Archive for the ‘Fiscal Credibility’ Category

David Cameron in Birmingham - by Michael Webster

Mercredi, octobre 8th, 2014

Prime Minister David Cameron is to be congratulated on the excellent speech he delivered at the Conservative Party’s 2014 conference in Birmingham, in marked contrast with Ed Miliband’s very poor one.

Interesting to note that he has promised $40 billion of spending cuts over two years, compared with French President Hollande’s $60 billion, and specifies these will come especially from Welfare, which M. Hollande is unlikely to dare to do.

Mr Cameron has at the same time promised tax cuts. This he is able to do because of the successful revival of the British economy. The IMF has just reported very favourably on it, withdrawing its previous criticisms of the austerity policy and stating that the country had emerged from the financial crisis and was due to grow at a faster rate than any other developed nation.

This is such a contrast with the lack-lustre French economy and the now faltering German one, that it should prove to be a vital factor which will win us the election.

Michael Webster,
BCiP member

Fall in Output from Construction Sector

Mardi, mars 12th, 2013

An opposition Labour party press release on Twitter says “Shocking Construction output figures from the ONS, shows that Cameron and Osborne’s economic plan isn’t working“.
To describe this as “shocking” is to use rather over-blown language on the electorate for effect before examining the detail, but output from the British construction sector fell 6.3% in January, 2013 and is still 7.9% lower than a year ago. The major contributor to this overall decline was the private (and largest) sector with 22% of construction output and over which investment government has less control, but this contributed an even larger 14% decline compared with a year ago.
The challenge for this government with its severe budget constraints is then how to balance limited funding of major public projects (over which it has more control), with also encouraging the important private sector (over which it has less control) to take more risk, in order to develop overall growth in the construction sector.
Vince Cable, the Business Secretary, is already calling for more borrowing to invest in schools, transport and homes, while the British Chambers of Commerce (BCC) wants the government/Bank of England to underwrite private investment in infrastructure projects to lower the costs of funding.
Taken together with the tightening regulation and deleveraging of the financial sector which is driving up costs, adding to the uncertainty and restricting the flow of credit , there is a current risk-averse culture in the private sector of the economy which is difficult for the government to offset, without accepting too much of the risk (cost).
One of the most challenging future construction projects is for new nuclear power stations which both the present government and the previous Labour one have pledged to build without public subsidy. In the final negotiations with EDF (which is 84% owned by the French state) for support in building the first new reactor in Britain in two decades at Hinkley Point in Somerset, EDF is asking the government to underwrite part of the project to reduce finance costs, as well as for “change of law” protections against policy changes by future governments. EDF and its possible future investing partner in the project China Guangdong Nuclear Power, are also expecting a minimum electricity supply price to be legislated by the government, to be able to recover the £14 billion construction cost over the project operating cycle. This minimum supply price is likely to come out at around twice the current market rate for power meaning that the British consumer will also have to contend with significantly higher electricity bills.
If the British government to meet its low carbon targets finally underwrites the financing and subsidises the output price, it needs to negotiate in exchange a maximum transfer of technology know-how and project content to British companies such as Rolls Royce, to re-build local capability in the nuclear industry and reduce the outflow of billions of pounds to such foreign suppliers in the future.
Reference: Business Section of Sunday Times 10th March, 2013.

Open Letter to Supporters of Stimulus/Opponents of Austerity

Mercredi, septembre 5th, 2012

Here’s a thought-provoking open letter to supporters of stimulus/opponents of austerity (especially Labour party supporters) from Ryan Bourne, Head of Economic Research at the Centre for Policy Studies, writing in the

Lowering Growth Expectations for the British Economy

Vendredi, août 10th, 2012

The Bank of England (BOE) has finally taken a more conservative position in managing public expectations of the British economy, by lowering its previous forecast of 0.8% growth for 2012 to zero. This also reflects the unexpected 0.7% contraction (subsequently revised upwards to a 0.5% contraction) in the second quarter of 2012 and its cautious view that the London Olympics would finally have only a small, positive impact on growth in the current third quarter. The Governor of the BOE has also stated that he does not know when growth will return to pre-financial crisis levels in the UK and that he cannot predict how events in the Euro-zone will affect demand for British exports or how business confidence will develop in the real economy.
Rachel Reeves, Shadow Chief Secretary to the Treasury, has predictably taken this as another opportunity for the Opposition Labour party to repeat that this was time for the Chancellor to admit that his deficit-reduction plans are not working, given that, despite the crisis in the Euro-zone, Britain is just one of two G20 countries in a double dip recession. To counter this argument, it is instructive then to compare the relative performance of the British economy with that of the two other leading European economies i.e. France and Germany.
In actual fact, the Bank of France has now joined the BOE in projecting a more pessimistic view of the French economy, warning that GDP would shrink by 0.1% in the current third quarter, after a similar reduction in the second quarter of 2012, and thereby technically predicting a second (double dip) recession as per the UK. This would also suggest a subsequent reduction in the current forecast of 0.3% growth for the French economy in 2012.
Even the German economy which has been performing resiliently since the Euro crisis in 2010, appears to be slowing down, with industrial production falling by 0.9% in June 2012. If this manufacturing slowdown continues into a German recession, this will be more due to the effects of a general slowing down in global growth, which is already impacting the British and French economies, rather than a reflection of the current policies of the individual governments.

Maintain Plan A Mr Chancellor!

Dimanche, juillet 29th, 2012

Figures for UK Gross Domestic Product (GDP) published last Wednesday, showed a 0.7% drop in GDP in the second quarter of 2012 after a fall of 0.3% in the first quarter, the latter which followed a 0.4% fall in the final quarter of 2011.

However, some commentators view this continuing technical recession as inconsistent with the strength of the latest job market figures, which showed that the number of persons employed increased by 181,000 during March-May, 2012. This is the strongest increase in employment in the last two years and comes mainly from the private sector. An additional quarter of a million people have been employed since autumn, 2011 while the economy according to the GDP figures has been technically in recession. At the same time the unemployment rate has decreased from 8.6% to 8.1%, which would indicate weak growth in an economy rather than one in recession. Otherwise, overall productivity has fallen which would then rather beg the question of employers as to why they have needed to recruit? This seems unlikely, particularly when historically such GDP figures have also always tended to be subsequently revised and, more often than not, upwards compared with the earlier estimates.

Therefore, the international rating agencies are currently still maintaining the AAA credit rating of the UK, with growth anticipated in the second half of 2012. Should such growth not materialise by the end of the year, however, the International Monetary Fund (IMF) has recommended that the government should consider a range of measures to boost economic growth, including slowing the rate of its deficit reduction programme.

Despite, therefore, Labour Opposition cries that Plan A of the Chancellor has manifestly failed and that now is the time for a new Plan B for Growth (not Austerity), it would appear that the Chancellor should maintain course with his Plan A.

Debt Overhang Depresses Growth.

Samedi, mai 19th, 2012

Siren political voices in recession-hit European countries are luring voters with the appealing notion that there is a simple choice to be made between growth or austerity: Up with growth! Down with austerity! However, the Bloomberg article below - Bond Market May Not Warn When Debt Crisis Strikes - reveals that historically examples of countries growing their way out of excess debt are very rare.
In summary, too much debt - with the critical element being Debt Overhang, defined as a 5-year period when gross public debt exceeds 90% of GDP - depresses growth by as much as 1.2% points lower than in other periods, with real interest rates also typically as low during debt overhangs as they were before. Therefore, the financial markets will not necessarily send a warning signal to a government such as the US, through higher interest rates, that their policy could be detrimental to economic performance.
According to this definition of Debt Overhang, Italy, Greece and Japan are regular members of this club and, although the US is not there yet, it first breached the 90% threshold after the 2008 financial crisis, with Belgium, Iceland, Ireland and Portugal not far behind.
Austerity is not a cure for excessive debt either with such episodes in the past involving all kinds of explicit and disorderly debt restructuring or dressed up another way as e.g. debt forgiveness.
One successful example from the past is the US which made a complete recovery from the 1944-1949 period through balanced budgets, financial repression and robust growth in the 1950s and 1960s; however, with the federal deficit set to exceed $1 trillion in 2012 for the 4th year running, necessary cuts to entitlement programmes a seemingly insurmountable challenge and consumers not in the mood to spend for growth, financial repression appears the only option today.
This means keeping nominal interest rates low and allowing inflation to reduce the real value of debt whilst real interest rates remain negative for savers. Indeed the Federal Reserve has pledged to hold its benchmark interest rate near zero at least through to late 2014 and the Bank of England seems to be following a similar policy.

US vs UK Economic Growth Policies.

Jeudi, mai 10th, 2012

In the Sunday Times two weeks ago and following the strong showing of the opposition Labour party in the local council elections, Dominic Lawson ( wrote that Ed Balls the Shadow Chancellor was again urging the government to follow the policies being pursued in a rapidly recovering America. Dominic Lawson recalled, however, that in his column in February he had already pointed out that….one slight embarrassment for those making this argument is that the public expenditure plans of the US government involve a cut, in real terms, at no less a rate than that proposed by the UK government.
An analysis of the alleged gulf between the US growth agenda and the British austerity approach had also been supplied the previous week by John Redwood, the chairman of the economic affairs committee of the governing Conservative party. This analysis indicates that total US public spending rose by 2.2% in 2011 and is forecast to rise by 3.8% in 2012 and by 2% in 2013. In comparison, public spending in Britain increased by 4.8% (2.2% for US from above) in 2010-11, by 2.9% (3.8% for US) in 2011-12 and is forecast to rise by 2.6% (2% for US) in 2012-13.
The conclusion of John Redwood from the above analysis is that….if the contrasting performances of the two economies prove anything, it appears to be that an economy with a higher proportion of spending in total GDP with a higher level of public borrowing (i.e. the UK), performs worse than an economy with comparatively lower figures (i.e. the US). Underlying these figures, as Dominic Lawson points out, is the inherently greater vibrancy and flexibility of the US employment market, which allows employers to shed employees more easily in a downturn and, in turn, more rapidly recruit in anticipation of potential growth in the economy. This is a major difference between the US and especially the southern European states suffering most in the Euro-zone from the rigidity of their employment laws.
On the different approach to the British economy presented by the Labour party in the local council elections, Dominic Lawson summarized their economic alternative to that of the Conservative-led Coalition government as aiming to also cut the deficit – but a tiny bit more slowly! Judging by the extremely low turn-out for the local council elections, it would appear that the average British voter is not convinced that there is any significant difference in the Labour plan for growth either.

Fiscal and Growth Pact

Lundi, avril 30th, 2012

Perhaps German Chancellor Angela Merkel and Francois Hollande, if the latter becomes the French President following the upcoming second round of French presidential elections, will each save face by settling for a combined Fiscal and Growth Pact. Mario Draghi the President of the European Central Bank, has already said last week that the Euro-zone region needed a Growth Pact. Fiscal austerity alone is seen by some as only deepening the jobs crisis in Europe and could even lead to another recession, since the deficit reduction efforts in many countries would not necessarily create conditions for private sector employment growth, if these countries were just simply crushing economic activity and making great cuts in productive public investment.
The Conservative-led Coalition government in Britain is facing a similar challenge with initial figures from the Office for National Statistics pointing to a small contraction in GDP for the last two quarters in succession, the economy of the country thereby being defined as technically again in recession. The downturn in the European markets which normally represent some 50-60% of British exports is one contributing factor to this slow growth in the economy. However, more importantly, growth in the domestic economy is being held back by weak lending to business which is not helped by evidence that Britain is going further than its international competitors in tightening regulations to ensure a stable and safe banking system. As a result, the UK has a banking system that is continuing to raise prices and shrink lending to conserve capital and meet stricter regulatory requirements. Add in the need for the 11% of GDP budget deficit to be tackled by raising taxes e.g. VAT from 17.5 to 20% in the face of an already heavily-indebted consumer, and cutting government spending, it is not so surprising that growth in the economy is so weak.
This again leads the opposition Labour party to claim that the government Plan A to cut the deficit and restore growth in the economy has failed, pointing out the example of the US economy which appears to be growing at some three times the rate of the UK, through a policy of borrow-and-spend while Europe has chosen austerity as the path out of recession. However, here the Americans have the advantage of the US Dollar as the major reserve currency**(see below) and can keep government borrowing costs low, with currently an in-built confidence in the financial markets and assurance to creditors that they will be paid, even if only in depreciated Dollars, that also most conveniently stimulate exports. Any such reduction in exports to Europe is again offset by the fact that the volume of US exports to e.g. Canada, Mexico and Asia is traditionally much greater than that to Europe, and the growth in these three markets is much faster. Any comparable move by the British government to push up borrowing-and-spending e.g. in line with the so-called Balanced Plan for Deficit Reduction of the Labour party, would be highly likely to be penalised by the rating agencies and financial markets. The value of the £ Sterling would fall, inflation would in turn increase, further squeezing household real incomes and weakening demand, as well as the reduced confidence in the future of the British economy being reflected in increased borrowing costs for a British government currently running a budget deficit greater than that of Spain.
There are, therefore, no easy solutions but an effective growth pact for the Euro-zone would be good news for Britain in terms of growth from exports, as would an increased credit flow to small businesses in Britain, together with larger businesses demonstrating their confidence in government policy and the future of the British economy, by starting to spend more of the capital they are currently conserving.

** World Foreign Exchange Reserve Holdings: US$ 62%; Euro 27%; £ Sterling 4%; Japanese Yen 3%; Other 4%

The Biggest Companies in the UK did not need a 2% Tax Rate Cut?

Dimanche, avril 22nd, 2012

Richard Murphy of Tax Research UK in his article on why the biggest companies in the UK did not need a 2% (Corporate) tax rate cut, writes that…….Amongst the few items in last month’s budget not, so far, subject to retrospective Tory regret about the incompetence in the thinking behind it, was the 2% cut in the large company corporation tax rate introduced for this current financial year. 1% of this had already been scheduled in earlier budgets, and another 1% was added in March.

He continues that …..There are two points to make about this. The first is the very obvious vote of no confidence that this represents in George Osborne’s economic strategy. Businesses are not investing here because they have no faith in the prospect of economic growth which he said he can deliver, but which they do not believe.

Secondly, and a lot more importantly, when large businesses are sitting on this amount of cash then there is no way on earth that they are short of money to fund any investment that they want to undertake. Far from it, they are awash with the funds needed to invest, but are refusing to undertake it. As a consequence a cut in the corporation tax rate to encourage investment will achieve no such goal. It is not the current tax rate that is stopping big business investing in the UK, it is the lack of confidence big business has in George Osborne that is stopping that.

However, is there not a counter argument here? With the economy not able to rely on the financially, hard-pressed consumer to go on a spending spree and kick-start growth and limited prospects for increased exports to the Euro-zone, large businesses refusing to invest are also contributing to the lack of growth in the economy. A lack of confidence in the growth strategy of the Chancellor is not a sufficient reason for this in a trading nation in a global economy, when traditional export markets are depressed.

The Critical Financial Sector Debt of the UK.

Samedi, février 18th, 2012

Britain has a net public sector debt which has just hit £1 trillion for the first time and a budget deficit which compares unfavourably with most of the economies recently downgraded by the rating agency Standard & Poor’s. However, Britain is also one of the few countries to retain a triple-A sovereign debt rating and, as a result, pays very low interest on that type of debt, together with others in the triple-A group which includes Australia, Canada, Denmark, Finland, Germany, Hong Kong, Liechtenstein, Luxembourg, the Netherlands, Norway, Singapore, Sweden and Switzerland. This would then appear to be an endorsement of the current deficit-cutting plan of the British government but of course offers no guarantee against a future downgrade if the financial markets, which matter more than the rating agencies, lose confidence.
Concerning the UK debt position as a percentage of GDP, David Smith in his Economic Outlook in the Sunday Times of 22nd January, 2012 presented some interesting figures with which to compare the UK with other economies:
• UK total debt at 507% of GDP is at the level of Japan (512%).
• The total debt of other countries is lower: USA (279%), Germany (278%), Italy (314%), Spain (363%), and Portugal (356%).
• For government debt, the UK is at 81% while Japan is much higher at 226%.
• The UK (109%) and Japan (99%) are similar for corporate debt but France is higher (111%).
• Household debt in the UK stands at 98% of GDP and well above Italy (45%), France (48%) and Germany (60%). The difference is in mortgages with a relatively higher level of owner-occupation in the UK. Similar countries are the US (87%), Canada (91%) and Australia (105%).
• The main problem for the UK debt-wise is in the financial sector at 219% of GDP, almost double the level for Japan, over five times the US figure and three times the level of most other countries. This reflects the position of London as a major financial with a high proportion of major, foreign banks.
Excluding the financial sector then, total debt in the UK is more in the region of 400% of GDP rather than 500% , more manageable but still too high. The financial sector is a critical area which ballooned almost out of control during the boom years and, with the need for the banks to now reduce their debt, also explains the more limited flow of credit to help grow the UK economy.