Category: Blog

We hear today of the upcoming row between those puritan Europeans – slash the deficits – and those cavalier Americans – stoke the recovery. Mr Spend and Borrow himself, Mr Obama, has warned Europe not to overdo the cuts. So who is right?

They are both right. As we have seen in the Euro zone, failure to control deficits in countries like Greece, Ireland, Portugal and Spain leads to higher interest rates and market forces pushing the states to even bigger cuts. High deficits and surging debt levels undermine confidence and come to impede recovery. No highly borrowing state with the possible exception of the US can ignore the need to rein in their borrowing and maintain or regain the confidence of markets. The US will get away with more borrowing for longer because the dollar remains the world’s reserve currency and China still has some appetite for it.Even the US one day has to repay the debts and put its budget into shape.

Just cutting state spending and borrowing will not of itself generate recovery. Countries emerging slowly and fitfully from a deep recession need to promote private sector led recovery. This requires lower taxes on enterprise and effort, and a plentiful supply of credit at realistic rates for business to grow and invest.

The best combination from here is gradual tightening of the fiscal stance, bringing down the build up of state debt, and relaxation of the monetary stance through credit being offered to the private sector.

If the G8 and G20 want to make a contribution to economic recovery the US and the EU should not waste too much breath on disagreeing, when their two proposals could be married into a coherent whole. What they need to do instead is to examine the state of the world’s banking system again, and seek ways to allow more private sector credit creation. The danger is the sound of bolting the stable door on the banks long after the horse has bolted, and demanding more cash, capital and tax revenue from banks at the wrong stage of the cycle.

The single most important thing the G20 could do to help recovery is to persuade world markets that no country will renege on its debts. That would be a boost to confidence and a reason to be less worried about certain banks.

Some have been suggesting I have been giving post budget advice about family budgets. Far from it. I have offered no such advice.
Well before the Budget I was talking here about the state cutting down its middle class lifestyle – too many foreign trips and consultants. I drew an analogy with what middle income shoppers have done if their income falls. I made it clear that if you are on a low budget you cannot cut easily.
They should try reading it instead of twisting it.

We are told that there has not been enough rain recently. There will be a hosepipe ban in the North West. We face the massacre of the innocent bedding plants, the death of billions of blades of grass.

There were floods last autumn. A couple of wet years in 2008 and 2009. Now the North West is to be subjected to rationing of its water.

The water industry should do better. It should create new reservoirs or find new soruces of water. We need full competition in the water industry. The large regional monopolies do not serve their customers well. They charge too much and supply too little.

It is typical of the spin era that the first serious “crisis” in relations between General McChrystal and President Obama occurs over a few disobliging words the General and his team spoke about the President and his team. The endless rounds of deaths and dangerous patrols, the delays in finding political settlements on the ground and the ubiquitous ability of the “insurgents” to reappear are not apparently worthy reasons to recall the General for talks, but a magazine article is.

I have always doubted the General’s judgement, as I have feared he is too optimistic. I of course understand his need to be optimstic to rally the troops and keep up belief in the mission. Now many will wonder why he felt the need to open up his operation to such press investigation, and having done so why he allowed such careless talk. Good military performance requires levels of discipline not needed on civvy street.

Now we will see the mettle of the President. Is ill judged gossip in a magazine reason to remove the Commander he told us all to believe in? Will he show wisdom, and use this opportuntiy to review with his General how long this mission is going to take, what winning would look like, and how many more Coalition deaths are likely as a result? Wouldn’t that be a more important conversation than an interview about the words of a magazine journalist?

I wish the England football team every success today. It would be great if they can win the game, go top of the Group and enter the next round in style.

Meanwhile, many contratulations to the England cricket team – they have been on fire in 20/20 and one day games recently. We can enjoy their success.

The surprises in the budget were the big increase in VAT for next year, and the decision to continue with large cash increases in total public spending over the five year period. The Chancellor, who had said that 80/20 was the right balance for spending cuts and tax increases, settled instead for a 57/43 balance in 2011-12 and for 64/36 the following year. His spending totals are:

2009-10 (Last Labour year) £669bn
2010-11 £697bn
2011-12 £700bn
2012-13 £711bn
2013-14 £722bn
2014-15 £737bn (£68bn or 10% above Labour level)

It is true that the substantial cash increases in total public spending still require cuts in some areas. Debt interest, overseas aid and EU contributions, especially the first of these, make up a substantial increase in spending on their own. Labour decided to cut capital investment by around 40% which remains the plan in this budget. If welfare bills do not come down, and if public sector inflation remains a problem then the cuts in other programmes will have to be bigger. If the wage and pensions bill can be held down and the welfare bill brought under control the pressures on the rest of public spending will be reduced. We should place greater reliance on the next two year’s forecasts and less on the subsequent years, as plans will be subject to revision depending on economic recovery, inflation and other variables.

I pointed out in the Budget debate that success for this strategy would depend on assisting a stronger private sector led recovery. Welfare bills will come down faster if more jobs are created. Revenues will be rebuilt more quickly if the private sector grows faster. This will require a new approach to banking regulation to frree the banks to lend more to credit worthy businesses, and a new approach to monetary policy which has allowed easy credit and money creation in the public sector to the exclusion of much else.

It will also require more regulations to be removed from the Statute book to cut business costs. The reduction in the headline rate of Corporation Tax to 24% over the next few years is a welcome move towards restoring greater tax competitiveness, and the cuts in National Insurance will help.

I would like the government to prove Dr Budd wrong. He has forecast from the OBR that the budget will lower Uk growth by 0.1% in the first year and 0.3% in the second year. To prove him wrong the government needs to do more to assist enterprise Britain.

Public spending to rise 10% in cash terms over 5 years:

2009-10 (Last Labour year) £669bn
2010-11 £697bn
2011-12 £700bn
2012-13 £711bn
2013-14 £722bn
2014-15 £737bn (£68bn or 10% above Labour level)

See tomorrow morning’s comment here.

There are four pieces of welcome news on the new CGT proposals.

The first is that savers with modest incomes will still only pay 18% on modest gains over the tax free allowance.
The second is the substantial increase in the entrepreneurs allowance as an encouragement to people to establish and grow businesses.
The third is that the top rate is 28% rather than 40% or 50%.
The fourth is the maintenance of the £10,000 plus tax free allowance.

28% will not raise as much money as a lower rate. This year receipts from the first three months are likely to be high, as people sold assets prior to the budget. They are then likely to fall sharply.

Yesterday the yuan edged higher against the dollar as the first installment in China’s new approach to its currency after a period of pegging it to the dollar. Although the move was small, it was important. There are no guarantees of a big revaluation, and no suggestion that China will move to an unmanaged rate. However, it was important because at last we have a substantial world currency which the authorities do not wish to see fall.

Over the last couple of years the US and Uk authorities have been at best unmoved by declines in their currencies, and at times appeared to be grateful for any fall. In more recent months the Euro area has seemed relieved that its currency has started to fall against others. All the major countries have kept interest rates very low, putting people off holding their currencies and short term bonds.

The world remains divided between the hard working, high saving, successful exporting economies, and the heavily indebted, high borrowing, big importing countries. Japan has some mixed characteristics, China leads the former group whilst the US, UK and peripheral Euroland are in the second group.

To create greater balance, behaviour – and costs – have to change in both groups to level things up. Changing currency values can do some of that work for the relevant governments. China has put a new safety valve into the world economy. We need to watch the extent they allow it be used. Meanwhile the rupee has gone up reflecting India’s economic success, and taking a ltitle of the large inflationary pressure out of the Indian economy. These revaluations are Mr Osborne’s stroke of good fortune as he picks up a very difficult inheritance.

We do make heavy weather of controlling public spending in this country. The £6 billion of cuts which caused such anguish in the Election debates represented less than 1% of total public spending. Tomorrow’s budget will probably be proposing cuts of less than 10% over the lifetime of this Parliament. Sensibly managed, this need not entail cutting anything that really matters.

The UK state has been living a middle class lifestyle. If you are living on a low income then of course cutting spending is difficult or impossible. If you are living a middle class lifestyle and your income goes down by 10% you have plenty of options. You can holiday nearer at home and cut out the foreign trip. You can eat in more than in the local restaurants. You can trade down for a cheaper car. You can draw some money out of the savings account to tide you over until your income goes up again. You can buy more of the value items at the supermarket, and put more vegetarian dishes into the home menus. You can discover home entertainment to keep the leisure bills down. You can turn down the thermostat a little and put on a jumper.

The UK state finds itself in that position today. It has plenty of assets. Some can be sold to help out. It has been dining out on consultants and temporary labour. It needs to do more in house. It has been appointing all too many to exotic job titles which we could manage without, and sending many of them on expensive overseas fact finding trips and seminars. It has indulged in a mind blowing array of politically correct regulations which often fail to tackle the underlying problem they wanted to address. It has been a master at buying the “nice to have” or the “why do we need this?” instead of concentrating on doing the basics well.

I know it is asking a lot for an outbreak of commonsense by public sector CEOs in Councils and quangos. But can they spare us the crocodile tears and the parade of the bleeding stumps? Can they do what any household or company does when faced with a few percent off their income? Just get on and manage it in the least damaging way possible. The cuts in funding are going to be nothing like as severe as the loss of income in industrial companies during the great recession of 2008-10.