Thursday, 29 January 2009

Bad news week

Two reports from authoritative sources yesterday cast doubt on Labour's argument that Britain was particularly well placed to withtstand the global recession. First, there were the latest economic forecasts from the International Monetary Fund: IMF

Downing Street spun this as saying that the British figures were not much worse than those for Germany and Japan, but this is being economical with the actualité. The UK economy is forecast to shrink by no less than 2.8 per cent in 2009 and to grow by only 0.2 per cent in 2010, the worst slowdown since the 1930s.

Admittedly, the euro area is going to shrink by 2.0 per cent and will also grow by only 0.2 per cent in 2010 (which doesn't help British exports). However, a more relevant comparison is for all advanced industrial countries which are forecast to grow by 0.5 per cent this year and by 3 per cent in 2010. Britain is more exposed to the global economy than many countries, but even a comparison with the US is not helpful with a 1.6 per cent decline there this year offset by 1.6 per cent growth in 2010.

The figures for 2010 should give Dave Cameron pause for thought suggesting that the economy will still be in the doldrums should he become prime minister. With that in mind he should be careful about talking down the economy too much.

Even more worrying for Labour is the latest Green Budget from the Institute for Fiscal Studies: IFS
This suggests that some of Labour's key objectives to transform British society look to be increasingly unattainable given the prospect of a freeze on governmnent spending and real cuts from April 2011. Increases of 1.1 per cent a year in real terms would be taken up by higher debt repayments and higher spending on social security and public sector pensions.

Even with spending cuts and tax increases of £20bn a year, public sector debt will not return below the ceiling of 40 per cent of national income which Gordon Brown set as one of his fiscal rules before the early 2030s. Of course, the 40 per cent figure is an arbitrary one and has no particular rationale other than a political choice.

One crumb of consolation is that the IFS gives rare praise to the efficacy of Labour's cut in VAT. Overall, however, it is a bleak picture for Labour, reflected in double digit leads for the Conservatives in a number of recent polls.

Tuesday, 27 January 2009

Who should get help?

Yesterday was a particularly grim one in terms of employment news with big job losses at steel maker Corus. But, given that government funds are constrained, who should get help? Steel unions have asked for the kind of aid that is given to supplement the incomes of those on short-term working in France, Germany and the Netherlands. The UK Government is unwilling to do this, but might give money for 'training'.

Steel workers were complaining yesterday that money is given to 'top hats' but not to 'hard hats'. However, if we learnt one thing from the experience of the 1930s recession in the United States, it is that one doesn't allow banks to collapse.

In fact there may be another bias in the way in which aid is given. Women are losing their jobs faster than men in the recession and women MPs are complaining that too much emphasis is being given on helping male-dominated industries such as finance and motor vehicles, whilst 'soft' industries such as retailing and catering are ignored.

When I used to work on industrial policy, I was struck how many books were written about motor vehicles and steel, but relatively few about food processing. But, of course, food processing is an industry that employs large number of women workers. All the talk about 'real jobs' and 'making things' often conceals an implicit gender bias.

Of course, recurrent major crises of the capitalist system are a reorganisation device out of which it emerges leaner and fitter and able to grow again. Not everyone's job can be saved or subsidised, but the flip side of that is that the pain of recession falls harder on some than on others.

Sunday, 25 January 2009

When in a hole ...

The BBC has once again got itself into a hole over the Gaza appeal, but is displaying its usual obduracy and refusing to stop digging. The commercial channels have no difficulty in broadcasting the appeal. It has been made by the Disasters Emergency Committee which is a reputable coalition of charities which has made appeals in conflict zones before. Backing the appeal is not a sign of approval for Hammas policies or a criticism of Israeli ones, it is simply a recognition of the fact that there is a very serious humanitarian crisis in Gaza which requires international action.

The BBC has had a recent track record of shooting itself in the foot. Public service broadcasting is potentially always under attack from the right because its attempt to be balanced is seen as concealing a liberal bias.

Public service broadcasting is an asset not just in Britain. The country benefits from the BBC's worldwide reputation for editorial rigour and impartiality. If one lives in a country like the United States, as I have, one notices the absence of a public service broadcaster. PBS, by raising money from individuals and corporate donations, does its best to fill the gap and its radio service is particularly good. But American television is unwatchable because there as so many adverts.

By trying so hard to get things right, the BBC manages to get things wrong.

Friday, 23 January 2009

Spectre of IMF loan raised

Dave Cameron has raised the possibility of Britain having to go cap in hand to the IMF for a loan as happened in 1976. The political calculation here is obvious: such a move would be a final humiliation for Labour and its economic policy.

With the archives now available, more analysis of the events of 1976 is becoming possible. Sir Douglas Wass, then of the Treasury, has already produced a monumental, authoritative and rather expensive volume. PhD students are beavering away in the archives.

Without wishing to pre-empt what they might say, recent analysis has suggested that the measures taken were perhaps more severe than was necessary. However, in many respects 1976 rather than 1979 represented the real turning point in British economic policy. Certainly the left in the Labour cabinet was out maneouvred and defeated.

Dave admitted that an incoming Conservatibe government would face 'incredibly difficult decisions.' He was careful not to specify what combination of tax rises and spending cuts might be required.

He did, however, declare himself in favour of a 'new economy' better balanced towards manufacturing and the north (where the Conservatives would like to win some seats). In that respect he seems to be singing off the same hymn sheet as Peter Mandelson. This could confirm the view of those who believe that acerbic party disputes are 'all sound and fury, signifying nothing' as the range of available policy options in a given situation is actually quite limited.

Monday, 19 January 2009

Return of the big beast

Ken Clarke is to rejoin the shadow cabinet as Shadow Business Secretary. Unfortunately, with Peter Mandelson in the Lords, there will be no 'Ken and Mandy' show.

Ken Clarke is one of the big beasts of Conservative Party politics, but he was rejected three times as party leader because of his Europhile stance. As Chancellor, he turned the economy round and bequeathed it in very good shape to New Labour.

The Conservatives have had quite a lot of difficulty in landing punches on the economy. Even though their poll lead is in double figures, the charge that they are the 'do nothing' party has resonated with the electorate to some extent.

The move has been unpopular with some Conservative activists. However, Clarke is one of the few Conservatives who would be recognised by most people and his 'blokeish' image allows him to communicate complex points in a very straightforward and effective fashion.

Sunday, 11 January 2009

Never a saver be

About 40 per cent of savings accounts that cater for those with deposits of £5,000 already pay less than 1 per cent. If banks and building societies pass on Thursday's half point rate cut in full, the percentage of those accounts paying less than 1 per cent rises to 66 per cent. Amount a tenth of all savings accounts already pay only 0.1 per cent.

Among those hit particularly hard are pensioners who rely on savings accounts to boost their state pension, most typically the less well off retired. There are other options, of course, such as corporate bond funds (or even individual purchases) and income funds, but these appeal to the more sophisticated investor.

The argument is that interest rates have to be cut to stimulate the economy, but it hasn't done much so far, although defenders would argue that it takes a while for such cuts to come through. Business is vociferous in its defence of rate cuts as it is a clear beneficiary, if a business can find a bank to lend it money (it's simply not having for small businesses according to an accountant I was talking to on Friday who specialises in the sector).

Given that there are three savers for every borrower, Dave Cameron has seen an opportunity and promised to move towards a zero rate of tax on borrowings for basic rate taxpayers. Another option, and one that Labour may take up, would be to increase the derisory £3,600 limit on a cash ISA.

Wednesday, 7 January 2009

The end of depoliticisation?

Another cut interest rates to 1.5 per cent looks likely this week. If rates fall even lower, towards zero, the Bank of England will lose its independence to set monetary policy. In an interview with the Financial Times Alastair Darling made it clear that the Bank and the Treasury would have to work 'hand in hand' in these circumstances. Should the Bank need to operate monetary policy by printing money to buy assets, so-called 'quantitative easing', the Treasury would be intimately involved.

Monthly MPC meetings would then lose much of their importance. The nine members would turn up simply to keep interests low while the big decisions were taken at a higher level between the top echelons of the Treasury and the Bank.

The depoliticisation project involved decisions about interest rates being taken away from politicians and made by technical experts based on an analysis of the relevant data. This worked well enough in benovelent economic conditions. It does not work well in a crisis when elected politicians have to get involved and take responsibility.