Tories want to cut child benefit, cut salaries, cut unemployment benefit, cut health spending, cut investment
I have a post on Left Foot Forward with details.
The PBR in One Picture
As I type Osborne is ranting again about ‘markets losing confidence’. He is totally and utterly wrong.
The chart below shows the yield on ten year government bonds. If the markets are worried they demand a higher interest rate and the yield goes up. If the yield falls it shows confidence.
Here’s what happened as Darling spoke.
Looks like a credible deficit reduction plan to me.
Some Links & More on Ireland
Hopi Sen has a wonderful post on ‘class war’.
James Purnell & Graeme Cooke’s FT Article is worth a read. Anyone especially interested in the Government Jobs Guarantee idea should probably also read this 1997 paper from L. Randall Wray.
Freethinking Economist has an interesting post on credit ratings agencies.
Finally, I liked this Bloomberg Story.
I’ve been arguing for a while that if one wants to see Tory economic policy in action one only needs to look at Ireland. As Osborne continues to demand immediate spending cuts, he should consider:
Dec. 8 (Bloomberg) — Irish government spending cuts aimed at reducing the budget deficit may end up sacrificing long-term economic growth, according to Michael O’Sullivan, head of asset allocation at Credit Suisse Private Banking.
“Arguably the Irish bond market is being saved at the expense of Irish society,” O’Sullivan, 38, author of a 2006 book on Ireland’s economy, said in an interview at Bloomberg’s London bureau. “By cutting spending you lower the trend line of growth and store up bigger fiscal problems down the line.”
(My emphasis)
Dividing Lines & Economic Policy
The newspapers this morning have put me in a very good mood. The front page of the FT leads with two stories. First we have ‘RBS sound retreat of big bonuses’.
Royal Bank of Scotland has signalled that it will succumb to pressure to pay its high-flying investment bankers substantially less than rival institutions amid an escalating row with the government.
The bank, which is 70 per cent owned by taxpayers, is hoping to avoid a high-stakes showdown after it was forced to give the Treasury the final say over the total size of its bonus pool as a condition of signing up to a scheme that will insure £240bn in toxic assets.
RBS insiders insisted on Thursday that pay-outs in its investment banking division would be “at the low, low end of the scale”, even if that meant losing experienced staff to competitors.
The most interesting story though is ‘Darling to defer moves to cut deficit’:
Alistair Darling will next week set out a pre-Budget report that will increase taxes on the wealthy and funnel scarce resources into boosting the economy, while deferring tough new measures to cut Britain’s £175bn deficit.
…
Mr Darling will argue that a further squeeze on spending now would choke the recovery, contrasting with the Tories who have promised to move more quickly to control borrowing.
A fiscal responsibility bill will be published setting out detailed provisions to cut the deficit to 5.5 per cent by 2014, and giving details of how the chancellor arrives at his forecasts, to boost their credibility in the markets.
Darling is completely correct as this blog as argued for months. The dividing lines are becoming clear. Martin Wolf’s excellent column on the UK economy today offers support:
The path of least resistance on growth would be the desperate hope that a wave of loose monetary policies across the globe would allow a resurgent, but largely unreformed, financial sector to refloat the UK economy. That would be dangerous, economically (because unstable) and fiscally (because potentially costly). The UK can barely afford to insure its current financial sector, let alone one even bigger.
This is basically the Tory position, as advocated by Osborne – a reliance on loose monetary policy:
What we call for is a credible plan to eliminate the deficit that commands international and domestic confidence, and that moves more quickly and decisively than the government to deal with the deficit.
For tightening fiscal policy as the recovery gathers pace will help prolong the low interest rates that are doing so much to cushion the impact of the recession and bring about a recovery
Wolf, having condemned Tory plans, continues, with his ideal solution:
The solution must be found elsewhere: in a growth-oriented policy that encourages emergence of a more diversified economy. This should be done not by suppressing markets, but by supporting and guiding them. Fiscal cutbacks must not fall on activities likely to support growth – infrastructure and research and development. Both savings and investment will need to rise. Immigration policy should seek those most able to contribute. In view of the household indebtedness, attention should go to activities that serve world markets.
Which is the policy that Darling is adopting – a growth-oriented policy of support for the economy. Mandelson’s interview in today’s Guardian only reinforces this:
He wants the government to do more to support hi-tech industries such as biosciences, digital and low carbon manufacturers (which include everyone from reactor suppliers to builders of wind farms).
“I’m unashamedly talking about the reindustrialisation of the British economy, but not by going back to the old smokestack manufacturing past – we know we can’t turn the clock back,” he says. If successful, he hopes the transformation will also spread the wealth more evenly around the UK.
So there we have it, a Labour Government which intends to use fiscal policy to support the recovery and industrial activism to help rebalance the economy versus a Tory Party committed to slashing public spending and hoping that loose monetary policy alone will be enough. Robust recovery & rebalancing versus a possible double-dip recession and dependence on the financial sector. Next week’s PBR will be interesting.
Osborne: Hitting Low Earners
It appears that George Osborne has messed up again.
Yet another of his ‘brave and bold’ pledges to reduce the budget deficit seems to be unravelling (‘brave and bold’ pledges that amount to a grand total of £7bn a year in the context of a £175bn deficit). Much like his claims on the savings from pension reform – which turned out to be £3bn wide of the mark.
As the FT Westminster blog reported at the time of his conference speech, Osborne claimed he could save £400mn a year by cutting tax credits to ‘high earners’:
Withdraw tax credits from “high earners”: If Osborne reaches No 11, any household earning more than £50,000 should no longer expect the family element of the child tax credit. This is done by reducing the threshold for means testing to £40,000 — so families with incomes of 40-50K will also receive less. This saves around £400m a year. This is a brazen raid on a middle class perk: a household with two teachers would be affected. But the Tories say the maximum loss will be around £10 a week.
It was obvious then that not all of these ‘high earners’ actually earned that much.
More details have emerged today. This goes well beyond ‘high earners’ and the ‘middle class’:
As Left Foot Forward reports today:
“To reduce total annual Tax Credit expenditure by £400 million, it is estimated that the second income threshold would need to be reduced to around £31,000.”
In other words couples earning as little as £16,000 each would lose out.
As Liam Byrne says:
For the Tories to recoup £400 million from tax credits as they’ve pledged, Osborne had claimed he would only remove tax credits from those earning over £50,000. But figures released to Parliament today show that to raise the £400mn Osborne’s credibility depends on, a couple earning as little as £16,000 each would be hit by his tax plans.
These new Treasury figures expose how George Osborne has misled millions of people over the scale of cuts he would make to their tax credits.
Today we learn that he would hit millions of families on low incomes, while still promising to give £200,000 to the richest estates.
Yesterday it was prisons, today it’s tax credits. Every day, another of George Osborne’s unfair policies unravels.
It’s not clear whether it’s down to his bad judgement, his inexperience or something more sinister.
I’ve long accepted that George Osborne’s macro-economic views are nonsensical. It would be nice though if he could at least add up properly.
No wonder the city is losing confidence in him.
RBS, bonuses and some really basic financial analysis
I side with Lord Myners and Alistair Darling in the current dispute between UKFI and RBS over the payment of bonuses.
As the Beeb says:
Last month, Chancellor Alistair Darling announced that the Treasury, as the major shareholder in the bank, would have the “right to consent” to how much RBS pays in bonuses and how they are paid.
RBS is said to want to pay £2bn in bonuses across the group for its performance in 2009, with £1.5bn going to its investment banking division, which is expected to make £6bn in profits this year.
£6bn in profits this year? It sounds like a lot doesn’t it? And surely these hyper-talented bankers need to be paid well, otherwise they might leave and then RBS would be less profitable – damaging the shareholders (i.e. UK taxpayers).
All sounds plausible.
It is also all totally wrong.
Take a lot at RBS’s most recent results. The Global Banking & Markets division (where these super-talented investment bankers reside) reported decent results (page 43 of the pdf document). In the first nine months of the year it generated an operating profit of £5.1bn – so the £6bn figure is certainly attainable. Total income before costs in the first nine months came in at £9.5bn.
But, and this is a big but, that very same division has the following assets (allocated to it by RBS high command) (page 44):
Loans & Advances: £157bn
Reverse Repos: £75.4bn
Securities: £117.6bn
Cash and eligible bills: £63.8bn
Other: £50.8bn
Or total assets of £464.6bn.
That gives a lot of context to the operating profit of £6bn. Indeed it represents a return of only 1.35% on the assets employed! Hardly inspiring.
Being more generous and ignoring the costs, the £9bn income generated is still on a return of 1.94%.
To give context, if instead of being used to fund the ‘Global Banking & Markets’ division that £465bn had was used to buy simple, risk free 10 year UK government bonds (gilts – currently yielding 3.65%) it would generate an income of £17.0bn, or assuming similar costs (and they would probably actually be lower) an annual profit of over £11bn.
I’m sure RBS does indeed employ many very talented people. But let’s not pretend that big bonuses are the only route to profitability.
Is Deutsche Bank trying to tell Osborne Something?
Alphaville is reporting the first few ‘2010 Outlook’ notes coming out of the major investment banks. So far we have Morgan Stanley, Deutsche and Goldman’s. No economic forecast will ever be completely right, but it’s always worth reading these notes to get some idea of where ‘financial’ opionion stands.
Deutsche have four scenarios. The fourth one (emphasis mine) is perhaps most interesting.
- Scenario 1 — This scenario is the most optimistic and is one where the authorities have as good a year as they did in 2009. They likely keep stimulus extremely high in the system without there being any noticeable consequences of their actions (e.g. rates at the short and long-end stay low). Under this scenario we would expect equities to be significantly higher, credit spreads be much tighter but with bond yields only edging slightly higher as the authorities are seen to have firm control of inflation expectations and may even be continuing to buy bonds.
- Scenario 2 – This scenario is the most likely and suggests that we start to see gradual easing off the gas from the authorities but only as it’s proved that there is some momentum in the underlying economy. Under this scenario risk assets have a good year but returns are checked to some degree by rising bond yields and less stimulus being injected into markets. A satisfactory year for risk, especially equities, but a mildly negative one for fixed income. Credit investors will likely have to rely on spreads (and higher beta credit) to get positive total returns.
- Scenario 3 – This is the second most likely scenario overall in 2010 but one that potentially becomes more likely as the year progresses. Here we are likely to see sharply higher bond yields start to disrupt the positive momentum in markets. These higher yields could be either due to Government supply starting to overwhelm demand (especially as the impact of QE, and similar schemes, wane), or because of inflation fears. It seems unlikely that actual inflation will be a concern in 2010 but it’s quite possible for expectations to become unanchored. We would also have to include the potential for a Sovereign crisis somewhere in the Developed world within this scenario. We would note that the higher yields in this scenario are not based on positive growth momentum but by inflation/Sovereign risk. Such a scenario is incorporated in Scenario 2.
- Scenario 4 — This is the nightmare scenario of Deflation or in less extreme terms perhaps a double-dip. Given that much of the world is currently still in negative YoY inflation territory it is difficult to completely rule out even if we do live in a fiat currency system and even if inflation is expected to return to positive territory in early 2010. For deflation to be sustained we would probably need an exogenous event to hamper the authorities ability to continue to successfully fight this credit crisis. Such events could be a fresh banking crisis arising, a political backlash encouraging immediate withdrawal of stimulus, or possibly a Government bond/currency sell-off that forces the authorities to aggressively reign in stimulus for fear of a sovereign crisis. A Sovereign crisis outside the Developed world could also encourage this scenario as there would be a flight to quality into Developed market bond market in spite of the fact that these markets have their own large fiscal issues. Bond yields would eventually rally strongly but risk assets would experience a very poor year. As time progresses this scenario becomes less likely as the system gradually repairs itself and the authorities are allowed more time to inflate the global economy. As we discuss in scenario 3, the more likely risk scenario is inflation, especially as time progresses.
Deutsche think the ‘nightmare scenario’ could be caused by ‘a political backlash encouraging immediate withdrawal of stimulus’. That would be ideologically driven cuts then?
They also provide a very interesting chart which puts to bed the Tory myth of a ‘government debt crisis’. Notice how small government debt actually is…
Economic Roundup
Tony Dolphin has his lastest monthly economic update at Left Foot Forward. Detailed and always worth reading.
Tony notes that:
Households are saving more. The economy is so weak because the private sector is spending less and saving more.
Exactly. And what does Osborne want to do? Raise the savings rate further…
Links for Tuesday
My weekly article over at Labourlist – having a look at the GDP numbers.
Alphaville on 19th Century ‘shadow banking’.
Paul on Frank Field and Economic Policy.
Wolfgang Munchau on Greece.
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