Month: March 2011

The capital gains tax paid this year will reflect transactions at the old rate prior to the hike from this government. The OBR forecasts £3.2 billion in receipts. For 2012-13, when the new higher rate system will be bedded down, they forecast just £2.9 billion, a fall of a tenth. They seem to agree with those of us who have been arguing that you will raise less if you hike the rate too much.

The OBR also forecasts a weak year for Stamp duty land tax in 2011-12, another tax which has been increased sharply in recent years. They think revenue will fall from £6 billion to £ 5.8 billion. The Treasury needs to do more work on how lower rates of tax can promote more growth  and higher revenues.

The Budget has changed some of the numbers of the five year plan. Spending goes up a bit more – £93.7 billion extra  in Year 5 compared with the last Labour year for total current spending, and  £74.9 billion extra total spending including capital, where there are cuts.

Total borrowing will be £165.5 billion in 2010-11, and £167.4 billion in 2011-12. £261.6 billion of this is additional borrowing for extra spending. Much of the rest is refinancing of maturing debt. There will be  no shortage of government bonds around for several years. The Chancellor’s budget adds £44 billion more  to the national debt by 2014-15, taking the total increase in debt over the five years of the strategy to £485 billion.  

According to the OBR interest rates will rise to 4% by 2014-15. Gilt values will fall as yields rise from an average 3.6% to 4.9% on their view.

All those arguing that the Chancellor is cutting the deficit too quickly, and those who mistakenly think he will be “paying the debt down”  should read these numbers. We are deep in debt, and will adding to the debt substantially. In order to keep interest rates down to realistic levels it is important we are seen to be curbing the deficit, slowing the rate of growth of the total debt.

Our UK national  house is fully mortgaged, but we are taking out a second mortgage to pay the bills and keep up the spending. If we sought an even larger second  mortgage  the international bank managers might well  call time on us as they have on Greece, Ireland and Portugal.

The main change in the budget is the increase in public spending which was not flagged in the speech. The figures for extra spending are:

2011-12   increase of £10.6 billion

2012-13  increase of £9.2 billion

2013-14  increase of £8.1 billion

2014-15  increase of £6.1 billion

 

             I spoke in the Commons after the budget and will post that speech tomorrow when text is available.

              The budget confirms the same plan as before – deficit reduction through big increases in tax receipts. It relies on above trend growth for three years. I will comment more tomorrow on the various measures to promote growth when I have seen more the detail. The enterprise taxation measures are welcome, and the moves to less regulation also helpful. The Corporation tax and Carbon tax changes are more complex, as are the fuel and oil tax changes.

              On Monday I attended the debate on Libya, but decided not to vote. I should explain why.

              I of course support the United Nations in its wish to protect civilians in Libya from the barabrism of its government. I could not disagree with the main sentiments of the Commons motion. We would all like the Libyan government to behave better, and would like democratic forces to be allowed to protest and to seek peaceful change.

             My concern is who intervenes and what they do. I would prefer the UN resolution to be enforced by the Arab League, supported by NATO powers close to Libya who will find it easier to lend planes and personnel to the task. I do not wish to see more UK lives at risk in conflict after the enormous sacrifices made by our armed forces elsewhere in the Middle East. At a time of necessary restraint on public spending  we need to avoid any new open ended financial commitments as well.

              The debate raised the issue of how do the UN forces achieve success and get out again?  Whilst the aim of the intervention very clearly is to seek to protect Libyan civilians from violence by its government, and not regime change, the easiest way of seeing an end to this business would be the end of the Gaddafi regime. Were the Gaddafi factions to fragment and to topple him, that would provide an exit. If the bombing did kill him, as some have suggested, that too would mark an end.

                  If the Gaddafi regime stays in place  there will remain a serious risk that he and his forces will revenge themselves on the rebels. If the UN does not arm and support the rebels it will be difficult to prevent this. The air zone allows bombing of tanks and army units when they are in open ground moving from town to town, but does not allow intervention house by house in urban areas if the Gaddafi forces blend into the urban landscape and attack the rebels at closer quarters. There will be growing pressure to offer assistance to the ground forces of the rebels if the internal conflict continues.

 

             Inflation has continued its rapid upwards movement. The RPI was 5.5% higher in February 2011 than a year ago, and the Bank’s target rate CPI was 4.4% up, or 120% above the 2% target. We are paying the price of the devalued pound, the low interest rates and the quantitative easing. These high prices will squeeze consumers more. The Bank set interest rates which were too low over a year ago, as we discussed on this site at the time.

 

              Reform have produced a sensible pamphlet entitled “Off balance” prior to the Budget. Unlike many commentaries about the last five years it agrees with this website that large errors made by Central Banks and Banking Regulators in leading western economies caused the violent boom and bust cycle. It was avoidable, if they had listened to those of us who warned against too much credit prior to 2007 (there were a lot of people worried about that) and to the few of us who warned of too little money  in 2008-9.

             The Reformers also sketch out a sensible agenda for the budget. They urge “more capitalism”, not less. They seek more competitive tax rates, less regulation, and more infrastructure investment based on market prices and market returns. It is an old recipe that could produce a decent dish.

             They explain how the UK ec0nomy started to decline, as measured by income per head relative to others, from 2005 onwards. As the public sector took more and more of our resource, as public spending and the deficit rose, even as we reached the top of an unsustainable boom, we were slipping back.  By 2009 our income per head was £12,869 lower than Norway, £7,128 lower than the USA and  £6,044 lower than Switzerland to name three of  the top four of the world.

                The pamphlet says that Labour attempts to narrow the regional gap failed. Despite money and time lavished on regional policies,  London  performed much more strongly than the North and West. London went from £22,136 of gross value added per head in 1999 to £34,200 in 2009, with its share of UK  GVA rising from 19.2% to 21.5%. They warn the government against any idea that it can grow the economy differently to move activity from south to north and from London elsewhere.

                 The government in drawing up its budget should heed this advice. They also need to understand that so far the squeeze has been on the private sector, not the public. The BBC/IFS figures over the week-end again confirmed a theme of this site. The losers since 2008 have been private sector employees.  There were 1 million job losses during the recession in the private sector, whilst public sector jobs expanded by 400,000. The private sector has taken the hit from high inflation, leaving people worse off as prices outstrip wage awards. Pensioners have lost out from low interest rates whilst mortgage holders have benefitted. No-one on median earnings has lost out from tax and benefit changes (excluding VAT), whilst those on higher incomes have been hit by tax and benefit changes.

                          Let us hope the Chancellor acknowledges this by cutting tax on fuel, and by further Income Tax cuts. Any relief of these pressures would be helpful for recovery. Meanwhile public spending  from the Coalition remians up 7% in cash terms so far, and on course to rise each year in cash terms from now until 2015. The cuts are the result of a failure to manage the public sector more effectively, and the result of decisions to boost some areas at a time of tighter budgets.

                   The Budget will probably  include cutting costs on business through deregulation,.Enterprise Zones and other initiaitives. In practice we will be waiting for the Vickers Report into banking, as that is likely to  have more impact than the budget.

                       The main figures for this government’s strategy for the  five years  (20014-15 compared to last Labour year) remain as below:

Total spending    plus £71 billion a year, 

 Total tax revenue   plus £176 billion a year,

 5 years additional state  borrowing £440 billion.

 The government has a target to cut the administrative overhead by 30% over the life of this Parliament. This is a demanding target, but one that can be hit. It will be easiest to do so, if full use is made of people leaving public service to retire or take jobs elsewhere. It’s cheaper and fairer than sacking people.

I have asked a series of questions to find out how effective this means of slimming the overhead is proving. So far, in the departments that have answered, they have lost around 4% of their staff numbers in an eight month period. This suggests the overall annual rate of  leavers is 6%. What is surprising is they have replaced half of these, meaning that the overall numbers are only down around 2%. If they are to hit the 30% target, they need to get better at avoiding replacement. If the post is essential then they need to promote from within, and remove some other post as a result.

You can view a slide of the complete data here – Civil Service Employment by Department.18.03.11.

 

                   It is worrying to hear that Gaddafi has moved his troops and tanks into urban areas before UN forces can take action against him, but not surprising. The offer of a cease fire was evidence that he will play to the gallery, and exploit what he sees as the West’s weakness. He despises the rule of law and the idea that civilians should not be injured by military action.

                The West has the fire power to ground his jets. They have the capability to destroy his army from the air if it is on the move in open ground between settlements. It does not have the power without forces on the ground to ferret him out of urban areas, or to tackle his military when it is hunkered down or within settled communities. Delay has prevented early success.

                  The US says it wants regime change. The UN says it wants to protect civilians. The UN’s aim may not be possible without regime change, but the Resolution limits the means to achieve it. The West is in danger of being dragged into a conflict where the weaker combattant can exploit the procedures of the West to his advantage. The UN Coalition needs to find other means to disrupt the dictator and help undermine his position from within.  It would also be welcome to hear and see a bigger role for the Arab supporters of the UN action.

               I wonder why Italy is not flying her jets to take the action from the air? Italy is after all a member of NATO, the UN and the EU. Italy  has air bases close to Libya. Instead the UK is flying jets on a 3000 mile round trip with in flight  refuelling. Isn’t it time other members of the Coalition did their bit?

I awoke to the BBC revealing some of the details from 1979-80 from the Thatcher archive. As always, and as then, the talk was about the cuts not working. If they cared to look back at the figures, they would see that in her first year in office Margaret Thatcher’s government put through a huge increase in public spending, honouring commitments to very large pay awards throughout the public sector. Strangely the awards were the “Clegg awards”. From memory cash public spending rose by almost one quarter.  Controlling growth in public spending (“the cuts”) started properly in the 1981 budget.  Even these so called “cuts” meant public spending in the public sector’s preferred “real terms” continued to grow by more than the growth of the economy for the first four years of  her Premiership. In the second half of her term stronger economic growth cut welfare and benefit spending as more people went to work. Over her term as a whole public spending grew by 1.1% a year in real terms.  The government’s popularity nosedived in the first couple of years when spending was still surging. Economic recovery and recovery in popularity occurred after the 1981 budget, once control over spending and borrowing was asserted.

Japan makes seven times as many cars as the UK.  China produces fifty seven times more steel than the UK. Neither China nor Japan have a carbon tax or price for carbon in their energy costs.

The UK used to be the workshop of the world. It was famed for its ships and steel, its cars and domestic goods. Continuous decline under governments of all three main political parties since 1945 have left us with a much smaller industrial sector, and with a much much smaller industry relative to China, India, Japan, Germany and the USA.

It is true we still have some good companies and good technology. The UK pharmaceutical industry is strong, as is aerospace and defence engineering. We have a great base in performance cars and some component technology in autos, and some individual good car  plants for major overseas manufacturers. When we want to buy trains, nuclear power stations or many consumer durables we usually today turn to imports.

The government says it wants to drive a revival of manufacturing. This is a very popular policy around the country. The left wing politicians and commentators who dislike big business,  usually genuflect in favour of more industry. Even the keen green campaigners within the major parties consent to the idea that we ought to make more cars, planes and domestic appliances here,  though all these things take energy to make and burn energy to use.

This is where, however, these same commentators and lobbyists can talk with forked tongue. They tell us we should make more things, yet they also want us to hit ever more exacting targets for carbon dioxide emissions. The simplest way to get our emissions down is to make less here and import more from abroad. That does not help the world picture but it hits the domestic targets.

Much of industry requires using large quantities of energy, to transform earths into metals, and to shape metals into products. Steel and aluminium manufacture requires huge quantities of energy. Process plants making glass or cement require large amounts of energy. Even assembly plants need subtantial raw energy as they are heavily automated. Petrochemical processes to make and shape plastics also require large inputs of heat.

Soon the government has to set a carbon price. This is central to decisions people will then make about which technology to adopt for the many new electricity power stations we are going to need. We have to replace the coal stations that will close thanks to the EU Emissions legislation  come 2015, and to replace ageing nuclear stations near the end of their design lives. Set the carbon price high, and it will tip it more in the direction of renewables.

But if the government sets it too high it will also mean the end to dreams of the Uk restoring a stronger position in basic industry. A high carbon price means we will have to  import  our steel, our aluminium, even our cars and our fridges, washing machines and cookers.  Energy costs are bigger than labour costs in some of these energy intensive activities. It’s not an easy choice for this government. It will be a test of  what matters more  – UK industry and jobs, or UK CO2 targets?

The United Nations has late in the day decided to stand up to the Libyan dictator. Their task would have been easier if they had acted when David Cameron first raised the issue.

Under the remit the coalition of the willing that forms to carry out the task could keep Libya’s jets from bombing their own country. They could also damage his army when on the move across open country by air to ground bombing. It might well be possible to stop his further ruthless progress. If they could use this power to force negotiations that might help. Without troops on the ground they cannot easily reverse the regimes gains to date.

I wish them well. I want to see Arab countries with perhaps the assistance of France and Italy undertake this task. They are the  neighbours  with the planes to do the job and the airfields nearby.