Sunday, 27 January 2008

Northern Risk

The joke is that Northern Rock is now known as Northern Risk or Northern Wreck. But the Government's plan to see the Bank of England's £28bn loan to Northern Rock replaced by bonds backed by Rock assets and guaranteed by the government is no laughing matter. Gordon Brown insists that the taxpayer will be quids in, but it could be Richard Branson or some other private sector bidder that is laughing all the way to the back.

Vince Cable launched into the Goverment's plan with forensic skill, claiming that the prime minister had decided that the losses of Northern Rock should be nationalised, but the profits should be privatised. In his view it's nationalisation without the potential benefits.

So why is the Government breaking its own sustainable investment rule and pushing debt above the 40 per cent of national income rule? It seems very scared of the N-word. Philip Stephens suggests in the Financial Times that Teflon Tony could have got away with it, but Mr Brown still carries Old Labour's political baggage.

Since the bonds will have at least a three year life and possibly five, if there is a mess to clear up it could be the responsibility of Mr Cameron and Mr Osborne. In the short term, however, it hands them another stick with which they can beat the Government.

Although the Commons committee report has placed quite a lot of the blame for last autumn's mess on the Financial Services Authority, it was the Government that created the tripartite structure that led to many of the problems in stopping what was reckless behaviour by the bank turning into a more general crisis.

Tuesday, 22 January 2008

How much regulation?

The British Chambers of Commerce is among those campaigning for not imposing the projected 2p increase in fuel duty. Given the price of oil and the state of the economy, there is a case for doing this. However, the state of the public finances may not allow it. Government borrowing already overshot last year.

In support of their case the BCC is also arguing that business is having to pay for £55bn of additional regulation. The costs of regulation are notoriously difficult to assess and it is difficult to come up with precise or reliable figures.

However, the OECD has made one of the most serious attempts and their figures, which admittedly go up only to 2003, show tha Britain had the lowest levels of product regulation of any OECD country, including the United States. The UK was also low on state control, barriers to entrepreneurship and barriers to trade and investment. Even if there has been a surge of regulation since 2003, the picture won't have changed that drastically.

Of course 'regulation' for employers is often a code word for human resources legislation that gives more rights to employees, especially paternity and maternity rights which are argued to be particularly disruptive for small businesses.

One of my children who is an entrepreneur confirms that human resources legislation is the biggest challenge they face, but they simply outsource it to a company that specialises in advising small businesses.

Interestingly when the £55 billion figure was quoted on Radio 5 no attempt was made to challenge it by the interviewer.

Monday, 21 January 2008

Sir John Harvey-Jones

As someone who has studied business-government relations in the chemical industry, I have read with interest the various obituaries of ICI's former head, Sir John Harvey-Jones. In summary they say:

* Although he greatly improved ICI's performance, some of the credit should go to his predecessor. He was fortunate with the business cycle and his venture into speciality chemicals was a mistake.
* His long hair and flamboyant ties are always mentioned.
* As are his criticisms of Mrs Thatcher's policies
* He is probably best remembered by the public for the television programme Troubleshooter in which he offered (not always good) advice to companies in trouble.

What no obituary has mentioned is his role in re-organising the European chemical industry federation, CEFIC, to make it more effective and give large firms a greater voice in its operations. It is now recognised as one of the most effective industrial lobbies in the EU.

ICI itself has now disappeared. It was, of course, a 'chosen instrument' and national champion, created with government encouragement in the 1920s. It was recognised as one of Britain's best performing companies. Interesting, then, that if Labour had been elected in 1951, they planned to nationalise the chemical industry.

Sunday, 20 January 2008

The very rich get richer under New Labour

The very rich have grown richer at double the pace of most Britons under New Labour and their incomes may have accelerated further in recent years on the back of a rising stock market, research from the Institute of Fiscal Studies shows. More information is here: IFS

Using the most detailed analysis of tax returns to date, the IFS showed that the income of the very richest person in every 1,000 adults grew on average by about 4 per cent above inflation every year between 1996-7 and 2004-5, compared with growth of about 2 per cent for those on middle incomes.

To join the top 0.1 per cent of earners, you need to earn a little more than £350,000 in today's prices. There are about 47,000 people with incomes of that level, most of them in London and the South-East with the borough of Kenington and Chelsea home to one of the largest concentrations of high-income earners in the country.

The high earners are predominantly made up of middle aged men working in finance or business services. Interestingly, the one group outside law and finance in the top 1 per cent of incomes works in the health sector (although least part of their income may be derived from private practice rather than the NHS). Some £100,00 a year is required to claim a place among the top 1 per cent of earners, while £35,000 qualifies you for the nation's top 10 per cent.

The government has never had any ambitions to curtail income growth among the super rich, 80 per cent of whose income comes from occupation rather that investments. It has sought to bolster the incomes of the least well off, particularly the working poor and families. However, some of the drivers for these widening gaps are structural rather than policy related with globalisation being a key factor. Without the government's interventions, income distribution might have been even more skewed.

Tuesday, 15 January 2008


Peter Hain's future is on hold while the Government awaits the outcome of the investigations by the Electoral Commission and the Parliamentary Commissioner for Standards. Hints are already being dropped by sources close to the Electoral Commission that, frustrated by their own inability to impose penalties, the whole matter may be referred to the police.

By all accounts the Hain campaign was 'chaotic'. Hain's excuse was that his duties as a cabinet minister led to carelessness over reporting donations, although that shows a lack of respect for the regulations. Goody two shoes Harriet Harman was also careful to appoint a 'whiter than white' treasurer to keep an eye on that aspect of her campaign.

One of the most peculiar aspects of the whole matter is the use of a think tank, the Progressive Policies Forum, which never appears to have done any thinking - or at least produce any tangible evidence of it. It appears to have functioned somewhat like one of the old conduit bodies that channelled funds to the Conservative Party.

Perhaps the most extraordinary aspect all of this is the time, energy and money expended by the six candidates trying to capture the deputy leadership of the Labour Party, a non-job if there ever was.

Thursday, 10 January 2008

Nice work if you can get it

Tony Blair has been appointed as a part-time adviser to Wall Street bank JPMorgan, the first post of this kind to be taken by a former Labour prime minister. His salary is not known, but it is not expected to be less than $1m a year.

It's a far cry from the experience of Herbert Asquith who was in such a poor way financially that his friends had to organise a public appeal in The Times to pay off his debts and give him a pension. And Mr Blair has secured a book deal worth £5m.

Quite what his role will be is not entirely clear but JPMorgan chief exective Jamie Dinon said that both of them wanted 'to try to make the world a better place and have a bit of fun doing it.'

Dinon said that Blair would be 'enormously valuable' to the company, but others are more sceptical. Political scientist Kevin Theakston noted, 'Blair knew notoriously little about economics.'

Wednesday, 9 January 2008

When the depoliticised is repoliticised

There has been almost universal praise for New Labour's decision in 1997 to give the Bank of England operational independence to set interest rates, thereby reducing the risk of politicians allowing their decisions to be influenced by electoral considerations. It is seen as the classic example of the new orthodoxy of depoliticisation.

Yesterday the Chancellor, Alastair Darling, came close to breaking the government's self-imposed rule on not calling for rate changes when he said the Bank's Monetary Policy Committee minutes showed 'they have got room to make reductions.' Indeed, at the same press conference, Gordon Brown came close to saying there would be a reduction on Thursday, before hastily correcting himself.

Darling's intervention was criticised by Professor William Buiter of LSE, a former member of the MPC. He said that Mr Darling should 'learn and practise the art of silence' when itr comes to rate decisions as 'it is undermining on of the crowning achievements of the Blair-Brown years.'

This is not an isolated incident as far as the Chancellor is concerned. He has also called in the energy companies to explain their price rises, effectively by-passing the energy regulator.

What this suggests is that depoliticisation is fine in benign economic conditions, but once there are problems with implications for the Government's electoral standing, repoliticisation can occur.

Friday, 4 January 2008

What counts as posh?

Social class may no longer 'be the basis of British politics' with all else 'being embellishment and detail' as Peter Pulzer once famously said. (That must be one of the most used quotations in exam questions at University and A level). However, it is always bubbling along beneath the surface in British society.

The talented young singer Kate Nash has been accused in some discussions on YouTube and elsewhere of being posh, a mockney chancer no less. In some of her songs, e.g., Foundations, she affects something of an 'Estuary' accent. In part this because this is what the lyrics of the song requires and her normal speaking voice sounds pretty classless, neither BBC English nor chav. But accent has always been seen as one key give away of social class 'membership'.

Nash hails from Harrow, not the posh bit where the school is, but in the shadow of the hill, standard inter-war median income housing. Her father is in IT and her mother is a nurse.

Nash herself is something of a subtle social observer as her lyrics show. As she points in one interview, 'chavs' or the white working class are the one target seen as fair game for everyone.

Wednesday, 2 January 2008

The year ahead

I wrote this at the request of a forum, but I thought I would reproduce it here:

Britain has been enjoying the longest period of sustained growth in its modern history. The economy has grown every quarter since 1992. In the period from 1992 to 2006 the economy grew by 49 per cent in real terms. But can this impressive record be sustained? And if it isn’t, what will the implications be for the government of New Labour’s Gordon Brown who took over from Tony Blair in 2007?

Because of its strong links with the global economy the British economy is vulnerable to any downturn in the United States. It has already been seriously affected by the sub-prime crisis in the United States with the first run on a British bank since the 19th century. The British economy is particularly dependent on the housing market. Rising house prices stimulate consumer confidence which has sustained the British boom. However, house prices have steadied and in some cases begun to fall. Underlying this trend is the fact that first time buyers can no longer afford inflated prices and are withdrawing from the market. They underpin the market as a whole. Forecasts differ about what will happen to house prices in 2008, but a small fall seems the most likely outcome.

The consumer boom has been built on the ready availability of debt in the form of credit cards, mortgages and loans. Given substantial problems of personal indebtedness, there has been a tightening up on the issue of credit cards with a higher proportion of applications being rejected. However, this does not seem to have had any effect on the willingness of consumers to spend over the Christmas period. There was a last minute Christmas rush and then a considerable increase in spending at the ‘sales’, particularly on high value items, with retailers discounting heavily. Of course, this may mean that consumers will reduce their spending later in the year.

The turmoil in the key financial services sector, which has been a major driver of employment growth, is expected to lead to more redundancies in 2008. Combined with public sector job losses, there are concerns that unemployment may grow next year, perhaps reaching 1.8 million, its highest figure since New Labour came into office in 1997. Of course, this could be offset by a decrease in the number of immigrants from central and eastern Europe seeking work as the labour market tightened.

In some respects the underlying condition of the economy is less strong that a debt fuelled consumer boom might imply. Unemployment is higher than it appears because three times as many people are on incapacity as unemployment benefits. Skill levels remain a problem, particularly among those who emerge from the education system with few or no qualifications to enter an economy in which the number of unskilled jobs is declining. They often find themselves in a ‘revolving door’ of government schemes and unemployment.

The Bank of England has the capacity to reduce interest rates to offset the risk of a recession. So far the Monetary Policy Committee is judged to have done well, but it has never been tested by difficult economic conditions. If it reduces rates too fast, it may stoke inflation which is being driven by rising food, oil and utility prices. However, it seems unlikely that the British economy will experience a recession in the sense of two successive quarters of negative growth in 2008. Growth will fall, however, and this will put the squeeze on already constrained public finances, narrowing the options available to Prime Minister Gordon Brown. Some of the tensions are already evident in disputes with the unions over attempts to hold back public sector pay.

After a short honeymoon period, Gordon Brown’s credibility was undermined by appearing to encourage the possibility of a November election and then pulling back from it. In an era in which electorates make decisions more on competence than on ideology, the Government’s image has not been helped by a series of unfortunate events, in particular the loss of large amounts of confidential data held on citizens by various departments. If Gordon Brown is to restore his authority in 2008, he will have to hope that the economic downturn is not too severe