Archive for the ‘Fiscal Credibility’ Category

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Business Boosting Measures Announced

jeudi, janvier 5th, 2012

The official site of the office of the British Prime Minister has announced business boosting measures.
Thursday 5 January 2012

Tackling the compensation culture and freeing small and medium enterprises (SMEs) from the stranglehold of health and safety red tape are part of a series of measures announced to back enterprise by Prime Minister David Cameron today.

Speaking to an audience of small businesses and entrepreneurs at Intuit UK in Maidenhead, David Cameron announced that:

?to tackle the compensation culture and address the fear from businesses of being sued for trivial or excessive claims ? we will extend the current scheme that caps the amount that lawyers can earn from small value personal injury claims, and reduce overall costs in cases funded by ?no win no fee? deals. This will help bring down the cost of many cases and deter the speculative health and safety claims made against good businesses that would appear not to have done anything wrong.
?the health and safety law on strict liability for civil claims will be changed so that businesses are no longer automatically at fault if something goes wrong.
?we will investigate the demands made by insurance companies on businesses to ensure that levels of compliance do not force businesses to go far beyond what is actually required by the the law to secure their insurance cover.
?we will write to the Chief Executives of all major insurance companies, asking them to set out what they will do to deal with this problem ? and they will be invited to a meeting at Downing Street next month to set out their plans.

The Prime Minister also announced that next month we will ask organisations to bid to manage the £1bn of Government funding available through the Business Finance Partnership. This fund will help businesses access the finance they need to grow.

David Cameron said:

?I am determined that we do everything possible to take the brakes off business: cutting taxes; slashing red tape; putting billions into big infrastructure projects; making it much easier for British firms to get out there and trade with the world.

?And there is something else we are doing: waging war against the excessive health and safety culture that has become an albatross around the neck of British businesses.

?Talk of ?health and safety? can too often sound farcical or marginal. But for British businesses ? especially the smaller ones that are so vital to the future of our economy ? this is a massively important issue. Every day they battle against a tide of risk assessment forms and face the fear of being sued for massive sums. The financial cost of this culture runs into the billions each year.

?So this coalition has a clear New Year?s resolution: to kill off the health and safety culture for good. I want 2012 to go down in history not just as Olympics year or Diamond Jubilee year, but the year we get a lot of this pointless time-wasting out of the British economy and British life once and for all.?

The above are fine words but now is the time to move from rhetoric to reality with e.g. the Prime Minister already admitting that the special National Insurance scheme aimed at job creation has not been a success. The government is also being accused of attempting to kill off the UK Solar Industry, by reducing feed-in tariffs to half previous levels and reinforcing the view that it doesn »t understand and/or has never run a business.

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Growth Plan A/A+

jeudi, novembre 17th, 2011

The Chancellor George Osborne, ahead of his autumn economic statement later this month, has talked about a plan for longer-term growth in the British economy, through an increase in financial support for the housing market and a boost for public sector infrastructure projects, including e.g. power stations, social housing construction, super-fast broadband telecommunications networks and toll roads. In addition, 40 infrastructure projects already approved will be brought forward for rail, road and national electricity grid improvements.
This growth plan, devised by the Treasury and the Department for Business, Innovation & Skills, aims to attract private sector financing from institutional investors such as pension funds and insurance companies looking for a safe return e.g. from traditionally safe public utility-type assets, where a stable regulatory framework can be guaranteed. A key question from such investors is then what type and level of government guarantee and/or risk sharing is proposed to attract and protect their private sector investment? Work then continues on creating an appropriate investment scheme to attract private finance but which will not undermine the current triple-A credit rating of the UK by increasing official government borrowing figures.
However, the most immediate problem is the current lack of growth in the economy which the government seems to be mainly attributing to short-term weaknesses in the Eurozone. Therefore, the Chancellor at the end of November, will also announce proposals for a so-called credit easing to boost lending to small and medium enterprises, with a medium-term plan to access the financial markets directly (i.e. by means other than the banks) through specialist small business funds. That said, despite the EU/Eurozone representing over 50% of UK exports, this trading bloc will remain a mature market with modest growth rates when it recovers, compared with China, India, Brazil, Russia, Turkey etc. , all fast developing markets where the future for British exporters must lie.
The opposition Labour party is also waiting in the wings with its opportunistic leader Ed. Miliband urging ministers to change course away from economic austerity (the currently termed Plan A), Labour having calculated that, due to the lower than predicted growth in the economy, the government will be forced to over-borrow an accumulated £100 billion or more by 2015. Therefore, Labour is again waving its 5-Point Plan (refer to Categories/ Chairmans Blog/Labour 5-Point Plan in the right-hand index column) to boost the economy despite providing no real details, apart from a further £2 billion raised by an additional tax on bank bonuses, on how these growth policies would be costed without adding substantially to the existing UK deficit and dragging the economy further downwards.
If the government holds its nerve and can generate some growth in the economy in the period before 2015, its Plan A could be viewed by the public as more a Plan A+!

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German Economic Success?

jeudi, août 4th, 2011

The German economy has seemingly made a remarkable recovery since the onset of the financial crisis with GDP growth of 3.6 % in 2010, the same level expected in 2011 and unemployment now below 3 million, giving the best results for 20 years. A major factor has been the labour market proving more flexible than expected, enabling costs and productivity to be held at more competitive levels than e.g. the weaker members of the Euro-zone such as Greece, Portugal and Ireland which are now requiring financial bailouts. In reality, the German economy is now back to where it was in 2009 and the current growth rate is not considered typical, underlying growth being around 1.2 % according to Stefan Kooths of the Kiel Institute.
However, despite this growth in business and manufacturing adding an unexpected Euro 135 billion in extra revenues, the financial crisis has still left the German federal government finances weaker than before. There are structural threats to the economy from local public authority indebtedness, a costly social security system and a health system with a Euro 11 billion deficit. Half the total income of Berlin comes from federal sources and e.g. Frankfurt as a major financial centre with a population of 600,000 raises three times as much in local taxes as Berlin, which has a population of 3.5 million and a debt mountain of over Euro 60 billion. In common with the north of the UK, the former industrial heartland of the Ruhr region is still trying to replace jobs in iron and steel with new businesses in high technology and services such as the media, as the financial health of many cities in the region has steadily declined. The city of Bremen in the north of Germany has a debt of Euro 20 billion on a budget of Euro 4.5 billion and Saxony-Anhalt has the highest debt of any German state outside Berlin, with around Euro 20 billion of debt equivalent to 40 % of income.
Therefore, as is the case with the Coalition government in the UK, the German federal government is faced with having to reduce its debts (currently 83 % of GDP) by what some might well consider, however, a less than ambitious although substantial Euro 80 billion, considering the large tax gains from growth in the previous year (and indeed what the government in the UK is still struggling to replicate from growth in the British economy). It is aiming to achieve this mainly through cuts to the social service budget and family benefits, together with redundancies amongst civil servants and tax increases. Local authorities are also being forced to find new sources of income from taxes and cutting costs by withdrawing support for e.g. libraries, sports programmes, parks, playgrounds and swimming pools.

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Slow Recovery (OBR)

mercredi, décembre 1st, 2010

The Office for Budget Responsibility (OBR) formed in May, 2010 to provide an independent assessment of the public finances and the economy for each Budget & Pre-Budget Report, has increased its growth forecast for 2010 from 1.2% to 1.8% of GDP but cut its forecast for 2011 from 2.3% down to 2.1% and the estimate for 2012 down from 2.8% to 2.6%. The stronger growth in the middle of 2010 is attributed to temporary factors such as unsustainable activity in construction and companies rebuilding stocks. The recovery then would be the weakest for any downturn in the UK since World War II, taking a projected four (instead of the three of the two previous recessions) years overall.
On the more positive side, the OBR reduced its forecast of 490,000 job cuts in the public sector, down to an estimated 330,000 job losses with private sector job creation likely to offset these public sector losses over the next few years. The OBR also said that the Coalition government had a greater than 50% chance of achieving its deficit reduction goals. It added that it would be unprecedented in the post-war period for economic growth to not exceed 3% of GDP in a calendar year over the recovery phase of the economic cycle and warned of the considerable uncertainty around its main forecasts, particularly on levels of government spending and revenue. Overall, the deficit at 10.0% of GDP in 2010 is seen as falling to 1.9% in 2014-2015.
George Osborne the Chancellor in his own autumn report to the Commons, seized on the projected fall in public sector job losses as justifying his cuts to the Welfare Benefits System, which in turn had made more budget money available for other government departments to protect jobs. The Labour opposition, however, criticised the OBR for being too optimistic in its forecasts, although these would appear to be in line with the expectations of the financial markets. The pick-up in tax revenue from the increased growth in 2010 has still to come through and, in the key export markets of the Euro-zone, growth is continuing at the core.
That said, last week George Osborne put aside his much-advertised white paper on growth (with the associated prospects for job creation) and there remains the need for a narrative on economic recovery for those facing austerity. Otherwise, the view of the Institute for Fiscal Studies that the poorest are bearing more than their fair share of the cuts programme, will only add credibility to the accusation made by opposition Labour leader Ed. Milliband that the government is reducing economic policy to deficit reduction. The Social Market Foundation Think Tank also sees it as inevitable that the costs for the new Universal Credit System for Welfare Benefits, will end up as being much higher than many now expect and significantly outweighing the savings after 2014/15 when the system is fully up and running, with its associated universality and simplicity much less impressive than billed.

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Fiscal Credibility

mardi, septembre 14th, 2010

To restore its fiscal credibility within global financial markets, the Coalition has set itself the political goal of eliminating the current structural deficit (11% of GDP) in the UK by the end of this parliament (2015). Ed. Balls now shadow education secretary but with a major economic influence on Gordon Brown in the last government, has responded with what seems a rather self-serving attack on this planned deficit reduction programme, when linked to his ambitions as a candidate in the current Labour leadership contest and an associated need for public-sector union votes.
According to Mr Balls, there was no significant structural deficit until the collapse of tax revenues from the financial sector in 2008, although the Office for Budget Responsibility (charged with an independent watch over government fiscal policy) has this deficit already averaging 2.7% of GDP (£40 billion) from 2003 onwards. He had even warned the previous Labour chancellor Alistair Darling, that his planned £73 billion of fiscal tightening (of which £52 billion was in reduced planned public spending) to try and only halve the deficit over four years, was a mistake. Although seemingly ignoring the negative effects of the financial markets on the credit rating and associated elevated borrowing costs of the UK government, he is on the side of the more Keynesian economists who argue that the aggressive cuts planned by the Coalition will severely undermine the recovery. Indeed, he is advocating for the UK economy the example of the US which to date, despite its large deficit, has hardly tightened fiscal policy with almost US$1 trillion of financial stimulus and additional proposals from President Obama for e.g. US$50 billion of extra spending on infrastructure. The latter is viewed as key to supporting more rapid economic growth in the future. In the UK, the Confederation of British Industry (CBI) for the employers supports this case in warning against large cuts in spending on roads and rail.
The problem for the UK is that it is not as fortunate as the US which has in its favour the US$ as the major reserve currency in global financial markets, should the US choose to continue to try and spend its way to economic recovery. That is, unless the Chinese government, with its huge foreign currency reserves in US$, decides for geopolitical reasons to severely undermine the value of its US government bond holdings through a major sell-off. In the case of the UK, according to the Institute of Fiscal studies, a policy of ignoring the financial markets and rating agencies, together with continued borrowing instead of cutting public services and projects, would result in a deficit of 7% of GDP by 2015 and total public debt rising unsustainably towards 100% of GDP and beyond.
Within Europe in comparison, a country such as Germany with a deficit below 4% and a booming export sector has much more fiscal space should it so choose, to stimulate demand in its domestic market and at the same time drive overall growth within the Euro-zone and the EU. However, Germany with a memory of the effects of hyper-inflation not that far in its past, prefers savings and investment over the seemingly unrestricted consumer borrowing and spending of its more profligate neighbours, who should first put their own houses in order.

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