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Econoblog

Discussion and analysis of the latest economic issues.

By Sean O'Grady, Economics Editor of The Independent.
It says it all and it says nothing. The Coalition Agreement states quite baldly that the Government will indeed introduce a bank levy, a remarkable moment for a Conservative-led government. But, apart from the usual commitment to consult, it says nothing about what sort of tax it will be.

One suspects the UK will go along with a surprisingly radical proposal from the IMF, acting on instructions form the G20, that taxes both banks activities and their pay and bonuses, partly because banking is actually undertaxed for what are called "technical reasons" - ie it doesn’t charge VAT.

Whatever its merits, it would certainly cost the banks a great deal of money when they are still very fragile. Over the next year or so it may be more likely that the banks will be getting more money form government, rather than the other way round, given the way the sovereign debt crisis in Greece and elsewhere threatens the value of the government bonds that they all hold (ironically because national regulators insist on the them holding such "ultra safe" assets).
George Osborne has a tricky decision to make. He really now must decide whether the UK is going to join the rest of the EU in regulating the hedge funds and private equity. It isn’t fair in one sense, because they haven’t been very important in this financial crisis. But they have caused trouble before - such as the LTCM crisis in 1998 - and the EU rule is basically that if you act like a bank (borrowing and lending lots) then you should be regulated like a bank.

Inflation figures are not a good omen

Posted by Sean O'Grady
  • Tuesday, 18 May 2010 at 12:41 pm
Today's inflation figures confirm what many of us have been noticing in "real life", as opposed to the official statistical version - that the cost of living is going up at a fairly quick pace.

RPI measure inflation is up to 5.3 per cent, and it's a pretty wide ranging phenomenon. Everything from women's clothing to cigarettes are up substantially, so bad news for the nation's Bridget Joneses.

More worryingly the cost of living is going up much faster than wages at the moment, which spells a nasty squeeze in living standards, even before George Osborne and David Laws have started to inflict their own special brand of pain in tax hikes and spending rises.

Not a good omen for the shops or the economy.

Prepare for savage cuts

Posted by Sean O'Grady
  • Thursday, 13 May 2010 at 02:29 pm
The 5 per cent cut in salary for ministers on six-figure salaries doesn't really tell us very much about the "savage cuts" - as Nick Clegg once called them - that will soon hit every neighbourhood in the land. What will they really mean? Local libraries and swimming polls shut. Social services even more starved of funds. Longer waits for a train, for the police to arrive, for a pay rise if you're a teacher. This coalition will very soon be very unpopular, and the Lib Dems especially so.

Worse, immediate cuts do threaten the recovery, just as Vince Cable warned in the election. Even if manufaturing and exports pick up, the hit from public spending cuts and public sector job losses - perhaps 30,000 to 60,000 this year say the National Institute of Economic and Social Research - will knock the economy back. I shudder to think what a hike in VAT might do, though if it was pre-announced it might boost spending a bit before it was imposed, say in a year's time. Still, 19 per cent VAT is not exactly something to look forward to.

Breaking up the banks will be a more popular task, but there are some big practical questions about how they will make this work. Another downturn in the economy, rather than any return to recklessness, is probably the biggest risk the banks face now, broken up or not.

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European appeasement, for now

Posted by Sean O'Grady
  • Tuesday, 11 May 2010 at 12:16 pm
At last European leaders have got one step ahead of the markets. The vast, almost unimaginable sums they are waving around to persuade investors that they mean business and that the euro will be defended look convincing enough.

But behind all that is the sinking feeling that some eurzone states - not just Greece - are bust, even with lots of international help. And there will come a limit to the ability even or Germany and the IMF to carry such burdens.

But still, like the UK, the markets have been appeased. For now.

The markets stay calm despite the chaos

Posted by Sean O'Grady
  • Tuesday, 11 May 2010 at 12:15 pm
Keep calm and carry on is a war time slogan that has become famous recently, though it was never actually used at the time, for some reason. Anyway, that seems to the overwhelming mood in the markets today to the continuing political uncertainty. Traders seem resigned to the fact that democracy can sometimes move slowly, and they are perhaps assured that across all parties is a consensus about the need to get the deficit down.

In any case the gilts auction today - a sale of British government securities, which you wouldn’t want to buy if you thought the place was going bust - was oversubscribed two and a half fold.

So far people are happy to lend the nation money. Just as well as we'll be borrowing another £163bn or more this year...

A eurozone deal, at last

Posted by Sean O'Grady
  • Monday, 10 May 2010 at 12:11 pm
At last. Though it will cost a trillion dollars, Europe's leaders, with a little help from Barack Obama and the IMF have done what they need to do to save the euro, and probably the European Union with it.

It might have be cheaper simply to set up an EU Treasury that would stand by all eurozone national debts irrespective of nation, in return for control over their fiscal policies. That is effectively where we've ended up anyway.

Mervyn's words were hardly controversial

Posted by Sean O'Grady
  • Friday, 30 April 2010 at 03:37 pm
Has Mervyn King had his very own Gillian Duffy moment?

No. For one thing, the Governor, I assume, made the usual careful preparations to make it clear that his comments were strictly off the record, and for information only. Unlike Mr Brown, Mr King’s trust was betrayed, rather than compromised by misadventure, and that is a shame. Like other senior Bank officials, Mr King is not a Trappist. He does speak, occasionally, on a background basis to professional economists and, yes, journalists too. It helps us understand what the Bank is trying to do, and maybe they learn a little about whether their polices are understood or working, or both. Nothing wrong with that.

In this case, Mr King’s comments, though colourful, are hardly that controversial, and make the point he has been banging on about for months; we need a credible plan to fix the deficit. He ought to be allowed a little poetic exaggeration. The next government will indeed – as all parties agree – have to impose painful spending cuts and tax rises. It is no revelation to suppose that four or five years hard slog under any party (or parties) will be unpopular with voters who have enjoyed living beyond their means. By-elections will be lost, there’ll be rebellions in the Commons, strikes, protests, unrest and a big job of explanation at the election after this one. Britain will endure a few years of agony. Deep down, we all know that.

Still, it is embarrassing for the Bank to be caught in this way. All public speeches and interviews are banned during the election campaign, for obvious reasons, and the next meeting of the Monetary Policy Committee to set interest rates has been moved after polling day. Obviously that is not quite enough. Maybe the Bank should just pull the phones out of the sockets, shut those big imposing doors, and go on holiday for a few weeks.

Banks are making money and it's down to you and me

Posted by Sean O'Grady
  • Tuesday, 27 April 2010 at 12:40 pm
"Bank makes profit - shock". Actually quite a few banks have been making good money lately, and much of it is down to you and me - the taxpayer - providing ultra cheap funding to them and pumping £200bn into the economy directly, which has inflated stock market and bond values, which also helps the likes of the life insurance companies and fund managers.

Some of the banks' profits are thus artificial, and ought to have been taxed accordingly. Yet we cannot get away from the desperate need to restore the banks to health, because without them lending to business the recovery will be slow indeed. And that means allowing them to rebuild their profit margins.

The side effect is that the taxpayer ought to make a nice return on the funds the Treasury has used to buy chunks of the Lloyds Banking Group and RBS, when the time comes. But when we do have a sell off of the shares the profit the taxpayer makes will be, I suspect, way below the real cost of the financial crisis and the recession, which may be as high as £7trillion, taking into account the damage done to long-term production by the fall in investment and growth.

That is gone for good.

After Greece the markets hunt for their next victim

Posted by Sean O'Grady
  • Monday, 26 April 2010 at 12:11 pm
Without getting too anthropomorphic, markets are a little like pack of hunting dogs; once they’ve identified, killed and eaten the lame Wildebeest at the back of the herd, they'll move on to the next weakest victim. That is what they did during the banking crises of 2007 to 2008, moving across successive institutions before the fall of Lehman Brothers finally sated their blood lust ad forced the authorities to defend the corral the surviving the beasts.

So now it is with the PIGS - the highly indebted weaker members of the eurozone, comprising Portugal, Ireland, Greece and Spain.

Greece is currently being disembowelled by some very powerful sets of jaws; and the search is on for the next prey. The guess is it will be Portugal. Though a smaller economy, it is another burden for Germany, and one that her government and voters will find unacceptable.

The real nightmare would be if the wolves pulled Spain down. The third largest member of the eurozone is too big to be rescued by eurozone members and would even be a bit of a handful for the IMF. That really would mean that the euro's credibility would be seriously jeopardised, and its break up might not be far behind, with big implications for European integration.

The momentous times are not yet over.
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