Good news – China will revalue the yuan.
The huge imbalances in the world stem from supercompetitive China knocking the rest into a cocked hat. Gradual increaes in the value of yuan will help rebalance a bit, and will mean China is nearer to the end of her period of slowing her economy by restricting credit.
The Uk will be worse off again because Chinese goods will be dearer, but have better chances of making things to export or to substitute for imports.
I was pleased to hear yesterday through the media that the budget will include measures to boost a private sector recovery at the same time as taking action to control the public deficit. As I have been arguing, the country needs hope and budget control needs the prospects of many more private sector jobs. Curbing the deficit means transferring people from the public sector payroll – be they on benefits or in non jobs – to the private sector.
So what measures can and will they take to boost the private sector? The likely measures include:
1. Cutting employer’s National Insurance, the tax on jobs.
2. Putting tapers and Indexation into Lib Dem plans for higher CGT.
3. Cutting the overall level of Corporation Tax to 25%.
4. Cutting the small companies tax rate.
5. Exempting NI on the first ten jobs created by small business.
6. Sweeping away some of the regulations and set up costs on new business.
7. Encouraging new groups and individuals to set up schools
If they want to send out a strong and positive message that the UK is re-opening for business after the deep recession they could also:
1. Set a CGT rate of 10% for gains over 4 years
2. Say Corporation Tax is coming down to 20% over the life of this Parliament
3. Announce a return to 40% top Income Tax rate for 2012
4. State small business profits tax will not go above 20% this Parliament
5. Announce a plan to cut business regulatory costs by £20 billion through the Great Repeal Bill
6. Offer areas of public sector work to private sector franchise/state employee buy out
7. Announce asset sales programme from public sector
8. Split up some government contracts to allow smaller businesses to compete
9.State that banks now have enough cash and capital, allowing them to lend more to the private sector
10.Amend the tax rules on private sector pension contributions so more pension funds can be saved
11. Boost tax free savings plans for investment in business
Some bloggers advise me to keep away from football commentary. Last night I returned home in time for the highlights of the England game. That didn’t take long to watch. England have now played around three hours of match football wthout scoring a goal after their stylish opener against the USA. Perhaps our football experts who write to this site could send in their best reason why England finds itself in this predicament, and their best advice to England for the last game of the league stage. The replacement goalkeeper’s interview this morning was a classic of how to stay loyal to the manager without conveying any sense of confidence in him or his strategy.
The government needs an MPC which gets it right. Unfortunately, for the last five years, the MPC has been well behind the plot, lurching from too easy to too tight to printing money.
Today their rationale for believing inflation is not a problem is that our economy enjoys a lot of unused capacity. So, they say, as more money finds its way into the system the UK can just produce more without prices going up. So why then are prices increasing by more than 5% a year (RPI)?
If you talk to manufacturers they will tell you that we now live in a global market. UK factories depend on a global supply chain. Raw materials shot up in price over the last year. Oil more than doubled from the bottom, metals like copper were also bid up rapidly. Now the surging demand in China, India and the rest of Asia, coupled with some recovery in the USA means a shortage of various components. There are price pressures within the global suplly chain. The UK does not have loads of spare factory capacity that it can bring on to insulate itself from these pressures. The long decline of the last decade meant many more closed foundries and factories. The recession also led to reductions of capacity, as firms were forced by a shortage of cash to close their produciton facilities. Many will not reopen.
At the same time the UK has experienced a big devaluation, in part brought on by the money printing in the latter stages of the last government. That too has served to raise industrial costs here at home.
Just as the good inflationary news comes in of a modest revaluation against the Euro countering some of the price increases, UK private sector wage increases start to rise from their very low levels during the recession. Inflation expectations are on the upwards march again. We need a more convincing account from the MPC of why they got it wrong over the recent past, and how they intend to stop inflation from here. Now the currency is beginning to help them they have a chance to break the cycle of rising expectations of more price increases to come.
BP’s decision to go to the White House on Mr Obama’s terms was strange enough. I would have thought they should have offered to go in conjunction with their main American sub contractors, saying “We are all in this together. We need all to be available to answer the President’s questions and to show how we can work together to find an answer”. It is the drilling company which offers most hope of a solution, as the end of the oil spill now rests on two new wells they are drilling to relieve the pressures in the failed well.
Yesterday the politicians were bound to be very angry as their constituents are. They were bound to want to know how and why it all happened. Without pre-empting the final results of the enquiry, BP could have been more forthcoming about the problems of drilling so deep so far below the waves, and could have made some preliminary findings public about what failed. Instead of saying he was not involved or did not know, the CEO could have said “our preliminary view is… or subject to further enquiry we believe…”
Let us hope the new wells work as planned. The best answer to BP’s critics is to find a way to stop the spill. BP needs to put up a new senior spokesman who is American and who knows about oil wells to field the US media and politicians.
It was good to learn yesterday that projects announced shortly before the election which Labour could not afford are to be cancelled. I am surprised in many cases that people think it worthwhile arguing against such cuts, when there is no money to pay for these new commitments.
The BBC chose to give time to critics to defend one of the most marginal ones – a new Visitor Centre at Stonehenge. When we are borrowing £1 in every £4 spent surely a new Visitor Centre for an ancient monument must be top of the list for cuts? If it is likely to bring in much extra revenue, as its defenders suggest, then it is a project which should be carried out with private capital under a suitable franchise or lease arrangement which transfers all the risk and none of the existing public revenue to the private sector.
It was also good news to learn that the taxpayer will not be asked to pay £240,000 a year for a new head of the Audit Commission. I am sure they will find someone good to do such a job for around half that amount of money. If the Audit Commission cannot set an example over value for money then heaven help us.
Today at the European meeting David Cameron should allow France and Germany to impose new controls on the budgets and economic policies of Eurozone members – they need them. You can’t have an effective single currency without having a single economic government. The borrowings of one are the borrowings of all to some extent, so all need to be able to help control the borrowings of each. The price for Uk agreement should be to remove any liability for UK taxpayers to help bail outs within the zone, and powers back for the UK.
I am relieved there have been so few goals and exciting football in the World Cup, as I have been too busy to watch apart from the England match.
Why don’t they abolish the offside rule so we could then tune in and see more action in a new tournament? Cricket had to invent 20/20 to draw the crowds – now that does give you loads of action. They could keep a tournament on old rules for those who like the no goal game.
The BBC had a funny piece this morning on the joys of the goal free draw.
One cheer for the decision to get rid of the FSA. Another cheer for putting all regulation of the banks together at the Bank of England. These are both things I have argued for ever since Gordon Brown foolishly split banking regulation in 1997. We warned that Brown’s bodged regulatory structure was likely to be bad in a crisis, and warned of the excess credit and monetary looseness in the Economic Policy Review in 2006-7.
I am not awarding the third cheer that is conventional on good news for one very simple reason. The Monetary Policy Committee remains unchanged, yet the MPC as readers of this site will know has had a dreadful five years of misjudgements. The Governor last night said it was the job of the MPC to take the punch bowl away when the party gets into a swing. That is exactly what they failed to do in 2005-7, when they stubbornly against external advice kept interest rates too low for too long and allowed excessive credit.
It should also be the job of the MPC to avoid excessive collapses of credit. In 2008-9 the MPC helped engineer the most dangerous and precipitate decline of credit. Again some of us were going hoarse warning them of the dangers. Even one of their own members saw the problem, but the MPC ignored commonsense. It had lurched from money being too easy to money being too tight. How can we trust this group of people going forward? Inflation remains way over target whilst activity is weak. They have helped get us into a nightmare situation.Their money printing flooded the public sector with cheap money and inflationary tendencies whilst banking regulation starved the private sector of funds.
Which brings me to the new Financial Policy Committee. Their job we are told by the Governor is to turn down the music when the dancing gets too wild. By the same token I hope it is also their job to turn up the music when the dance floor is empty. In case the Governor hasn’t noticed, the dance floor has not been too popular with the private sector for the last couple of years, largely because they cannot afford the entry tickets whilst the regulatory bouncer on the door is keeping many of them out. The first task of the FPC should be to restore some balance to the UK economy, and take the action that needs taking to allow sensible levels of lending to enterprise and growing business so we can have a decent private sector led recovery.
The Governor’s language is appropriate to the conditions of 2005-6 which he misread at the time. It is not what is needed in 2010.
The oil spill in the Gulf makes both the US and the UK poorer. The Gulf states lose oil, tourism and fishing business. They are seeking the $20 billion from BP for starters to make up for some of their losses. They are taking it from a global company which generates a lot of its revenue and profit in the US. As a result of the BP/Transocean disaster these companies along with the rest of the local oil industry in the Gulf region will now be further restricted by the new controls on oil activity the President has introduced. Much of it is a series of transfers of cash and profit within the USA, with the money all in dollars.
The UK has 40% of the BP shares. The Uk therefore loses 40% of the total dividends paid by BP for as long as the dividends are unavailable. Savers, charities and pension funds between them will loses several billions this year, and the Treasury will lose some tax revenue. There will be less cash switched into pounds by BP to meet payments.
The bad news for BP is their Board has done a “deal” with the President that fails to cap the BP liabilities, makes no mention of the responsibility of any of the other companies involved in the drilling accident and places the disbursement of the money in “independent” hands. BP may find that the administrative and legal costs of handling the funds become high whilst the number of potential claimants multiplies. The Group needs to place some kind of limits on how many people and businesses it is responsible for compensating, whilst the President has every interest in maximising the numbers who will look to BP for cash.
Badly chosen words can also prove expensive in the understandably emotional atmosphere of the crisis. The CEO’s comment about wanting his life back has now been matched by the Chairman saying he cares about the “little people”. How do such highly paid people make such obvious errors? I heard a few weeks ago that BP management regarded holding the dividend as central to their task. I did not pass on this on as I thought it incredible at the time. It will be interesting to hear what BP management now think their main aim is.
Once again I am not offering investment advice on this site. BP remains in acute difficulties all the time it fails to cap the well and stop the flow of oil into the ocean. Once the well is controlled then BP needs to establish some fair limits on its responsibility for clean up and compensation. The Group has important and valuable reserves, but they come with an expensive leaking well and an angry President targetting the company which could prove very expensive even for a Group as large as BP.