They Blog For You

Listening to parts of the public sector, it’s as if they want things to go wrong.

Yesterday we had to be treated to a leaked letter from the Department of Justice, enabling the media to have another round of discussions of “deep and damaging cuts”. Few point out that current public spending in cash terms will rise by 14% over the period 2010-15 overall, which should give plenty of scope to protect everything worth protecting.

I often had to “cut” budgets in companies I helped lead. We never cut the quality or reduced customer service, and never treated the customers or the wider public to a running commentary on how we were going to cut budgets to make ourselves more efficient. Cutting waste, inefficiency and overall unit costs is just part of good management. It’s what you have to do if you want to compete with China.

Today the Bank of England will confirm the barrage of gloomy briefing about how it needs to cut its forecast of growth and increase its forecast of inflation. It will be implied that the “cuts” and the VAT increase are to blame. It could just be that once again the Bank has made lousy forecasts and needs to get its act together.

After all, it was the Bank which recommended the ERM which did so much economic damage in the early 1990s. It was the same Bank which fuelled the credit boom in 2005-7 with too much easy money, and the same Bank which helped bring the bloated banks down by starving the markets of money and hiking interest rates in 2007-8.

The “cuts” – a slower rate of increase in cash spending – should have come as no surprise as Labour enacted prospective cuts before they left office, and Conservatives made clear they wanted to speed these up. That should not have been difficult to forecast. The current high inflation has nothing to do with Mr Osborne’s future VAT increase, and everything to do with the Bank’s erratic monetary policy.

Finally, why does the Bank expect its QE and low interest rate strategies to produce faster growth in credit and in output, when the banking regulator is insisting on the banks holding so much more cash and capital? The Bank prints more, then the banks have to sit on it to satisfy the authorities. It also forces the commercial banks to put up prices and write less business.

The Bank seems to be following a growth rather than an inflation target. If it wants to do that more successfully it needs to mend the banks, and change the regulations.