Monday, 7 March 2011

Upcoming 2011 UK Budget.

Mr. Cameron is trying to prepare the country for a budget that will be the most pro-growth in a generation and one which will encourage the entrepreneur. At the same time there is an emphasis on getting banks to lend to small business.
Mr. Cameron might find British Economic History from the early 1970s interesting. Ted Heath pressed cabinet and the chancellor, Tony Barber, into an expansionary budget; a dash for growth. At the same time the Bank of England had liberalised the high street banks to lend money without credit constraint and the World was embarking on a commodity boom fueled by the break down of the dollar peg.
The result was a classic Keynesian expansion, UK style. Investment into industry actually fell as the banks chose property as the sector to invest in. ( British banks have always favored property with its natural collateral, rather than small business). Billions went into property and when interest rates rose in November 1973 and a rent freeze was imposed, the whole house of cards collapsed. The Bank of England was forced to rescue the secondary banks and property companies collapsed alongside the banks.

In other words, the combination of pushing banks to lend, a reflationary budget with ever increasing commodity prices and low interest rates produced a classic boom and bust. Sounds familiar?

1 comment:

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