Tag Archives: George Osborne

Britain, Economic, Government, Politics, Society

Analysis of the Autumn Statement…

AUTUMN STATEMENT

A highly charged political autumn statement delivered by the Chancellor, George Osborne, has set a trap for Labour by challenging the party to sign up to a new set of tough fiscal rules that would mean billions of pounds of new spending cuts after the 2015 general election.

Mr Osborne announced that Parliament will vote on a new ‘charter for budget responsibility’ before the election. This would set the terms of the election battle but would give maximum advantage to the Conservatives, who seem certain to pledge the running of a budget surplus once the annual deficit has been removed in 2018-19.

The Chancellor’s plans for a ‘responsible recovery for all’, however, have been dealt a blow when the independent Office for Budget Responsibility (OBR) warned that house prices are expected to jump by 3.2 per cent this year, 5.2 per cent next year and 7.2 per cent in 2015. This implies that the OBR expects homes to cost 10 per cent more by 2018 than it previously predicted. Labour said that brought into question the merits of the Government’s Help to Buy scheme which guarantees 95 per cent mortgages, but which critics claim could inflate another housing bubble. Labour has warned that home-buyers would be ‘back to square one’ if prices rose sharply and they were unable to get a mortgage. But Mr Osborne said the OBR’s new forecasts still left house prices 3.1 per cent lower than their 2007 peak.

The statement contained few surprises, with the Chancellor confirming limited ‘giveaways’, including a tax break for married couples, free school meals for all five- to seven-year-olds and the scrapping of a 2p rise in fuel duty due next September.

Trumpeting higher than expected growth and lower borrowing forecasts, the Chancellor said: ‘Britain’s economic plan is working. But the job is not done. We need to secure the economy for the long term.’

Mr Osborne’s statement, seen more or less as an election gambit, creates a huge dilemma for Ed Miliband and Ed Balls, the Shadow Chancellor, who was drowned out by Tory MPs on the backbenches when he responded to it. Whilst Labour has pledged to stick to the Coalition’s day-to-day spending plans for the first year after the election the party does intend to borrow more to fund building projects such as a huge housing programme.

Charges of irresponsibility could be made by the Tories if Labour does not vote for the new charter. And whilst Labour will invariably try to find a different approach, allies of the Labour leader fear the public may stick with the Tories if Labour appears to promise more of the same austerity.

For his part, Mr Balls has vowed that Labour would not be deflected from fighting the election on the ‘cost of living’ crisis. The Shadow Chancellor said that recent statistics published showed that working people in 2015 would be £1,700 worse off on average than they were when David Cameron became Prime Minister, up from the previous estimate of £1,600. He also said that wages would fall by 5.8 per cent over the five-year term of this parliament. In its election campaign, Labour seems certain to accuse the Tories of being ‘out of touch’ and failing to understand the huge problems that ordinary people face because wages have lagged behind inflation.

The Liberal Democrats will be anxious to avoid a commitment to yet more Tory cuts. Though Nick Clegg has signed up to the idea of a new ‘fiscal framework’ which uses budget surpluses in good years to bring down debt, he seems certain to part company with the Tories by insisting that the deficit should be cleared partly by higher taxes (such as a mansion tax on homes worth more than £2m) rather than solely through spending cuts as the Tories propose.

Vince Cable, the Business Secretary’ said: ‘The Liberal Democrats are an independent party. We will go into the election with our own identity, equidistant from the other two parties and with a completely different set of policies. We will not be locked into a Tory agenda.’

Mr Osborne also set out plans to impose a cap on welfare spending. Cyclical benefits for those seeking work, part of the housing benefit budget and the basic state pension will be exempt. The move could open the door for pensioners’ perks such as winter fuel allowances, free bus travel and TV licences to be pared back.

The squeeze on public sector pay will continue, with annual rises limited to 1 per cent. But in a scheme to be trialled, some government organisations will be given the freedom to make the trade-off between pay and jobs.

AUTUMN STATEMENT – MAIN POINTS:

Pensions – People in their 40s get state pension at 68. People in 30s at 69

Growth – 2013: 1.4% (up from 0.6%); 2014: 2.4%

Cuts – Extra £1bn from government departments each year until 2017

Borrowing – 2014-15: £96bn, 2015-16: £79bn, 2018-19: £2bn surplus

 

Economic growth – Growth forecast for this year increased from 0.6% to 1.4%, revised up for next year from 1.8% to 2.4%, but then down slightly for the following three years to 2.2%, 2.6%, and 2.7%.

Revised figures from the Office for National Statistics show that UK GDP declined by 7.2% in 2008-09, not 6.3% as previously thought, equivalent in value to £112bn.

Government Borrowing – The UK’s “underlying” deficit – a measure that excludes the acquisition of the Royal Mail pension scheme and the effects of quantitative easing – has been revised down by the Office for Budget Responsibility (OBR) to 6.8% this year, and to 5.6% next year.

It is then expected to fall to 4.4%, 2.7% and 1.2% in the subsequent financial years.

The OBR predicts there will be a small cash surplus in 2018-19.

Borrowing is expected to come in at £111bn for this year, falling in 2014-15 to £96bn, then down to £79bn in 2015-16, £51bn the year after and £23bn the year after that.

Public debt this year is due to total 75.5% of GDP – £18bn lower than forecast in March – rising to 78.3% next year, before peaking at 80% the next year. By 2017-18, debt is expected to be more than £80bn lower than forecast in March.

Departmental budgets will be cut by about £1bn next year and the year after.

Benefits and Pensions – The state pension age is to increase to 68 in the mid-2030s and to 69 in the late 2040s. In April 2014, the state pension will rise by £2.95 a week.

Overall welfare spending is to be capped.

Anyone aged 18 to 21 claiming benefits without basic English or Maths will be required to undertake training from day one or lose their entitlement. People unemployed for more than six months to be forced to start a traineeship, take work experience or do a community work placement or lose benefits.

Taxes and Allowances – From April 2015, capital gains tax will be imposed on future gains made by non-residents who sell residential property in the UK.

From 1 January 2014, the rate of the bank levy will rise to 0.156%, and is estimated to raise £2.7bn in 2014-15 and £2.9bn each year from 2015-16.

Employer National Insurance contributions are to be scrapped on 1.5 million jobs for young people.

Stamp duty on shares purchased in exchange traded funds is to be abolished.

The personal income tax allowance will rise to £10,000 from April 2014, and then increase from 2015-16 by the Consumer Prices Index (CPI) measure of inflation.

A married couples and civil partners tax break, which is set to cost about £700m a year, is proposed to start in April 2015, enabling people to transfer £1,000 of their income tax allowance to their partners.

Business rates in England to be capped at 2% rather than linked to RPI inflation, with some retail premises in England to get a discount. Businesses moving into vacant high-street properties will have their rates cut by 50%.

From April, a new tax relief is to be introduced for investment in social enterprises and new social impact bonds.

Jobs and Training – The number of people claiming unemployment benefits is down 200,000, with unemployment now forecast to fall from 7.6% this year to 7% in 2015. Unemployment is then expected to fall further to 5.6% by 2018.

Total number of jobs to rise by 400,000 this year and 3.1 million jobs predicted to be created by 2019.

A boost in the government’s start-up loans scheme will aim to help 50,000 more people start their own businesses.

Export finance capacity available to support British businesses will be doubled to £50bn.

Transport – Petrol taxes stay frozen – a planned rise of 2p per litre for next year is to be scrapped.

Regulated train fares will rise in line with inflation, not at 1% above RPI as planned.

The tax disc to show motorists have paid vehicle excise duty is to be replaced with an electronic system.

Education and Families – An extra 30,000 places at English universities will be created in 2014-15. The following year, the current cap on student numbers will be abolished entirely.

Science, technology and engineering courses will receive increased funding, and a new science centre in Edinburgh University is to be named after Prof Peter Higgs, the discoverer of the Higgs boson particle.

The proportion of young people from disadvantaged backgrounds applying to university is up.

An additional 20,000 apprenticeships are to be funded over the next two years.

All pupils at state schools in England in Reception, Year 1 and Year 2 are to get free school lunches from next September, at an estimated cost of £600m a year.

Housing – The government hopes £1bn in loans will boost housing developments in Manchester and Leeds, among other sites.

The housing revenue account’s borrowing limit is to rise by £300m.

Councils are to sell off the most expensive social housing and rundown urban housing estates to be regenerated, and workers who live in council houses are to be given priority on housing lists if they need to move home to find a job.

Infrastructure – Tax allowances aiming to encourage investment in shale gas to cut tax on early profits by 50%.

More investment in “quantum technology”, which involves attempting to apply the strange behaviour of materials on a tiny scale to practical purposes, is promised.

Overseas Aid – The government’s pledge to spend 0.7% of gross national income on international development is to be met without an increase to the current aid budget.

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Banking, Britain, Economic, Financial Markets, Government, Society

Statements by RBS are clear on two points…

ROYAL BANK OF SCOTLAND

A series of rash statements issued yesterday by the Royal Bank of Scotland is clear on two points. Firstly, the decision taken to create an internal ‘bad bank’ with toxic loans amounting to £38 billion will hardly provide an instant cure. It will take a further three years of write-downs and bank disposals before the institution will even be considered to have recovered from its 2008 financial collapse and taxpayer funded rescue.

The second relates to serious deficiencies in the day-to-day management of RBS – from its chronic failure to meet targets on lending to small and medium sized firms, through shortcomings in service to personal customers, and to the provision of £250 million made by the bank for mis-selling payment protection insurance.

It is extremely unlikely there will be any start to the sale of the bank back to the private sector until well after the General Election.

RBS has announced a bottom-line loss of £634m for the three months to September. Far from the internal ‘bad bank’ resolution being hailed as a panacea, it is little wonder that shares in RBS have slumped. Even in its darkest hour of 2008, few would have believed that the recovery of what was then the UK’s largest bank would have taken eight years and a massive restructuring and shrinkage of its business. RBS has suffered a major curtailment in much of its global business and activities, not just the unwinding of the vainglorious acquisitions of the Fred Goodwin era but is also shorn of the overseas expansion delivered by his predecessor, Sir George Mathewson.

The protracted period of indecision on whether the bank’s bad loans – much of them incurred in Ireland by Ulster Bank – should have been left with the government or treated as a separate entity, is a nettle that should have been grasped in 2009 rather than allowed to have festered for the length of time it has. Chancellor George Osborne had had to recognise that RBS’ problems – structural and cultural – will take far longer to resolve than the government first anticipated before a share sale can be undertaken.

The traumatic legacy of its near-collapse remains problematic today. This induced a deep reluctance within the bank to lend, in particular to small and medium-sized businesses. A highly critical report by Sir Andrew Large found RBS was performing so erroneously it was not even in a position to meet its own targets. In the meantime, a review by RBS into how it serves its personal customers is scheduled to report next year.

The bank still has a mountainous task ahead under its new chief executive, Ross McEwan. There is much to do to overhaul the bank’s lending practices; by moving away, for instance, from the sales target-driven excesses of the previous era and by making major improvements to its overall service to customers.

RBS will eventually revert to being a domestically focused retail bank, stripped down to those core banking competencies it should never have deserted in the first place. The biggest challenge ahead will be to rebuild customer and investor trust. The bank’s widespread loss of confidence makes that a daunting and difficult task.

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Britain, Economic, Government, Politics, Society

How is it ‘socialism’ to say that market failure beckons on a grand scale?

CONSERVATIVE PARTY ETHOS?

Thatcher’s revolution of the 1980s led to politicians of all persuasions putting their faith in a new economic paradigm – a guarantee of prosperity for the majority, which has lasted decades. Today, however, following the ‘Great Contraction’ of 2008-2009, political parties can no longer offer that guarantee with the same level of confidence. Whilst economic growth in Britain has returned following three years of stagnation it is forecast that real wages will not increase until 2015 and will not return to their pre-crash levels until 2023. A fractious and defective energy market, in which just six companies control 98 per cent of supply, has left more than 4.5 million in ‘fuel poverty’. Extortionate rents within the inner cities have forced millions to rely on housing benefit. By any measure, this must amount to market failure on a grand scale.

The crisis in living standards is a challenge for all political parties but no more so than for the Conservatives, the natural defenders of capitalism. After Ed Miliband, the Labour leader, pledged to freeze energy prices until 2017 – and to build 200,000 homes a year by 2020 – the Conservative Party had a chance to offer its own solutions. Alas, as we witnessed from the conference in Manchester, it retreated to its comfort zone. Aided by an ever more right-wing press, speaker after speaker derided Mr Miliband as a ‘socialist’ and ‘Marxist’, as if concern at deteriorating wages were comparable to a belief in world revolution.

The Conservative Party conference failed to recognise that when Margaret Thatcher assailed her left-wing opponents in the 1980s, she did so in the confidence that her free-market policies retained popular support. David Cameron does not enjoy that luxury: polls show that some two-thirds of voters support a 50p top rate of income tax, a mansion tax, stronger workers’ rights, a living wage that is more consummate with actual day living, and the renationalisation of the railways and the privatised utilities. If Mr Miliband is a socialist, so must the public be if these polls are anything to go by.

George Osborne rebuked the Labour leader for suggesting that ‘the cost of living was somehow detached from the performance of the economy’. But this was a remark that betrayed Mr Osborne’s failure to appreciate that the crisis is not merely cyclical (a problem most certainly exasperated through his austerity programme), but structural. It was in 2003, way before the crash, that wages for 11 million earners started to stagnate.

Other than a pledge to freeze fuel duty until 2015, what else did the Tories have to say on the question of living standards? The most important announcements were the earlier than intended introduction of the Help to Buy scheme and Mr Osborne’s commitment to achieve a Budget Surplus by the end of the next parliament, both of which risk further depressing incomes. By inflating demand without addressing the fundamental problem of supply, Help to Buy will make housing less affordable, while the Chancellor’s promise of a balanced Budget is likely to be met by imposing even greater cuts to benefits and services for the poorest in our society. Osborne’s ideological fixation with the public finances, particularly in relation to interest payments on the government’s debt, ignores the greater crisis in people’s finances.

On the fringes of the party, though, there was some positive thinking. The Conservative campaign group Renewal, which aims to broaden the party’s appeal among northern, working-class and ethnic minority voters, published a strategy for the building of a million new homes over the course of the next parliament, a significant increase in the minimum wage, a ‘cost of living test’ for all Acts of Parliament, and for action to be taken against ‘rip-off companies’. Yet, there is little sign that the Conservative leadership is prepared to embrace the kind of reformist, centrist agenda that secured the re-election of Angela Merkel in Germany.

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