Month: May 2011

 

          Spaniards are  understandably fed up with 45% youth unemployment and 20% general unemployment. They have recently directed their anger at socialists in local government. The causes of their misery are the level of the Euro, the EU austerity programme, their over borrowed state and above all their weak banks. These things are the result of past Spnaish governments signing up to the EU and Euro  project. Now they are locked in it is difficult to do much about their problem.

           The EU thinks higher taxes are part of the answer. They are part of the problem. The EU thinks the banks need to be buttressed with more cash and capital. That is true in the longer term, but when you want an economic recovery it is not a good moment to become more defensive about bank balance sheets. Nor should they believe the bad debts and other issues in the banks will simply go away. They do need to tackle those, so the banks that remain after asset  sales, write downs, capital reconstructions and the like have better assets and are in a stronger psychological position to lend more money sensibly.

             There is nothing the Spanish state can do about the high valuation of the Euro. As a result, in order to compete and sell more abroad they have to either work smarter or accept lower pay. US and UK workers have had their effective wages cut by devaluation in recent years. Spanish workers have to agree to cut  their wages  directly, or agree higher productivity working with their managers.

             The state does have to get closer to living within its means by showing it too can bring its spending into line with its income. This also requires productivity boosting measures, or a tougher approach to state employee pay.

             So what can power growth when all these adjustments are going on? For growth is needed to help create the jobs. If they take the sensible actions of adjustment the economy can start to export more. It will need more capacity to export, so private sector investment will also rise. If they mend the banks or create some new ones there will  be more credit available for suitable projects and businesses. Over time, as jobs are created, private sector consumption can then start to rise as more people have work incomes to spend.

             It will not be easy, but that is the only approach. Playing around with more state and bank debts without sorting out the underlying imbalances will not work.

              Today PArliament has an opportunity to vote against any further UK involvement in Euro bail outs. We do so just as the EU markets are once again puttingpressure on Greek, Irish and Portuguese debt, and just after a debt rating warning for Italy.

 

                 In the year to March 2011, the first year of the new government, current public spending rose by a little over 5% in cash terms. Contrary to all the stories of big cuts to come, it will continue to rise in cash terms for the rest of the 5 year plan.

                 There are two things to note about the rises. The first is, the rises are biggest in the early years, and toughest in the later years. The second is, the government increased planned spending for later years between the June 2010 and March 2011 budgets, showing the figures are not cast in stone.

                 The pace of the increases is curious. On the red book figures curent spending rises by 5.3% in Year 1, 3.8% in Year 2, 2.0% in Year 3, 1.9% in Year 4 and 1.8% in Year 5.  I can understand lower figures for the middle two years of the strategy, as these are the years of the pay controls, and the years when the full benefits of buying better and cutting bureaucracy should be materialising. The last couple of years when the pay freeze comes off and the government is in the run up to an election you would think  might be years of faster growth in current spending than 2011-13.  

                 The substantial increase in Year 1 is also surprising. I appreciate it takes time to get on top of programmes, and some expenditure was contracted in advance by the outgoing government. It is usually best when undertaking a financial turn round to hit spending from the very beginning. It is easier to relax your grip than to come back for a second round of reductions in plans.

                The other curious thing is that the public sector scores these cash increases as real cuts. As inflation is meant to average just 2% on the government’s own target whilst the spending increases average 3% you would have thought this would represent small real growth. When you add in a two year pay freeze for most public sector pay, better buying, and a big back to work programme to take people off benefits you would hope that a 3% per annum increase in spending would  get you some real increases in service.

               It is true that interest payments go upwards as a result of the extra borrowing. This only squeezes other spending badly if interest rates take off, not something assumed in the forecasts.

 

Most of the debate about the UK deficit reduction programme is about whether the government is doing too much too quickly. There is another side that rarely gets examined – is it doing enough and is the programme going well?

Before critics get to work claiming falsely I want to see  cuts in schools and hospitals, let me confirm I do not. There are, however, other areas and budgets, starting with the state owned banks and going through the large EU expenditures, moving on to the pace of sorting out the administrative overhead  where there is some scope to cut the deficit more quickly.

Let us today look at the strategy so far. The government in June 2010 said it planned to borrow an extra £451 billion over the five years to 2015. This entailed substantial reductions in the rate of increase in the state debt, from the very high levels reached in 2009-10. The aim is to get rid of the structural deficit by 2015, leaving a relatively small running deficit in that year.

Eight months later, in the March 2011 budget, the government decided it could afford to borrow £485 billion over the five years. It decided to increase spending over the period compared to July 2010 plans, and had to allow for a small revenue loss owing to a downgrade of the growth forecast for 2011. The amount the state plans to borrow in five years  is more than the total UK state debt in 2004. The growth forecast was lowered from 2.3% to 1.7% for 2011, and from 2.8% to 2.5% for 2012.

As controlling the debt and deficit is crucial to our economic future, something all commentators and political parties agree, we need to ask how robust is the current plan? Is the March 2011 budget the last when we should expect an overrun or increase in the planned borrowing, or could the same happen in any future budget?

Let us take the growth forecasts first of all. The plan assumes growth will accelerate to a lively 2.9% in 2013, a further 2.9% in 2014 and 2.8% in 2015. This could happen. If the banks by then are mended and capable of lending more money on mortgage and to businesses, that would help. If the world economy is growing well, that will provide a good background. The government’s welfare reforms should  be kicking in with their contribution.

If, however, the world economy faltered, or if the banks were still unable to finance a robust recovery, there could be a disappointment. Every 1% of growth less means a revenue loss of around £6 billion each year. If 2013 saw 1.9% growth instead of 2.9% growth, for example, the government would need to borrow an extra £18 billion over the period to reflect the three years of lower revenue from the lost growth. There would also be some consequential increases in public spending, as there would be fewer jobs.

We need also to ask if the public spending figures will be delivered as currently planned. Normally as a government gets closer to an election it wants to increase public spending. Lobbyists intensify their efforts to persuade politicians to give them more money for their causes in a  more fevered atmosphere.  We have seen the government giving some ground on spending related issues already when it faces criticism. It seems likely that the government will increase spending somewhat compared to plan as we get nearer to 2015. Some of the cuts pencilled in for 2013 may not materialise.

I think it unlikely the final outturn for total government borrowing over the five years will be as low as the forecast £485 billion. Looking at the figures I think other actions need to be taken to allow for some increases in spending on core programmes, and to allow for any disappointment in the global growth rate which could adversely affect UK growth. The government is right to warn that it must cut the deficit to keep the confidence of the markets and keep interest rates low by Greek or Irish standards. That is why delivering the strategy is important, and why we need to ensure something like the forecast numbers is delivered.

 

On Tuesday a group of Eurosceptic Conservative MPs have secured a Commons debate and vote on the issue of the European bail outs.  They asked me to support their motion, which I am happy to do. The motion argues that there is no Treaty legal base for making EU money available for bail outs. It questions the idea that the natural disasters clause can be used to justify the EU fund to pay these countries. The aim is to spare the UK the costs of these bail outs, leaving them as a proper matter for the Euroland countries.

The debate should also cover the whole issue of the wisdom of these bail outs. The fact that the Greek bail out has not worked, and has to be renegotiated should lead the EU to reconsider any others.  The EU should be worried about the money go round it is creating. A Euro member state needs to borrow more money. It does so from the rest of the EU and from its own banking system. The member state’s debt swells to  high levels, so markets worry about the stability of the banks that lend the state in trouble so much money. The state then has to lend more money or offer more guarantees to its banks, so the state itself then needs to borrow more money. This is not a good  way to seek to resolve a problem. There is simply too much debt in the system. Weak states cannot easily prop up weak banks, and vice versa.

So what is the answer?  There are three parts to a solution. The first is, the overborrowed banks and the overborrowed countries need to sell assets instead of borrowing so much extra money.  In order to break out of the vicious cycle of borrowing more, having to pay more interest, and having to borrow more to pay the extra interest, they need to sell assets to stem the borrowing. The damaged banks need to be slimmed down. If they are in grave trouble they need to be put through a kind of managed administration, keeping the important parts going but winding down and selling off the rest. The states need to disentangle themselves from the banking risks. There needs to be an honest statement of the losses to date, and a rapid move to staunch future losses.

The states themselves need to sell assets whilst they are looking for longer term ways to boost their revenues and cut their costs. Greece may well need to get better at collecting its taxes. A higher corporation tax rate is not a good answer for Ireland, as that economy needs to attract more business, not deter what it already has. Setting competitive tax rates may be part of the answer. Tax rates should be set to maximise revenues, not as some kind of revenge against commercial success.

There is, in the end, no substitute for going through the expenses of the state line by line. The not very important and the nice to have have to be deleted. The wasteful and needless have to be rooted out. European governments seem unwilling or unable to live within their means. Everyone else has to. If they refuse to do so, in the end taxpayers have to pick up the bills.

 

 

 

 

 

 

 

 

 

 

 

 

             President Obama has rediscovered his gift for words following the killing of Bin Laden. He now tells us he believes in democracy, freedom and the right to peaceful protest in the Middle East. What he does not tell us convincingly  is how he thinks the Middle East can get to that happy state, and how the USA thinks it is helping.

             The truth is the USA intervenes militarily in some places and not in others. Where it has invaded and occupied, in Iraq and Afghanistan, it has found it very difficult to impose a western style democracy it is happy with. In other places with equally undemocratic regimes that offend western ideals of civil liberties and freedoms the USA either turns a blind eye or thinks condemnations and sanctions suffice as a response.

              Many independent commentators think the US policy has an altogether more down to earth common thread, the defence of western access to oil. When the UK was the major world power and the USA the challenger for that onerous crown, the USA condemned too much intervention in other people’s countries and affairs. The USA argued against invasion and occupation, calling it colonisation. Now the US is the world’s superpower it has allowed itself to be dragged into more direct involvement.

            Mr Obama should make a sequel speech answering  the following questions:

How important is the supply of oil to the west in his thinking, and what are his policies to reduce US dependence on imported Middle Eastern oil?

Why does the USA take direct military action to tackle what it sees as the government problems of Iraq and Afghanistan, but not of other countries?

Does the USA want regime change in Libya or not?

Does revenge make for good policy? Why did the USA take much  stronger action against Afghanistan than Pakistan following 9/11?

Why is Syria more unacceptable than Bahrain or Saudi, but less unacceptable than Afghanistan or Iraq?

 

            I am fed up with hearing that the world will sadly miss Mr Strauss Kahn, and his economic genius.  His supporters in the IMF job say he was so good at brokering a deal to “save” Greece, and was  much needed to do the same for Portugal.

             The truth is the first Greek deal did not work. It had to be renegotiated six moths later, and now renegotiated again. It is not working for Greece, Euroland or the rest of the EU. The IMF needs to ask itself how it can help countries that are locked into a single currency at the wrong rate for them, with economies that are not working harmoniously with the larger economies at the centre of the currency zone. Mr Strauss Kahn’s policy isn’t working and cannot work. It does not take an economic genius to lend more of other people’s  money in the hope that the underlying problems will solve themselves.

 

           Whenever I listen to Andrew Mitchell, the Overseas Development Secretary, I am impressed by his passion to tackle world poverty, hunger and disease. He believes in what he is doing, and he is making important changes at the department.

          I welcome his decision to stop giving aid to richer nuclear weapons countries like China and Russia. There was something bizarre about the UK granting aid to China out of money we borrow, only to have to borrow the money on international markets from countries like China with large surpluses. It would be good to enjoy those savings whilst we get the deficit down.

          I am glad he has accepted that a lot of state to state aid finds its way into the wrong hands, and can end up buying better cars or weapons for tyrants if it is not properly policed. He has made clear his zero tolerance of waste and fraud in the budget.

         I also think the west needs to do more to give the hungry and poor of the world a better chance in life. There are two things that to me are more important than the overseas aid budget in bringing this about.

           The first is the west should restrain itself from printing too much money which helps power  commodity speculation. Recent food price increases are in part the result of quantitative easing money finding its way into more risky assets like commodity futures. The hungry of the world are the most damaged by the big increases in the prices of the basics over the last year. The west needs to understand that its inflation can do damage miles away from home as well. Spending more on buying food for immediate relief is no permanent answer if food is getting dearer and dearer.

           The second is the west should do more to allow access to our markets for produce coming from poor countries. The Common Agricultural Policy acts as a block on the poorer countries growing more product to sell for hard currency receipts to help get them out of poverty.Reform of the CAP – and the US equivalent protections – would do more to tackle world poverty than many aid programmes.

          I welcome the governemnt’s strong commitment to poverty and hunger relief. I would like them to take a tougher approach to restrictions on world trade and to permissive inflation, as these are two of the biggest obstacles to progress.

 

          The Liberal Democrat Orange Book, written by Messrs Clegg, Laws and other leading luminaries contains some strong language.

          Mr David Laws wrote about the NHS. He characterised the NHS as a “cumbersome, centrally directed public sector monopoly” delivering a “second rate state monopoly service” to “passive recipients” rather than to “customers”. He recommended a big dose of “choice, competition and decentralisation” and more use of the voluntary and private sectors to sort it out. He sees many people as “losers” from this “failure”, and condemns the inefficiencies. He strongly recommends competition including more provision from the private sector.

 He concluded that the NHS as we know it should be replaced with a National Health insurance scheme, where everyone would have either NHS or private provider health insurance. In the light of these ideas, it is difficult to understand why Lib Dems say they are needed to stop the Conservatives making more modest reforms to the NHS than they themselves have proposed, especially when the milder  Coalition reforms planned were in the Lib Dem 2010 Manifesto.

          Mr Clegg was very worrying in his aims. He wrote about the need for the Lib Dems to be a pro EU party setting out the case for European integration. He proposed “Liberal Democrats should reassert themselves in this debate  (on the EU), by adopting a clear stance  that addresses the need for EU reform whilst promoting the simple and overwhelming case for European integration.”

            At the edges of the EU government Mr Clegg can be persuaded that we need to change the Common Fishery and the Common Agricultural Policy, but at heart he is a strong integrationist. He says “Far from becoming  outdated, such supranational EU governance represents the most fitting response to the modern challenges of globalisation, in which economic and political sovereignty has become increasingly disjointed”

               Mr Huhne in his conbtribution welcomed the creation of a rapid reaction force for the EU – an EU army – and proposed a single budget holder for weapons procurement in the EU. “Europe needs to reshape its military  to make a substantially greater contribution to the keeping of global order…”

                It may be that the Conservatives have to act as a moderating influence on these bold and in some cases dangerous views.