Tuesday, 26 October 2010

Growth higher than expected

Growth was at the upper range of expected outcomes in the third quarter at 0.8 per cent: Growth

This does not fit well with the forecasts of those who have been predicting a double dip recession. However, I always thought this was largely a question of semantics. There isn't that much difference between a negative growth rate and a positive one if the latter is not robust enough to generate enough private sector jobs to replace those lost in the public sector.

Consumer confidence as revealed by retail sales is not strong and one test for policy will be when the 20 per cent VAT rate is introduced in the new year. The public sector job cuts will, of course, not happen all at once and some of them will take the form of retirement from the labour force. But when they start to cut in, policy will be tested.

Thursday, 21 October 2010

The economic context of the CSR

The consequences of the CSR, particularly in terms of employment, depend to quite a considerable extent on how far the private sector can generate new jobs to offset the nearly 500,000 to be lost in the public sector. Of course, it will not be necessary to provide that number as some of those leaving will retire.

That in turn will depend to some extent on the condition of the global economy and I will return to that later. Let's first consider the domestic situation.

The downturn resulting from the global financial crisis saw a 6 per cent drop in output as against 3 per cent in the early 1990s. However, fewer companies have become insolvent. Employment was down 1 to 2 per cent at peak compared with 5 per cent in earlier recessions. Jobs have increased by 300,000 in the last six months, although it is doubtful whether that rate can be sustained.

Nevertheless, given the amount of emphasis that has been replaced on the dependence of private companies, it is as well to remember that Britain is not a Soviet style economy. It is still a private sector led economy. After the 1990s recession the private sector created 2 million jobs.

One concern is that the type of labour found in the public sector is not necessarily the type of labour that the private sector requires. Hence, the natural rate of unemployment could go up.

There are some concerns about the global economy which could impact on the growth rate in the UK. The Chinese economy may not be growing as fast as it has been. There is a risk of 'currency wars' in which countries engage in competitive devaluations of their currencies. This in turn could lead to a resurgence of protectionism.

It is also evident that G-20 is working less well than it did at the onset of the crisis. There is not an adequate mechanism for generating properly coordinated policies at a global level. Even the central bankers who meet every two months do so to share information rather than to coordinate.

The future is therefore very uncertain and the unemployment risks of the CSR could be substantial.

Wednesday, 20 October 2010

Difficult politics

Responses to the defence review show how difficult the politics of cutting public expenditure is going to be for the Coalition Government. In my view with a cut in real terms of 8 per cent defence got off lightly. This was particularly true of the defence industries.

A spokesman for the UK Defence Association (an organisation I had never heard of before) was given a lot of air time on the BBC. Apparently a formal naval commander, he argued that as defence was the nation's first priority, it should not be cut at all. A prime example of fiscal nimbyism.

It is true that some parts of the defence budget have been cut more severely. In particular, the Navy has taken a 18 per cent hit. But this reflects what we need in a post-Cold War context when state versus state conflicts are rated as a relatively low threat.

There was also understandable concern from communities where bases look likely to be closed, particularly in Scotland. Local campaigns of this kind are, however, unlikely to affect the Government's stance.

Some Conservative backbenchers were also clearly unhappy at what they saw as too big a concession to the Liberal Democrats on Trident. Welcome to the give-and-take of coalition politics.

Today's cuts simply attempt to take back public expenditure back to where it was in 2006-7 in real terms. But even that is politically very difficult.

Friday, 15 October 2010

Liam Fox wins

Cuts in the defence budget will be less than 10 per cent after the personal intervention of the prime minister. It's a considerable victory for Liam Fox after what Michael Heseltine described 'as the letter designed to be leaked'. Even Hilary Clinton weighed in on his side.

There will be some painful cuts for the Navy and RAF, but the two aircraft carriers are safe. Cutting them would have hit jobs in what remains of the shipbuilding industry hard. There will be some unspecified savings on Trident as a concession to the Lib Dems.

The schools budget is also to be protected, at least in the sense tha Nick Clegg's 'pupil premium' for disadvantaged pupils will offset cuts elsewhere. This could mean that some schools with better off pupils could lose out.

All this means bigger cuts elsewhere. Higher education will take a big hit with 79 per cent of the teaching budget cut and £1bn off the research budget. Higher education is effectively being marketised and there will be big structural changes as a result with some universities merging or disappearing.

Although the Government is doing what it can to protect the less well off, some of these cuts, such as those in education, could hit median income families hard. However, the Government is going to give £1.5bn to Equitable Life policy holders from 'middle England', although their spokeswomen was not pleased and argued that taxpayers should have provided nearly £5bn.

And the Scottish Government has somehow found the money to abolish prescription charges.

A bonfire of quangos?

As has been noted before on this blog, the key questions to be asked about quangos are: (i) one should the function be performed by government and (ii) should it then be performed by a central department?

As it turns out ministers have discovered that many of the functions performed by quangos are required. Many of them will disappear into central government departments. But whether they will be performed in a more transparent or accountable way there is a genuinely open question.

Many of the quangos that have been retained in their present form have been justified on the grounds that they are 'performing a technical function which should remain independent of government'. Quite.

Others have been re-constituted as departmental expert committees. Consider the Pesticide Residues Committee of which some fun was made on Radio 5 yesterday. It exists because consumers are concerned about toxic pesticide residues on food. These are monitored and the committee supervises this system. So the task is a necessary one and making it an expert committee is hardly going to save any money.

Monday, 11 October 2010

The 1970 general election

From time to time, BBC Parliament re-runs the coverage of a general election, although this is not always well publicised. On Saturday they featured the 1970 general election.

In such unedited material it is the little points one noticed. One regional correspondent had a cigarette smoking in an ashtray. A new Conservative woman MP who was interviewed, Janet Fookes (later to become a deputy speaker and now in the Lords) was described as a 'gorgeous redhead' for the benefit of viewers watching on black-and-white sets.

This hardly fitted well with her declared intention to pursue issues relating to the legal status of women. Robin Day also tried to talk up some romantic interest in Edward Heath, but she insisted that she was not interested in sailing.

'Mad Mitch' who have defeated Laura Grimond in Aberdeenshire West had a rather acerbic interview. He gained his nickname after re-taking the Crater district of Aden from nationalist insurgents on his own initiative. This was described as 'the last battle of the British Empire'. Mitch stood down in 1974 to pursue what turned out to be a failed business venture. The maverick right-winger later described this as his biggest mistake, but all his attempts to return were unsuccessful.

A very posh lady interviewer attempted to talk to racegoers at Ascot but either they didn't want to talk her or they had little understanding of politics despite being declared Conservatives.

Friday, 8 October 2010

Alan Johnson is shadow chancellor

Ed Miliband has found an interesting solution to the Ed Balls/Yvette Cooper dilemma by appointing Alan Johnson as shadow chancellor. Balls and Cooper both get senior posts, Balls as shadow home secretary and Cooper as shadow foreign secretary.

What is interesting about this appointment is that both Balls and Cooper were 'deficit deniers' in the sense that they thought that even halving the structural deficit over the lifetime of a Parliament was too stringent a target. Johnson is believed to have been aligned to the halving target, but it will be interesting to see what stance he takes now.

Thursday, 7 October 2010

Yvette or Ed?

Husband-and-wife team Yvette Cooper and Ed Balls came first and third in the poll for the shadow cabinet yesterday. But which of them will take the key role of Shadow Chancellor?

Ed Balls is a heavyweight political bruiser and has long experience in the Treasury as Gordon Brown's Deputy Chancellor. But I think Yvettte Cooper, has the forensic skills required to tackle the detail of Coalition Government spending plans and has better presentational skills. I would choose her, but I suspect that Ed Miliband will choose the other Ed, although he could make him shadow foreign secretary.

Jack Straw said yesterday that half a dozen of those elected would not be up to serving in the real Cabinet. Who could he mean? Perhaps the Eagle twins who have both been successful?

Wednesday, 6 October 2010

The big society

This was the unifying theme of David Cameron's speech to the Conservative Party conference. The implication was that this was the way forward which would enable the country to withstand the cuts in public expenditure necessitated by the budget deficit and take us to the sunlit uplands beyond.

The 'Big Society spirit' was mentioned more than once, as was the notion that 'your country needs you'. The prime minister used the example of the 100,000 people who had volunteered for the Olympic Games as evidence that additional volunteers were available. He attacked the notion that 'if government takes care of this, we won't have to'.

Citizenship was more than a transaction - although citizens have been increasingly encouraged over the years to define themselves as consumers of public services with certain entitlements, not least by New Labour. In other words, this idea has become quite embedded. This is not to say that it should not be challenged, but it's a perception that will be hard to dislodge.

It was noticeable that the attacks on Labour got the loudest applause in the hall. He managed to define Labour, in terms of the views of Ed Balls, as opposed to aspiration and there was a neat dig of Neil 'we've got our party back' Kinnock. Ed Miliband was more or less a non person, which is probably the way to play it for now. The prime minister's defence of the union also went down well with the audience.

The comment that we were geared up to fight old wars did not sound like good news for the Navy or the RAF. It seemed to me that there was a clear endorsement of Ken Clarke's refreshing approach to criminal justice issues.

It was interesting that two references were made to football, the last World Cup and the hope of holding the 2018 one in England.

I didn't think there was much that was new in the speech, but probably there didn't have to be. It was an attempt to define Cameron's distinctive approach and brand. There is such a thing as society, but it's different from the state (Sam Cam's idea originally) and it needs to be an active and engaged society. I don't think it is just cover for the cuts, but I'm not fully convinced either.

Interesting how much the cameras focused on Sam Cam during the warm up video and at other times. But she was looking very glamorous.

The child benefit row

Denying child benefit to higher rate taxpayers has caused a media storm and disquiet among Conservative activists and backbenchers, despite the fact that relatively few people are 'unfairly' affected, mainly stay-at-home mums although they are a group close to the heart of some Conservatives.

However, it seems that 83 per cent of voters approve, although that is not that surprising given that around that percentage do not lose out from the proposals: Poll

I think David Cameron made something of an error by appearing to offer a married couples tax allowance as a sop. Admittedly, it is in the coalition agreement, but it was supposed to only apply to basic rate taxpayers and the Liberal Democrats might not like it being extended to higher rate taxpayers.

What this particular disproportionate row does illustrate is the difficult politics of reducing the deficit. Given that this particular measure saves only about £1bn, it appears that stopping child benefit at 16 is still on the cards, as is restricting the availability of bus passes. More generally, we are shifting from a universal welfare state to one provided as a safety net for those in need.

Tuesday, 5 October 2010

Child benefit concerns

Some concerns are starting to surface among Tory activists about the decision to deprive higher rate taxpayers of child benefit. For example, it is being pointed out that households with a stay at home mum with the husband in the higher rate tax bracket could lose out. Next door a working mother with both parents in the basic rate bracket could be earning more and would keep their child benefit. However, tax returns are made by individuals, not by households and changing this would be a much bigger blow to better off households, apart from being open to criticism as sexist.

The real problem here is that the higher rate of tax in Britain cuts in at a relatively low level. Nothing can be down about that at the moment, but it might be possible to increase the threshhold by 2013 when the child benefit changes come in.

Some tweaking of the proposal may be politically necessary, but the underlying principle is that those on low incomes should not be taxed to make a transfer payment to those on higher incomes.

Monday, 4 October 2010

Lib Dems shut out at Defra

Defra is just one of three government departments that does not include a Lib Dem minister. Moreover, all the ministers in the department have strong farming links, inclining them towards a productionist agenda.

Lib Dem farm spokesman Andrew George, the MP for West Cornwall and the Isles of Scilly, has criticised the Conservative stranglehold on posts. Differences have emerged on the proposed badger cull and the decision to abolish the Agricultural Wages Board.

Mr George has been trying to work with the Secretary of State, Caroline Spelman, to have some say about how budget cuts are made. However, he has admitted that he was 'not yet in the inner circle of Defra ministers'.

Most disagreements are likely to be over matters of domestic policy such as the two that arisen already, rather than attitudes towards the CAP where both parties share a relatively liberal, market oriented stance. However, the Lib Dems are particularly attuned to the concerns of smaller farmers from whom they receive electoral support.

There was speculation that Defra would be abolished or at least re-named, but this seems to be off the agenda for now.

Higher rate taxpayers to lose child benefit

George Osborne has announced that child benefit will be withdrawn from higher rate taxpayers from 2013: Child benefit . (Incidentally, one would think the Telegraph would know the difference between 'principal' and 'principle').

Universal benefits of this kind cost a huge amount of money, although they also underpin support for the welfare state from the better off part of the population.

Of the various options that have been discussed so far, this is a more equitable move than stopping child benefit at 16 or restricting it to the first two children (the latter would particularly hit poorer families).

It will be interesting to see whether there will now be restrictions on the winter fuel payment or bus passes. One has to remember that a lot of older votes are Conservatives and they have a high rate of turnout.