Spending cuts are needed to change the economic weather

Mar 10 2010

City AM report (page 4) that Sir Stuart Rose, Executive Chairman at Marks & Spencer, has added his voice to the growing chorus calling for spending cuts to happen sooner rather than later:

“Our customers, Tesco’s customers, Sainsbury’s customers - they’re not stupid. They know that the UK economy is in a difficult situation, they know effectively we are over-borrowed and they know there is medicine to be taken,” he said.

“I am an advocate of having that medicine earlier and more regularly, because we know if we don’t take the medicine now, the medicine will be more painful for us to take later.”

The same story reports yet another warning from the ratings agencies, this time from Fitch. The scale of the deficit, and a growing awareness of problems being stored up for the future, must be contributing to the dire state of the economy.

In a blog yesterday, BBC economics editor Stephanie Flanders set out a couple of points about what must be happening to produce dire export figures while the pound is so weak:

"What's supposed to happen when a country's currency depreciates is that its exports become cheaper, in terms of foreign currency, and imports become more expensive. In other words, its terms of trade deteriorate: you can buy fewer imports for one unit of exports.

Though Harold Wilson famously tried to claim otherwise, that means that "the pound in our pocket" is worth less in the global marketplace than before.

But, other things equal, it should also mean that UK-manufactured goods do better against their competitors - both abroad and in their home market. As a result, we should be buying more UK-made products because they're cheaper. And so should foreigners.

Except, as I've mentioned before, that is not what we've seen. What we've seen is exports and imports falling - along with the wider economy - but exports more than imports. And there has been almost no change in our terms of trade.

In other words, UK manufacturers seem to have taken the opportunity to increase their margins - here and abroad - rather than pick up new sales."

Isn't that exactly what we would expect if the pound weakened but manufacturers were worried that the fiscal situation would mean big tax hikes in the future? If they think government is lining up to clobber them, manufacturers will batten down the hatches and take what extra returns they can as the pound collapses. Many won't invest in order to sell more if they think tomorrow's returns will be taken away in taxes to pay off today's government borrowing.

All the more reason we need cuts in spending to reassure markets, businesses and families. Our new book, out at the end of this month and available to pre-order, sets out how.