Archive for avril, 2012

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.

Conservative Models

jeudi, avril 12th, 2012

Addressing the future of Conservatism in the English-speaking world John O?Sullivan, who started as a speech writer for Mrs Thatcher and is now an American citizen at the Hudson Institute, discusses in the National Review Online the four distinctive Conservative Models adopted in the US, Canada, Australia and Britain.

For the US, Tim Stanley writing in the Daily Telegraph blog sees the struggle between the Republican contenders for the soul of Conservatism as essentially a less fundamental one between the Country Club and the Church Picnic, a struggle which both sides can afford to lose. American Conservatism remains vigorous and fundamentally healthy but what it needs to acquire from the Primaries is a leader with both the firmness to adopt a strong programme of reform and the rhetorical skill to persuade the American people of its necessity.

Conservatism is also thriving in both Australia and Canada although in different ways:
– In Australia by boldness
– In Canada by caution.

The key moment in Australian internal politics occurred in December 2009 when Tony Abbot became leader of the Liberal Party. Today his Liberal?Coalition has a 10% lead over a fraction-ridden Labour government uneasily reliant for its small majority on three independent MPs. Paul Kelly of The Australian summed him up in writing that …….[Abbot] has a Conservative set of values that he champions yet his policy outlook is highly flexible and pragmatic. …..Because Abbot is seen to stand for enduring values he gets away with multiple policy switches with impunity. Sometime in the next 18 months Abbot is expected to win a national election on a programme boldly Conservative but not dogmatically pure.

In contrast the Canadian Prime Minister Stephen Harper under-promises and over-delivers. Until recently Conservatism was considered a doomed philosophy in a Canada governed by a large and ideologically sprawling Liberal Party, interrupted by brief intervals of power granted to a so-called Progressive Conservative Party. Stephen Harper undermined the Progressive Tories by founding a rival Conservative Party called Reform and then amalgamating Reform with the rump Tories to form the Conservative Party of Canada (CPC). This he led first into minority government on a programme of moderate reform. He then made the CPC the natural party of government with a clear majority in an election in which the Liberals fell into third place. Although after 6 years social Conservatives might feel a little let down by a leader who has avoided issues such as abortion and has adopted conventional views on immigration, the Prime Minister has cut the size of government to one of the smallest in the advanced world, as well as having a similarly low tax burden of around 31% of GDP.

Yet it is David Cameron in Britain who has attracted the most attention in the US as a possible model for the Republican Party and American Conservatives. The standard Cameron narrative is that the GOP should learn to detoxify its image in order to win new votes as David Cameron succeeded in doing by e.g. going Green and avoiding traditional Tory issues. However, the article goes on to criticise the Cameron Tories over what is judged a certain passivity on economic policy, as a sub-set of a larger decision not to challenge the cultural assumptions of modern metropolitan liberalism across the board in Britain. It also questions their policies e.g. towards minorities, whether ethnic or otherwise, and reshaping British human-rights law.

Given that this then leads the author to conclude that alongside Tony Abbot and Stephen Harper, there seems little that American Conservatives should want to copy from Cameron Conservatism, the recent decision announced in the March 2012 budget to reduce the top rate of income tax from 50% to 45% as well as corporation tax by a further 1%, is a strong signal that the Conservative Party in Britain has not abandoned the intellectual tools of anti-socialist economics, i.e. that tax cuts are a more efficient form of economic stimulus than increases in public spending and that Britain is again now open for Business.