An open trading nation such as the UK cannot afford to ignore the globalised markets and the effect e.g. of the cost of government debt and worldwide commodity prices. There is evidence of the merit in the continuing commitment of the Chancellor in his 23rd March Budget, to shrink the public spending deficit to 2 ? 3% or thereabouts of GDP by 2015/16. Long-term interest rates are currently marked closer to those of benchmark Germany , rather than the considered more profligate Portugal, Greece and Spain, the latter economies all facing higher borrowing costs than the UK despite their lower budget deficits.
However, the Labour opposition, aided by the recent surge in oil prices and the negative growth (-0.5%) recorded in the last quarter of 2010, is still arguing that cutting the deficit too soon is harming growth and the living standards of the squeezed middle-income earners, citing the downgraded growth forecasts for 2011 and 2012 as evidence of this (refer also to Chairman?s Blog/Categories/Budget 23/03/11 in the right-hand index column).
More important for the Coalition government is that the independent Office for Budget Responsibility (OBR) has revised upwards growth forecasts for 2014/15 when the next general election could take place. Labour also has no real counter to the fuel price cuts to help households and small businesses or the raising of the lowest tax threshold above which people start paying tax to help the lower paid. Instead Ed. Miliband, with no apparent alternative policies ahead of the completion of his own policy reviews, is seemingly being drawn closer to the Trades Unions marching against cuts and, thereby, risking being viewed as an obstructive rather than constructive opposition leader by voters still doubting the overall competence of Labour on economic policy.
The main threat to the recovery of the economy in fact comes from inflation with the Consumer Price Index (CPI) at 4.4% and the Retail Price Index (RPI) at 5.5%. Higher inflation is responsible for the new OBR figures for the budget deficit with net borrowing in 2010/11 of £145.9 billion (£2.6 billion below what was forecasted but this undershoot less than expected by the markets). The OBR then predicts continuing overshoots starting with £4 billion on borrowing of £122 billion in 2011/12 and averaging £10 ? 11 billion thereafter, due to the impact of inflation on benefits, public sector pensions and debt interest. Underlying this scenario is the assumption that average earnings will not be rising faster than inflation until 2013, with the Bank of England in order not to stifle growth, only allowing interest rates to slowly start to rise up later this year to average 1.8% in 2012 and 2.8% in 2013.
However, without a sharp drop in inflation next year as the effects of the recent increase in VAT and other such contributing factors fall away, an average CPI of over 4% (RPI 6%) in 2012/13 could trigger a jump in average earnings together with a bank rate at over 6% in 2013. The net result would be a squeeze on the economy equivalent to the effect of the cuts but without the offsetting stimulus of low interest rates.
Inflation Threat to Growth
mars 30th, 2011Vision for Growth Budget
mars 25th, 2011The 23rd March, 2011 and Budget Day in the UK, our blog received an interesting comment viz. In passing would just like to say that it does not matter what George Osborne likes to pretend will be the outcome of the Budget, the real winners will again be the banks from whom as a culture we must borrow, at excessive interest, if we want to eat, sleep and breathe. Changing anything other than that is purely cosmetic. Food for thought for you all!
This is a real problem for households and businesses but unfortunately for the government it cannot over-risk driving off-shore such a wealth creating sector as financial services, which has served to compensate for the reduced value-added contribution to the economy of the diminished British manufacturing base (see Chairmans Blog/ Categories/ Banks & Bonuses in the right-hand index column). Following the financial crisis, these banks are also still in the process of rebuilding their balance sheets and have adopted a more cautious lending policy towards both retail and business customers, who in turn find themselves faced with what they perceive as excessive rates of interest compared with before when money seemed cheap. Having, therefore, already taxed and pressurised as far as judged prudent the banks to reduce their level of bonuses and improve their lending levels to small businesses in particular, the Chancellor in this his second budget has hit instead upon another popular target for the public i.e. oil companies, with a £2 billion windfall tax to pay for a 1p cut in fuel duty (instead of the 5p increase due from next month).
The high price of oil in recent years having encouraged increased investment particularly by smaller companies in the rapidly decreasing reserves of economically accessible oil in the North Sea, there has predictably been an outcry from an outraged and surprised oil industry that this can only lead to job cuts and less investment. Nick Clegg, the Deputy Prime Minister, considers this a fair deal since these oil companies are making huge profits (rather like some banks). However, it is a gamble for a business friendly Chancellor looking for investment and growth in the economy, particularly when you reduce after-tax returns on profits from North Sea oil fields by a quarter, the off-shore industry accounting for a third of total industrial investment. The industry also mainly benefits Scotland and the North of England, areas which again face public spending cuts. It serves to illustrate just how little room the public spending deficit has left the Chancellor in which to manoeuvre when he also admits to having essentially used up the political capital or public goodwill gained from winning the last election, by the tough but necessary things he is doing.
A problem for his termed Vision for Growth Budget is that he was forced at the same time to announce lower forecast growth rates of 1.7% and 2.5% for 2011 & 2012 respectively (although then rising to 2.9% in 2013/2014) with, in addition, the Office of Budget Responsibility (OBR) saying it made no difference to its own forecasts, which were themselves downgraded from 2.1 % to 1.7% this year and from 2.6% to 2.5% next year.
That said, the Chancellor revealed a number of business?friendly measures including a surprise 1% reduction in the main rate of corporation tax which will be cut to 26% from April 2011 and reduced by 1% per year thereafter to 23% in 2014. There was also the introduction of 21 new enterprise zones, improved incentives for R & D and a strong indication that the current 50% top rate of income tax was considered only a temporary measure (certainly considered politically impossible to scrap immediately, given the strong public feeling on the issue e.g. of highly paid bankers & their bonuses). These enterprise zones will offer discounts on business rates, provide super-fast broadband communications and have more efficient planning rules to encourage the establishment of new businesses. The Green Investment Bank will also receive an extra £2 billion of seed money, although the Green lobby was not too happy about the 1p cut in fuel duty.
The above measures aimed at rejuvenating the private sector were broadly welcomed by analysts although recognising that the government was still gambling on growth whilst continuing to cut public spending so deeply. Public spending would also be a cumulative £44 billion higher than expected over the course of the current parliament according to the OBR. In addition, the national debt would now reach 70.9% of GDP in 2013/2014 (£1.25 trillion), worse than forecasted last November.
Ending on a more positive note, the head of WPP, the largest advertising company in the world, was moved to comment that WPP would now be considering relocating their HQ back to the UK instead of remaining in Ireland. Forecasts for growth in world trade are also being marked higher, the UK manufacturing sector is performing well and the OBR is still expecting private sector employment to have increased by 1.3 million by 2015, compared with a decrease of some 400,000 public sector jobs. Such growth remains dependent upon a number of variables such as businesses having the confidence to start reinvesting and hiring more people, despite rising inflation, the state of the banking system, the outlook for household spending and unexpected events in a globalised trading world.
Nuclear Cloud or Jobs Opportunity?
mars 15th, 2011The current crisis at the Fukushima nuclear plant in Japan, following the major earthquake last Friday, has cast a cloud over the ambitious British government plan to build 10 or more nuclear reactors at selected sites around the country over the next 15 years. Such a plan is viewed as critical to meeting commitments made by the previous Labour government and maintained by the current Coalition to reduce carbon dioxide emissions by 34% from 1990 levels by 2020 and 80% by 2050. Chris Huhne, the Energy Secretary, also published last week the Carbon Plan of the Coalition and in which the government commits to creating a law to set a carbon floor or minimum price for emissions permits. It is planned that by 2013, big polluters will not only be limited under the European Emissions Trading Scheme whereby they have to buy carbon permits for each tonne of pollution they emit above a pre-determined limit, but also by this carbon floor price programme. The current carbon price is generally considered to trade at too low a level to make it worthwhile for companies to be able to profit from cleaner energy sources such as wind or nuclear power that are more expensive to build but cheaper to operate.
If we accept the premise that no technology currently providing the concentrated output capacity and reliability of supply of either fossil-based fuels or nuclear, is absolutely safe or without environmental effects, it is worth considering that a 1 Giga-watt, light-water reactor uses about 25 tonnes of enriched uranium a year, requiring the mining of some 50,000 tonnes of uranium. About 25 tonnes of used fuel or radioactive waste is taken from the nuclear core each year and , if reprocessed as in Europe and Japan, 97% of this can be recycled leaving only 3% of high-level waste amounting to 700 Kilo-grams per year but needing to be isolated from the environment for a very long time. In comparison, a 1 Giga-watt coal-fired power station requires the mining, transportation, storage and burning of around 3.2 million tonnes of coal per year , creating up to 7 million tonnes of carbon dioxide emissions and also sulphur dioxide, depending on the type of coal. In addition, solid waste from the plant can be substantial and cause both environmental and health problems.
Meanwhile on the jobs front in the UK, initial contracts of the French nuclear supplier Areva to build 4 of its new European Pressurised reactors for EDF Energy, could create up to 4000 building and manufacturing jobs and stimulate a British revival in a high-tech industry, with major growth prospects worldwide. Areva has already contracted Rolls Royce as its main British manufacturing partner and launched a joint venture with the National Advanced Manufacturing Research Centre which was set up with public funds to develop British manufacturing. This joint venture will then support the qualification process of other such companies (to date 20 are approved and 370 have applied), in taking them through the educational, training and procedural requirements of an industry in which the safety aspects of manufacturing are fundamentally different from other industries and the standards are exacting but again called into question by isolated, high profile events such as Three Mile Island in Pennsylvania, Chernobyl in the Ukraine and now Fukushima in Japan.
Certainly the fail-safe systems of nuclear power plants will need to be revisited worldwide, although their generally being sited close to the sea or large rivers is due to the need for large quantities of water for cooling purposes and to drive the turbine generators. It is also understood that the Fukushima nuclear plant in crisis was configured to withstand a 6-metre Tsunami although not the monster which swamped the stand-by generators and the power for the associated cooling system of the nuclear core, whilst devastating the large and inhabited area inland. However, with hindsight, the risks of radioactive contamination of the emergency repair teams and to the surrounding areas would seem to have been multiplied by co-locating 6 reactors at Fukushima, 4 or more of which appear to have been damaged.
WIth enhanced safety procedures implemented worldwide following the lessons learned from this incident, nuclear power can remain a powerful source of energy for the future and in the US President Obama has already spoken in its defence although also ordering a safety review.
Big Society Debate
mars 10th, 2011The Big Society could be perceived as part of an overall government policy to push back the power and associated cost of the state, and which can help to fill the resulting services shortfall through more privately funded or voluntary initiatives.
The selection of comments below on the Big Society (see also Categories/Chairmans Blog/Big Society in the right hand index column) add to the debate on a concept which seems yet to gain traction in the minds of the British public perhaps due to a lack of clarity and convincing argument from the government. How does the concept differ from what already happens naturally in civil society through the voluntary and charitable sectors for example and also in the past when people had to organise themselves through e.g. co-operatives, friendly societies, unions etc.? Does the initiative of Jeremy Hunt, Minister of Culture, in seeking philanthropists to contribute to the shortfall in the Arts budget fall under the Big Society? Following on from the comments of the Archbishop of Westminster below, the Church has certainly played an even larger role in the past when religious belief had greater influence on society e.g. in education, Quaker businessmen etc. How essential is a successful Big Society to the need to cut the central government budget e.g. for education and health? With the basic idea appearing to be the devolving of power from central government to local council level and below, also presumably involving the transfer of related costs from central budget to local government/ council tax or the private sector at the same time, how can central government be held accountable other than at the ballot box, if it cannot control the outcome?
The National Citizen Service (NCS) proposed by David Cameron can form part of the overall narrative in encouraging 16-year-olds to spend their summer after leaving school doing voluntary residential placement. Charities, social enterprises and private firms would then be invited to apply to the government to become providers of placements. Although this is already criticised as only likely to interest the middle class and motivated teenagers, it does serve to illustrate the key value of self-reliance which underlies the concept of the Big Society and is generally shared by this part of the community.
The unions are wary of the concept and hostile to the voluntary sector with its do-it-yourself attitude, accusing it of lack of capability and taking jobs from the public sector. Protesters have already occupied the council chamber in Lambeth Town Hall Brixton south London, where the local authority has a radical plan to become the first cooperative council in Britain with services provided by voluntary groups wherever possible.
Small Business comment to our www.conservatives-paris.org blog:
? As the Big Society idea of David Cameron looks like coming apart already because of government cuts, he?s lining it up to get government funding. I mean, why make cuts in the first place?
Archbishop of Westminster speaking at LSE (as reported in the Times, 4th March 2011):
? The religious contribution to the renewal of civil society is more significant than had been thought. How we achieve this renewal is a good moral question at the heart of the idea of the Big Society. The debate opened up by David Cameron under the uneasy title of the Big Society is indeed a big one, for it invites us to ask what the purpose of society actually is, and that in turn depends on an understanding of what it is to be human. This is an important debate for our society to have, and it is a different debate from the other necessary debate about public expenditure.
Francis Maud, Cabinet Office Minister giving evidence to Commons Public Administration Select Committee (as reported in same Times article as above):
? Implementation of the Big Society programme will be untidy (neither chaos nor tidy) and difficult to plan. There will be a different pattern in different parts of the country. The idea is to devolve power to charities, voluntary organisations and businesses while retaining accountability. Although there will be lines of accountability to the centre, the government could no longer be responsible for every school and hospital.
Multicultural UK
mars 9th, 2011Is there a lack of clarity surrounding Coalition government policy on multiculturalism, which has left the British public confused? This was suggested by Caroline Flint, the Labour Shadow Communities Minister, commenting on a speech last week in Luton by Nick Clegg, the Deputy Prime Minister, in which he called for engagement with extreme groups even if they appear to hold deeply unacceptable views.
The multiculturalism picture drawn by Mr Clegg is of an open and confident society in the UK which welcomes diversity but resists division, it being better to fight the views of extremists rather than to ignore them and to win such people over through smart argument. He, therefore, rejects the idea of a multicultural society in which there is more segregation and people lead separate and parallel lives. This is a very liberal position to take of course which assumes the other side will listen and respond to what e.g. Mr Clegg considers reasoned arguments based on traditional British values. There is, however, the problem in any such negotiation process that if one side wins the values argument the other side must by definition have lost. Each side, therefore, needs to concede something for a win-win outcome in which by definition the more liberal or tolerant is likely to give more than the extreme.
His views do not seem that different from those of the Prime Minister as expressed in a speech at a security conference in Munich last month, when he attacked the doctrine of state multiculturalism in the UK which had encouraged different cultures to live separate lives. His speech was not only welcomed by the right-wing of his Conservative party in the UK but also in France where Marine Le Pen, the new leader of the far-right Front National, saw a parallel with their policy on immigration. Where the more muscular liberalism of Mr Cameron might appear to diverge from that of Mr Clegg is in calling for an end to engagement with groups which do not share British values about e.g. human rights, equality of women, integration and democracy. However, this could also be viewed as only adopting a tougher initial negotiating position than Mr Clegg.
Essentially the main multiculturalism issue still seemingly being debated within government is how to address Muslim extremism and if by definition an extremist group is an organisation with which no negotiation is considered possible. Even Mr Clegg says that he supported the proscription of the Pakistan Taleban adding, however, that proscription must always be a last resort and not just an automatic reaction. Perhaps the difference in tone, language and values of the two speeches reflects the need for both leaders to reassure their own party members on this sensitive issue rather than the country as a whole.
Protection of Intellectual Property Rights
février 26th, 2011James Dyson, the British inventor and Chief Engineer of the Dyson Company (see also Categories/Chairman?s Blog/Fairness/Job Creation in the right hand index column), writing in the Sunday Times of 16th January, 2011 on protection of Intellectual Property (IP) rights, knows that ideas, technology and exports are key to reshaping the British economy with, as in Germany, manufacturing (& not just financial services) the driving force for recovery. Manufacturing he defines as the generation of unique goods to patent and export, independent of the location of final assembly i.e. on the model of Apple and Dyson. He views as promising, therefore, for the next generation of British inventors, the technical schools initiated by the Conservative peer Lord Baker and e.g. the engineering academy opened by JCB, the British construction equipment company. Citing China as a key market offering British exporters major opportunities, he raises the issue of how to protect IP rights.
Dyson in common with other technology companies invests heavily in research and development, the associated financial risk partly offset if it can rely on its ideas and products being protected. Taking protective action around the world is expensive and time consuming, its value based on being able to enforce the rules, assuming each country plays by the same set of rules. However, a robust and solid European Union patent system is continually undermined by e.g. companies in China (and China is said to be the worst offender) which continue to ignore this and other patent protection systems, steal IP and thereby produce counterfeit goods.
China apparently has indicated that it would do more to improve IP protection, wanting to increase the number of patents it grants to 2 million by 2015. With proper enforcement of IP law China would also be a fairer and more hospitable trading environment for the Dyson Company. The Asian taskforce established before the November last visit of David Cameron to China, is proposed as having a crucial role to play in influencing action on fair , global trade by all parties involved.
Quangos Bonfire
février 8th, 2011Before the election there was much Conservative party talk of a policy which was finally announced in government last October as a Bonfire of the Quangos (Quasi-Autonomous Non-Governmental Organisations), aimed at abolishing 192 Quangos to save money (£1 billion was the target) and reduce the associated bureaucracy.
However, a report by the Commons Public Administration Committee issued in January 2011 has concluded that it could take over 10 years to make significant savings due to existing contractual commitments and rental leases. The Conservative Chairman of the Committee, Bernard Jenkin, views it also as a wasted opportunity to help build the Big Society (See Categories/Chairman?s Blog/Big Society in the right hand index column). He thinks that the responsibilities of an additional 118 Quangos which have been merged mostly into existing government departments, would have been better transferred instead to e.g. charities or mutual organisations, which would in turn have provided much more clearly identified public bodies for stakeholders and civil society to engage with.
Responding to criticisms of conflicting guidelines and ,therefore, inconsistent application Francis Maude, the Cabinet Minister, said the Quango overhaul was not a top-down exercise driven by the centre but a decentralised process led by departments with the overall aim being to increase accountability for State activities. Given the all-pervading influence of the Civil Service within these departments, it is perhaps not surprising that the Head of the Civil Service, Sir Gus O?Donnell, when giving evidence to the Committee was not able to give any estimate of how much will finally be saved, even when given the opportunity for more time to estimate this figure!
Squeezed Middle
janvier 24th, 2011One of the first sound-bite attempts of Ed. Milliband, as the newly elected Labour party leader, focussed on the Squeezed Middle of the British electorate for his future national election prospects, although he lost some credibility when questioned due to not being able to more precisely define what he meant by this part of the population. Indeed, the squeezed middle according to Mr Milliband seemed to include anyone neither very rich nor very poor i.e. just about everybody else or perhaps the 75% in the middle who also contribute around the same proportion of total income tax taken by the government. It is interesting then that Reuters today (24 January, 2011) issued a report on Life in Europe »s Squeezed Middle.
In summary, even as Europe has begun to grow again, the global financial crisis which has adversely impacted tens of millions over the last three years is still influencing people and households to watch their budgets, save more and avoid over-extending. The plans and hopes of a generation are seen as having been scaled back and, even if the general economic situation improves, will affect the continent of Europe for years to come. Examples of the experiences so far of austerity affecting relatively affluent people are described for Spain, Germany, Greece, Romania and Britain. In Spain, working Spaniards are facing the fact that they will not be as rich as their parents. Germany is booming again but the experience of being forced to work shorter hours to keep more people employed has left many workers scarred. In Greece, there is a growing wave of emigration. For those Romanians who managed to avoid getting into too much debt from the wide availability of cheap credit, when Romania was the fastest growing economy in the EU two years ago, there are hopes for a better year ahead.
Addressing Britain, the example from the squeezed middle is a young mother with two children and currently unemployed but, thanks to the British policy of mixing affordable social housing with high-end real estate, receiving a subsidy from an independent, not-for-profit housing association to live with her family in one of the most expensive areas of London, next to Westminster Abbey and Big Ben. She, her partner and two children are currently insulated from the impact of the cap on housing benefit introduced by the government as part of the £81 billion public spending cuts. However, their monthly rent of £600 is only a third of what they could be charged on the private market if they were forced to move. That said their annual income of £32,000, just above the national average, comes largely from her partner who works for the London police but is concerned about the security of his job, given the 300,000 public sector positions expected to disappear with government budget cuts, including thousands in the police force. Even if he keeps his job, he will find his pay frozen for the next two years and be paying more into his pension fund. This squeezed middle family is, therefore, already cutting back on unnecessary expenditure before they start feeling the effects of the government cuts.
Considering the examples taken by the Reuters reporters, the squeezed middle covers a rather broad spectrum of which one imagines Conservative party strategists are already well aware. It also seems apparent that although the Office of National Statistics is attributing to the bad weather the unexpected 0.5% contraction in UK GDP for the last 3 months of 2010, the economy currently appears to be stagnating with the squeezed middle concerned about the future and, therefore, cutting back and spending less, offsetting somewhat e.g. the 1% or so growth in manufacturing.
Bankers, Bonuses & Competition
janvier 19th, 2011Despite the financial downturn and the continuing public furore, JPMorgan last week announced it was paying its investment bankers some £6 billion in pay and bonuses for 2009. Citigroup, Morgan Stanley & Goldman Sachs will issue their results and bonus plans this week, the latter investment bank expected to announce a pay and bonus pool of around £8.5 billion. The results of British banks will be announced in February, the total associated bonus pool estimated at some £7 billion. Even state-owned Royal Bank of Scotland (RBS) is anticipated to pay its investment banking staff bonuses totalling £1 billion.
Excluding the state, the major shareholders in British banks are institutions such as large insurance groups or fund managers (e.g. on behalf of major pension funds), with those holding the biggest stakes including Legal & General, Axa, Fidelity, Standard Life, Scottish Widows, M&G (of Prudential), Aviva and Schroders. Together they hold around 15% of Barclays, 11% of HSBC, and 7% of Lloyds. These institutions are not necessarily content with the level of bonuses being paid out by the banks because they are also aware that these banks are still rebuilding their capital bases. However, they find themselves at the same time trapped by the demands of a market in which the banks have to pay big bonuses or lose staff to their competitors. Institutions are, therefore, looking to the politicians to find a long term solution to what could be considered a structural issue possibly requiring an overhaul of the banking industry, including the key aspect of competition.
The problem for the politicians, however, is that they cannot risk driving the wealth-creating financial sector offshore, its importance to the UK economy having increased as the proportion contributed by manufacturing has progressively decreased before and during the last 13 years of Labour government. Indeed the banks will pay an estimated £20 billion in tax this year. The Prime Minister has, therefore, called for an end to verbal attacks on the banks and blaming them for all the ills of the economy; the bonus tax demanded by his Liberal Democrat partners in government has also not been taken any further at present. Behind the scenes, the on-going negotiations (code-named Project Merlin) between the government and the banks continue to focus on increased lending to small businesses & restrictions on bonuses, in return.
In fact, bank bonus payments on average are expected to be 20% to 30% down on the year before, although this is said to be mainly due to the trading profits of the big investment banks having collapsed last year. The bankers are also seemingly feeling secure enough to suggest that the period of remorse and apology (e.g. of waiving of bonuses and giving to charity) now needs to end, as evidenced by the performance of Bob Diamond, the new Chief Executive of Barclays, before the Commons Treasury Committee. In addition, new regulations in the UK now mean that over 50% of a bonus must be paid in shares and deferred for 3-5 years, half of the other 50% in cash also deferred but linked to performance targets and the remaining cash then falling into the 50% tax band for top earners, with many bankers now given large increases in basic salary to compensate. This reflects the real world within which, however, the public perception also remains strong that bankers still earn significantly more than other professions, despite the taxpayer having contributed hundreds of billions of pounds to rescue the financial system and large numbers of public sector workers continue to lose their jobs, in what also seems a very unfair world.
Of course, if a major bank or open trading nation such as the UK chose to go against the global market, each would be likely to suffer financially and this then points to the need for a global agreement on financial market regulation. In the absence of this, some in the media point out that the banks make large profits mainly due to seriously overcharging corporate clients, companies which are in turn owned by the same big shareholders. Not all of these profits are returned as dividends to these shareholders, a large part being siphoned off to pay bonuses. There are also apparently, suspiciously similar charges for financial services such as underwriting of share issues, while the number of major players in the market has been reduced by banking failures during the financial crisis. Perhaps the Independent Commission on Banking which is looking into how to improve competition in the financial services industry will ultimately feel the need for a full-scale Competition Commission inquiry, as real competition would be expected to squeeze profits and the associated pay & bonuses. It would also be expected to reduce the level of bonuses paid out to (as admitted by at least one senior banker) quite mediocre talent, who surround the stars that really bring in enormous amounts of business and may well indeed deserve their extraordinary remuneration.