Photo by Alex E. Proimos
And when your fears subside
And shadows still remain
I know that you can love me
When there’s no one left to blame
George Osborne’s Autumn Statement started with a familiar refrain – all our growth problems are due to sovereign debt problems in Europe. If there’s a recession it’s due to the Euro crisis. Never mind that growth’s been flat since this government’s economic policies started to take effect.
Then there was a couple of minutes of blaming the profligacy of the last Labour government – profligacy he of course supported as Shadow Chancellor.
Lead in done, we get to the meat of the matter. OBR projects growth down to 0.7% in 2012, for the whole year, borrowing up. But it’s ok, because our bond yields are low and that means low mortgage rates. Which somewhat ignores the fact there’s very little linkage now between government bond prices and mortgage rates.
There’s an extension of the public sector pay freeze limiting rises to 1% per year for 2 years after the freeze ending which I’m sure is in no way intended to pour oil on the troubled waters of tomorrow’s strikes, ahead of hiding behind John Hutton and blaming the Unions for damaging the economy.
Overseas aid target of 0.7% of GDP has gone from a target to a limit which, given lower GDP, means DFiD will be getting a budget cut. Large parts of the working tax credits program have been frozen, which is effectively a 5% cut, although he did baulk at freezing benefits.
There’s £40bn worth of “credit easing” using money from the largely unused business asset purchase facility at the Bank of England to offer loan guarantees to small businesses – those with turnover of less than £50m, funnelled through existing banks based on how they increase net and gross lending. Depending on the details this could basically be a bung to the banks to take further risks.
The heavily trailed return of right-to-buy is in there, with a 50% discount on prices. While the leaks floated a rule that councils would be able to use the money to build new houses this doesn’t seem to have been mentioned in the speech – whether this is a good thing or a bad thing rather depends on the detail. Might just prop up the inflated housing bubble a bit more though.
The Lib Dems’ £5bn in capital spending has gotten in, with £1bn going on Network Rail, expect them to seize on that as a “coalition benefit” while ignoring the rest of this.
There’s a big £20bn sized lump of pension fund capital being used to build various infrastructure projects and, somewhat bizarrely, a £50/year cut in bills for customers of South West water – aimed at the Lib Dem constituencies round there? That of course isn’t new money, it’s existing investment that’s being used for a more interventionist government policy. Quite an odd thing for a Conservative chancellor to do. There’s also a big increase in capital allowances for the North of England, which is good – and it would be good if Holyrood could do the same.
Bit of chipping away at employment rights, ‘elf and safety – profits, not people, and planning laws – nothing says “Conservative” like ripping down historic buildings.
Corporation tax and income tax for start up investors will be cut, though again no detail. The red book (the detailed document describing what all this actually means) will be very interesting. There’s normally quite a few hidden things in there that alter the headline meaning. Nick Robinson:” From April 2012, anyone investing up to £100,000 in a new start-up business will be eligible for income tax relief of 50%. In 2012, any tax on capital gains invested in such businesses will also be waived.”
OBR predicts unemployment hitting 8.7% next year and by 2015 it’ll only fall to 6.2% which is kind of horrific. There’s going to be a raft of supply side measures to prepare people for jobs that aren’t there, and if they can’t take a job that isn’t there then they’ll be forced into subsidised jobs for companies. Fuel duty’s cut, school investment up.
And, like all the best songs, he closes with a callback to the start – Euro crisis and the mess we inherited. DIMBLEKLAXON.
The big news, of course, is that the UK government won’t eliminate the deficit by 2015. Unsurprising given the damage they’re doing to the economy, a key part of that was always to get GDP up.
And it’s hard to hold a candle
In the cold November rain
#1 by An Duine Gruamach on November 29, 2011 - 3:32 pm
“Periodic crises in the small manufacturing and financial sectors of the economy were also familiar, in Britain at least from 1793. After the Napoleonic Wars the periodic drama of boom and collapse – in 1824-6, in 1836-7, in 1839-42, in 1846-8 – clearly dominated the economic life of a nation at peace. By the 1830s… it was vaguely recognized that they were regular periodic phenomena, at least in trade and finance. However, they were still commonly regarded by businessmen as caused either by particular mistakes – e.g. overspeculation in American stocks – or by outside interference with the smooth operation of the capitalist economy. They were not believed to reflect any fundamental difficulties of the system.” – Eric Hobsbawm, The Age of Revolution: 1789-1848, p. 56.
#2 by Jeff on November 29, 2011 - 3:43 pm
So what you’re saying is basically we should buy some shares? 😉
#3 by Aidan on November 29, 2011 - 4:03 pm
Heh, reading “On History” atm, just finished one lecture where he was talking about Kondratiev Waves.
#4 by Jeff on November 29, 2011 - 3:54 pm
I don’t see there being much wiggle room in what George Osborne can do in the short term, and we can see that in the anaemic growth over the next couple of years (and, as you Aidan, it magically increases for the few years after that, just like it did for Alastair Darling).
Osborne would like to cut a little bit more, Balls and Miliband argue that they would like to see a bit more borrowing to get us over the hump. There’s a good debate in there but we’re talking margins of error of Treasury calculations. Labour committed themselves to bringing down the deficit almost as much as the Tories did and, yes, Cameron could do more to help solve the crisis (a more constructive attitude to Europe in general for a start) but there’s very little specifically that can be done via Osborne’s statement today other than batten down the hatches and help out new start ups and people getting back to work as much as possible (the extra free childcare will be very useful, for example).
I’m probably as guilty as the next person for deciding Osborne’s budget is a bad one before he’s even delivered it but, that said, I think he did what he had to today and while having no options shouldn’t lend itself to attracting too many plaudits, I think he did it well.
#5 by Aidan on November 29, 2011 - 5:08 pm
VAT cut would be a big help, spending money on building houses not roads, the start up tax move is going to end up being a massive loophole with everybody investing £100k and a penny in their friends consulting business merry go round.
Labour committed themselves to reducing the overall deficit by a smaller amount over a longer time scale and, crucially, doing that by supporting growth and keeping the economy going – if there are more people in work then the government pays less out in benefits and gets more in in taxes.
What Osborne is doing is economic vandalism which hurts the poorest most and doesn’t even achieve the limited aims he’s set himself.
The move on childcare is being paid for by cutting existing child care arrangements and is, I think, likely to actually make the situation worse for most people.
This isn’t just shifting deck chairs on the titanic, this is ripping planks out the hull, nailing them to the deck and saying there’s a new diving board just been installed.
#6 by GMcM on November 30, 2011 - 8:09 am
Absolutely spot on Aidan.
#7 by Allan on November 29, 2011 - 8:16 pm
“Then there was a couple of minutes of blaming the profligacy of the last Labour government – profligacy he of course supported as Shadow Chancellor.”
What is becoming more and more wearysome when Govenment ministers trott this line out is that no one asks whether they would have let the banks burn rather than create the defecit – £1.2 trillion to the UK’s failing Financial sector. Not that that last Labour government should escape any blame – as i have said before Brown created the conditions for the crash to happen through the “Light Touch Regulation” policy. A policy which the Tories wanted taken to its logical conclusion.
As for the news about the deficit not being cleared this side of an election, well a primary three school child would have been able to tell polititians that if you take billions of pounds out of the ecconomy, through various cuts and pay freezes, then demand and liquidity will suffer badly.
While I agree with Aidan’s synopsis about Osborne’s deficit reduction plans – the phrase I have been using for Osborne’s plans since… Oooooh April 2010 has been Scorched Earth Policy -there isn’t really an awful lot of a sign of a proper alternative from the two Ed’s. For a start, what Balls could focus on is the poor running of HMRC since the last election – especially in relation to tax evasion. Balls could target Osborne over the “deal” with Switzerland, which has frankly turned the UK into a laughing stock, and lastly Balls could also step up the pressure on Dave Hartnett (the head of HMRC) over his deals with Vodaphone and Goldman Sachs.
There is an alternative to this madness, it’s sadly no longer a surprise that Labour would much rather try to play to middle England than consider those (not that radical) alternatives, or the “Tobin” Tax.
#8 by GMcM on November 30, 2011 - 8:18 am
“A policy which the Tories wanted taken to its logical conclusion.”
Don’t forget the SNP also called for less regulation to make us as competitive as Ireland et al.
What position would we be in if either had their way?
With the mess the Tories have made of the economy since being elected I tend to think it would’ve been far worse than it was/has been.
#9 by Observer on November 29, 2011 - 8:33 pm
I do think Labour had a far better strategy for dealing with the deficit, which was a symptom of economic crisis, not the cause of it. But it was pretty unrealistic to expect people to believe that.
Which is a pity, because I agree with Aidan.
#10 by Craig on November 30, 2011 - 1:40 am
Type your comment here
A financially illiterate post.
There appears to be a misunderstanding about how the bailout worked. The vast majority of the bailout took the form of extending Government gaurantees, which have not been called upon (certainly nowhere near the extent expected in 2008/09). Other parts were loans, which the Treasury expected will be repaid. The third category was extra government borrowing (i.e. not funded by general taxation) to recapitalise RBS and HBOS through share issues. This had a one-off effect on the deficit in 2009 and adds about £5 billion to the overall annual interest bill of £44 billion. However, as of December 2010, the Government had spent £10 billion on this interest while receiving £9.91 billion in fees and interest from the various support schemes – not counting the taxes or bank levy paid by the banks). Eventually the cost of recapitalising the banks (circa £75 billion) will be recovered when the Treasury’s stakes in RBS and HBOS are sold off (not unlikely given the low price they paid in the first place). Essentially the bailout will pay for itself.
The deficit has two main causes: the structural deficit – the deficit that existed before th crisis when the Labour Government were spending more than they received in record tax receipts – this is what both the Coalition and Labour committed to reduce by the end of this Parliament; the other part is the cyclical deficit – the extra borrowing created by the automatic stablisers (lower tax revenue and higher welfare spending), which will be eliminated as the economy recovers in time. The bank bailout places very little role in either bar the recapitalisation of the banks in 2008/09.
UK Uncut likes to bang on about Vodafone. Firstly the case was about a one off tax provision in the region of £2 billion. It certainly wasn’t an annual figure nor £6 billion (Private Eye got it wrong). The case was about whether CFC rules apply within Europe. Cadbury Schweppes at the ECJ ruled that the CFC rules were incompatible with EU law. HMRC pursued the case against Vodafone anyway. But Vodafone won in front of the Special Commissioners and the High Court. HMRC appealed again to the Court of Appeal who gave a more nuanced judgment that more guidance from the ECJ. At this point HMRC realised there was then a very real prospect of losing the case once and for all. They wouldn’t just get nothing from Vodafone but also 100 other British companies that have similar arrangements to Vodafone. Hence before it got to the ECJ they made a settlement with Vodafone that gave them £1.25 billion out of £2 billion due and left the door open to negotiate money out of other companies. If, as UK Uncut seem to want, they had carried on pursuing the case to get the full £2 billion (not £6 or even £8 billion reported) there was a very real chance they would lose far more.
In the case of Goldman Sachs – it appears to be civil servant incompetence by not involving their lawyers (who would have pointed out that a) there was no impediment and b) HMRC couldn’t settle at that stage under its own governance regulations).
#11 by Allan on November 30, 2011 - 9:58 pm
Two things. Firstly according to the Eye and the Tax Research UK blog, HMRC were winning their case against Vodaphone. Yes the Vodaphone bill relates to the one off tax liability (from the purchase of German mobile phone operator Manesmann by… er… Vodaphone’s Liechtenstein “arm”) of £6 Billion. Funnily enough that was before Osborne took over the Treasury. Yes UK Uncut like to bang on about Vodaphone. However if I were them, i’d turn my fire on the £30million (HMRC estimate) to £75 million (the estimate of UK Tax Research) tax which is not collected/not paid/evaded. This figure has been growing for several years, and certainly would have contributed to the pre-crash defecit.
(http://www.taxresearch.org.uk/Blog/2011/03/18/worstall-misses-the-point-time-and-again-on-uk-uncut/)
Secondly, your narative about the make up of the banking bale out ignores one salient point. If the Government expect this money to be made up once the stakes in Lloyds, Halifax, Bank of Scotland, Natwest and RBS are sold off, why are they not content to service this debt untill this happen? Prehaps because they think the best bet would be to sell them off at knock down price – like what happened with Northern Rock Asset Management.
My post might well be financialy illiterate, but the part about George’s focus on the Scorched Earth policy – to the detriment of growth – is true.
#12 by Craig on December 1, 2011 - 10:55 am
Type your comment here
I wouldn’t pay much heed to Richard Murphy. Not least because on May 19, the European Commission stated that the UK CFC regime was still incompatible with EU law.
As for the tax gap – almost half the HMRC estimate is the result of unpaid VAT (all those people paying builders in cash). Although frankly HMRC come dangerously close to overstepping the mark. They measure the gap according to both the letter of the law and what they think Parliament intended – Courts have repeatedly told HMRC they do not have the authority to do that. Of course, like any other crime it is also very difficult to eradicate completely – so suggesting that we would magically get all this money is unrealistic.
As for the banks. Well, firstly they haven’t sold off Northern Rock Asset Management – that’s the “bad bank” (although it will actually return quite a decent profit as defaults have been lower than expected) they kept. It’s the “good bank” Northern Rock plc that they’re selling to Virgin Bank. It has hardly been sold at a loss either. As part of restructuring NR into parts in Janaury 2010, the Government injected £1.4 billion of equity. However, that equity has been eaten into by losses of £211 million last year (reducing the book value to £1.182 billion), a smaller loss this year and they expect to make a loss in the first half of 2012 – all in all reducing the value of the business down to about £1 billion. The loss of £400 million is the risk you take in investing in a business in distress. Meanwhile Virgin Bank will likely pay in the region of £1 billion – £747 million in cash now, £50 million within 6 months, £80 million if floated within 5 years and still retain £150 million of Tier 1 capital notes (which would be very attractive for Virgin to buy out quick). Compared to the current value of RBS and Lloyds (which are trading at heavy discounts to their book values), Virgin paid a relatively high price.
Of course, getting our money back isn’t the only issue. We also need to increase competition in the retail banking sector – particularly due to the concentrated power of Lloyds-HBOS, which was only allowed by bypassing competition law. But the restructuring did require EU State Aid approval. One of the conditions the EU placed on Northern Rock was that it must be sold off by 2013 (redacted out of public copy of letter sent to David Miliband). RBS and LBG need to each sell off a package of couple of businesses and branches in same time frame. Now given that Northern Rock was going to carry on making a loss until the first half of 2012 and any profit in 2013 will be small compared to the losses sustained since 2010, there is little prospect of Northern Rock recovering it’s £1.4 billion book value before the deadline. What’s more the closer we got to the deadline, the more powerful position any buyer would be in and the greater the risk that they would find out about the deadline. A later competition also leaves little room for a failed sale (not unlikely in these circumstances).
But I guess that doesn’t suit the non-financial media who would rather pull fantastical figures out of their ass for the supposed loss to taxpayers.
#13 by Angus McLellan on December 1, 2011 - 5:41 pm
Thanks for that Chris, interesting stuff. The point about competition – or the lack of it – in high street retail banking is a good one. A one time hit of less than £10 a head doesn’t seem much to pay for the extra choice.
#14 by Allan on December 1, 2011 - 9:01 pm
“Northern Rock Asset Management – that’s the “bad bank— – my mistake, sorry.
Regards the purchase by Virgin of Northern Rock plc, it was stated as £747 million plus a possible £280 million – not sure of the breakdowns but what you say sounds correct.
Lastly – “I wouldn’t pay much heed to Richard Murphy. Not least because on May 19, the European Commission stated that the UK CFC regime was still incompatible with EU law.” – compared to some of the issues that flares up anti EU feelings, where’s even a modicum of indignation about the EU here?