Tag Archives: Office for Budget Responsibility

Britain, Economic, Finance, Government, Politics, Society

An alternative to the Chancellor’s plan to permanently shrink the state…

 ECONOMIC MANAGEMENT OF THE PUBLIC FINANCES

George Osborne’s plans delivered within his Autumn Statement last week lays bare the neoconservative strategy. Hidden amid the plethora of all the other numbers, the Treasury has announced a further year of austerity spending for 2018/19 – the ninth in a row. This Autumn Statement, however, was different, because it was the first where the Chancellor has called for a permanent, structural shrinking of the state.

Since 2009, the Treasury has sought to return the public finances to roughly where they were before the crash. Now, though, out of political choice, Mr Osborne is proposing that government spending should fall, as a share of national income, to far below its pre-crisis level.

In 2007, public expenditure equated to 40.5 per cent of national income. It increased rapidly to 47 per cent by 2009, mainly due to the economy shrinking, rather than rising spending. Since then, the Treasury has been clawing its way back towards Labour’s level of spending, and in March Mr Osborne’s plan was to reach the pre-crisis benchmark by 2017. Within this year’s Autumn Statement everything has changed – without any announcement, the Chancellor pencilled in a cut of 38 per cent of GDP for 2018.

Historically, when public spending slipped this low it was because the economy was extremely buoyant. In the late 1990s, for instance, Tony Blair’s government were caught off guard, with inherited Conservative spending plans and a booming economy. This time is different; despite a recovery that is helping to move the country out of recession the economic projections are far from impressive, and the strain of shrinking the state is to be borne solely by spending restraint.

Examining the detail will reveal that, in 2016 and 2017, the plan is ‘more of the same’ – total real spending is to fall at a similar pace to that from 2011 to 2015. Then, on top of seven years of cuts, spending in 2018 is to be frozen, even though economic growth is predicted to be 2.7 per cent.

If implemented, there is only one conclusion that may be drawn – the end of public services as we know them. By 2018 spending on services would be almost 20 per cent lower, and that’s on a comparison with today. And if the government remains adamant in protecting areas like the NHS, international development and schools, other government departments would face cuts of up to 40 per cent. In reality, this will mean many services spending less than half what they did a decade previously. The only option in limiting this damage would be more severe cuts to welfare. It is difficult not seeing pensioner benefits, which form the bulk of welfare spending, not being affected in some shape or form.

A shrinking state. Graphical variations between the Autumn Statement, the March Budget and proposals put forward by the Fabian Society post-2015.

A shrinking state. Graphical variations between the Autumn Statement, the March Budget and proposals put forward by the Fabian Society post-2015.

The Treasury plan is wilfully counterproductive in terms of the government’s proposals for public investment. Following the Autumn Statement, the Office for Budget Responsibility (OBR) revised down its expectations for business investment as a driver of recovery, but this suggests by implication that public investment is needed more than ever. Yet, for two years after the election it is to be flat in real terms. This can only amount to a further decline (as a share of GDP), and will become a further restraint on growth.

In October, the Fabian Society Commission proposed another way with its Future Spending Choices. It argued for a significant boost to public investment and for overall spending to rise after 2015 by one per cent a year for two years. This, the Commission says, would take spending as a share of national income to the pre-crash benchmark of around 41 per cent of GDP. After that, expenditure should return to trend and match annual rises in GDP.

The Fabian Society’s proposed spending path is compatible with sustainable public finances but diverges hugely from the government’s spending plans. By 2018, there would be almost £40bn more to spend, enough to turn the Chancellor’s massive cuts to public services into a freeze. This still assumes tough spending decisions to be made, but public service meltdown could be avoided. Mr Osborne’s plans should thus not be interpreted as inevitable or even necessary.

Labour should take the opportunity in delivering post-2015 plans. They should define an alternative, so that the Conservatives do not set the terms of the fiscal debate as the general election draws near.

George Osborne’s ideological cuts are just one route to sound public finances, but many others are also available. Many will say that we do not need to deliberately shrink the size of the state to such levels that the government now seeks. Overshooting pre-crisis spending should not be the objective of any future Labour government.

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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, European Union, Financial Markets, Government, Society, United States

What the banking crash five years ago has taught us…

BANKING FIVE YEARS ON

THE last five years have been the most nerve jangling and traumatic in the modern history of the British economy and for the City of London.

It is only now, on the 5th anniversary of the collapse of the 158-year-old investment firm Lehman Brothers – and after intensive ministrations from the Bank of England – that the UK economy has started to splutter back to life.

However, the banking sector, which should be a bedrock of the economy, remains vulnerable and susceptible to external shocks, and to scandals of its own making.

The Central Bank administered strong economic measures, namely in the form of a staggering £375 billion of extra cash into the UK financial system.

It has held the official bank rate at a historic low level of 0.5 per cent for more than four years and it is currently heavily subsidising the cost of buying homes as well as supporting smaller enterprises through its Funding for Lending scheme.

Finally, it appears to be working, and forecasters are quickly revising their predictions upwards as every part of the economy – from the dominant services sector, to manufacturing and construction – has begun to take off.

In the Chancellor’s March Budget, the independent Office for Budget Responsibility (OBR) predicted that gross domestic product would expand by a miserly 0.6 per cent this year.

The Paris-based OECD has doubled its forecast to 1.8 per cent and some City forecasters say the economy is expanding by as much as 3 per cent.

House prices are moving up firmly in many areas and not just in overcrowded and overcooked London and the South-East.

The jobless rate is currently 7.7 per cent and falling more rapidly than many critics could have imagined.

But it would be wrong to get carried away. UK output is still 2.8 per cent below where it was before calamity struck in 2008. In contrast, the German economy has expanded by 2 per cent and the United States by 5 per cent.

Despite the new born optimism of many British forecasters, it is safe to say that the whole edifice of the UK upturn is built on worryingly fragile foundations.

No doubt, the most important lesson of the terrifying events five years ago is how important a functioning banking system is to the creation of wealth.

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ACCORDING to the former Chancellor, Alistair Darling, Britain was ‘on the brink of what could have been a complete and utter calamity’.

Cash machines at the Royal Bank of Scotland and Lloyds Banking Group came within two hours of running dry. The economy’s restoration to full health cannot possibly happen until these two banking High Street giants have been restored to the private sector.

Yet, half-a-decade on from the near collapse of these two banks, the struggle over how to re-privatise them is nowhere near being resolved.

Consider RBS. Stephen Hester, the man brought in on a salary of £1.2 million by Gordon Brown to turn the bank around, resigned after a fractious relationship with Chancellor George Osborne. At the behest of the Parliamentary Commission on Banking, merchant bankers NM Rothschild is investigating how to split off RBS’s flawed investment-banking arm from the retail operation that serves the public and small firms.

Until it reports, the important job of extending credit to new and growing businesses has been put on hold and the process of returning the Government’s 80 per cent in the bank to the public has been suspended.

Lloyds, though, does look in far better shape. Under an EU ruling, it has separated out 632 High Street branches and relaunched them under the revised TSB banner.

But its return has been less than smooth.

In the aftermath of the financial crash, the bank emerged as one of the biggest providers of Payment Protection Insurance (PPI) policies in which customers were mis-sold expensive insurance schemes to cover debt repayments. It was required to spend £4.3 billion in compensation, part of an industry wide bill of some £14 billion.

PPI is just one of the egregious scandals to emerge since the financial crisis. In June of 2012 Barclays Bank agreed to pay a fine of £290 million for rigging the LIBOR interest rate that helps to set the cost of corporate loans, mortgages and other commercial transactions.

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BRITAIN’S highest paid banker, Bob Diamond – who earned more than £100 million in his years at Barclays – was forced to resign.

Even the most respected and safest names in British banking have found themselves in the dock.

The mighty HSBC admitted it had been involved in money laundering activities for Mexican drug cartels and Middle East terror groups.

London-based Standard Chartered was forced to own up to billions of pounds of sanctions-busting transactions with Iran.

And to top it all, the world’s largest and most blue-blooded bank of all, JP Morgan lost $6 billion in 2012 at its London branch after engaging in high risk trading in credit default swaps.

There are now signs, at least, that regulators in the U.S. and Britain have forced a clean-up of our banking system by imposing heavy fines and penalties and by forcing the errant institutions to accumulate fresh capital.

But looming over the City is the spectre of the eurozone, which is caught in a ‘doom loop’ – a self-perpetuating cycle that relentlessly racks up both national debts and those of banks.

The recovery, then, at best is being built on the most fragile of foundations.

Even if our banks manage to overcome the already formidable problems, the medicine itself already used poses its own future dangers in the shape of surging inflation and higher interest rates that could eventually be as frightening as the events of five years ago.

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