Category: Blog

 

              I have always thought the oil companies miss an important presentational trick. They should put on the pump and on the receipt for fuel how much is UK tax. When almost two thirds of the fuel price is tax, people might like to know that so much of their very large bill is going to their local hospital or school, not to the fat cats of the oil company.

              All western governments tax petrol and diesel heavily, though the UK is one of the highest chargers whilst the US is still relatively low. The G7 countries take more money from the fuel consumer than OPEC or the other oil producers  who supply the raw material. The UK government takes almost twice as much  in tax as  OPEC gets from the sale.

             The VAT rise is tax on tax, and has taken UK fuel prices to new highs at the pump. Meanwhile the oil price itself is around $90 a barrel, compared with a high of over $140. It is time for the UK government to dust down its idea of a fuel price stabiliser operated through variable taxes on fuel, starting now with a reduction, to take some of the inflationary pressure of this latest move out of the system.

              Anyone from the US reading this might spare a thought for all those of us paying more than $9 a gallon.

 

           By yesterday afternoon the price of borrowing ten year money for Portugal had risen to 7.24%, up from 6.75% at the end of last year.  The Spanish borrowing rate rose too, to 5.53%. The Irish one is still at 9.28%, post the “rescue”.

           Given the large sums these countries need to borrow it is going to prove expensive. They will get into that vicious circle where interest costs take an ever rising proportion of the budget, and make controlling total public spending that much more difficult.

            I wonder how much longer, before Euroland politicians want to talk about this, and end up with another “bail out” to try to lower the costs of borrowing for a distressed country or two?

 

    Last n ight on Newsnight the French Finance Minister gave an accomplished interview. She understood poorly worded questions and spoke well in a foreign language. Her message was perfect spin. She told us all current members of the Euro would remain members. She said there will be no more bail outs. She was sure no country within the zone would have difficulties financing itself in the year ahead.  It was a “Crisis, what crisis?” moment, a “Let them eat cake” interview.

      The BBC’s Economics correspondent afterwards told us the Euro political classes are in denial about the troubled  universe of the bond traders, bankers and business people who have to work with the results of the broken banks and the overborrowed states that stay within the Euro zone. He could have added that the politicians have to keep spinning through whatever the odds. If they once suggested there could be another bond crisis, or another bank shake up, or further deterioration in one of the struggling economies, they would hasten just such an event. Loose talk about reneging on bond obligations and seeking repayment of loans by the ECB to Irish banks was sufficient to cause the last phase of the crisis.

         The Euro, just like the Exchange Rate Mechanism before it, forces politicians either to fly in the face of reality or to keep quiet. Markets want to go in the opposite direction to the politicians. In such circumstances careless talk can cause great economic and financial damage. The French Finance Minister had to say what she said. She might have shown greater wisdom by declining to comment at all. A defence few believe is no defence.

  Great batting, great bowling, brilliant fielding. This team has it all. More importantly, they had the grit and determination to win, saving the first test when it seemed lost, and bouncing back after  defeat in another. Their story shows you can live your dream if you work hard, take nothing for granted, and never give up.

 

              Worldwide inflation is quite rapid. Food prices have been especially lively in recent months. China has hoisted interest rates to 5.81%, Brazil to  10.75% and India 6.25%. Australia and Canada too have started to increase theirs. In the UK mortgage rates and lending rates to small business are nothing like the official 0.56% base rate. Mortgage rates have been going up recently.  Only the Bank of England keeps on driving by looking in the rear view mirror. It remains more worried by the past recession than the looming inflation.

                    Yesterday the Chancellor advised the EU to get its house in order by stress testing banks more strenuously and doing more to deal with the problems of Euroland. He said “The affirmation of the UK’s triple A credit rating and the fall in market interest rates shows that it is possible to earn credibility with a convincing deficit reduction plan.” 

                   He is right to remind us that the UK’s top credit status was at risk on the previous policy. Lenders have taken some heart from the goverment’s expressed intention to cut the rate of increase in borrowing. However, his comments on the movement of interest rates are now a little dated. The 3.4% yield on ten year government bonds at the time of the budget did fall below 3% at its best. Today the rate has gone back up to 3.57%.  There has been a general shift up in EU government  bond rates, including Germany’s, as a result of the Euro crisis of late autumn. Some modest contamination did rub off on the UK, despite our non membership of the Euro.

            It makes it more important than ever that the UK should decline any future involvement in financial bail outs and show it  can now earn a dividend from staying outside the Euro. Meanwhile, we await decisive leadership from France and Germany from within the Euro area, as they move to sort out the problems of their currency. Chancellor Kohl always saw political union as an important complement to monetary union. The present German government both wants there to be more discipline over the other member states, and for the union to remain a union of independent countries where each one takes responsibility alone for its own budget and borrowing.

              Senior Germans do not like the idea of bigger transfer payments around the union to allow the rich and successful to help the poorer and less enterprising. They do not want to pool their sovereignty over budgetary matters. They do, however, wish to impose substantial controls over the budget freedom of other states. This could prove to be a sticking point when it comes to hammering out practical proposals to put a sovereign behind the currency.

 

          It was good to see the Prime Minister talking the economy up, and some evidence of briefing in the press to point out that UK manufacturing is growing again. There is a recovery underway, and that is most welcome.

          Worldwide the news is considerably better than it is in the West. In Asia and parts of Latin America they are already having to put up interest rates to  try to slow things down to control inflation, so fast has the growth and recovery been. Indeed, the Credit Crunch slump was largely a phenomenon of  the EU and the USA. Monetary and budgetary policies were better conducted in much of the emerging world than it was in the advanced world, with better results. The factories of the East still rule the roost in many export markets.

        The world exconomy as a whole expanded at more than 4% last year and may do so again this year. The digital revolution continues apace, bringing many more people into the world of the web, social networking and rapid communication. The internet allows enterprising people in China, India and similar countries to start up a business with relatively little capital, and to gain immediate access to the worldwide market. Millions are being lifted out of poverty by enterprise capitalism operating ever more widely throughout the developing world. The web itself is something of leveller for business as well as for governments. It can help bring the prices of services down, and strengthens worldwide competition in many markets.

       The success of the private sector, of individual and family enterprise and access to the global market in providing opportunity to the jobless and higher living standards to the badly off is obvious to anyone who visits cities like Mumbai and Shanghai. It is all happening so quickly. The global market also means that countries which penalise enterprise, saving and effort too much can be shunned equally quickly in the rush to locate and grow in the more tolerant jurisdictions.

         We have three worlds. The advanced world, in danger of resting on past laurels; the emerging world, growing quickly and agressively; and the opt out countries like North Korea who choose autocratic economic systems to match their stifling political systems, and who confine their people to loss of liberty and an absence of prosperity.

        The West needs to understand the dynamics of this rapdily changing world. The Prime Minister was wise to highlight enterprise and opportunity, the chance to set up a business and to swap work for enforced lesiure yesterday. Ministers need to ensure the tax and regulatory regimes they set reinforces the fine words. The EU needs to switch from bail out to work out to sort out its problems, and needs to roll back some of the big government that gets in the way of prosperity.

 

            What passes for political debate about the deficit and how to reduce it struggles to inform, because it is based on  the strange proposition that most of the reduction is occurring through spending cuts. The numbers show otherwise. Whilst there are cuts in planned spending, total  spending carries on rising in cash terms, so all the deficit reduction planned happens through increased tax revenues. The increases in VAT and National Insurance are an important part of delivering this tax based approach. As we have seen, the main reason increased cash spending delivers some unpleasant cuts  is the rising inflation. Bad public sector management in some Councils and quangos adds to the stresses.

            The poor public debate is made worse by many people misunderstanding the difference between debt and a deficit. A deficit means the debt is going up – the country has to borrow more money each year to pay for the excess spending, on top of the huge debts already built up. A lot of people including  media interviewers and commentators, seem to think that reducing the deficit is the same as paying debt off – if only!

            Last night on Channel 4 News the Snow interviews left the impression that increased VAT could be a short term measure to ” pay down the deficit”, and that once that was done the tax  could be cut again. The increased VAT on the government’s strategy is needed to meet some  of  the costs of rising cash spending that otherwise would have to be borrowed. Increased VAT pays off no debt. It does not even stop the debt increasing. It merely slows the rate at which the debt is increasing. The £13 billion a year increase in VAT is considerably less than the planned cash increase in spending over this Parliament.

              Labour’s approach is to say that even more of the job of deficit reduction should be achieved by increased taxes. As all the deficit reduction is being achieved by increased taxes this in effect means Labour wishes to increase spending more rapdily than the Coalition, and use extra tax revenue to pay for the extra spending. Labour wants extra National Insurance on top of the the planned increases the government is putting in. Of the two plans on offer, the Coalition one is preferable because it cuts the deficit more quickly, and avoids even higher taxes which would be job destroying. Better control of public spending, as often discussed on this site, would help the recovery. There is no substitute for the public sector doing more with less.

 

               The UK’s economic policies carry a strong family resemblance to EU policy generally. That does not make them  wrong, but it is worth examining similarities, both where they might help and where they will hinder.

                The EU correctly thinks high government deficits are unsustainable and need to be brought down. It recommends a 3% ceiling on annual borrowing, and a 60% ceiling on the stock of  state debt, as proportions of National Income.  This is prudent and sensible. It will take the UK a long time to get back to these levels on current forecasts, but the intended direction of travel is clear.

               Most EU countries are embarked on deficit reduction policies. One of the most popular ways of doing this is through increasing VAT.  In the last couple of years the Czech republic and  Estonia have lifted their rates to 20%, as has the UK. Latvia, Lithuania,  Finland, Greece, Spain, Ireland and Hungary have also raised their rates.  VAT is of course an EU required tax, and the EU draws a stated  proportion of the VAT revenues from each country to support its own expanding budget. Cutting public spending at the EU level, which would be a better economic option for deficit reduciton, is not on the agenda, despite the UK government’s attempts to pursue this.

                 The EU has put in place a dear energy policy, requiring expensive developments of renewables and imposing carbon penalties on energy users. The EU as a whole will find increasing amounts of heavy industry investment go elsewhere, as energy costs are an important part of total manufacturing costs, expecially in cases like the  steel industry, foundries and castings. There is a danger that the EU’s energy policy will not succeed in curbing world carbon dioxide emissions, but will succeed in accelerating the transfer of heavy industry away from Europe.

                  The EU is advocating  more trans European rail investment, preferring rail links to other forms of air or surface transportation.  This makes hitting deficit reduction targets more difficult, as railways are extensively subsidised throughout Europe.

                  The EU advocates European level bank and financial service regulation, in addition to global regulatory standards and national regulatory activity. The Uk may find that bringing more of its successful financial service industry under EU control makes London a less desirable location for such  businesses, helping the transfer away to Hong Kong, Singapore, Shanghai  and other emerging centres.

 

               Nick Clegg kindly sent me his New Year message. I think I get it, because I logged on to the Lib Dem site during the 2010 General Election to check their promises for that campaign. It is nice he stays in touch.

               He told his troops that many Lib Dem promsies and pledges have now been incorporated in the Coalition programme. He claims credit for the following:

Fairer taxes

Extra money for disadvantaged pupils

Green economic growth

New open politics

Taking more people out of Income Tax

Earnings link for pensioners

Pupil premia

Scrapping ID cards

Stopping a Third runway at Heathrow

Ending child detention

            He does not point out that lower Income Tax has been a long standing Conservative promise, from way back when Lib Dems had as their main Income Tax pledge an increase in the rate to spend more on state schools. The Conservatives promised extra money for disadvantaged pupils,  green economic growth, the restoration of the earnings link for pensioners, scrapping ID cards and stopping the Third runway. I appreciate that some of my readers do not agree with some of these policies. The only point I am making is that they were policies common to Lib Dems and the official Conservative view.

            Lib Dems also promised an In Out referendum on the EU which they no longer offer now they could do something about it, and pledged not to increase Student fees. Conservatives made no such pledges on either item.

           The interesting questions include what will Lib Dems do on the EU Bill which the government plans to debate once Parliament returns. Do I detect a second change of policy, backing away from an In/ Out referendum, just as they backed away from supporting a referendum on Lisbon when Conservatives tabled and backed one under the last government?

          I also see the Independent on Sunday has run a readers’ consultation on what to put in a Freedom Bill. They tell us such a Bill remains popular . Of course it does. But they should also follow the plot. As readers of this site will know, as we did a similar exercise months ago, Mr Clegg seems to be in no rush to bring out his Freedom Bill and seems to have  backtracked  to letting the Home Office produce a civil liberties bill only. What we want is a much larger and more ambitious peice of legislation after years of over bearing regulation.

 

             In 2001 I wrote a book about the rivalry between the USA and the EU, entitled “Stars and Strife”. In that I recognised the first signs of emerging Asian strength in world affairs, concluding that  “The UN will have to recognise the strength of numbers and force of arms point in the direction of the leading Asian countries playing  a bigger role in world affairs as this century advances. As India, Pakistan and China  start to flex their muscles,with the  capacity to raise and sustain huge armies, and now with some nuclear capability, we have to recognise they will have more influence in the world.”

       In 2005 I wrote an update, entitled “Superpower struggles: Mighty America, Faltering Europe, Rising Asia”. I stated in that ” In recent years the Chinese economy has grown at a staggering 9% per annum. It has already overtaken Italy to become the world’s  sixth largest economy, and will soon pass the size of France and the UK at market exchange rates. By the next decade (2010 ) it will be larger than Germany, in third place, poised to overtake Japan. ”

          The news came through in August 2010, just  a couple of quarters into the new decade, that China had overtaken Japan’s GDP at market exchange rates.  My forecasts now  need updating. The UK Treasury forecast in 2005  said it would take China until 2015 to reach $5 trillion of output, a level they achieved in half the time. The West has been good at underestimating China.

           The only comparative target for China  to hit now remains the GDP of the USA, the world’s number one. At the end of 2009 the US GDP was around $14 trillion, far out of sight of China’s $5 trillion. However, if you assume China can grow for another ten years at the astonishing 9% average she has achieved in the last three decades, and if the USA grows at 2.5% a year on average ( a little below her historic average to allow for the problems created by the debt overhang), China overtakes the USA’s GDP level by 2020, without a further revaluation of her currency. Even if we allow for some slowing of China’s growth rate as she becomes richer, it will still be not much more than ten years from  now that China will sport the world’s largest economy. This can also be speeded by some revaluation of the Chinese currency.  When she reaches that goal she will still enjoy an average standard of living of around one quarter of the USA’s.  There is no reason to suppose she runs out of growth when she reaches that point.

           In 2005 I summed up the Chinese evolution by saying ” One day China will turn her new found economic power into military power as well. For the time being her success will be heavily concentrated in industrial products and product markets,and her main impact on the west will be felt in the  rising commodity prices as Chinese demand surges. Unlike Jpapan, she will not remain neutral and lightly armed. As her economic success develops so too will her political and military might.” 

            The Chinese strategy rests on acquiring large commodity deposits and commodity production around the world, to fuel her factories and feed her population. It also is driven by the wish to emulate and surpass western technology in key areas. There is always someone willing to sell it to Chinese interests, a situation which will grow as the overborrowed West looks for easier ways to repay debt or cut their deficits.

                  China now uses 43% of the world’s steel output,  imports 45% of the world’s iron ore,  39% of the world’s copper sales and 42% of the world’s  cotton output. Her economy has a manufacturing sector which accounts for almost half the total economy, and is now dominant in many major areas of world trade. China is already the world’s largest exporter.

                 The West does not seem to have adjusted to the pace of China’s rise, or the speed and depth of her success. The West ignores the fact that in some ways China has a better tax and regulatory regime for new manufacturing than the older established centres in Europe and the USA. Governments should take heed and should understand how co-ordinated China’s strategy is. They seek control over raw materials, over production and over some market outlets. The Chinese government is determiend to raise domestic living standards and to power growth through international trade. The West needs to respond more quickly, more dramatically and more positively. The West is rapidly becoming uncompetitive in all too many areas of activity.