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“OK, but…” – Yes, It’s a George Osborne Speech #cpc11

In to the conference hall (my customary no-more-than-one visit to that glorified media briefing) to hear George Osborne’s contribution. It was a good speech from a technical point of view; it had a few jokes and he said what need to be said (S&P today reaffirming the UK’s AAA credit rating).

The Party has also learned a lesson from New Labour: that reannouncements work, as the morning’s headlines testified. Those in local government had it confirmed some time ago that the second year of the concil tax freeze was on, and so Labour were right that it was nothing new … but such details never stopped them when in government.

The interesting stuff was the small business ‘credit easing’ (is that a recognised term?) and the reigning back on the carbon emissions targets. The latter might also have the happy outcome of cheesing off Chris Huhne; as it was no doubt meant to, to keep us polar bear barbecuing right-wingers happy.

Yet just as with the Chancellor’s major parliamentary statements, such as the budget, the announcements among the cynical old timers could only lead to a muted “OK, good, but …”.

On small business lending, the banks are not avoiding lending because they can’t be bothered to take the time out from counting their bonuses and toasting their saviour Gordon Brown. Banks are nervous, quite probably over-cautious, and are looking to rebuild balance sheets and minimise the effects of any existing toxic debt. Presumably Osborne’s scheme, one way or another, will involve the government intervening in lending decisions (either by the banks or markets at large). Will they have available some secret font of wisdom as to whether businesses are being denied credit by a nervous bank, or if they are genuinely bad risks; be it because of poor management, business potential or more quantifiable matters such as collateral?

Having avoided the temptations of unfunded fiscal stimulus, an infrastructure bank or more direct means of forcing banks to lend, he must not, even unwittingly, spark the creation of another credit bubble.

Then we have the scaling back of the carbon emissions targets. Again, good on the face of it, but the acid test will be what effect it has on the climate change levy, fuel duties, feed-in-tariffs and carbon reduction commitment mechanisms, all of which are adding to living costs in the name of fighting climate change, sometimes with the most tenuous of justifications.

OK, that’ll do for now, back to the fringe guide to find something to eat before the Boris rally tonight.


This Isn’t Just an M&S Parody …

This wasn’t just a gold sale,
This was gold drizzled away at the bottom of the market.

This wasn’t just a deficit,
This was a wholemeal structural deficit steadily rising over 9 years.

This wasn’t just overspending,
This is an artisan underachievement of income.

This wasn’t just printing money,
This was a jus of quantitative easing supporting a shell of faux growth.

This wasn’t a raid on pensions,
This was a delicate extraction of £5bn a year topped with a liberal portion of chutzpah.

This wasn’t just an end to boom and bust,
This was a conflate of bovine extract on a bed of debt and dodgy accounting.

This wasn’t just an economic balls-up,
This was a Labour economic balls-up.

‘Do Nothing’ Should be Osborne’s Plans B to Z

You’re the captain of the super-tanker ‘Tired Metaphor’. You’ve only been there a few hours, taking command with your plan to jettison a modest amount of the unnecessary and badly distributed weight, to allow the vessel to right itself and thus be steered away from the iceberg that those Mediterranean leaky buckets over there have been heading straight for.

But despite having nudged the wheel only minutes ago, you can hear the old captain down in his cabin. He’s been working his way through his drinks cabinet, and is now so blotto that he can’t even see the icebergs anymore and thus thinks there never was any problem, and is saying that you’re doing it wrong anyway because the tanker isn’t turning on a sixpence.

Labour's car scrappage scheme - were you stimulated?

Yes, the Left are whining that the economy isn’t booming yet, and if only George Osborne were to commence another spending splurge – a.k.a. ‘fiscal stimulus*’ everything would be OK. The economy is grinding to a halt and yet Osborne’s doing nothing. After all, the stimulus that Alistair Darling embarked upon was such a success, wasn’t it?

Err, no. Apart from the sickening sight of thousands of perfectly good cars being destroyed as part of the scrappage scheme (a bung for the motor industry dressed up in green clothing to get round EU state aid rules), the extra spending added even more to the public debt total, increased the deficit and yet as soon as the stimulus ended (as it inevitably had to, because there was no money left, remember?) everything drifted back to a near-halt.

This is the fundamental problem with ‘fiscal stimulus’. The ‘multiplier effect’ is a mirage because for every pound spent by the state, a multiple of that pound must first be generated by the private sector. It must be raised through tax, either now or in the future; the latter not only presenting a net drain on the economy, but also adding to upward pressure on interest rates. On top of that, the state pouring money (back) into the economy will be inflationary.

So, the Left seem to think that pushing up taxes, interest rates and inflation is the way to get the economy moving do they? Fiscal ‘stimulus’ may provide some short-term relief, but it doesn’t significantly shorten the time it will take for the economy to recover. The culmination of a twelve month recovery will be two years’ away if we embark on a year of ‘stimulus’.

The problems we have seen in recent years are down to one thing: debt. First, it was business and personal debt – specifically the ‘toxic debt’ – that gave rise to the ‘first’ financial crisis. (And no, its not just ‘the bankers’ to blame: for every irresponsible lender there must, by definition, be an irresponsible borrower.)

The shock of that episode then sent its waves towards the other great indebted institutions: governments.

It is the addiction to debt (and for governments its parents, interventionism and excessive public spending) that is the problem here. Not surprisingly, as with an addict in the early stages of their withdrawal, many people are screaming for more of their drug. Just as with drugs, the comfort that comes with another shot is short term. Just as with an addict, every shot puts off their recovery. “Just one more dose, please”, cry the Left (and, unsurprisingly, some sectors of business), “then we promise we’ll be able to give up”.

George Osborne should stay strong (some would say be stronger and bolder). Do not give in to the debt addicts, you’ll only put off their – and the nation’s – recovery.

Not for the first time, I find myself quoting Reagan: “Don’t just do something, stand there.”

* A caveat for the future: my definition of fiscal stimulus for these purposes is purely one involving increasing public spending: tax cuts are no such thing; they involve leaving money in the economy and thus present a real lasting positive effect.

Bankers’ Bonuses: I Don’t Like To Say I Told You So …

… nah,  who am I kidding?

Well, although a few may be playing the residency system, most will have paid tax on those bonuses…. They would have paid tax at typically 51% (ignoring the effects of pension and personal allowance restrictions). Now, those bonuses, if not paid and retained by the bank, will be taxed with the banks profits at 28%. if circumventing the rules involves converting the bonus into capital, then we’re looking at just 18% tax.

And lo:

Bankers’ pay cuts lead to £5bn tax loss

The Treasury will lose up to £5bn of tax revenue in the next five years because of a reduction in bonuses to UK bankers following a crackdown on pay packages.

An analysis by the Office for Budget Responsibility reveals that the UK’s bankers will receive about £10bn less in bonuses over the next six years than had previously been expected.

The OBR has cut its forecasts for tax receipts from “financial sector bonuses” by £1bn a year between 2010 and 2015. At the effective 60pc tax rate the OBR uses – from 13pc national insurance and a weighted average of 47pc income tax – the annual cut in bonus payments is £1.6bn.

That is all.

Reasons To Be Cheerful … Or Miserable?

There is a tone that newsreaders adopt when announcing, for example, that crime has risen or that a company has closed with hundreds of job losses, or the death of some obscure lefty writer that virtually no-one beyond Broadcasting House or Farringdon Road has ever heard of.

I heard this tone this morning, when the BBC’s Today programme told us that bonuses in the largest companies have risen back to the levels that they were before the credit crunch:

FTSE 100 executive bonuses close to pre-crisis levels

Executive bonuses are close to their level before the financial crisis, a survey by business advisory firm Deloitte says.

It found that the average bonuses for directors of FTSE 100 firms amounted to 100% of their basic salary, rising to 140% in the top 30 public companies.

Yet surely this is excellent news? Generally speaking, if bonuses are up then that might be a sign that we’re turning the corner, economically speaking. (The accompanying point that general executive pay is not rising particularly fast suggests that directors are also exercising some healthy and measured caution.) It’s certainly good news for the Treasury, as these bonuses will be taxed at up to 70% – a much higher rate than if they have been taxed at, say, the main corporation tax rate.

So why the glum faces everyone?

P.S. No, I haven’t got time to check out the bonus levels of, say, BBC executives and how they compare to 2007….

Fearing the Worst – Giving Polly a Good Fisking

Polly Toynbee speaks at the October 2005 Labou...

Polly Toynbee, with her mouth in gear

Polly Toynbee was churning out incoherent ramblings again last week. Unlike mine, though, she gets paid for hers. As Guido suggests, perhaps she’s got financial worries on her mind, like so many in the real world beyond the Grauniad offices. (Was it coincidence that this came out hours after her husband was told he’d be out of a job?)

Where Cameron and Osborne have been most successful is in frightening people … However, fear can be useful politically. Cameron’s government has skilfully created a hate campaign directed at the public sector. The release by Eric Pickles this week of all the spending data from his department and its quangos was admirable openness – but mainly a crafty assault on everything spent by public servants. Anecdotes work. People are easily persuaded that the handful of civil servants paid more than the prime minister are typical and that Indian head massages are the norm.

Yes, Polly, anecdotes can be powerful things, which must explain why, having piously cited David Cameron’s efforts, you serve up this:

… the public sector can be lax, but where is a comparison with lavish corporate hospitality at Wimbledon, Twickenham or the grand prix all paid for from peoples’ pension funds? A public employees’ £539 group awayday to Blackpool Pleasure Beach is less than the champagne bill for a public company’s beano at the races.

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As High Streets Struggle, Assembly Calls for More Aspic

It is tempting for us politicians to think that we can make things better by intervening, without stopping to take stock of our previous efforts, and whether they had any effect or even made things worse.

This is something the Mayor would do well to be aware of now that the London Assembly has delivered its opinion on the struggle faced by local shops; troubles not helped by the recession of course.

The report …

…. calls for changes to local, regional and national planning policies – including the Use Classes Order – to offer them more protection…

Deputy Chair of the Planning and Housing Committee, Jenny Jones AM, said:

“People in residential areas need local shops that provide essential services that they can walk to.  They do not need rows of betting shops and internet cafés, or to have to travel to supermarkets by car.”

Whether they need rows of betting shops and internet cafés is hardly for government to decide. They may not need to have to travel to supermarkets by car … yet they might want to.

It seems that some people have an idyllic view of the corner shop, open all hours, which is then brutally crushed by the big supermarket opening up down the road. Yet it’s not the supermarket that closes the shop – it’s the fact that so many people prefer to shop at the supermarket. Tesco et al know this. If they thought that their offer wasn’t better than the existing provision, they wouldn’t waste money opening up.

“Use it or lose it” goes the old saying.

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The Emergency Budget: A Triumph of Expectations Management

Well, the big headline – the 20% VAT rate was expected. Proportionately it is a lower increase than Labour’s return of VAT to 17.5% at the start of this year, introduced when the economy was arguably weaker than it’s likely to be next January. Not that I’m happy that we are increasing taxes – even marginally less unfair taxes such as VAT – but we all know who is really responsible, and it shouldn’t have been a great surprise for students of the nuances of political language – “we have no plans to…” means little in the unpredictable political climate of 2010.

All in all, the scare stories that were inexplicably circulating before the budget did make the actual thing seem a lot a expected. Capital Gains Tax will only go up to 28%, not the 50% that a return to a pre-2008 arrangement would have meant. Child benefit remains, albeit frozen. More interestingly, it remains universal; and, one could argue, why not, given that those on higher incomes have paid more tax and thus may feel entitled to get something back from the system.

Then the increase in the personal allowance will be worth around £200 to many people.

The bank levy will not be a transaction based Robin Hood Tax, and combined with the reduction in the main corporation tax rate may not trigger the flight that some feared – though time will tell. Expect other governments to now react in a similar direction, including the xenophobic White House (they may be itching to re-fight the American Revolution, but that won’t stop them welcoming, at least privately, the moves on this side of the pond).

There’s still more to digest, but that is largely a function of the quantity of significant measures in the speech, rather than the time-bombs that Labour used to hide away to explode during the committee stages. Something new that we will have to get used to, is the reaction of the Lib Dem coalition partners. Hysterical Hattie, in response to Osborne, may have a point when she highlighted how many Lib Dem MPs would have campaigned against the very measures contained in today’s budget.

Laugh/Cry/Emigrate (delete as applicable)

Via Guido, The Devil and the venerable Samizdata, our Aussie cousins have nailed it rather well with this satirical skit:

Saint Peston Declares Year Zero

What’s life like in Lefty la-la-land? Ask Robert Peston, the BBC’s economic affairs editor.

He has spent quite some time recently talking about the “New Capitalism” and about how, now that the government has a stake in nearly everything, business will now have to be answerable to “us” – i.e. the taxpayers. The passage from his essay (pdf 37kb) sums it up:

So if we’ve witnessed a semi-permanent nationalisation of the banking system and will soon see significant taxpayer support for real companies in the real economy, then our banks and private-sector companies will have to work much harder to sustain the goodwill of those who are keeping them alive: millions and millions of taxpayers.

Peston falls into the old trap of confusing the State with the people, but that we expect. What he also misses is the small fact that most businesses don’t get far without listening to people in the first place – i.e. their customers. Ignore your customers and they will go elsewhere and your business dies. Unless, that is, you have a state-sponsored monopoly, or some way of raising revenue without needing to have regard to your customers. I wonder why a BBC employee would think business was run more along the lines of the latter case?

Anyway, the deification of Peston by his employer gathers pace (in stark contrast to his reputation among those in the thick of it), with his featuring prominently in some trailers for BBC news and current affairs coverage (aren’t you glad the BBC doesn’t have adverts?) and last night he presented a piece on his “new capitalism”. From now on, we will see business being more ethical, less about a mad grab for profit and having to think more about their role in society. Even David Cameron was wheeled on to support the idea of more ethical business practices.

Except it’s all a load of cobblers. Most businesses do recognise their place in their communities, and why wouldn’t they? Their leaders, managers and staff and, of course, their customers are all part of those communities. Most businesses are small or medium sized enterprises that are naturally pretty close to the ground. Thus, by most reasonable definition of “ethics” they have been ethical for years and will continue to be so – the ones that survive the next couple of years, anyway. For larger companies, their shareholders will include individuals and their pension funds. In fact, the best way to sever the link between the ownership of a business and society must be to have the State take a stake in it – either through forced nationalisation, or by dilution of existing capital with a the State’s share.

Of course there are some stereotypical ruthless uncaring capitalists around, just as there are some socialists driven by spite, bitterness and class hatred, but we’re into rotten apple analogies here.

It has been interesting to see the Left wetting themselves with glee over recent months and predicting the “end of capitalism”. Talk of a “new capitalism” is just a slightly more refined version of that idea. The concept, much beloved of at least one notorious left wing regime in recent history, is of a “year zero”, albeit an economic one. As if the recent turmoil – the bust that followed a state-assisted boom – is something more than a particularly hard downturn in the economic cycle. Recent events no more herald a “new capitalism” than the earthquake that triggered the 2004 Indian Ocean Tsunami heralded a new tectonic system. It’s nonsense.

Ironically, an economy with a higher degree of nationalisation and state interference is more reminiscent of the misguided socialism of the post WW2 era, rather than anything “new”. One also cannot ignore that fact that US governments, starting with the Clinton administration, pushed banks to lend to riskier cases in the name of fairness, and in the UK the sham of Bank of England independence was underpinned by inflation targets that were based on measures that significantly understated real inflation, and thus resulted in unnaturally low interest rates.

And that is what Peston and his ilk conveniently forget – perhaps because it was all before their unilaterally announced year zero.