opinion on where the money goes, bit of a hint it isn’t the young and feckless no matter what you think.

  • Nonconformistradical 14th Aug '17 - 10:18am

    “I’d advise anyone looking to cut the benefit bill to look at

    This would be a great graphic except that one doesn’t see the real story until clicking on the “Show me the actual split” link. Without doing this it gives a very misleading picture suggesting the £258 billion is split evenly 6 ways

  • Steve Trevethan 14th Aug '17 - 10:43am

    Might it help if our party discussed and possibly came to clear conclusions about the creation, storage and distribution of money and debt?
    Some, possibly including members of the Bank of England, seem to be of the opinion that money is created by borrowing and the creation of debt.
    Steve Keen is interesting and informative.

    If money is created by borrowing and the creation of debt, is it actually possible to get out of debt?

  • John Probert 14th Aug '17 - 10:51am

    Wise words again from The Sage of Twickenham!

  • @ Ian Sanderson I get it that you had to deal with Glasgow, Ian, but in this day and age of telecommunications, telephones and computers isn’t that just as accessible as the opposite end of the M25, and if it was in London not Glasgow, would that guarantee you better service ?

    Glasgow is a lively interesting city with, for the most part, lively and interesting people living there. Surely you, as a liberal, are not prejudiced against Scotland are you ?

  • The reasons for debt have completely changed since the boom in debt in the early 2000s…
    Then banks fell over themselves to offer ‘secured’ loans to any mortgage holder for new cars, holidays, etc.. (maybe, even pianos).Their advertising were meant to make anyone not taking advantage of their giveaway offers feel like they were a pauper at a wedding….
    Today much of the debt is for necessities….Wages/allowances have fallen behind costs; loans for rents and even food/heating is the norm…

    Highlighting the obvious, without offering a solution, is pointless…,

  • Bill le Breton 14th Aug '17 - 11:33am

    Michael Cole, you should read Peter Martin’s 13th Aug ’17 – 7:17pm comment more carefully. He points to Germany (of old) printing DM … as our own Bank of England are doing at a considerable rate (to keep the value of the exchange rate down). These days of course the German monetary policy works indirectly through their influence on the ECB which is still engaged in QE.

    Of course a central bank can’t beat a determined group of speculators but they have to be very very brave, even these days. But even today the Bank of England’s monetary policy is not exactly passive.

    Bill Fowler points to an interesting possibility – ” we are approaching an interesting moment in monetary lunacy, namely if the UK decided to suspend debt interest payments it would actually balance the books”.

    Well actually, the Bank of England already owns nearly half of the debt and each year allows the Treasury to suspend the interest payments on these – thus reducing the size of the annual budget deficit.

    What of course it could do is ‘burn’ those gilts. One of the limiting factors of QE is that people assume that QE may one day be reversed – that it produces only a temporary increase in the money supply. Announcing that they will not reverse QE would have a dramatic effect.

  • Frankie.
    I’ve seen those graphs before. I always wonder if the payments for disability are only applicable to working age recipients or if they include pensioners or whether or not the figure for the amount paid to pensioners also includes disability payments. I’m never entirely clear how these numbers are arrived at or how they are being interpreted.

  • David Evershed 14th Aug '17 - 11:44am

    Vince Cable worries about personal debt but should be equally worried about public debt.

    The government borrows £1.5 trillion on behalf of all of us in order to defer having to pay for public services from current taxation.

    So the government is borrowing more than £20,000 for each of us – to be repaid or refinanced by our children.

    Live now – let someone else pay later.

  • Thank you frankie for the link the figures are:
    Pensions £108bn
    Disabled and ill £41bn
    Unemployed £3bn
    Housing benefit £27bn
    In work benefits £44bn
    Social Care £43bn

    @ Bill Fowler
    “the only one I can think of is complete benefits/tax reform re citizen’s income etc whilst increasing the tax receipts by 20bn and decreasing benefit spending by the same amount but getting the tax rates yet lower for those on low incomes.”

    A Citizens Income should increase the amount spent on benefits, because it is universal and so taxation has to be increased to pay for it.

    If we built 1.5 million new homes this might decrease the levels of rents and so reduce housing benefit a little. Increasing the National Living Wage above £9 per hour after 2020 would decrease in work benefits and housing benefits a little.

    Increasing taxation by £20bn would deflate the economy by over 1% directly and more once its affects have worked though the economy.

  • David Evershed,
    Well done again for trying and you always say the right thing but nothing is going to save our grandchildren from destitution and British Favellas. The hubris of this generation will see to that.
    All I read is print, borrow, tax to solve the money problem.
    Nowhere, absolutely nowhere on these blogs could you find the word ‘earn’.
    The generation yet unborn, doesn’t stand a chance.

  • Palehorse – the only way to solve debt problem is to create genuine growth of wealth creation. In the past, such growth came from new technology rather than tax and spending. By pushing business to adopt automation and energy efficiency tech, we can save lots of costs and boost productivity massively. For example, it is found that energy efficient tech can save us six Hinkeys by 2030 via cutting electricity demand. While automation in manufacturing is found to have a ROI of around £49 for each pound invested.

    Next, British average tax rate is lower than both EU and OECD averages, so another simple answer is to raise tax: income tax on all bands, reverse corporate tax cut and increase it to 22%, and let’s try a form of LVT both to raise tax and to curb property bubbles (we can start with Pensylvania model of LVT).

    Finally, a weak pound seems to have strong impact on export because our manufacturing relies on imported components. So, the final solution is some form of import substitution policy combined with export oriented strategy and discipline, the final one is crucial because with discipline, all kinds of strategy will fall apart. You can also change the way we spend on foreign aid, by scrapping the bogus “humanitarian” aid and focus entirely on ODA as a mean to boost exports.

    Overall, I support a return to mercantilism. Remember, England had a crazy protectionist policy during the First Industrial Revolution, and it declined when it switched to free trade. I mean, mercantilism wins over the long run.

    Bill Fowler – the problem with “printing money” is that the money went to bank balance sheets and rich asset holders rather than being spent as direct government stimulus to boost the economy.

  • If we lived in a closed economy the amount spent on products would equal the amount of products produced and it would be fine for the government to balance its budget.

    However savings and buying imports takes money out of the economy. This would be fine if borrowing and exports equalled the same amount.

    Therefore it is fine if the amount spent on UK products and services, plus imports, plus savings equals UK products and service produced (including exports) plus borrowing (including government borrowing). It would become a problem if borrowing was restricted.

  • Peter Martin 14th Aug '17 - 6:54pm

    @ Merseylib @Michael Cole

    Any country that deliberately holds its currency down on the Forex markets has a weaker currency than it need have. Making its exports cheaper and imports dearer. It’s not quite so obvious now that Germany has replaced its DM for the euro. The euro is too weak for Germany, which it likes, but too strong for for Italy, Spain, Greece and others.

    It’s still pretty obvious how it all still works for Denmark which is how it used to work for Germany. The Danish Govt pegs its currency, the krone, at 0.13 euro. It can do that for as long as it likes. It’s really no problem providing the free market rate for the krone is higher than that. What’s to stop it? So you are quite mistaken in thinking:

    ” It is the international market which determines the exchange value of any currency; it is not for any one country to decide that level.”

    There’s only a problem if a country tries to peg its currency at higher than the market rate. You’ll perhaps remember Black Wednesday in connection with that, when the Tory Govt tried to maintain the pound’s value at an unrealistic level.

    The Danish govt deliberately does this to run a surplus. It’s not the only one. For every country running a surplus, another country has, penny for penny, to run a deficit. Thereby creating a debt problem for us all.

  • Peter Martin – frankly the only way to eliminate all those trade deficits like that is to adopt Keynes’ Bancor system. Therefore, we must reduce deficit or even stop to be a deficit country to reduce debt. Our current account needs a trade surplus to be balanced.

    Arnold Kiel – first we need productivity to grow. Then, we need to keep wage growth below productivity growth to reduce unit labour cost and increase competitiveness like Germany or Denmark, which will allow us to reduce trade deficits.

    I also want some forms of compulsory savings

  • Michael Cole 15th Aug '17 - 10:44am

    A belated reply to Bill le Breton 14th Aug ’17 – 11:33am: The point I am making is that it is the international exchange market that determines the price of a currency.

    Reference to “Germany (of old) printing DM … as our own Bank of England are doing at a considerable rate (to keep the value of the exchange rate down).” is irrelevant.

    ‘Quantitive easing’ is usually a short-term policy to alleviate temporary internal difficulties – such as a large government deficit or to boost a flagging economy. It does not, of itself, lower the currency exchange value.

  • Steve Trevethan 15th Aug '17 - 11:43am

    Labour costs are not the only costs affecting returns and profits.

    It might aid our discussion to include costs relating to the financial aspects of business including debt costs and financial services costs.
    It might also be relevant to consider the multiplier effect of the different types of costs to business and of progressive and regressive taxation.


    “a tax cut for the wealthy will have a much smaller multiplier effect on the economy than one for the lower economic classes”

    Austerity is moving money from the “lower economic classes” to the “wealthy” which increases economic and social inequality and results in even those with skills in needed jobs, starving.

    Might the adoption of realistic, informed and clear economic/financial policies be better for the most of us and therefore our nation?

  • Steve Trevethan,

    Overvalued housing has a direct effect on prosductivity as this economist article explains:

    Productivity in Britain has actually fallen since the Financial Crisis.. Unless productivity picks up, wages cannot grow.

    Inner London is by far the most productive region of the country, thanks to its clusters of finance, technology and nerds. More than one third of new jobs created in Britain since the recession have been based in the capital. London could create more still, but its lack of housing hems it in. The average price of a home in London is £478,142 according to Nationwide, nearly double the national average. Soaring demand has met stagnant supply. In the past decade the number of homes in London has grown by just 8%. The effect of high house prices is to push people out of London (or stop them moving in), and thus put them in less productive jobs. Others waste time on marathon commutes. From 2005 to 2014 the number of people commuting into London rose by 32%.

    “But it is not just housing markets that hold back productivity. According to one study, employment in the Bay Area around San Francisco would be about five times larger than it is but for tight regulation on construction of all types. Similar work by Paul Cheshire and Christian Hilber, of the London School of Economics, estimated that in the early 2000s regulations acted as a tax worth roughly 300% in Milan and Paris, 450% in the City of London, and 800% in its West End. All in, land regulation has a massive impact on advanced economies. Lifting all the barriers to urban growth in America could raise the country’s GDP by between 6.5% and 13.5%, or by about $1 trillion-2 trillion. It is difficult to think of many other policies that would yield anything like that.”

    The adoption of realistic, informed and clear economic/financial policies would be better for the most of us and our nation – starting with a shift towards taxes that do not impair economic activity and regulations that make our economy uncompetitive.

  • Steve Trevethan 15th Aug '17 - 2:15pm

    Mr Steve Keen has some relevant, interesting and possibly useful comments.
    “We have to stop bank lending causing asset bubbles, while making it profitable for banks to lend to companies and entrepreneurs.”
    “One supreme weakness of our current system is that encourages the public to want higher leverage.—This could be prevented by limiting bank lending to some multiple of the income-earning capacity of the asset being purchased-say ten time its annual rental income [actual or imputed].”
    With lower accommodation costs, wages/salaries would be under less pressure and fewer people would resort to food banks and survival debt.

  • Steve Trevethan,

    those appear to be insightful comments from Steve Keen. Fred Harrison who studies this area of real estate credit has highlighted the seeming regularity of property bubble induced recessions hrrisson said “We know that for centuries, the land value cycle has operated on an 18-year basis. The fact is, there is a very clear 18-year pattern, which is always intersected with a mid-term recession.”

    Professor Hanke of the Cato Institute notes the same feature
    and quotes Prof. Mason Gaffney – “Bank credit swells and shrinks in synch with the land cycle. The two interact in a positive feedback process: swelling bank credit raises land prices; buyers need more credit to purchase the land; the appreciated land then serves as collateral for more bank loans, and so on.”

    Land prices eventually peak and then construction activity peaks. This is followed by a peak in the general economy. In short, land prices are a leading indicator of both construction activity and general economic activity.

    “.. every 18 years we can expect the culmination of a credit-fuelled real estate and ensuing business cycle. This, of course, doesn’t imply that all recessions are preceded by a real estate cycle. It only says that all real estate cycles have spawned economic downturns.”

    This knowledge has allowed for some prescient forecasts. The prize in that department goes to Prof. Fred Foldvary who wrote in 1997: “the next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war.”

    Amar Manzoor, author of “The Art of Industrial Warfare” and creator of the 7Tao training system for manufacturing standards, has come to the same conclusion. He said “This 18-year cycle has resulted in the massive decline of industry and has been the Achilles heel in the performance of Western economies.”

  • David Raw 13th Aug ’17 – 7:56pm:
    Yet another twist in the Brexit tale and maybe somebody out there can tell us whether the pounds nose dive is a good or bad thing with the Deutsche connection.

    Their 2015 predictions proved to be remarkably accurate…

    ‘Pound is ‘most overvalued currency in the world’, analysts claim’ [December 2015]:

    Analysts at Deutsche Bank warned that the Bank of England may not be able to raise interest rates “at all” if Britain’s recovery slows.

    It believes the pound could fall as low as $1.27 next year and $1.15 in 2017 from about $1.485 today if the US Federal Reserve continues to tighten monetary policy and the Bank of England leaves interest rates on hold.

    “We have various different ways of looking at currency valuations and what we find is that sterling is the most expensive currency out there at the moment – even including the dollar,” said Oliver Harvey, foreign exchange strategist at Deutsche Bank. Earlier this year, the International Monetary Fund said the pound was between 5pc and 15pc overvalued.

    ‘Deutsche Bank backs the City with 25-year commitment for London base’ [August 2017]:

    Profits at the group grew 143pc year-on-year to reach €575m (£487m) between January and March, significantly higher than analysts’ expectations.

  • Peter Martin 18th Aug '17 - 1:49pm

    @ David Evershed,

    So the government is borrowing more than £20,000 for each of us – to be repaid or refinanced by our children.”

    They will only have to “repay” the money to each other. They won’t be able to send it backwards or forwards in time!

    If you buy a premium bond or a national savings certificate, you are creating government debt. But, if I understand you correctly, government debt is a bad thing.

    So buying premium bonds and NS certs is a bad thing too?

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