Sunday, 30 November 2008

Labour falls back in polls

The latest Ipsos MORI poll reported in The Observer today shows that Labour has fallen back by five points to 32 per cent since mid-November. The Conservatives and Liberal Democrats have gone up by three percentage points to 43 and 15 per cent respectively.

However, a higher proportion of the public trusts the Prime Minister and the Chancellor in the current crisis than trusts David Cameron and George Osborne (46 per cent to 33 per cent). On the issue of which team would be the best to run the country after the next election they are level pegging at 39 per cent.

On careful analysis the Darling package is flawed in a number of respects and is hardly likely to provide much of a stimulus to the economy despite its cost. Equally, the Conservatives have been relatively flat footed in the crisis, particularly in terms of spelling out an effective constructive alternative.

For the first time this year, the PSA Awards were televised (albeit at an obscure time on the BBC Parliament Channel) and the Parliamentarian of the Year award justifiably went to Vince Cable. Dr Cable, who is an economist by origin (but one with extensive business experience), is listened to with respect in the Commons on economics and financial issues because he has been proved right so often.

It was therefore quite alarming to hear him predict that the effects of the present systemic banking crisis may be felt for many years to come. I do not doubt that he is right. Rather one engaging in a blame game, what is really needed is to plot a credible forward course.

Wednesday, 26 November 2008

The sting is in the tail

To understand the pre-budget statement you really need to read it in full which I have not had the time to do that. However, a few stings in the tail are emerging, leaving aside the discarded proposal to increase VAT to 18.5 per cent after the 'tax holiday'. Anyone who has worked on government files in the National Archives knows that proposals are often discarded at the last minute, although Dave Cameron is using it to push his recycled 'Labour's tax bombshell' theme which always invites the question 'well what would you do?'

National Insurance is a form of income tax by another name (the marginal 40 per cent rate is already effectively 41 per cent) and is to go up again. Moreover, tinkering with tax allowances means that owes earning over £100,000 are set to pay a lot more tax in the future.

Even more significant, the tax threshhold for the 40 per cent rate will not be raised setting 'fiscal drag' in motion as inflation returns and clawing more taxpayers into that band, including many public sector workers such as teachers and police personnel. They will take a hit from another direction because, after many years of perhaps over rapid growth, the public sector will receive relatively little extra money in real terms. Indeed, given the demands of an ageing population, in some respects it could lead to cuts in services.

Alastair Darling has not been quite as transparent as he would like to claim. And when the full implications sink in the euphoria about 'soaking the rich' in the Labour Party may dissipate.

There is a real incentive question here. If highly skilled and qualified people think they are being over taxed and also receiving deteriorating public services, there are plenty of other places they can go - although it seems that they may be beaten to it as far as Australia is concerned as many citizens return home.

Tuesday, 25 November 2008

Island politics

There's something odd about politics on islands. Note this gaffe from Guernsey:

Meanwhile, it's all kicking off on the once tranquil island of Sark with phrases like 'feudal Talabinist' flying around:

Sunday, 23 November 2008

The end of new Labour

The widely leaked proposal to create a new tax band of 45 per cent for those earning over £150,000 a year - but not until after the next election - marks the end of new Labour. Once one has such a band, why not then make it 50 per cent for those earning over £100,000 a year?

There are probably no more than 400,000 people earning over £150k a year and one might generate £1.2bn which sounds a lot but is not compared to public expenditure totals. This is symbolic politics, but symbolism is very important in politics.

Of course, it does give something of an answer to the Conservative 'how would you fund it?' question. It also puts the Conservatives on the spot because if they say they wouldn't go ahead it creates a divide on fairness, albeit a somewhat artificial one, between them and Labour.

The reason for getting rid of high tax rates was in terms of the disincentive effects compared with the lack of revenue generated. Of course, what is often overlooked is that the 40 per cent marginal rate starts at a relatively low level in Britain compared with other countries. Someone like a deputy head teacher finds themselves in the higher tax bracket.

Timely, temporary and targeted

This was Gordon Brown's rhetoric tonight on tomorrow's 'pre-budget' report, although in practice it is more like an actual budget than the usual dress rehearsal. It appears that a central plank is to be a 2.5 per cent cut in VAT which could last for fifteen months. Whether that will be enough to boost the economy remains to be seen.

The retail economy is actually not doing that badly, although some retailers find the official figures misleading. One of the paradoxes of the present situation is that the real problem in the UK, as the IMF recently pointed out, is personal indebtedness. But given the importance of household consumption in driving the economy, shoppers have to be encouraged to splurge some more.

The IMF, business organisations and the majority of analysts agree that a substantial fiscal stimulus of more than 1 per cent of GDP is essential. Somewhat cheekily, Samuel Brittan suggested in the Financial Times on Friday that the Government could print more money without risking a monetary driven inflation.

I am afraid that Dave Cameron and George Osborne are out on a bit of a limb. Of course, I understand why they are upset. It's like someone else ordering a slap up dinner of the sort the Bullingdon Club might have enjoyed and then presenting you with the bill eighteen months later.

Taxes will have to be raised and public expenditure cut. The risk is that this would not be a temporary phenomenon, but could go on for some time, acting as a drag on the economy. But the greater risk is not doing enough now. This is a very deep crisis, as the problems faced by Citibank show.

The consequences can be seen in the normally 'cool' country of Iceland where police had to use pepper spray and batons to disperse an angry mob trying to invade a police station. Angry Icelanders want their prime minister and central bank governor to resign and for an election to be called. But how many of them were complaining when their country was floating upwards on a great iceberg of debt?

As always, I would recommend the Institute of Fiscal Studies for informed, authoritative and balanced coverage tomorrow. Visit their special pre-budget page here: IFS

Not beyond our Ken

Ken Clarke is always good value and the long interview with him in The Times is worth a look: Ken

He is studiously loyal to George Osborne, pointing out that it has been 'get George Osborne fortnight', but does not rule out ever being Chancellor again, whilst emphasising that he has many interests outside politics. He could not be accused of a lack of what Dennis Healey calls 'hinterland'.

I have only met Ken once, but I must say that I find him very likeable and he is a considerable asset for the Conservatives as he always manages to deliver a few blows at Labour, as he does here on the subject of public expenditure, an area where many nonpartisan analysts would say that they have been profligate and sometimes wasteful.

Wednesday, 19 November 2008

Dave and Yvette

First of all let me recommend the latest article by Peter Riddell on developments in economic policy. As always, he talks very good sense: The Economy

Yesterday I had Yvette Cooper on Radio 5 attempting to defend government policy. It was a classic series of examples of politicians not answering the question asked. She repeatedly failed to answer a question about why there should be speculation against sterling rather than any other currency.

She also claimed that the Government was able to pump money into the economy now because it had reduced debt. Well, it all depends on what you mean by debt. Do you count all the projects funded under PFI arrangements which will have to be paid back? Do you count the amounts used to nationalise Northern Rock and Bradford and Bingley as well as to buy shares in various banks? To be fair, it should be possible to recoup most of that money when the recession comes to an end.

Dave Cameron has now said that he will no longer stick to Labour expenditure plans should he gain office. I can understand why he needs a 'not me guv' defence against unpopular tax rises and public expenditure cuts.

What he will not say is where the public expenditure cuts will fall other than on 'central government waste'. Now, of course, there is always some waste in such a big operation as government which is why we have a National Audits Office and a Public Accounts Committee. One could save quite a bit of money by not proceeding with the identity cards project. But that wouldn't be enough.

Equally, Yvette Cooper would not specify what combination of tax increases and public expenditure cuts will occur in the future, as they will have to. It's going to be an interesting pre-budget report.

I think that the Government has to give a major fiscal stimulus to the economy. Already the CBI is talking of 9 per cent or 3 million employed by 2010. If no action was taken, the recession could be much worse than those of the early 1980s or early 1980s. But the Government also has to be honest about how it would rebalance the public finances - and so does Dave.

It also applies to Vince Cable as well, except that he is unlikely to be in government, so he can continue to make admittedly very shrewd attacks on policy from the sidelines.

Sunday, 16 November 2008

Did we learn anything?

The Sunday Times today has a full page feature on 'Our tax manifesto: what Brown could do to help.' Now, admittedly, this was probably put together by the journalist in a very tight time frame.

However, suggestion three is 'bring back mortgage relief'. It took a big struggle to get Mrs Thatcher to reduce what was originally brought in a subsidy to counteract an unpopular tax that used to be applied to property owners (Schedule A as I remember). Labour finally got rid of the relief (Schedule A went after it cost the Conservatives at the Orpington by-election).

It is argued in the piece that it could be limited to first time buyers. In practice, actually ensuring someone was a 'first time buyer' would take a lot of time and effort, involve endless complications and be open to fraud.

The most basic objection is that this involves subsidising an investment that should yield positive returns in the longer run. So those in social housing or in private lets would be transferring some of their taxes to those making house purchases.

From various hints the Government seems to thinking of using the tax credit system and the winter fuel allowance to distribute its fiscal stimulus. But not everyone who is entitled applies for tax credits, while neither measure would reach those who are in work but not well paid and without children.

Far better to increase personal allowances and make an offsetting change in the higher rate threshhold.

Saturday, 15 November 2008

Breaking news

Radio 5 booked me yesterday to talk about the G-20 summit this morning. A 7.05 slot wasn't ideal, as we went to the theatre in London last night to see The Tragedy of Thomas Hobbes (which I would recommend). However, by the time I got in the cab at 6.30 the producer was on the phone: the main story was now George Osborne's 'scorched earth' remarks.

Leaving aside the partisan political rhetoric, what sort of case does Osborne has? There is no doubt that the pound has fallen heavily against the pound and the euro and I would expect it to fall further. I don't know where it will bottom out but hopefully before we have parity with the dollar and the euro. My guess would be $1.20.

Potentially this fall has inflationary implications and would thus constrain the scope for further interest rate cuts. However, it will be some time before there is an inflationary effect and in the meantime there will be scope for selling more British exports. Of course, it's going to cost a lot more to go on holiday abroad and I think that voters are quite sensitive to that.

George Osborne wants monetary policy instruments to do the heavy lifting, but my view is that one needs a two club policy and a fiscal stimulus is important. The key on a global level is further action by China and the United States.

He is also being a bit disingenous when he says that the problem is government debt. Of course, the Government has been guilty of fiscal laxity. However, as the IMF made clear the greater part of the problem in the UK has been personal indebtedness. People in Britain have been living beyond their means - but paradoxically they have to carry on doing so to maintain the economy.

I can see why George Osborne is upset because the Conservatives have beeen handed a poisoned chalice should they come into office. However, he has laid himself open to charges of talking down the currency. Labour has also repeated the 'novice' charge, but this will wear thin if it is overused.

Thursday, 13 November 2008

Dave's tax dilemma

The proposals for the Conservatives on tax in terms of a National Insurance rebate for employers hiring new workers have not gone down too well. On the one hand, employers are pointing out that the resultant fiscal stimulus would be insufficient. On the other hand, economists have been reminding us of the 'dead weight' or 'additionality' problem which always rears its head when any kind of subsidy (which a tax rebate in effect is) is proposed.

This means that you are paying for things that would happen anyway. An employer needs to take on a new worker, but collects £2,500 when s/he passes 'go'.

It now seems likely that Labour will outflank the Conservatives by offering bigger tax cuts. At some point the money will have to be repaid. And what worries the Conservatives is that they may be in government by then.

Tuesday, 11 November 2008

Congestion charge

I got a bus from Euston to Aldwych today (not a straightforward journey by tube given that the Aldwych stub line was closed aeons ago and is now used for film shoots). It took nearly 40 minutes. I should have walked: it was a nice day and it would have been quicker.

I asked my London hosts what had happened to the congestion charge and they said that it had had an impact for about a year. Then people got used to paying it (or found a scam to evade it).

No doubt Ken would blame Bozza. I see that today Ken 'announced a new task force to revive London's flagging economy ... called Progressive London, to offer an alternative to the Boris Johnson regime at City Hall.' And no doubt to help Ken's plans to stage an early return.

Brown bounce cuts Tory lead

The latest Populus poll in The Times shows Labour up 5 points and the Conservatives down 5, which, if it was repeated in a general election, would probably result in the Conservatives being the largest party in the Commons but without an overall majority

Once again it's the economy, stupid. Gordon Brown has a 20 per cent lead over Dave Cameron in terms of being the best prime minister 'to deal with Britain's economy in recession'. However, Cameron has a 7 per cent lead in terms of being able to lead Britain forward after the next election. Peter Riddell develops this theme here:

The Conservatives have been caught a little flat footed by recent economic developments and George Osborne's reputation has taken a bit of a battering. However, it's a difficult wicket for an opposition party. Criticism can be seen as irresponsible carping, while the prime minister is able to appear as decisive and authoritative on the world stage. Much will depend on the credibility of the tax cuts package proposed by the Conservatives.

Sunday, 9 November 2008

Open season on the banks

Attacking the banks is a popular political sport at the moment and Alastair Darling and his aides piled in on Friday, showing those who attended the meeting with the banks at No.11 Downing Street an unfavourable headline in one of the day's papers. At least those attending got bacon rolls rather than miniscule sandwiches and 'soldiers' of marmalade supplied by caterers who must also have the contract for Back House. (But quite possibly that is the C list menu).

My local MP has also jumped on the bandgwagon, proclaiming in his circular letter that 'This help has strings attached. Banks must mend their ways and stop paying huge bonuses.' I would rather say that they should stop paying bonuses that are unjustified by performance.

In practice the banks have some scope to make cuts in mortgage interest rates as the gap between the key inter-bank lending rate, the three-month Libor, and base rate has narrowed. It fell by about 1 per cent at the end of last week to just under 4.5 per cent, leaving it at 1.5 per cent above base rate.

Another area in which the banks are under pressure is on maintaining overdraft facilities to small businesses and not upping the rates charged. Small businesses do fail with some regularity, in part because they have unrealistic business plans, particularly in relation to cash flow. Admittedly anecdotal evidence from a chamber of commerce network suggests that the two businesses that have failed recently were both regarded as unsound.

Of course, the whole relationship between the banks and the Government is complicated by the fact that it takes three forms: nationalised banks - Northern Rock and Bradford and Bingley; those with substantial government shareholdings; and those that have preferred to look elsewhere for their money, notably Barclays which turned to the Gulf States for recapitalisation. This pleased me as a Barclays customer, but did not please shareholders who felt that their holdings had been diluted by selling a stake at a generous price.

It is worth nothing that Barclays is a bank that has global ambitions and has a business model that does not fit with the UK government as an investor. Royal Bank of Scotland has operations in the US and Asia and a large investment banking division. Its rivals claim that with government as a shareholder it will struggle to attract new investment banking staff or commit to significant investment in operations outside the UK.

It should be noted that the combined Lloyds TSB-HBOS operation (providing it goes ahead) will be largely focused on the UK market and in particular retail customers and SMEs. It is thus well placed to respond to government exhortations to maintain lending to house buyers and small businesses.

Lord Mandelson has made it clear that the bank shareholdings would be managed at arms length from government. This has led to a revival of the idea of the state holding company which in the 1970s was championed by socialists as a mechanism for bringing about creeping nationalisation of the economy. It saw fruition in the National Enterprise Board which was really a mechanism for bailing out lame ducks rather than establishing a vast state commercial empire on then then vaunted Italian model.

The new holding company is to be headed by the chairman of J Sainsbury, Sir Philip Hampton, who has a public service record and John Kingman, a senior Treasury manadrin. The overall aim of UK Financial Investments Limited is to 'protect and create value for the taxpayer as a shareholder.' In other words, there will be no return to old style nationalisation, but some discreet influence will be exerted on the banks, recalling the old days of 'lunch table directives'.

How bad is the recession - and what can be done?

According to the IMF the UK is going to have the worst projected recession in the rich world with the economy contracting by 1.3 per cent in 2009. What marks out the UK is the high level of indebtedness, particularly among households.

The IMF is encouraging countries to give a stimulus to their economies and the UK has been using both fiscal and monetary instruments. The one-and-a-half percentage points cut in interest rates was a bold move by the normally cautious Monetary Policy Committee, but just how quickly it filters through to the economy remains to be seen.

There are also some downsides. Just how far can the rate be cut? Well, notionally to zero, but the consensus figure is 2.5 per cent, although some commentators are holding out for 1 per cent. That means negative real interest rates, bad news for savers, but also potentially inflationary. If sterling falls, that could also be inflationary. But the Bank is caught between a rock and a hard place.

There is also going to be a fiscal stimulus. Robert Chote of the Institute of Fiscal Studies has suggested that in the pre-Budget report due later this month the Chancellor would have to announce lower taxes or higher public spending close to 1 per cent of national income or £15bn.

There is quite a lobby gathering for a cut in VAT from 17.5 per cent to 12.5 per cent, but that would have a big effect in revenues. It might, however, be possible to tweak both VAT and corporation tax payments to help company cash flows. One could also, in effect, give profitable firms encountering losses a tax rebate by allowing them to 'carry back' losses for three years rather than one as has been the case since 1997.

But at some point the bills are going to come in. As well as stimulating the economy, the Chancellor has to demonstrate that he has a medium-term plan for re-establishing fiscal prudence, once New Labour's watchword. The temptation will be to offer jam today and leave the bill to be sorted out after the next election, most likely by George Osborne (who has already stated that taxes might have to be increased).

A forecast from the European Commission implies £90bn of public borrowing next year compared with the Treasury's budget forecast of £38m. Paying that back implies some pain.

A breezy circular letter from my local (Labour) MP first of all blames the problem on the Americans, overlooking indebtedness in the UK. He then goes on to assert that the Government can afford to borrow more money in the short term 'because we repaid a lot of debt when our economy was growing strongly.' In fact, most independent experts agree that there was fiscal profligacy after the Government's first term in office.

If one was going to be generous, one could say this was Panglossian. I think that he really belives what he is saying, but that is what worries me.

Political cartoon archive online

The University of Kent has put its extensive archive of political cartoons on line:

I used the search function to find cartoons about the post-war prime minister, Clement Attlee, generally regarded as one of the outstanding prime ministers of the 20th century. The first cartoon I came up with was one about the Irish sweepstake which just shows that you need to know some obscure history to put this in context.

This was really a form of offshore gambling. When he was a young man (in the inter-war period), my father used to travel over to Ireland at the weekend to buy pre-ordered tickets in the Irish hospital sweepstake. As a railway worker, he could make these journeys more cheaply than anyone else could, but it must have involved some rough crossings on the Irish Sea now and then. But probably he had the same genetic make up as me, as I have never been sea sick, even in some very rough seas.

Saturday, 8 November 2008

Thinking the unthinkable

The conventional wisdom is that the House of Lords must be replaced by a wholly or largely elected second chamber, although actually bringing about reform has proved difficult. It was therefore interesting to hear a talk yesterday by Professor the Lord Norton of Louth who put the case for the status quo, albeit with some reform to existing arrangements. More can be found here: Campaign for an Effective Second Chamber

The core case of the 'if it ain't broke don't fix it' brigade is that the Lords is essentially a revising chamber, one of legislative scrutiny, a task in which the expertise possessed by its members plays a key role. The argument against the Lords in its present form is that it lacks the legitimacy provided by election. But if the upper house was elected, it would be in a stronger position to challenge the Commons and legislative gridlock could result.

One of the anomalies in the present situation is the continued existence of 92 hereditary peers who are selected by election on the basis of their contribution to the House. This was a compromise in which my former colleague, Professor Lord Skidelsky of Tilton, played a part. I remember him asking what the arrangements had been under the old system of electing Scottish 'representative' peers which was abandoned many decades ago.

Professor Lord Norton and his colleagues would argue that the herditaries should be allowed to 'die out' by not replacing them through by-elections when one of them dies. However, this is likely to be a long process and it might be better to create life peerages for those who are really effective.

What I do know is that I often turn to Lords committee reports rather than those from the Commons because they are more authoritative and less influenced by partisan debates. The Lords also undertakes the scrutiny of European legislation much more effectively than the Commons.

Thursday, 6 November 2008


The substantial Labour victory at Glenrothes is a major shot in the arm for Labour, particularly given the personal involvement of Gordon and Sarah Brown. Even yesterday, Labour was saying that while it had narrowed the gap, expecting the SNP to win. In fact the swing to the SNP was only five per cent giving Labour a comfortable majority of over 6,000.

The SNP case has been looking more than a little weakened since the collapse of the 'arc of prosperity' and the two leading Scottish banks having to be bailed out by Britain. The local SNP council was also none too popular, particularly over care charges, and the council leader was their candidate.

Labour had a popular local candidate, but it would seem that the economic crisis helped Labour. One voter remarked in a vox pop that Gordon Brown was needed to get the country out of the mess.

It's the economy, stupid?

This is not an American politics blog, but it is interesting to compare the predictions made at the forecasting panel held at this year's American Political Science Association conference in Boston Ma. in August with the outcome.

All but one of the panelists (allegedly a Republican) forecast a victory for Obama, although three of them with substantially larger shares of the popular vote. With some votes apparently still to be tallied, Obama's share is currently running at 52.4 per cent. The nearest forecast was the economic indicators model at 52.2 per cent.

Perhaps it was a case of 'the economy, stupid?'

Tuesday, 4 November 2008

Scottish identity

Further to my piece on Glenrothes yesterday, a Scottish friend writes:
'I find the identity question perplexing. In my lifetime Scotland in some senses has become much less distinct - disappearance of Sunday observance and the erosion of influence of Church of Scotland. People follow the English Premiership as they do everywhere else. The Scottish editions of London newspapers grow all the time. Now the banks are eroding and yet just at the point that everyday life is becoming less Scottish many feel more Scottish.'

Of course, it is just when an identity is threatened that people cling to it more strongly and try to re-define and reinforce it. In an era of greater global interdependence, more specific identities can provide something of a security blanket.

Monday, 3 November 2008

Glenrothes too close to call

The general consensus of the UK, Scottish and local media (aka the Glenrothes Gazette) appears to be that this week's by-election in Glenrothes is too close to call. Breaking the convention that prime ministers do not campaign in such elections, Gordon Brown has been there twice, while the new secret weapon, Sarah Brown, has been there virtually daily and appears to have gone down well.

One of the earlier versions of the seat was for fifteen years one of the few seats in the House of Commons ever to be held by a Communist, reflecting its mining roots. The local SNP council is none too popular and Alex Salmond's arc of prosperity is looking a bit sick, but Labour supporters may well not bother to vote.
Labour has admitted that it was 3,000 or 4,000 votes behind the Nationalists a month ago and the gap might be too big to close. Paradoxically, Labour can campaign against the incumbent administration in Edinburgh.

If the SNP do win, it will be a big boost for Alex Salmond and a blow for Gordon Brown. But the real winner will be Dave Cameron, even though the Conservatives are not expected to do well. Labour's recovery will have derailed. Successfully defending a 10,664 majority would hardly be a great feat, but it would be an improvement on the nadir of Glasgow East.