THE DEFICIT MYTH – We’re STILL underperforming the #EU ……..#GE2015
THE DEFICIT has been a constant in our ears ever since someone at Conservative HQ discovered that because the GDP was exceptionally low in 2010, THE DEFICIT was a high percentage of it.
In fact, it was about 10%.
Gradually, because the GDP has increased, THE DEFICIT has gradually become a lower percentage of the GDP.
It is now of the order of 5%……..or as Messrs Cameron and Osborne prefer: “We have HALVED the deficit!”.
Yes…from 10% to 5%.
The graph above shows that as far as THE DEFICIT is concerned, the United Kingdom continues to UNDERPERFORM the European Union.
(If you click on the “EXPLORE DATA” link on the above graph, you will land on the official Eurostat page where you can add other countries to the graph for comparison and have as much fun with statistics as our Coalition Government did!)
Blue or Red corner?
We are constantly being reminded that that the May General Election, rather than being an ideological battle between the two usual suspects, it is much more open…..but is it?
The main two protagonists have been standing toe-to-toe in the middle of the ring for some months now…but it is is the Blue Corner’s “second” who is twitching on the slab, hoping for a last-minute crumb of absolution from the electorate. The mauve circus continues to be led towards that mythical New (EU-free) Dawn by their gurning ringmaster…hardly spilling a drop as he marches through town…always steering towards the Main Event but aware of the fate which befell the man on the slab. There are the tree-huggers flitting in and out like Noddy’s goblins…but there will always be tree huggers. The REAL Green Controller is staying well out of this Rumble in the Westminster Jungle.
The UK 2015 General Election IS a Beauty Contest but with only two contestants. No matter HOW many votes go to the Mauve Circus, the Man on the Slab or the Green Goblins, it is (and always has been) either the man in the Blue Corner or the Man in the Red Corner who will become Champion.
So which one should our money be on?
Very light on his feet (No! NOT in that way!), trains hard by performing endless U-turns and making vague promises about the future. Puts on a brave face but beginning to suffer mild stabbing pains between the shoulder blades. He likes to start fights but rarely finishes them (see European Union) but likes to say that everything will improve, if he wins his next fight. His “previous” as a former speechwriter to John Major (really?) and special adviser to Norman Lamont (in 1993!) does NOT look too good on paper but his shouting skills at the Despatch Box have become legendary…plus he has perfected the art of giving the same answer to every question! For example: “Good afternoon, Dave” “It would have been a much better afternoon if we didn’t have to clear up the mess..left behind….etc” Invented but unfortunately mislaid The Big Society.
Although youthful, his face looks as if he’s been in many fights but apparently, it’s his natural look. He suffers from the same stabbing pains as the other guy but always gives the impression that he is very thick skinned….as you’d expect from someone who once shafted and humiliated his own brother in public. His general “look” has been described by some as “weirdo chic”, as has his voice, face and hair. His “previous” is as impressive as his opponent’s…his main claim to fame being a very long-standing association with the Old Charmer himself, Gordon Brown…as an adviser and then as author of his party’s last election manifesto. A 2011 Ipsos Mori poll found him to be less popular that Iain Duncan-Smith when he was Leader of the Opposition.
THIS is going to be very close but my money will be on the Blue Corner……Purely on political guile, leadership qualities, contacts and presentation skills. However, they ARE reasonably well-matched with the main issue for both of them being the quality of the people they have surrounded themselves with.
(Who would YOU rather see across the table from Putin?)
Cameron in the “you know what”…..Again!
The judge in the British phone-hacking trial criticised Prime Minister David Cameron for not waiting until all verdicts were in before commenting on Andy Coulson, his former media chief who is facing jail.
Less than two hours after yesterday’s verdict, Cameron issued what he called a “full and frank” apology, saying he had taken Coulson’s assurances of innocence at the time at face value, something he now realised was a mistake.
The jury was however still deliberating on two further charges on Coulson.
“I asked for an explanation from the Prime Minister as to why he had issued his statement while the jury were still considering verdicts” the judge, John Saunders, said in court.
“My sole concern is to ensure that justice is done. Politicians have other imperatives and I understand that. Whether the political imperative was such that statements could not await all the verdicts, I leave to others to judge.”
In addition, the Leader of the Opposition, Ed Miliband, referred to Coulson as “a Criminal” !
The jury was discharged today after failing to reach agreement on whether Coulson was guilty of authorising illegal payments and it would now seem that Coulson will NOT be tried on the two remaining charges against him because of the premature outbursts by clueless politicians.
In spite of Cameron’s very dramatic waving-about of the Leveson report during PMQs, like some executive Teddy Bear or talisman designed to protect him from any suggestion of wrongdoing in hiring Coulson….he still doesn’t get it!
The Root Cause of this mess is not “I am innocent of negligence because I was given ASSURANCES ” but in the amateurish recruitment procedures on Planet Politics.
“I hear that he’s a good bloke”……….” I knew his father”………… We were at the same school”…….”I shagged his sister”….etc…. STILL take precedence over ability.
Coulson was “recommended”…..and of course, the Conservatives needed to please their benefactor Rupert Murdoch.
( It was Chancellor Osborne who did the recommending…….. What’s his game?)
We’re SO lucky !!
TONITE, while me and ‘er indoors go to the Bingo & then to the boozer, I’ll tell the kids to go to the railway to see if there’s any discarded coal. Then, as a special treat, they can stand outside the pub with crisps, lemonade and maybe share a Woodbine!
We’re celebrating because I heard on the bus that Chancellor wassisname says we’re going to get £15 grand and we can have it all at once! It’s all because of the dificit or something. The bloke said it was a percentage (whatever THAT is ??!) of GHQ or it could have been ATM!
Then , because we’re quite strict with the young ‘uns (ha! ha!) it’s in bed by midnight for them! After all, they’re only six and eight. We give them ten minutes start because once we get going, me and the missus can get quite noisy! One day we hope they can have their own room and we’ve been looking at bed sheets in that Argos Book!
Busy day tomorrow – it’s the Friday family trip to Tesco for a bit of light shoplifting and then off to the food bank.
Gideon’s Pensioner, Bingo & Beer Budget 2014
Above is the official “Budget Diagram” just issued by H.M. Treasury. Presumably we have to provide the crayons.
The most remarkable thing about this Budget was how small the numbers were – and I remember when ONE BILLION was a lot of money!
The ubiquitous “Scheme” was in there. This one was £3 billion to boost exports. As UK exports only represent a tiny percentage of GDP and because it is only “a scheme”…no harm done there!
UK potholes cost motorists about £730 million per year and cover a surface area of about 300 square miles. Therefore £200 million “made available for Local Authorities to bid for” seems a bit parsimonious…but nowhere near as mean as only £140 million for repairs and maintenance to flood defences. We not only need to patch up the damage but we need NEW flood defences. Presumably, the government’s resolve dissipated soon after the last COBRA meeting and when the last retina was reattached…..
The first “headline grabber” was scrapping VAT on air ambulance services and inshore rescue boats as well as scrapping Inheritance Tax for members of emergency services. As the current IHT threshold is £325,000 , THAT won’t bother too many firemen and ambulance drivers’ descendants and neither will the reform of air passenger duty!
We already knew about Ebbsfleet Garden City and PLANS for 200,000 new homes. Handy for the Ebbsfleet International Railway Station so that presumably, once HS2 has been completed,those pesky immigrants can be shunted-off to the North without even having to stop-off for a Starbucks.
Company-bought homes, valued in excess of £500,000 will now enjoy Stamp Duty of 15%. No doubt that can be recouped at the “sell” end of the process, which makes this a purely cosmetic gesture by Chancellor Gideon and a transparent attempt to create some egalitarian credentials ready for May 2015.
The Libdem-inspired tax threshold increase to £10,500 is a nice touch as is the freezing of Petrol Duty.
We have become used to the “let’s patronise the poor” section in which we have the cut in Bingo Tax, the freezing of whisky and cider duty and yet another PENNY cut in the price of a pint of beer!! ..which was negated (and worse) by the increase in cigarette prices. However, as all toffs know, the working classes smoke roll-ups so they will be unaffected!
By far the most important set of measures has all the electoral subtlety of a house brick through a crystal chandelier. It was for THE PENSIONERS (Gawd love ’em!).
When they retire, they will be able to get their liver-spotted hands on all of their Pension Pot and will NOT have to purchase an annuity. That sounds fantastic!! However, if a pensioner takes his pot of pension and blows it all on a Porsche 911….who is going to pick up the tab when there is no pension at the end of the money? Annuities are there for a reason.
In addition, when a pensioner cashes-in his or her pension, where can they keep the money? Why….a BANK, of course! Ideal! So it looks as if the banking system is due yet another windfall…but this one will be from the over 65s!
THAT is why there will be a PENSIONER BOND! The banks will be able to lock-in the money and pay 2.8% for a year’s use of the cash and only 4% for three years’. Win-Win!
The Premium Bond ceiling will be raised from £30,000 to £40,000! So, if you like your investment to REALLY be in the shape of interest-free eroding capital, then cash in your pension and give it to National Savings which, incidentally, is State-owned. Another Win-Win!
We won’t bother with the announced increase in tax threshold of a few hundred pounds for “middle income” earners because it is worth PENNIES.
The superficial generosity to the pensioners WITHOUT actually giving them anything is there for a reason!
Guess which section of the population has the highest percentage of voters?
He started it!
The Inequality and Iniquity of Growth.
This Christmas there will be millions of puzzled and sometimes hungry people staring at their televisions. Their hunger is easily explained – they are poor but what will confuse them will be the newsflashes showing smiling people shopping and talking about ‘Tablets’ at £500 each, Champagne, and a million other expensive items and yes…even Christmas turkeys!
Then they will see celebrity chefs cooking Brussels sprouts with pancetta, more champagne, the perennial debate about goose fat versus oil on roasties and how we’ll ALL be ‘over-indulging’ and falling asleep on the sofa! An alien world which some will have tasted but sadly, too many – especially children, will never inhabit.
This (to them) is a ‘make-believe’ world of plenty. They know it exists somewhere near them but it is like the parallel universe of science fiction….there but impossible to access.
They see shiny, smug politicians saying words about ‘the recession being over’….something the poor haven’t been too acutely aware of because what the politician calls ‘recession’ and ‘austerity’, they call “LIFE”.
‘The economy’ appears to be doing very well! …………..By the way….what is that?
The disparity between the most affluent Brits and the rest is hurting the economy. This chasm between rich and poor appears to have become an unacknowledged issue, primarily as the result of too many of the Cabinet belonging to ‘the Affs’. It is apparent that few understand that everyone (up to middle class) has seen their income stagnate, whilst wealthy households have really thrived.
Note: I propose to dispense with euphemisms such as “the well-off” and “society’s disadvantaged”. Let’s stick to rich and poor.
Bonuses, higher salaries, higher profits and exceptional stock market gains are flowing almost exclusively to the already-rich. Proportionately, however, the affluent household ‘spend’ represents much less of their money than that of low and middle-income consumers.
One of the priorities of this government should be to engineer a much broader spending base – one which encompasses the poor……allowing them to actually participate in the economy.
Currently, there is a very distorted picture of consumer spending because it is driven by the rich. The poor and the poorer are doing their best to keep up but inevitably need to borrow in order to spend – thus making themselves even poorer. Meanwhile, many rich are gaining profits from bank or lending company shares which are fueled by the poors’ accelerating poverty….but the rich have something else which the poor have never had: OPTIONS or CHOICE!
One very profitable option this year has been the stock market – but once the markets have calmed down (which they will!) and gains are no longer eye-wateringly high, the affluent (As and Bs) will stop spending or at least, cut back dramatically.
THAT will have an immediate and devastating effect on this virtual economic recovery. SO, it is in the government’s interest to sustain the recovery illusion by keeping interest rates low and Quantitative Easing flowing to the banks so that , from an investment point of view, the equity markets (stocks and shares) remain the only game in town, so that the rich retain their mega spending power for as long as possible – at least until May 2015!
That is a very dangerous game for any government to play.
This is the phenomenon which has created and is sustaining the ever more bitter ‘CLASS’ debate and is in danger of feeding Populism and ultimately, major unrest.
Income Inequality and not airports or trains should be the government’s priority.
There is now little doubt that in spite of government policy, the United Kingdom’s economic growth is picking up….as it is everywhere else (Global Economy!)
NOW, while the mini-recovery lasts, would be a good time for the government to tackle the INEQUALITY OF GROWTH which is not an iniquity but the iniquity of modern times.
Chancellor Gideon – Fact or Fiction?
One of the greatest pleasures in life used to be for someone to read a great work of fiction to you out loud. You would sink back, close your eyes and let it wash over you ……and all that you had to do is to compose the pictures! Unfortunately, reading out-loud is a dying art and now a pleasure only enjoyed by young children and the infirm.
So imagine the frisson of anticipation ahead of listening to Chancellor Gideon reading The Autumn Statement – (I have always been a great fan of realistic fiction!) I closed my eyes, kicked back…but…the pictures just wouldn’t come. All I could visualise was a smug fat boy with a Caligula haircut and eyes with all the charm of two bullet holes, reading with all the conviction of a posh grocer reading a Fortnum’s shopping list.
GDP..blah blah….Growth…blah blah….Deficit…blah….and so on.
Then, after the “de rigeur” and customary: “Hard-working people” , “Mess they left behind” and “Tough decisions” plus the recently conceived “It will be less that it WOULD have been”….all from the Coalition Book of Platitudes, came something about the Normal Retirement Age (NRA) moving ever closer to life expectancy!
I felt myself slowly emerging from the Treasury-induced coma.
Whether the NRA is 69, 70 or 102, it will never affect those on a private pension or those with enough money to be able to make choices.
The ability to make choices is what individual freedom is all about. One of the overriding features of this government is that too many people perceive that their choices have been compromised. Control has been wrested away from those who are relying on the State to feed and provide their shelter in old age.
Meanwhile, the “well-off” will continue to be able to stop working whenever they want to.
It is only those clapped out individuals who see retirement age as The Finishing Line who will be affected. They are the ones who used to retire at 65 and die at 67.
Soon, they will retire at 70… not quite dead but maybe wishing they were, knowing that some of their better-off acquaintances will have already been retired for 20 years.
(BTW, unemployment at the time of the 2010 General Election was 2.47 million. It is STILL 2.47 million. ……NO statistical sleight-of-hand will ever change that fact!)
United Kingdom economic growth is weak and will remain weak. That means that unemployment will stay high.(It is the same today as it was before the 2010 General Election). No amount of statistical engineering, designed to tart up the government’s performance will alter that basic fact. The latest announcement by the Prime Minister of NOT maintaining the right of the 16-25 group to claim benefits means that young graduates will now be starting their adult lives in debt with little or no help from the State which put them in debt. Reminder to the Coalition government: AMBITION is driven by SELF-ESTEEM. What the government is doing is showing that all the talk of encouraging entrepreneurship in young people is nonsense because they are destroying the very mind-set which they need to nurture.
HOUSING BENEFIT: So far ONE-THIRD of households affected by the Coalition Government’s reduced Housing Benefit are said to be in arrears with their rent. Eventually, Local Authorities will HAVE to step in – in spite of the fact that many have a non-eviction policy. Then, the Local Authority will have to ask the Government for more cash to balance its books and to provide alternative housing. The circle will have been squared. This government is ONLY looking at its own balance sheet when making what are life-changing decisions on behalf of the people affected. Luckily for them, the Socio-Economic groups which are suffering are unlikely to be Conservative voters so in effect, they don’t matter because they won’t affect the Tory vote. Meanwhile, the Tories’ self-styled social conscience, the Libdem Party, can do nothing but stand on the sidelines and wring its hands whilst dispensing warm words. Fiscal decisions are all well and good but what about the social aspects of say a small family which has had the same neighbours for years, gone t0 the same pub, the same playgroup and a which has a support structure within an area it knows, being booted out to be rehoused elsewhere? Just so that an arrogant Works and Pensions Secretary can score a few Brownie Points and a desperate Chancellor can squirrel away a few more quid into empty Treasury coffers. The so-called Bedroom Tax will do for David Cameron what the Poll Tax did for Margaret Thatcher. A scrapping of this nonsense-attempt at Social Engineering would be one U-turn which would be very, very welcome.
LIBDEM conference: Yesterday, our professional (and perpetual) political bridesmaid, the Liberal Democratic Party rejected calls from party members to relax fiscal discipline and spend more. Instead, the Party pledged broad support for the government’s austerity-focussed economic strategy. The Party is assuming that by May 2015, those elusive green shoots will have finally emerged and that they will once again ride into Westminster hanging onto Chancellor Gideon’s (straw) coat tails……………(AUSTERITY? It’s a well-known fact that if you want to make a horse to run faster, you don’t encourage it through a combination of hay and ass-kicking….you pull back on the reins as hard as possible….don’t you?)
The last time we heard a UK inflation figure, it was 2.8% per year. Today it has been announced that August inflation “fell” to 2.7%. However, the Consumer Price Index has INCREASED from 125.8 (July) to 126.4 (August). That is an increase of 0.6 in ONE MONTH, which when annualised, gives a price inflation figure of 5.7% per year! This is a situation which we’ve been amused by for quite a long time now: Inflation falling while prices increase. The magic of numbers! Here is the latest ONS bulletin. The numbers are on page 4: http://www.ons.gov.uk/ons/dcp171778_323760.pdf
UK Economy: I told you so!! But would you listen?!
A single swallow doesn’t make a summer! Now is the time to calm down and inject a bit of realism into the equation!
(Reuters) – British industrial output was flat in July and there was a marked deterioration in the trade balance, official data showed on Friday, taking some of the shine off recent strong economic data.
Output in the industrial sector – which makes up about one sixth of Britain’s economy – had been expected to edge up by 0.1 percent according to a Reuters poll.
The narrower category of manufacturing rose by 0.2 percent, just short of forecasts for a 0.3 percent rise, although June’s figure was revised up, the Office for National Statistics said.
The Bank of England pledged last month to keep interest rates on hold until unemployment falls to 7 percent, something it does not envisage happening for another three years, but the strength of recent data has encouraged traders to bet rates might rise as soon as next year.
Separate figures showed Britain’s goods trade deficit widened to 9.85 billion pounds in July after narrowing sharply in June. Economists had forecast a gap of 8.153 billion pounds.
Including services, in which Britain traditionally runs a surplus, the trade deficit widened to 3.085 billion pounds. That was more than double its level in June and the worst reading since October 2012.
Exports to non-European Union countries plunged by nearly 16 percent, the biggest monthly fall since January 2009.
Monthly trade figures are volatile but July’s figures may dampen hopes that Britain’s economic recovery is broadening and moving onto a more sustainable footing.
(Reporting by Christina Fincher and William Schomberg)
The Reports are telling us. The Statistics look good. The graphs appear to have turned a corner. Today’s good news is that August’s UK construction PMI has hit its highest level since September 2007! ALL fantastic news! However, we all look forward to the day when the population-at-large is given the means to participate in the Coalition’s “New Atlantis” because, in spite of the statistics and flim-flam, too many Brits continue to struggle. The As and Bs “have it”! Great Britain is now a proper two-nation state.
Lynton Crosby – the DEFINITIVE answer from DC…or is it?
Below is the transcript of Andrew Marr’s conversation with Prime Minister David Cameron, on the subject of Lynton Crosby, the Conservative Party’s “campaign consultant” and his input or influence on the question of cigarette packaging.
I do so without comment (it would be superfluous) – apart from reminding DC that a “question” is merely a request for information.
“So can I ask you again whether you have actually talked to him (Crosby) about this issue?”
“Well I think it is important this issue of lobbying because, well look, let me be clear he has not intervened in any way, on this or indeed on other issues and the decision, it’s very important people know this, we haven’t actually changed our policy, I mean, I think there are merits to plain paper packaging for cigarettes, we need more evidence, we need greater legal certainty, we’re not going ahead with it right now, but I certainly don’t rule it out for the future.
“So the whole thing actually, from start to finish has been something of a media invention. So, he hasn’t intervened, it would be wrong for him to intervene in any way, the decision was actually taken by me, sitting up there (points towards building in No. 10) at my kitchen table, let’s not move ahead with this now, we don’t have enough evidence, there’s too much legal uncertainty.”
“But let’s be clear, this government has been very tough on tobacco, you know we have said we’ve got to cut down on these vending machines, we’ve got to stop big shops doing big promotions, we’ve carried on with the smoking ban, we’ve put up the price of cigarettes, and if we’re too much in hock to the lobbyists as it were, why have we just published a lobbying Bill?”
“You have told me absolutely everything except the question that I was asking, which is have you talked to Lynton Crosby about this?”
“I have answered the question; he has not intervened in any single way.”
“You haven’t actually prime minister, but you won’t tell me whether you have talked to him about it?”
“I think as I’ve said, he hasn’t intervened in any single way, I think you’ll find that is an answer.”
“Yes, but its not quite an answer to the question I asked.”
“But its all you’re getting (laughs).”
“There we go.”
Wars of the Rosettes: UKIP
It used to be said that one of the biggest corporate lies was “I like a man who speaks his mind!” Nobody likes someone who tells it straight – especially if there’s an element of implied criticism.
When a company director says to an underling “Tell me what you really think about our latest initiative” what should the response be? You honestly believe that it is a crock of shit but you also know that it was the directors “baby”. If you’re wise and familiar with office politics, you tell the director exactly what you know that he wants to hear. On the other hand, if you’re a highly principled idiot, you are likely to tell the truth (your truth). That sort of response can come under the heading of “a novel way to resign”!! It is not worth the risk.
UKIP leader Nigel Farage is a straight-talking man and tells us what we want to hear – but he is obviously no idiot. He tells it straight and his disciples continue to multiply. He has two things which give him a great advantage over other party leaders. Firstly, he has what Boris Johnson has – Charisma….a carefully-cultivated roguish old-school, charm……. and he smiles a lot. Yes…it’s THAT simple!
Of course, he has the added advantage of an Establishment-led Coalition government which gives the perception of being utterly incompetent. The Labour Opposition has no discernible “bite” and is led by yet another charmless product of Planet Politics. The other bit of the Coalition (the small bit) is already in terminal decline – a full two years before the next general election. For our mate Nige, it’s like shooting fish in a barrel.
Nigel Farage can do or say whatever he damn-well pleases and there’s no-one around with the balls to censure him. He is the enemy of all the other political parties, and coincidentally they are also the voters’ enemy. But more importantly, he is the sworn enemy of the self-serving bureaucratic edifice that is the European Parliament.
His election campaign started not a few weeks ago but leapt into life months ago in Brussels as Farage demanded of Van Rompuy: “Who [the f***] are you…..?” That was the moment when many of us , whether we agreed with his politics or not, fell in love with Uncle Nigel. [The parentheses above and their content are mine!]
There was none of the political correctness which constrains David Cameron. If pushed, you can imagine Nigel saying “Barroso! you’re a twat!”- not that he would….but he has imprinted his personality on the national psyche so powerfully….that we now believe that he WOULD say what many of us are thinking.
Farage’s other great plus-point is that although he is the son of a stockbroker and attended Dulwich College, he went to work(!) (as a City commodities broker) at the age of 18. He has exactly the sort of background that the Conservatives would dearly love their leader to have.
So, as Nigel and his disciples march out of the wilderness into the political sunlight and as UKIP party contributions and sponsorships accelerate, what’s the future for the other parties?
Make no mistake, the Tory Starchamber’s Illuminati are looking very closely at their own Party leadership, as are the Trade Union leaders who set the drumbeat for the Labour party.
In the first instance, we can expect a clumsy lurch to the Right from David Cameron in a desperate attempt to woo back former Conservative supporters and hopefully, the other Miliband bought a return ticket.
Whatever the mid-term future holds, we are in for a very interesting two years.
May 2015 will be upon us very quickly!
The Budget: George IV
Yesterday’s Budget had all the marketing qualities of a statement which is already anticipating the next General Election.
A few give-aways, something for the housebuyer, a little bit for the businessman and of course, a catch phrase!. In fact , the Chancellor provided three:
The Saatchiesque “Aspiration Nation” , another “nod” to Margaret Thatcher in the shape of the “Help to Buy” and of course, “Britain is open for business!”
This was the Budget of a Chancellor who either does not fully appreciate the scale of the United Kingdom’s economic decline or who is trapped but feels that he ought to show willing and fiddle at the peripheries.
Bitter past experience has shown that direct Government interference in the housing/mortgage market always ends in tears. On the face of it, it now looks as if the government may be encouraging house purchase by those who may not be able to afford it. That is what cause the 2008 banking meltdown. Luckily for the Chancellor, there is unlikely to be a big take-up of the “interest-free up to 20%” additional loans which the government is offering. Depending on how the £130 billion in “loan guarantees” is dispensed, it may just be more Quantitative Easing in disguise. Previous form suggests that once cash is handed to the banks by government, the difficulties arise when attempts are made to prise the money from their cold grasping hands. We’ll see!
Let us hope that on this occasion, some of the cash does end up in the hands of the house buyer rather than in Stocks or Commodity speculation by the banks.
The Chancellor’s “Rabbit out of the Hat” 20% Corporation Tax Rate already applies to businesses earning up to £300,000 with a marginal rate being paid by those earning up to £1,500,000. So, for several years, this will mean very little. Yesterday’s CT announcements were for big business only.
The Chancellor’s headline-writers may have had a good day but in reality, commerce has NOT received the shot in the arm which it needs TODAY.
Finally, here’s a bit of lateral thinking: How about the government having the courage to make a massive investment in agriculture. The returns would be in the Exchequer’s coffers far sooner that having to wait for those “forced entrepreneurs” to contribute.
p.s. Gideon……sack your voice coach.
Media Regulation? No point!
What is the POINT of Regulation? IT DOESN’T ALWAYS WORK!!!!
Before our politicians scratch each others’ eyes out on Monday, fighting over Royal Commissions and Press Regulation, they should consider what good a similar process did to the Financial Services Industry.
Regulation of any sort never works 100%.
Pre the various Financial Services Acts which spawned the Financial Services Authority, the Financial Services Industry was by no means perfect but is was self-regulated.
There was the occasional mis-selling scandal, life assurance salespeople occasionally confused clients’ money with their own and the standard of technical knowledge was below average. Bankers were boring but well-behaved and Building Societies were firmly rooted in the nineteenth century.
Then suddenly, products became more complicated, less client friendly, building societies wanted to be like banks, banks wanted to be like building societies AND insurance companies AND stockbrokers!! Shiny-new MBAs were hired!
………and oh yes………financial product design became marginally MORE complicated than Rocket Science.
More training, more technical knowledge and REGULATION were needed.
So what did all that regulation achieve – apart from creating a self-perpetuating multi-million pound regulation industry?
Well, since the financial regulator arrived on the scene, we’ve been subjected to many new experiences. For starters, there was the 2008 banking meltdown. Then we had PPI mis-selling by the Retail Banks, followed by LIBOR rigging by the Investment Banks. Then of course we had those VERY naughty Interest Rate Swaps which so many SMEs signed up to. There are still many major issues which will have to be dealt with by the regulators, the hugest one being the continued use of Off-Balance Sheet Accounting by the banks.
Regulation? Code of Conduct? Snooping through Filing Cabinets? Reporting Systems? Yet another Quango?
A fat lot of good they all did in financial services!
A basic Media Code of Conduct and SELF-regulation is the ONLY way forward.
Royal Charter or no Royal Charter, self-regulation of the media or a Regulator supported by law and a Bible full of Rules and Regulations will make absolutely NO difference, either to the conduct of individuals or the behaviour of privately-owned media corporations.
Yes, it is an important issue and Lord Justice Leveson has highlighted ALL the right issues but whichever approach is taken, it will make little difference.
The only thing which is important is that the media is NEVER controlled by the State plus that the legislators learn the lesson of the car-crash that is the regulated financial services industry
Eastleigh: a UKIP lesson
Last year, I predicted as follows: “David Cameron will realise that UKIP is a clear and present danger and will begin the fight-back by the only way possible. He will adopt their policies and reinforce that by continuing to spray copious volumes of testosterone in Brussels.” ( #17 HERE )
In spite of the Conservatives’ best efforts to smear the Liberal Democrats with the ridiculously-timed media Lord Rennard “Gropegate” campaign, the Party has been humiliated in the fifteenth by-election of this lame government. The majority of all the other by-elections since 2010 were straightforward and predictable “Labour Hold” results – this one was different. Very different.
If the insufferably smug UKIP leader Nigel Farage struts any more zingily, he’ll injure himself! But who can blame him? The incompetence, the 19th Century policies, the 18th Century verbal jousting and lack of cogent communication by the other parties has helped UKIP to begin their final climb to Westminster.
Both main parties will dismiss this colossal electoral success by UKIP as a mere mid-term blip…and they will suffer because of their total lack of either proper analysis or strategy. To both main parties but especially the Conservatives, UKIP has been allowed to become (ironically) like the Eurozone – it has flourished into a problem without solution. UKIP is here to say.
The way any government operates is very straightforward. The first half of its term in office is given over to imposing the necessary “bad bits” – the policies which are bound to be unpopular.
The second half of its tenure (especially in the final 12 months leading to a General Election) is usually distinguished by the giveaways – the “nice bits”. (Tax decreases, new thresholds, share handouts etc).
This time – it will NOT work. It will not work because , in the final analysis – forget policies and promises….we vote for people we like and trust. The present Coalition government (especially the Tories) have no-one particularly likeable to offer and they have certainly “blown” the last vestiges of any pre-election trust that the electorate had in them.
But the REALLY big tactical error that the Conservatives made in Eastleigh was their choice of candidate, Mrs Maria “I say what I think” Hutchings. She was the nearest that the Tories could find to their own ersatz UKIP candidate.
They thought that they might just fool the electorate…………. and failed.
We’ve already had the traditional “Yes, it’s disappointing but I’m sure that we can win the voters back at the next General Election” announcement from the Prime Minister.
Are you sure about that, Dave?
(BTW – well done Libdems………. and Nick, there’s a difference between “stunning ” and “stunned”!)
Chancellor Gideon’s Speech.
Still wondering why Chancellor Gideon was SO keen on maintaining the United Kingdom’s AAA-rating? Scroll down this speech, made just before the last General Election. I have highlighted the important bit in red. If you then care to read the next few paragraphs, you will see how the Chancellor’s original intentions and promises are developing.
George Osborne: Mais Lecture – A New Economic Model
Rt Hon George Osborne, Wednesday, February 24 2010
Thank you for inviting me to give this annual Mais lecture. Few Mais lectures have been given at a time when the challenges facing British economic policy makers were so difficult and complex as they are today.
Britain has emerged – just – from the longest and deepest recession in living memory, but growth is proving painfully slow to return.
The overhang of private debt in our banking system and our households weighs heavy on future prosperity.
And the public finances are the worst they have ever been in peacetime, with the largest budget deficit in the developed world.
This lecture is about these present problems and the urgent need to take us into a brighter future. But consider this one stark fact about our recent past.
We are coming to the end of the first full Parliament since the Second World War when national income per person has actually declined.
Even through the dark days of the 1970s and the recessions of the early 1980s and 1990s, every full Parliament saw our GDP per capita grow.
But not this Parliament.
When people ask the famous question – “are you better off than you were five years ago?” – this will be the first election in modern British history when the answer from the government must be ‘no’.
My argument today is simple.
Britain has been failed by the economic policy framework of the last decade.
It promised stability, prudence and an end to the cycle – it delivered instability, imprudence and the biggest boom followed by the deepest bust.
We need to head in a completely new direction.
We have to move away from an economic model that was based on unsustainable private and public debt.
And we have to move to a new model of economic growth that is rooted in more investment, more savings and higher exports.
This will require new policies and new institutions.
I want to talk about three crucial components of this new model.
First, a new approach to macroeconomic and financial policy, where we seek to contain credit cycles as well as target price stability.
Second, a new fiscal policy framework, with an independent Office for Budget Responsibility to ensure that public debt is sustainable.
And third, a supply side revolution that releases the pent up enterprise and wealth creation of our country, encourages a nation of savers, and addresses the long term structural weaknesses that no government has ever properly tackled – like poor education and a welfare system that traps people in workless poverty.
In order to ensure that a Conservative Government is accountable, I have set out eight clear benchmarks for economic policy against which I expect to be judged, together with the concrete measures we will take to achieve them.
If they are met over a Parliament then we will have begun to build a new British economic model.
I also want to explain today why starting to build this new economic model is not something we can put off until next year.
We have to get on with it.
There is no choice between going for growth today and dealing with our debts tomorrow.
Indeed we will not have any meaningful growth unless we show we can deal with our debts.
For it is the lack of a credible plan to deal with the deficit that is already pushing up market interest rates, undermining the monetary stimulus that
is supporting the economy, and sapping the confidence of investors and consumers.
It is the lack of a credible plan that has the credit rating agencies threatening to downgrade us unless action is taken urgently.
This is the reality of the situation we are facing.
Those who say we should simply ignore the markets are siren voices, luring us onto the rocks.
For an economic policy maker to rail against the unpredictable nature of financial markets is like a farmer complaining about the weather.
A loss of market confidence could force dramatic tax rises and spending cuts that were indeed savage and swingeing.
That would represent a loss of economic sovereignty.
And those cuts would be far larger than the actions that are needed now in order to retain our economic freedom in the first place.
Far better to be prepared and protect ourselves against the storm.
THE DANGERS OF DEBT
Before I set out the shape of this new economic model, let us first understand the nature of that storm.
No one doubts that there were massive failures of financial regulation over the last decade.
No one seriously defends the fiscal rules, once spelt out in a Mais Lecture like this, which proved unable to prevent the Government running a budget deficit at the peak of the boom.
But we will not draw all the right lessons for the future unless we understand the deep macroeconomic roots of the crisis.
Much has already been written about what went wrong. Much more is yet to be written.
Perhaps the most significant contribution to our understanding of the origins of the crisis has been made by Professor Ken Rogoff, former Chief Economist at the IMF, and his co-author Carmen Reinhart.
In a series of papers and now a book, they have demonstrated in exhaustive historical and statistical detail that while it always seems in the heat of the crisis that ‘this time is different’, the truth is that it almost never is.
As Rogoff and Reinhart demonstrate convincingly, all financial crises ultimately have their origins in one thing – rapid and unsustainable increases in debt.
As they write, “if there is one common theme… it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks that it seems during a boom.”
So while the specific financial innovations and failures of regulation that contributed to the credit crunch were new, the underlying macroeconomic warning signs were depressingly familiar from many dozens of crises in the past.
In this context, all the signals were flashing red for the UK economy: a rapid increase in household and bank balance sheets, soaring asset prices, a persistent current account deficit, and a structural budget deficit even at the peak of the boom.
Our banks became more leveraged than American banks, and our households became more indebted than any other major economy in history.
And in the aftermath of the crisis our public debt has risen more rapidly than any other major economy.
So while private sector debt was the cause of this crisis, public sector debt is likely to be the cause of the next one.
As Ken Rogoff himself puts it, “there’s no question that the most significant vulnerability as we emerge from recession is the soaring government debt. It’s very likely that will trigger the next crisis as governments have been stretched so wide.”
The latest research suggests that once debt reaches more than about 90% of GDP the risks of a large negative impact on long term growth become highly significant.
If off-balance sheet liabilities such as public sector pensions are included we are already well beyond that.
And even on official internationally comparable measures of debt, we are forecast to break through 90% of GDP in just two years time.
Indeed, baseline projections produced this month from the Bank for International Settlements show the scale of the adjustment that is needed to avoid that risk.
Once the costs of an ageing population are accounted for, they calculate that UK debt will rise to 200% of GDP in just 10 years without significant adjustments – that’s higher than any other country except Japan.
The interest payments on that debt would rise above 10% of GDP within ten years and to almost 30% in 30 years – the highest of all the countries they analyse including Greece and Ireland.
The BIS were amongst the few organizations who can credibly claim to have warned about the risks of a global financial crisis, and now they are highlighting the next source of risk.
As they argue, “persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term potential growth potential.”
In the short term, governments should not be “lulled into complacency by the ease with which they have financed their deficits so far” – especially those with relatively weak fiscal frameworks and a high degree of dependence on foreign investors.
For an economy like the UK with such high levels of private debt, increases in market interest rates would be particularly devastating to the prospects of a private sector recovery.
We have been warned.
MONETARY AND FINANCIAL POLICY
The long term implications for our economic policy framework of the crucial role of rapid debt accumulation in causing economic instability are profound.
It forces a fundamental reassessment of the way we conduct both monetary and fiscal policy.
Let me begin with monetary policy.
In his famous Mais Lecture of 1984, Nigel Lawson argued that monetary policy should be the main tool of short term macroeconomic management while fiscal policy should be set for the medium term.
Over time that became the consensus, and it was later explicitly endorsed by the Labour Government.
The monetary policy framework developed too, from the adoption of inflation targeting by the Conservatives in 1992 to the granting of independence to the Bank of England five years later.
Nigel’s original insight remains valid today.
The next Conservative Government will keep the inflation targeting framework because the benefits of anchoring inflation expectations remain substantial.
I have said before that in office we will review, in cooperation with the independent Bank of England, what modifications are appropriate to ensure that housing costs are once again properly reflected in the target – this process is already underway at a European level but there may be a case for accelerating it.
But given the fragility and uncertainty in financial markets, let me make it absolutely clear that we have no plans to change the CPI inflation target, and we will maintain the current arrangements and protocols for making decisions around quantitative easing.
I don’t want there to be the slightest suspicion that the next Conservative Government might try to inflate its way out of the previous Government’s problems.
But it is now clear to everyone that narrow inflation targeting is not in itself sufficient for macroeconomic stability.
Given what we now know about the way that unsustainable increases in debt can cause devastating financial crises, we must be as concerned about credit cycles as we have been about business cycles.
Alan Greenspan and others made the case for ignoring credit bubbles and then ‘mopping up’ when they burst.
But even Alan now concedes that this approach has been shown to have unacceptable costs.
So as economists like Robert Shiller and others have argued, we need a more sophisticated understanding of how financial markets actually work, including the psychology that drives them away from stable equilibria.
And we need an approach that actively seeks to identify emerging imbalances and takes action to reduce them.
The question is what tools are needed to do that.
In the UK, inflation targeting succeeded in anchoring inflation expectations, but the very design of the policy framework meant that responding to an explosion in balance sheets, asset prices and macroeconomic imbalances was impossible.
Because the tools needed to deal with these imbalances had been taken away from it, the Bank of England became excessively focused on controlling consumer price inflation to the exclusion of other variables, as the Bank itself has acknowledged.
And the Financial Services Authority became a narrow financial regulator almost entirely focused on rules-based regulation.
They had neither the capacity nor the inclination to stand back and make difficult judgments about the macro context and the growth of systemic risks.
To be fair they too have also be commendably candid about those failures.
So, while much has been made of how the tripartite system led to a fatal lack of leadership when the crisis broke, the much greater failure was in the years leading up to the crisis as the imbalances built up.
Crucially, this failure was hardwired into the institutional design of the framework, and no amount of tinkering with new committees and new statutory obligations will fix it.
Indeed we are in danger of making similar mistakes in the aftermath of the crisis, with too little consideration of the impact of higher capital and liquidity requirements on overall financial conditions and the pace of recovery.
And despite everything we know about the aftermath of banking crises, there is still no single institution that is responsible for ensuring that the monetary transmission mechanism is functioning as it should, so that policy rates are properly passed through to businesses and consumers.
So we need a wholly new framework.
Some have questioned our decision to put the Bank of England in charge of macro and micro-prudential supervision.
I see it as absolutely fundamental to a new economic framework for monitoring and controlling the growth of private debt in our economy.
Only independent central banks have the broad macroeconomic understanding, the authority and the knowledge required to make the kind of macro-prudential judgments that are required now and in the future.
Of course they must operate with a mandate from, and accountability to, the elected Government, similar to the existing inflation targeting system.
But this new role will inevitably require a degree of judgment and discretion that goes beyond the narrow rules-based system that failed either to spot or prevent the crisis.
And, because central banks are the lender of last resort, the experience of the crisis has also shown that they need to be intimately familiar with every aspect of the institutions that they may have to support.
So they must also be responsible for day-to-day micro-prudential regulation as well.
That case is particularly strong where the banking system is highly concentrated as it is in the UK, where the boundary between micro and macro-prudential regulation is not easy to define.
For example, who could deny that the micro-prudential regulation of a large international bank like Barclays, RBS or HSBC has in and of itself significant macro-prudential implications for the UK economy?
Since we’ve been making this argument about a new model of financial regulation, the intellectual tide has turned decisively in our favour.
The arguments we have made are the same as those that lie behind the direction of reform at the Federal Reserve and in the Bundesbank, and they are argument now publicly supported by the likes of Jacques de Larosiere, Ben Bernanke, and Stanley Fischer – the eminent monetary economist and Governor of the Central Bank of Israel.
The precise tools of macro-prudential regulation must now be the subject of intensive debate, international coordination, and ultimately experimentation.
They may include variable risk weightings for different asset classes, adjustable capital and liquidity requirements, and even more direct interventions in lending behavior, but we should rule nothing out at this stage.
We should also recognize that no system of supervision and regulation will ever eliminate failures.
That’s why we must keep up the pressure for reform so that our banking system itself is more robust to failure and the damage that failure inflicts on the broader economy is minimised.
It would be a tragedy if we ended up with a banking system that is even more concentrated, riskier and more prone to moral hazard than the one we had before the crisis.
More and better quality capital, credible resolution procedures, living wills and more competition are all important parts of the solution.
But I also believe we should pursue international agreement for a levy on the banking system, similar to the levy on wholesale funding proposed by President Obama or the levy already implemented in Sweden, as well as for structural reforms to prevent retail banks with implicit taxpayer guarantees from engaging in the riskiest activities such as large scale proprietary trading.
These would not have prevented the crisis on their own, and they cannot be a substitute for a better underlying macroeconomic and regulatory policy framework.
But together they would help to create a system that is more robust to failure.
These are the new tools and institutions that we need to control the growth of private debt in the future.
They are a key component of moving to that new model of economic growth.
But the bigger risk to our economy now stems from an explosion in public debt.
To entrench economic stability for the long term, we need fundamental reform of our fiscal policy framework.
There is wide agreement among economists on the need for more independent scrutiny of fiscal policy to replace the discredited fiscal rules.
Conservatives first proposed that independent scrutiny more than five years ago. We have now set out in detail how that scrutiny will be performed by an Office for Budget Responsibility.
Let me say a little bit more about this Office, because I don’t think people have fully appreciated what a radical departure this represents from the way Chancellors have put together Budgets in the past.
Everyone can see how the fiscal rules created in 1997 failed catastrophically.
They did nothing to prevent the Government from running a current budget deficit at the peak of the boom.
To coin a phrase, we didn’t fix the roof when the sun was shining.
The flaws in the fiscal rules are now well known – they were backwards looking, so that past surpluses could be used to justify present deficits, and they were adjudicated by the Treasury with no independent oversight, undermining their credibility.
But there is also an emerging recognition in the academic literature that any system of rules is likely to be unsatisfactory – either so general as to be ineffective, or so complex as to be inflexible and impossible to enforce.
Instead there is growing support for the concept of fiscal councils that can bring independent and forward-looking scrutiny to bear on governments.
Institutions of this kind now exist in Sweden, Denmark and the Netherlands.
I believe that just as we need to move away from narrowly defined rules towards greater judgment in financial regulation, the same is true in fiscal policy.
The benefits of fiscal councils for sustainable fiscal policy could be as profound as those of independent central banks for monetary policy.
Evidence suggests that many of the same time-consistency problems that lead to inflation bias when politicians are in direct control of monetary policy can lead to deficit bias in fiscal policy.
Of course the analogy is not exact – unelected bodies should not be given independent executive power over the levers of fiscal policy because of the fundamentally political distributive consequences of decisions over spending and tax.
But the power of a fiscal council to hold politicians to account for the fiscal implications of their tax and spending plans should not be underestimated.
These powerful arguments, and the steady erosion of public trust in official forecasts, lie behind our proposals for an independent Office for Budget Responsibility.
The OBR will be made up of a three person committee, accountable to Parliament, and a small secretariat of economists and public finance experts.
It will be responsible for publishing independent fiscal forecasts at least twice a year around the time of the Budget and PBR, based on existing government policy at the time.
And the committee will publish a recommendation for the amount of net fiscal tightening or loosening it judges necessary for the Treasury to have a better than 50% chance of achieving a forward looking mandate set by the Chancellor.
If the Chancellor choses not to abide by that recommendation he or she will have to explain their reasoning to Parliament, but it would be a brave Chancellor who chose to do so.
At least once a year, the OBR will also publish a comprehensive assessment of the true long term sustainability of the public finances, including off balance sheet liabilities such as public sector pensions, PFI and the likely costs of an ageing population.
For the first time we will have a transparent national balance sheet.
The Office for Budget Responsibility will be up and running on a temporary basis for the first Budget of a Conservative Government, much as the Monetary Policy Committee initially functioned for a year without underpinning legislation.
Sir Alan Budd has agreed to chair the Office for Budget Responsibility during this period. No one can doubt his independence, and I want to thank him for taking this important task on.
Whether I thank him in a couple of years’ time is another matter – but that is the whole point.
So this is how we will entrench fiscal responsibility for the long term, but we also face an immediate fiscal challenge.
In the last two weeks, disagreements within the economics profession over how quickly to tackle the record budget deficit have been thrust into the spotlight.
Before I address those disagreements, it’s worth remembering that there are broad areas of agreement that didn’t exist even six months ago.
There is a recognition that the scale of the deficit and the rapid increase in the national debt cannot safely be ignored, and that public expenditure will have to be cut.
That is something we Conservatives have been saying since the start, and we had to face down those who said that cuts were never going to be necessary.
There is also general agreement now that Britain needs a more credible medium term plan to deal with the deficit, as both the IMF and the OECD have argued.
The Governor of the Bank made this point yet again yesterday, as did the signatories of one of those letters to the Financial Times last week.
So when it comes to identifying the problem, the need to set out a more credible plan, and the case for having that plan independently monitored, there is broad agreement.
Where disagreements remain is on the details of the timing and pace of deficit reduction.
The economists who signed those two letters cautioning against early action are reasonable people who care deeply about the future of the British economy.
But while I respect their position, I take a different view – a view shared by the equally eminent economists who wrote to the Sunday Times, many leading business figures and crucially by international investors.
And that view is simple.
A credible plan is not really credible unless you’re prepared to make a start on it this year.
Otherwise we are trying to persuade people that we will be virtuous, just not yet – and when you’ve been as irresponsible as Britain has been, that isn’t easy.
That is my hard-headed assessment.
And it is driven by three things:
The nature of confidence; the realities of financial markets; and the practicalities of government.
Let me take each in turn.
Those who recommend delay argue that when private demand is weak, cutting government spending too quickly risks undermining the recovery.
In its most simplistic form this argument fails to ask why it is that private demand is weak.
Modern economics understands the importance of expectations and confidence.
Businesses and individuals look to the future, and while they are not the perfectly rational creatures assumed by the theory of Ricardian equivalence, uncertainty over the future paths of tax rates and government spending does play an important role in their behaviour.
This is particularly true when it comes to consumer spending and business investment, and as the Governor has made clear, the Bank of
England tries to take these effects into account when making its forecasts.
So a credible fiscal consolidation plan will have a positive impact through greater certainty and confidence about the future.
Businesses can expand safer in the knowledge that an out of control budget is not going to lead to ever higher taxes.
Consumers can spend safer in the knowledge that mortgage rates will remain lower for longer.
To be fair, a more sophisticated version of the argument for delay also takes into account the complex interaction between fiscal policy and monetary conditions.
It says that at the moment, and for as long as policy and market interest rates remain low, fiscal tightening should be as gradual as possible because there is little scope for more accommodating monetary conditions to accompany it, either through lower market interest rates or through the reaction function of the Bank of England.
And only as and when monetary conditions begin to tighten can the pace of fiscal consolidation be accelerated.
But even this, more nuanced, version of the case for delay is too complacent.
For it brings me to the second consideration: the realities of financial markets.
Experience shows that market adjustments tend to be neither smooth nor gradual – instead reassessments are more likely to be sudden and brutal.
The luxury of waiting for monetary conditions to tighten before embarking on fiscal tightening may not be one that we are afforded.
That is why the experiences of other countries right now, not just Greece but also Ireland, Spain, Portugal, Poland and others, as well as examples like Sweden and Canada in the past, are so important.
If markets start to lose confidence in a country and interest rates are driven up, recovery is undermined and the inevitable cuts to spending end up being deeper and more savage than would have been necessary to maintain market confidence in the first place.
Take a look at the measures the government was forced to implement across the Irish sea.
That is not a risk that I am prepared to take.
Already the yield spread between 10 year gilts and 10 year German bunds is more than 90 basis points, compared to 70 basis points for Spain and 110 basis points for Portugal.
In the most extreme cases, countries that lose the confidence of markets effectively lose their sovereignty.
As Goran Persson, the Social Democrat Prime Minister of Sweden who eliminated a huge budget deficit following a financial crisis and a deep recession in the early 1990s, used to say, “a country in debt is not free”.
This is why credibility is so vital.
Far from accepting “as binding the views of the same financial markets whose mistakes precipitated the crisis in the first place”, as one of last weeks letters to the FT put it, establishing credibility does exactly the reverse – it buys you more freedom from the very real constraints of financial markets.
How much better to make difficult decisions about spending on your own terms and at your own speed than to have them forced upon you on somebody else’s terms?
So undermining credibility by giving the impression that cuts can be avoided, or by suggesting that unexpected improvements in the public finances will lead to more spending, only makes deeper cuts more likely.
But the decisive case for making an early start on reducing our record deficit is not only based on confidence and the need to establish credibility.
It also draws on an understanding of the realities of government – in particular institutional inertia and the difficulty of real reform.
These considerations don’t appear in most economists’ models.
Economists usually talk about fiscal tightening in billions of pounds or percentages of GDP, but cutting spending is not simply a matter of numbers in a Budget Red Book.
It is a myth, perpetrated by politicians, that all Ministers have to do is sit in their Whitehall offices pulling levers, and things change on the ground.
More often than not, the levers aren’t connected to anything.
Real change that drives up productivity is a difficult process.
If unstable financial markets do force emergency cuts, then those are precisely the conditions in which their impact on the poorest in society and the quality of public services is likely to be greatest.
As Gordon Brown told his party conference when he was Shadow Chancellor: “Losing control of public spending doesn’t help the poor.”
Making an early start, on your own terms, creates the space for better targeted cuts.
It will give more time for public sector reforms to take effect so that lower spending is delivered through greater efficiency not cuts to the front line.
And it makes it easier to preserve public support for difficult decisions by protecting the poorest and most vulnerable.
A key lesson from the successful examples from around the world of fiscal consolidation is that you must be able to demonstrate that ‘we are all in this together’ in order to maintain a coalition for action.
So that is why we will make an early start – in order to bring confidence to the economy, establish the credibility with markets that buys you time,
and to ensure that spending cuts are well targeted.
Let me explain how a new government will do that.
There will be three clear phases to our plan of action.
Phase One involves finding out the truth.
Within days of taking office we will establish our new independent Office for Budget Responsibility.
We have put in place the plans and the people to be ready to do that on a non-statutory basis, until the legislation is in place to make it permanent.
The Office will help us publish a truly independent audit of the public finances before the first Budget.
So everyone will know the true state of the nation’s balance sheet.
And everyone will be able to see independent forecasts for growth.
Only then will anyone know the true scale of the fiscal challenge that faces whoever forms the next government.
Phase Two is the Budget.
This will take place within 50 days.
It will set out the overall fiscal path and spending totals that we will stick to over the years ahead.
As I have made clear, our aim will be to eliminate the bulk of the structural current budget deficit over a Parliament.
That is what the Governor of the Bank of England has called for and I agree with him.
The Budget will set out some of the cross-cutting measures on pay, the cost of Whitehall, the review of the pension age, and the largest public sector pensions, that will help to put our public finances on a sustainable footing.
Crucially, the first Budget will also contain measures to boost enterprise, encourage new jobs and show that Britain is open for business.
We will take targeted steps to reduce some budgets in-year – and we have set out some specific examples – in order to build credibility and make a start on reducing the deficit.
The scale of these steps will be informed by that proper audit of the nation’s finances, that independent assessment of growth and discussions with the independent Bank of England about the scope for monetary policy to remain supportive.
At the same time the rest of government will be embarking on the major structural reforms to the public services that will, over time, deliver the lasting productivity gains that drive real value for money.
Phase Three is the Spending Review
Over the Summer we will work flat out to conduct the detailed departmental Spending Review for the years after 2011 that the current government has simply refused to carry out, and publish that results of that review in the Autumn.
The only possible reason why the Treasury has not already produced a Spending Review is that the Government do not want to spell out the difficult decisions that even their own spending plans imply.
We will not hesitate to take the difficult decisions to get Britain working.
A NEW ECONOMIC MODEL
So this is the new economic framework for monetary and fiscal policy that we need to ensure that private and public debt are sustainable in the future.
But given that we cannot go back to the last decade’s debt-fuelled model of growth, the question I am asked most often at the moment, is “where is the growth going to come from?”
The answer is the final part of this new economic model.
The economics profession is in broad agreement that the recovery will only be sustainable if it is accompanied by an internal and external rebalancing of our economy: in other words a higher savings rate, more business investment, and rising net exports.
Economic theory and evidence both suggest that the macroeconomic policy combination most likely to encourage that adjustment is tight fiscal policy, supportive monetary policy and countercyclical financial regulation.
But that on its own will not be enough.
We need a program of supply side reform that is no less urgent or radical than the reforms of the 1980s and 1990s.
When our households, our banks and our government are so indebted, raising the real rate of return on investment is the only sustainable route to prosperity.
All the evidence suggests that Britain’s trend rate of growth has declined over the last decade.
And as we saw in the 1980s and 1990s, supply side reforms can take some years before their full effect is felt.
But a new government presents a golden opportunity to set out a new direction and harvest some of the long term benefits up front.
By embarking upon a series of reforms that will raise the real return on investment, we can raise the rate of investment right now.
That’s why I have pledged that a Conservative Government will use the opportunity of a change of government to send the signal that Britain is once again open for business.
And in order to bring some accountability to economic policy, I have set out eight benchmarks for the next Parliament against which you will be able to judge whether a Conservative Government is delivering on this new economic model.
So we will maintain Britain’s AAA credit rating.
We will increase saving, business investment and exports as a share of GDP.
The plans I announced at the weekend to sell in due course the government’s stakes in RBS and Lloyds will help to encourage millions of people to start saving and investing for the future, often for the first time.
We will improve Britain’s international rankings for tax competitiveness and business regulation with specific measures on corporation tax and regulatory budgets.
We will reduce youth unemployment and reduce the number of children in workless households as part of our strategy for tackling poverty and inequality.
We will raise the private sector’s share of the economy in all regions of the country, especially outside London and the South East.
And we will reduce UK greenhouse gas emissions and increase our share of global markets for low carbon technologies.
But perhaps the greatest challenge is reforming the public sector itself.
The part of our economy that is responsible for delivering this framework for economic success is the one that has performed the worst of any sector over the last decade.
Public sector productivity has actually fallen since 1997.
Indeed if productivity in the public sector had grown at the same rate as in private sector services we could now have the same quality of public services for £60 billion less each year.
A radical program of public sector reform is not just a fiscal necessity, it is vital if we are to deliver the world class education and welfare services that support a competitive economy.
So we will raise productivity growth in the public sector by increasing diversity of provision, extending payment by results, giving more power to consumers and improving financial controls.
We will expect productivity improvements to match the best of the private sector.
And crucially, the Treasury will return to its core role of ensuring value for money for the only interest group it should represent – taxpayers.
There will be no more empire building or attempts to interfere in every area of government policy.
How can I put it in a topical way?
You will have a Chancellor and a Prime Minister united with the common goal of unleashing the forces of enterprise.
Delivering the new economic model that I have set out today will not be easy.
Britain cannot run away from its problems. And if we fail to learn the lessons of the last decade we are doomed to repeat them.
We have to deal with our debts to get our economy back on its feet.
The core values that we need to apply are responsibility and accountability.
Over the five years that I have been in this job I have put fiscal and financial responsibility at the heart of my approach.
I resisted the calls to offer up front unfunded tax cuts. I said that an economy built on debt was living on borrowed time – and so it was.
I have also been straight with the British people about the challenges ahead.
I said that whoever won the election would have to cut spending.
And I have set out the benchmarks against which we can be held accountable.
Our ambition is nothing less than a new economic model for Britain.
Let us move from an economy built on debt to an economy that saves and invests for the future.
HS2 high-speed rail route. The Coalition’s next train crash?
Everything that our Coalition government has touched so far has been a train crash. Today’s initiative, announced by the Secretary of State for Transport, will be no exception.
The latest economic miracle-cure is the HS2 high-speed rail link between London and Birmingham ………. and maybe beyond to some of the outer planets such as Manchester and Leeds!
I just want to go on record to say that no matter what the cost assumptions are in respect of this rather grandiose and quite unnecessary scheme, the “guesstimates” made by proponents of the scheme are bound to be incorrect. Why? Because they’re ALWAYS wrong!
The government intends to invest £32.7 billion. Their advisers (whose computations, as we know from bitter experience, are always SO accurate!!!!!) have convinced the Cabinet (and others) that this investment (after factoring-in new job creation, less road congestion and profits from ticket sales etc.) will produce up to £47 billion in benefits!
On the face of it….a “No Brainer”. So…what’s the problem?
The major problem is the Law of Unintended Consequences, such as creating a gradual shift of trade from North to South……. “Accidental” Economic Engineering.
But the most obvious is the cost – and this is why I want to be on the record.
As government is dealing with Private Enterprise it will be ripped off. The Private Sector ALWAYS rips-off the government. It’s a national sport.
I predict that after factoring the pre-scheme aggravation, NIMBYS’ and government lawyers’ fees etc with ongoing expenses such as the crippling financing costs of such a project, this scheme cannot be delivered for less than about £250 billion.
Yes….a quarter of a billion!
£32.7 billion? Don’t make us laugh……and by the way…what do THESE GUYS think? They seem quiet….
(Thanks for your emails . For the moment, I cannot see Twitter or Linkedin. Back later this week.)