Bolitics The New Condem Government

[snowychap]

does anyone think it would be any different under labour?

Some things, probably (like the speed of the cuts and the changes to social housing - though I think similar ideas were mooted by Flint a couple of years ago).

Some things, probably not (like the change to ESA as it appeared that Darling seemed to agree with Phillip 'the tax avoider' Hammond).

[Richard]

Mark Steel absolutley no time for him at all and those comments are those of a rebellious schoolchild crying for his toys and then threatening to run away from home because he hasn't got them. Utterly reprehensible

Dem, to quote yours....

but does anyone think it would be any different under labour?

Under Labour I think the average cut per dept would have been 20BN, under this government it is 19BN

1) increase taxes even more something they havent done barring the vat

The treasury had already started work on looking at VAT increases for the Labour govt, so looks like they would have introduced that as well

[Richard]

Have to say, and I know as a Tory I will be accused of bias here, but I thought Alan Johnson's performance was woeful this afternoon and he is a politician I have a lot of time for. I respect him as a person and do listen when he speaks more than any other Labour politician but this afternoon he looked out of his depth and a man ill at ease with his portfolio.

Nothing he said cused me as a Tory supporter to worry about his challeneg to the Chancellor

[CarewsEyebrowDesigner]

Johnson doesn't have to do anything, Osbournes incompetence will speak for itself.

[snowychap]

Have to say, and I know as a Tory I will be accused of bias here, but I thought Alan Johnson's performance was woeful this afternoon...

I only caught some of his response (including the bit about the government's cost of borrowing) but he must have done really badly if he was overshadowed by Osborne eulogy to Thatch (crowding out/household budgets et al - I'm surprised he didn't start claiming that he was a simple grocer's daughter ;-)).

[peterms]

The thing that I don't follow with that article is that, given it's apparently good sound practice to follow Gordon Brown's golden rule (no one I've heard has ever said it's the wrong thing to do, not even the Tories), and that the rule seemed to be that over the length of a natural economic cycle, gov't should not increase the level of borrowing, unless it is to fund things for the future [like a high speed rail link, or a power station, or school building etc..] the article seems to my reading, in the bit I quoted, to be proposing the opposite, in part - to increase the percentage of public spending not on things to benefit the future, but just on stuff for the here and now - whether that be benefits, public sector wages, pointless quangos, plush offices for minsters, NHS costs, or whatever - the good and the bad. In other words to spend your way out of debt, not by spending on (as I said in an earlier post) improving the country's infrastructure, green projects, environment and transport etc, which would be good, but on things which are wasteful and which have no genuine positive benefit to anyone and which make the situation worse next year, and the year after.

In a simple analogy, if your house heating bills are more than your income, you can either

a) turn the heating up or leave it as it is and eventually get repossesed

turn the heating down and freeze

c) spend on insulation and draft proofing, knowing that this will over time bring your bills down permanently.

The tories seem to be proposing and that article, in part, a)

He doesn't give a view on that rule, but I don't think he's necessarily in conflict with it, if you look at the bit I've highlighted about "over the length of a natural economic cycle". He says

The appropriate level of budget deficit can only be decided according to the state of the economy. Of course, we may disagree on what the appropriate level may be for each situation, but any economically literate plan for spending cuts should specify the amounts of cut with reference to economic indicators – economic growth rate, unemployment rate, house prices, level of private sector investment, and so on – and not in terms of calendar dates, which has no economic meaning.

In other words, whether we act to increase or reduce a budget deficit should be determined by where we are in an economic cycle, rather than by arbitrary calendar targets.

His main point though, as I read it, is that the larger part of the problem is caused by the economic downturn, not structural factors; that growth is the best way out of this; that the government's assumptions of future growth depend on wishful thinking rather than clear analysis and credible planning; and that the proposals to tackle the deficit not only fail to understand or address the nature of the problem, but may actually make it worse. As Snowy says, he doesn't give his own proposals for how growth should be encouraged.

I don't think he's arguing for spending on current rather than capital items, simply making the case that the present proposals to cut current expenditure in some of the ways proposed don't make much economic sense.

I'm afraid the central heating analogy doesn't work very well, like most analogies which compare households and economies. But maybe a variant on it would be this.

If your market garden greenhouse heating bills are too high a proportion of your costs, and your sales don't recoup the costs and give you a viable financial position this year, you can either

a) cut the heating, watch production fall, accept that there will be fewer sales, and hope that something turns up;

turn the heating up, produce more, and plan to meet the interest on what you borrowed to pay for more heat through the increased revenues you generate; or

c) make barbed comments about the people who lent the money for some activities around the garden but slightly misread the market and required you to pay for the cost of their errors (but fail to make them pay), tell the greenhouse keeper that you will be regretfully requiring him to work longer for less pay because there's a crisis on, reduce the supply of imperfect fruit and veg to the staff who are sick, disabled or laid off, cut the supply of heat, seeds and fertiliser but plan for increased sales next year, and say that your tough decisions have been entirely driven by the faults of the last person to leave the greenhouse.

[JulieB]

And nothing the Labour government contributed to the banking crisis? The fact that the FSA was regulating the biggest financial services market in the world for example (ie like putting a new born baby in charge of a pack of wolves).

Quite and now the baby has grown his first milk teeth belatedly....the FSA are now a law unto themselves they are judge, jury & executioner NO right of appeal

And just for good measure....... anyone heard of Hector Sants plan to tidy up financial services by 2012...The Retail Distribution Review (RDR)

MPs are debating it at Treasury committee level right now...

Winners = Banks & Bancassurance Sector ( with FSO complaints of 98% about 90% upheld by the Ombudsman)

Losers = IFA's who are leaving the industry in droves.(FSO complaints of 1-2% & only about 39% of those upheld by Ombudsman)

Yet IFAs foot 28% of the enormous cost of the FSA!! Including the huge bonus payouts they get down at Canary Wharf!.. IIRC 200 employees at the FSA earn more than the PM!!

Hmmmmm.....I wonder what the hidden agenda might be?

As an Accountant Martin on the IofM how long are you responsible for any advice you give to a client?

As an IFA under FSA rules any advice I give to clients I am responsible for & liable for until the day I die! Surely that infringes on my human rights?

[LJRM050389]

I'm a Labour member so naturally you'd expect me to disagree with the decsions today, and I do over there pace, impact etc

But thats been debated.

So Tory's here's my question to you.

Up until Lehman Brothers the Torys supported Labours spending plans, infact wanted to increase public spending. It only differed once the banking crisis, where seemingly the Torys would not have saved the banks and created this above safe levels of a defecit we now have, where as Labour (and IMO) correctly increased public spending to save us from the collapse of banks.

So what was the right decison letting the market collapse when the banks failed, which is what the Torys would have done, or saving the banks as Labour did but now having to tackle this defecit?

[JulieB]

**** people who are on benefits.

Yes, let's see the children of the underclass starving in our streets.

Get a grip.

Didn't we do that in the 80s under Margaret Thatcher?!.. and became the "NO society...because I look after Number 1" generation?

IMHO alot of what has gone wrong with the UK espeicially the City was a direct result of what was encouraged in that era.

[chrisp65]

it's an undeniably difficult time and whoever was in power was going to have to cut budgets and then have their tactics affected by the external international markets. There is no right plan, there are simply plans that will be influenced by outside events we cannot forsee. If the USA goes down the tubes and France implodes, we ain't gonna export ourselves out of trouble.

One interesting idea buried in today's excitement was the prospect of public service workers being offered collective wage reduction and hours reductions instead of job cuts. It's the wage bill that needs reducing, not the number in employment. If people can be persuaded to take a pay cut of, say, 10% then this has a double effect. Everyone still has 90% of their income, we are not all paying for 500,000 people to be on benefits.

Interesting times ahead.

[drat01]

i think they need to stop the cuts after this its getting a bit too much

but does anyone think it would be any different under labour? if they didnt do this they would have done one of two things

1) increase taxes even more something they havent done barring the vat

2) continued spending making us even worse

Dem you couldn't be more wrong if you tried. The Labour party (and the Lib Dems) called for cuts that would be manageable. The LibDems sold their soul for their 5 minutes of fame with the Tory party and jumped in with the massive and vindictive cuts that we saw over the past few days.

The cuts are reckless, based on idealogical views held for many years within the Tory party - we have seen them before and we are seeing them again. The LibDems have no credibility at all.

The Myth being thrown about - and I saw it again a few minutes back from Gideon - is that Labour would not have undertaken any cuts. The manifesto said different (but then again we know what this Gvmt feels about manifesto commitments). Gideon is getting desperate, he tried to use the "joke" that the "Gvmt has no money" letter as some sort of policy. It was a joke, albeit a bad one, but nothing more than the banter we see in the HOP. To try and use that as justification is frankly scandalous.

The Tax rises in the announcement yesterday are ones that the previous Gvmt proposed (and at the time shouted down by the Tory party). The only Tory policies are hitting the poorest very hard and again fit in with the idealogical aims that are long held within the Tory party.

The realisation of what you have voted for in the Tory party, supported by the LibDems in this ConDem gvmt, will appear over the next 18 months and it will be so painful.

Mart (Risso), you don't like GB, OK fair enough, but rather than deflect from the issue at hand why not discuss the merits (and their are not many IMO) and the downsides of cuts being proposed.

[Jon]

so, Gid's going to feck up the economy by killing the public sector and adding another 500,000 to the dole queue. That should help matters.

Why not stick taxes up, and keep people in jobs? :?

Seems to me this is as much an ideological assault as an economic one.

Shame on the Lib Dems. If they're still in this coalition after May, i'll be very disappointed in them. How may seats are they going to win at the next election? Single figures perhaps?

[Awol]

One interesting idea buried in today's excitement was the prospect of public service workers being offered collective wage reduction and hours reductions instead of job cuts. It's the wage bill that needs reducing, not the number in employment. If people can be persuaded to take a pay cut of, say, 10% then this has a double effect. Everyone still has 90% of their income, we are not all paying for 500,000 people to be on benefits.

Indeed, exactly the same model that large parts of the private sector has followed for the last two years or so in order to survive.

Something that hasn't been mentioned here yet is that the private sector created 300,000 jobs over the last six months. Given the fact these public sector redundancies are to be phased over four years, you'd hope that the vast majority will either be moving into retirement or private sector employment without too much difficulty - although that may involve physically moving to an area where there is an opportunity.

[bickster]

...although that may involve physically moving to an area where there is an opportunity.

You are Norman Tebitt I claim my five pounds.

[blandy]

He doesn't give a view on that rule, but I don't think he's necessarily in conflict with it, if you look at the bit I've highlighted about "over the length of a natural economic cycle". He says

The appropriate level of budget deficit can only be decided according to the state of the economy. Of course, we may disagree on what the appropriate level may be for each situation, but any economically literate plan for spending cuts should specify the amounts of cut with reference to economic indicators – economic growth rate, unemployment rate, house prices, level of private sector investment, and so on – and not in terms of calendar dates, which has no economic meaning.

In other words, whether we act to increase or reduce a budget deficit should be determined by where we are in an economic cycle, rather than by arbitrary calendar targets.

We're in the bit of the economic cycle where debt should be being reduced, not increased, according to all the things I've read, anyway. Coming out of recession, heading towards higher growth. i.e. when things are on the down slope, you borrow more to stimulate and slow then reverse the decline, then on the way back up, you borrow less, then pay back, so as to balance over the cycle.

The there's the issue of the credit rating agencies. As I have read, again, if we have AAA rating, interest rates are lower, than if the rating is downgraded. These agencies want to dsee a credible plan top reduce bowwowing - so the yfeel they will get their money back, guaranteed. So that's another reason to cut borrowing at this point. Not to increase it as the article suggests. And implicit within the article is to carry on with areas of profligacy, and unsustainable spending on stuff which is not infrastructure.

I suspect that cutting so hard so fast is wrong and carries a high risk of backfiring and making things worse, and is driven by political desires rather than economica ones, but I do thing cutting is the right thing to do, unlike that article. As I said other parts of it I agree with.

a variant on it would be this.

If your market garden greenhouse heating bills are too high a proportion of your costs, and your sales don't recoup the costs and give you a viable financial position this year, you can either

a) cut the heating, watch production fall, accept that there will be fewer sales, and hope that something turns up;

turn the heating up, produce more, and plan to meet the interest on what you borrowed to pay for more heat through the increased revenues you generate; or

c) make barbed comments about the people who lent the money for some activities around the garden but slightly misread the market and required you to pay for the cost of their errors (but fail to make them pay), tell the greenhouse keeper that you will be regretfully requiring him to work longer for less pay because there's a crisis on, reduce the supply of imperfect fruit and veg to the staff who are sick, disabled or laid off, cut the supply of heat, seeds and fertiliser but plan for increased sales next year, and say that your tough decisions have been entirely driven by the faults of the last person to leave the greenhouse.

Splendid! But careful with those stones.

[Risso]

As an Accountant Martin on the IofM how long are you responsible for any advice you give to a client?

I don't work in public practice any more, so am not "using" my qualification so to speak. I don't think there's a time limit on customers being able to take action against registered auditors though.

[peterms]

In shocking news, there's an outburst of common sense from the BoE: Mervyn King hints at fresh round of quantitative easing

Bank of England governor says strong case for pumping money into economy to spur growth and stop inflation falling below 2%

Bank of England governor Mervyn King signalled tonight that he was closer to embarking on a second round of quantitative easing after he said there was a strong case for pumping funds into the economy to spur growth and prevent inflation falling below its 2% target.

King warned the next decade would be bumpy and the UK would struggle to claw back the 10% of output it lost following the banking crash.

A lower exchange rate is expected to support a rise in exports and help rebalance the economy towards investment and exports.

As evidenced by my posts on the economy I'm no expert but here's a few laymans' thoughts/questions anyway..

Devaluing Sterling through QE could do a number of things:

Lowers the cost of exports

Increases the cost of imports/Leads to inflation

Encourages people to inflate the next asset bubble with the excess cash instead of opting for slower but more sustainable growth - or - sit on the cash and pay down debt therefore giving no boost to the economy?

Potentially starts a devaluation trend that may be difficult to stop again?

By doing this would we not be trying to get ourselves back to a level of economic output of recent times that was essentially smoke and mirrors anyway?

Another thing is that we would not be devaluing in isolation (I've read Bernanke is thinking about another round in the US) so do we risk getting into an international race to the bottom and over time wiping out the value of individuals savings - beggaring a good proportion of the population in the process?

Following that route (potentially a la Weimar) seems like smearing ourselves in beef dripping then sticking our political and social collective into the lions chops tbh.

I know I've made a number of (unsubstantiated) leaps forward there but are they not plausable scenarios?

As much as it's going to hurt people who have done nothing wrong, there is a part of me that thinks we have no alternative now but to take our medicine and get through the hangover that has followed the binge. I'm not attributing political blame with that statement just trying to relfect the reality of where we are. There are no painless ways out that I can see.

Now, amateur economists of VT, let's tear that apart so I can try to understand what the feck is actually going on!

Your point about slower and more sustainable growth is key. Something like investment in developing sustainable alternative energy sources would be something which helps to address the predictable future energy crisis, and also helps to shield us against some of the global impact of such a crisis. Compared to that, look at the effect of the type of growth we've seen over the last 20 years in the financial sector - unstable, and we get to clean up the mess left while the financiers keep the profits they made.

On the point about taking our medicine, the analogy assumes that the effects of deficits are always the same, and that there's one outcome. There's a good article here written about the US, which debunks some of the myths about "there is no alternative".

The federal fiscal policy debate is being overwhelmed by a growing sense that America must slash its deficit now, before it is too late. Actually, the United States is in no danger of a treasury debt crisis and can carry far more debt than people believe without dire consequences.

Unfortunately, many who argue for rapid deficit reduction base their case on a slew of misunderstandings and fallacious generalisations about the consequences of high public debt. In reality, nations vary sharply in their capacity to carry public debt.

There is a broad feeling that public debt near 100% of a nation's GDP or greater is out of control, and for many countries – Greece being the poster boy – this is the case. But this is not true of the United States – or Japan or the United Kingdom. Still, with US treasury debt held by the public equal to 60% of GDP and rising rapidly, the United States is now frequently grouped with countries in which high public debt ratios have caused or are causing major problems.

These other countries did not get into trouble because of high public debt ratios alone. They had some combination of the following conditions that limited their debt-carrying capacity: first, a lack of government control of the money supply of the currency in which most of its debt is denominated; second, debt owed in or convertible into gold; third, the lack of a long history of political stability and an effective means of tax collection; fourth, the lack of a large, liquid market for government debt; and fifth, debt owed personally by a king or other supreme ruler. Not one of these conditions applies to the United States.

Public debt ratios of countries with high debt capacity have risen well above 100%. The United States, the United Kingdom and Japan have all had debt-to-GDP ratios over 100%, and in Britain's case, over 250%, without calamitous consequences. The record shows that in strong, advanced countries like these, a high public debt ratio does not necessarily lead to rising inflation or slower economic growth.

In both the US and the UK (the two high-debt-capacity countries with the longest history of public debt), there is no visible relationship between the public debt ratio and inflation. For example, the peak US public debt ratio of 109% in 1946 was followed by a decade of low inflation.

Similarly, both American and British histories fail to show that high public debt is a drag on growth; in fact, peaks in the public debt ratio have been precursors to unusually strong economic growth. This is not to suggest that the high public debt ratio itself causes strong growth; rather, circumstances that cause high debt – major wars and depressions (the United States is in a "contained depression" now) – can shrink private balance sheets and create forces for new eras of strong private investment and growth.

Sadly, discussions about the implications of rising public debt are riddled with many other myths and misplaced fears as well: that there will be insufficient "savings" to absorb the continued massive issuance of public debt securities; that the central bank will always be able to generate inflation to lower the real debt service burden; that the public debt ratio can only be lowered by onerous future tax hikes; and so on.

Understanding these issues will be crucial for successful policymaking and private-sector decision-making in the years ahead. A continuing, steep rise in the US public debt ratio is virtually unavoidable under any policies until overcapacity, excessive debt, and broadly deflating asset values no longer cripple the private sector – although there are certainly better and worse ways to run deficits until then.

For now, slashing the deficit would be hurtful to the economy and self-defeating. Such well-meaning but wrong-headed action would cause renewed recession and plunging tax revenues. Until the private economy completes the multiyear balance sheet adjustments underlying the current depression, federal debt will continue to swell.

The good news is that, despite what the alarmists contend, the country can handle it.

[snowychap]

Something that hasn't been mentioned here yet is that the private sector created 300,000 jobs over the last six months.

300,000 or 200,000? (The latter was the last figure I heard).

What kind of jobs were they? Were they full time or part time? And, as you suggest, where were they?

The weakening labour mareket

The BBC reports:

Across the UK the number of people employed increased by 178,000 in the three months to August, the ONS said.

Sounds good. A more detailed look at the data, however, suggests a bleaker picture.

First, of those 178,000, 43,000 are the newly self-employed. A sector that accounts for only 10% of employment accounted for 24.2% of employment growth. Now, if this is an increase in entrepreneurial spirit, fantastic. I suspect, however, that it is partly people re-labeling themselves as freelancers or consultants, or setting up tiny businesses that don’t pay as well as full-time jobs. Such people are frustrated employees.

Secondly, a further 123,000 net new jobs are part-time. More than half of these new workers - 65,000 - are working part-time because they can’t find a full-time job.

Thirdly, the number of full-time employees fell by 17,000 between March-May and June-August.

None of this is a sign of a strong labour market - quite the opposite.

Worse still, things seem to have gotten worse just recently. If we compare the May-July data to the June-August data - which is not in today’s press release but readily available in the time series archive - the number of full-time employees fell by 52,000, the second biggest monthly fall since June 2009.

This is consistent with the rise in employment associated with Q2’s boomlet in GDP now going into reverse - a possibility corroborated by the rise in claimant count unemployment in the last two months and by the 30,000 fall in the number of vacancies between Q2 and Q3. It is also, however, consistent with the possibility that actual employment never really increased that much and that the figures were flattered by a bit of luck in the sampling process.

Given all these signs of weakness, it shouldn’t be surprising that the wider measure of unemployment - which adds to the formal unemployed part-timers who’d like a full-time job and the economically inactive who want to work - rose in June-August. This now stands at 5.99 million, or 15% of the 16-64 year-old population.

Another thing. 44,000 of the 178,000 rise in employment was in the over-65 age group, even though these account for only 2.8% of all employment. This suggests there are growing numbers of people wanting to top up their pensions with work - which is hardly a sign of a prospering economy.

[peterms]

Why not stick taxes up, and keep people in jobs? :?

Seems to me this is as much an ideological assault as an economic one.

A lot of comment fails to distinguish between the tax take, and tax rates. Increasing the level of economic activity would increase the tax take without increasing tax rates. The question is how that's to be achieved.

Conversely, if economic activity falls, the tax base will fall, and tax rates would have to increase to keep tax income the same. The current plan to reduce the tax base and reduce the level of government spending seems to be more about preference than necessity.

Yes, it's very much about ideology.

[snowychap]

The there's the issue of the credit rating agencies. As I have read, again, if we have AAA rating, interest rates are lower, than if the rating is downgraded.

These agencies want to dsee a credible plan top reduce bowwowing - so the yfeel they will get their money back, guaranteed. So that's another reason to cut borrowing at this point.

There would be two points that I would make: that the fixation on the triple A rating is overplayed (from what I have read it is the market where the government seeks to sell its gilts, &c. which determines the interest rate and not what a credit rating agency or two decide or think - hence why our cost of borrowing has decreased since the beginning of the year and not just as Osborne claims); that the plan does indeed have to be credible, I would suggest that it is the credibility which may be under question (the credibility doesn't just rely on saying we will cut spending thus but how those cuts will engineer the result that is also claimed).

A piece on the ratings (from the same bod as above bearing in mind that this was from Feb so the data is out of date):

Osborne's AAA fetish

Is George Osborne making a fetish of the UK’s AAA credit rating? I ask because what really matters is the cost of government borrowing, which in turn depends upon the market‘s confidence in gilts. However, a AAA rating is neither a necessary nor a sufficient condition for the maintenance of this confidence.

The collapse in the market for credit derivatives shows that AAA ratings aren’t a sufficient condition for the maintenance of market confidence. Nor are they a necessary condition. Spain and Japan have credit ratings of AA, a notch below the UK, but 10 year Spanish government bonds yield just 4.1%, only 0.1 percentage points more than UK gilts, whilst 10 year Japanese government bonds yield only 1.4%.

A top credit rating, then, is no guarantee of continued market confidence, whilst the lack of this rating doesn’t mean confidence will disappear.

There’s a simple reason for this. Credit ratings measure only the risk of default (possible badly). But this is only one of many risks to bonds. And at the higher levels, it is a small risk. S&P, for example, says that an AA rating differs from an AAA one “only to a small degree.”

Instead, bond yields depend upon other risks. One, which hit credit derivatives, is liquidity risk - the danger that you’ll not be able to sell quickly the asset. For government bonds, though, there are two other, bigger, dangers.

One is inflation. In Japan, this is a minimal danger, so investors are happy to buy low-yielding JGBs, despite their second-rank rating.

The other is currency risk. Spanish yields are low because investors believe (rightly or wrongly) that there is only a small danger of Spain leaving the euro and having its currency devalued. With this risk small, yields are tied down by German yields.

Traditionally, these two risks have varied enormously. This is why gilt yields varied so much and were so high in the 1980s and 90s, even though the UK‘s credit rating then was not in question.

Which brings me to my problem. It’s quite possible that, even if the UK keeps its AAA rating, gilt yields could rise if investors perceive an increase in UK inflation or currency risk.

And Osborne’s words seem to add to this risk. In yesterday’s speech, he said he wanted to see “higher exports” - which could easily be taken as code for “lower pound”. And he’s also said that he wants “to keep mortgage rates as low as possible for as long as possible.” But this merely tells the world that he’d like the yield on sterling assets to be low - perhaps at the expense of infringing the Bank of England‘s independence. Which is pretty much an invitation to dump the pound - especially if overseas central banks raise interest rates.

If bond markets see this as a danger, then the benefits to gilt yields from retaining our AAA status could be swamped by a increase in the sterling risk premium investors require for holding gilts.

Now, I’m not saying this will happen. And I’m not saying AAA status is unimportant. I’m just saying that it’s not the be-all and end-all. Other things matter for the government’s borrowing costs. And the Tories aren’t being very careful about these.