Econoblog

Coalition Agreement tell us nothing about what sort of tax the banks will get

Thu, 20 May 2010 14:51:01 GMT

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).

Osborne faces tough decision on European hedge fund regulation

Tue, 18 May 2010 13:10:23 GMT

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

Tue, 18 May 2010 11:41:54 GMT

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

Thu, 13 May 2010 13:29:53 GMT

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.

European appeasement, for now

Tue, 11 May 2010 11:16:29 GMT

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

Tue, 11 May 2010 11:15:40 GMT

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

Mon, 10 May 2010 11:11:10 GMT

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

Fri, 30 Apr 2010 14:37:27 GMT

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

Tue, 27 Apr 2010 11:40:58 GMT

"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

Mon, 26 Apr 2010 11:11:52 GMT

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.

The Labour manifesto is the most interventionist since 1992

Mon, 12 Apr 2010 15:46:10 GMT

The Labour manifesto is the most interventionist since 1992. It has ditched new Labour's addiction to privatisation - as in the pledge to leave the Royal Mail alone - and is promising the sort of national investment bank advocated by labour in the more distant past. This time it is called UK Finance for Growth "bringing £4 billion together to provide capital for growing businesses, investing in the growth sectors of the future".

The scale of the challenge though is much greater than that; the fall in investment in this recession has been disastrous - more like £30bn to £40bn a year, which will leave growth constrained for years to come. That means lower living standards and poorer public services than we would otherwise enjoy - the real cost of the recession, running into trillions - millions of millions - of pounds. And fewer jobs. I couldn’t not help but notice that the manifesto launch was in Birmingham and three Birmingham constituencies have the highest unemployment of any in this country - Ladywood, Hodge Hill and Sparkbrook & Small Heath.

Labour has come a long way since its Thatcherite orthodoxy, but it is way behind where it was in 1945. Today of all days, I cannot resist quoting from that year’s Labour manifesto:

“The Labour Party is a Socialist Party, and proud of it. Its ultimate purpose at home is the establishment of the Socialist Commonwealth of Great Britain - free, democratic, efficient, progressive, public-spirited, its material resources organised in the service of the British people.”

“But Socialism cannot come overnight, as the product of a week-end revolution. The members of the Labour Party, like the British people, are practical-minded men and women.”

“There are basic industries ripe and over-ripe for public ownership and management in the direct service of the nation. There are many smaller businesses rendering good service which can be left to go on with their useful work.”

Brown, Mandelson and the two Milibands still have some work to do.

Latest economic forecasts present a win win situation for Brown

Wed, 07 Apr 2010 11:31:46 GMT

Good news for Gordon Brown. Bad news for Gordon Brown. It’s all the same as far as the economy is concerned. The latest readings on the service sector and the OECD's new assessment of the G7 economies suggest that Mr brown can expect a bit of a boost on 23 April when the Office for National Statistics publishes its first estimates for growth in the first quarter of this year.

The bad weather in January may not have prevented the recovery form accelerating, to +0.5 per cent of GDP some of the experts are saying. So Mr Brown can say his polices are working and he took wise decisions to protect the recovery. But he is in a win win situation. If the numbers come out unexpectedly bad, he can say, a fortiori, that this is no time to withdraw the stimulus, which he accuses the Tories of wanting to do (not entirely accurately as it happens).

Despite improved figures the economy is still stagnant

Tue, 30 Mar 2010 14:09:33 GMT

We oughtn’t to get too excited about the GDP numbers or house prices. Relying on one bit of data is always dodgy, and these numbers bounce around quite a bit.

There is also the bigger picture to focus on; the economy is still stagnant and unlikely to get back to its 2008 peak until 2012.

House prices too, and for the same reasons, face a good deal of resistance; GDP is just the collection of all the incomes in the country, and when they are stagnating so is the ability to borrow and pay back on mortgages. Besides, the banks are still broken and they’re not lending. Gloomy but true.

The Peoples' Chancellor

Tue, 30 Mar 2010 11:23:49 GMT

If we had an election for Chancellor of the Exchequer, Vince Cable would win it. Despite the best efforts of some in the media, he remains the Peoples' Chancellor, and in the Channel 4 debate last night he showed why.

I ought to add, in passing that the real differences between the three men on cutting the government's borrowings were minimal – about £8bn according to the Institute for Fiscal Studies - but just as all the commentators are calling for a "credible plan" to reduce the deficit, so the voters too are looking for a "credible man" to implement it, that man being Vince.

The real question is the path to get Cable into Number 11. To my mind it is fairly simple. Gordon Brown gets in as the largest party but is desperate for Lib Dem support. Clegg should demand: First, the alternative vote (which Brown is already committed to). Second, Cable in Number 11 (trickier, but doable), a couple of jobs for himself and Chris Huhne and some junior ministries. Third, an agreed four year programme for economic recovery. Everyone wants the parties to work together and everyone wants Vince to do the job of fixing the finances. He would be a tremendous asset to brown’s government. The Tories can whinge as much as they like but by 2014 it will all be forgotten and the economy ought to be recovered by then.

Another term for Gordon Brown might be unthinkable, but a first term for Chancellor Cable? An intriguing thought.

A decade of discontent?

Fri, 26 Mar 2010 13:23:08 GMT

We are not entering a spring of discontent. Strikes are still uncommon, expect in some well publicised cases. What we do have is an issue in the public sector, and those companies, such as British Airways, where they have “legacy” labour relations issues dating for their time in state ownership. There is also the powerful personality of RMT leader Bob Crow, who has shown other unions leaders how to do it.

What is going on is fairly simple; in the private and public sector organisations have been pushed hard by the recession. In the private sector workers have been unable to resist the assault on their living standards and real-terms wages have been slashed; in the public sector – with higher unionisation and fewer market disciplines – they have been more successful. Until now.

The public spending cuts that will follow the election will see public sector workers suffering the same kind of pain as their counterparts in private business. The UK, in other words, I becoming a “conflict economy”; when the national cake is not expanding there will be more fights over shares. That means more strikes and strife; bosses v unions; public v private sector; Scotland v England; more resentment about immigrants.

Perhaps longer term that discontent will spread across the nation. A decade of discontent, perhaps?

Budget backwash

Fri, 26 Mar 2010 12:46:45 GMT

What’s the difference between the Labour and Conservative parties? About £8billion, if you believe the Institute for Fiscal Studies, who can be trusted on such matters. That is the sum they reckon now separates the public borrowing/spending/tax plans of the two main parties. It sounds like a lot of money – but in the scheme of things, well, not really. Not, that is in a context of about £700billion of public spending and £163billion in borrowing. If they raised VAT by 1 per cent, say, it would remove most of that difference; if the economy picked up a little faster than it is now, that too would dissolve away the difference as well.

It does rather make one wonder what the next election is really about; really technical issues about fiscal management? Maybe in the long run the parties have a radically different vision for Britain, but in terms of the immediate task ahead of fixing the public finances, well, there just isn’t much in it.

Not as bad as it might have been

Thu, 18 Mar 2010 14:56:36 GMT

The borrowing is still bad, not as half as bad as it might have been. The long and short of it is that Alistair Darling will have maybe another £15bn to splash around in next weeks Budget. And just before an election! No guesses for guessing where he'll be spending it; on schemes that make the Tories look mean, bad and the friends of the very rich. If he is wise Mr Darling will also help industry by reducing its tax and regulation burden. Then his Budget might truly live up to its advance billing about supporting the recovery – and supporting Labour’s chances or re-election (better than you might think). The pain will come later.

The seeds of a new British green motor industry

Thu, 18 Mar 2010 14:34:29 GMT

Good for Peter Mandelson. For just a few hundred million pounds he seems to have single-handedly created an entire new industry; the British green motor industry. Suddenly what might have been unimaginable a few years ago is coming into focus; that the UK will have the most advanced electric car industry in Europe, way ahead of Germany or France, say.

There's the excellent news that Nissan is to make its Leaf car here, plus batteries; while Ford has received government backing to develop green engines in the UK plants. Also, Vauxhall will almost certainly win the contract to make the new GM electric car for Europe, the Ampera; and Toyota are building up their electric car presence in Derbyshire. Soon we may have critical mass in a critical industry.

For once, targeting seed corn capital seems the genuinely leveraged in a much larger chunk of private sector money and commitment. So, thanks Peter.

Employment figures are good but there are darker signs behind them

Wed, 17 Mar 2010 17:55:44 GMT

Unemployment down. Good news. Well, yes, and the figures are much better than were hoped for. They're a big political bonus boost for ministers who feared fighting an election with unemployment steeply rising and desperate headlines about dole queues; "Labour Isn’t Working" and all that.

There's a also a Budget bonus, as lower unemployment spending means Mr Darling will have a touch more room for manoeuvre next week.

But there are some darker signs. Long term unemployment is sharply up, reflecting the big rises a year ago; but its the number of jobs in the economy that is most worrying, falling off to a decade low and with more and more workers casualised or simply giving up on the jobs market. We are becoming a nation of two classes of worker; those in old fashioned permanent contracts, maybe even with proper pensions; and a part time, temping, casualised, marginalised rump.

The country that emerges from this recession will look very different.

'Latin is a language, as dead as it can be, it killed the ancient Romans, and now it's killing me'

Tue, 16 Mar 2010 23:47:06 GMT

So Boris Johnson thinks that teaching children Latin will steer them away from gun crime and help them master their native tongue. Well, I have news for Boris. Most children in London and other cities seem more keen on a sort of Ali G patois; can you imagine them getting into the classics?

I was force fed Latin at a Midlands grammar school – hence the name, because they taught, or tried to teach, Latin grammar – and it sent me to sleep. Literally. And the reason why I dropped off in classical studies (and was chucked out long before 'O' level) was because I could not see the point. It was a boring, irrelevant and dead language. It did me no good and I have never missed its declensions or pretensions. I quite understand why, to borrow an old phrase of Harold Wilson's, that might be purloined by Boris now, every child should enjoy the benefits of a grammar school education, or shall we say an Eton one, but I think juvenile intellects and imaginative boundaries might be stretched far more by becoming versed in Mandarin or German or Swahili. If you speak Mandarin you can speak to half the world's people. Latin is, lest we forget, a dead, thousand times dead language, and not especially pretty. Indeed given the fact that English is fast becoming the common world language it might yield the better dividends from the point of view of the economy if we forgot about languages generally and just got used to the reality that everyone speaks English, and leveraged that competitive advantage to devote more school hours to engineering. Who knows what the nation might achieve?

Is this all about money? Yes, for a nation on its uppers. Boris, and his friends on the Tory front bench, might only dream of the improvement in the quality of national political debate they'd enjoy if pupils were encouraged to take up economics from an early age. QED.

Hedge fund regulation is better settled by a new British govt

Tue, 16 Mar 2010 16:28:47 GMT

Do they mean it? There is only one question that really matters when it comes to the hedge funds (and other institutions like big investment banks). When they say that they don’t like higher taxes and tougher regulation and that it means they will leave for Switzerland on the next flight, do they actually mean it? I suspect that the threats are overdone. But even if they are - does there not come a time when we as a nation have to say look we can’t afford to support you doing business here on your terms in any case. Go if you want. It is broadly the approach we eventually had to take with the over mighty trade unions.

Perhaps the time has come to put the financiers in their place too. For now, though the EU has postponed discussion of its new directive. This is much better settled by a new British government anyway. But the big questions will not go away.

Don't blame the government for dearer petrol

Tue, 16 Mar 2010 13:43:09 GMT

Here we go again. Dearer petrol is something that cannot be blamed on the government or the oil companies. Instead blame the Chinese. They are the ones bidding up the price of raw materials again, and it is because they are going back to growth that the world price of foil has doubled in a year or so. Hence the rise in petrol I agree the taxes and duties don’t help, and actually make up the bulk of the price of fuel, but it is not why prices are rising so much right now. Besides, the best way to get us to drive less and use smaller cars is to tax petrol more. I have some sympathy with the hauliers, though, and I doubt any of us would like to see more of their protests in time for polling day...

Budget cuts - short term agreement, long term division

Tue, 16 Mar 2010 13:25:19 GMT

I oughtn't admit this, but in some ways the election fills me with dread. The European Commission are the latest body to call on Alistair Darling to be "more ambitious" in cutting the budget deficit, but there is no chance that any of the main parties will come up with such plans before election day. Can you imagine any of them admitting that they’d need to raise VAT to 20 per cent? Yet it is odds-on that that is exactly what will happen some time in the next 18 months. But no-one is talking about it, and won’t as we go into this election. Instead we have a highly technical argument about the exact timing of fairly small, even token, cuts in public spending this year.

In other words, all the three main parties actually agree, more or less, on what to do in the short term - not that much. Longer term there are divisions, but those will only be exposed after polling day.

A strange kind of democracy, you might say.

Econoblog: The Budget could be damaging for Tories

Wed, 10 Mar 2010 12:22:44 GMT

He might be a bully and he might lack many of the qualities of leadership, bit even his worst enemies - plenty of em - would have to agree that Gordon Brown did call much of the financial crisis right. And, sadly, the Tories called much of it wrong. At this distance the recapitalisation of the banks, the fiscal stimulus and the massive injection of money into the economy by the Bank of England, were all demonstrably the right thing to do, and each was, to a greater or lesser extent, criticised by the Tories. Brown is probably right now, too. The economy is fragile, not least because our largest trading partner - the eurozone - is faltering. We have deprecated the pound by 25 per cent, but there is no-one to buy our exports if the Europeans can’t afford to spend, or lack the confidence to do so. That has probably been the real damage form all the euro/Greek crisis headlines over the past few weeks; the erosion of confidence.

Having said that Mr Brown might have conceded a little more to those who want to see a more determined, ambitious plan to eventually bring down the deficit - eventually meaning sooner than currently planned. That ought not shatter confidence now, and ought to reassure the markets that the Government is serious about its problems. This, by all accounts, is the path the Chancellor Alistair Darling favours. Some token cuts this year would successfully spike the Tories attack, but without derailing the recovery. Even £1bn of cuts - tiny in the great scheme of things - would show willing and put Osborne and Cameron on the spot to be more specific, which they will hate.

The Budget, the date now confirmed for 24 March, has the potential to do enormous damage to the Tories' credibility. Plenty to play for.

'EMF' isn't a bad idea but it would lack the resources

Tue, 09 Mar 2010 15:31:16 GMT

A European Monetary Fund? Why not? It would do all the things that the IMF can do to rescue a stricken economy, but it keeps it in the family, the European family that is. It has the great political advantage of keeping the US (which has a big role in the IMF still) out of EU affairs. The downside is simply that any EMF would not have the funds to rescue an economy bigger than Greece, or a series of troubled nations. I mean Spain, of course, five times larger than Greece. Even the French and Germans don't have the resources I suspect. Let us hope that the contagion doesn’t spread to Madrid.