Monday, 29 November 2010

The UK and the Irish bailout

Ireland has not got a bad deal out of the EU/IMF bailout. They have retained their low corporation tax rate which, to be fair, is necessary if they are grow out of the crisis (although most analysts think the projected figures are optimistic). The interest rate is higher than Greece was charged at a mean of 5.83 per cent, but lower than some forecasts.

Irish citizens are blaming bad government for the mess they are in, but let's not forget that some of them were willing to take the cheap money when it was available and ruin the Irish countryside with completely out of character houses in prominent positions.

Britain is putting in a package of help as are two other non-eurzone countries, Denmark and Sweden. A texter to 'Wake up to Money' this morning asked 'How can we lend money to Ireland when we are skint?'

Simples. First, we are lending money to Ireland at a higher interest rate than we have to pay for it so we should make a profit. Admittedly, the Irish could default and they will be paying 20 per cent of their taxes to meet the interest. However, I think the odds are now against a default.

In any case, Ireland takes 7 per cent of our exports and British banks are heavily exposed in Ireland. The national interest is an over used phrase but George Osborne is right to use it in this case.

However, right-wing Conservative backbenchers are not happy and may be less so if it was proposed that Britain should help out Portugal or Spain who are the next likely targets for the financial markets. Spain is over 10 per cent of the eurozone economy, but it should be noted that the 'peripheral' countries only account for 20 per cent of the eurozone as a whole.

The eurozone could move towards a fiscal and political union but that is very unlikely. In the longer run we may see a smaller eurozone which is what many people wanted in Germany in the first place, but the actual mechanisms of exit for, say, Greece, would be difficult to set up.

Thursday, 25 November 2010

How can broke countries pay other broke countries?

An amusing video on the eurozone crisis: Eurozone

Apparently 99 per cent of readers of the Daily Express want to take Britain out of Europe. It's going to take some tug to tow it into mid-Atlantic.

The privatisation story

The Institute of Government held a 'policy reunion' last night for ministers, civil servants and others involved in the Thatcher privatisations. Talking to Andrew Gamble beforehand, we agreed that it all now seemed very long time ago. It was very difficult to convey to contemporary students just how nationalised industries had dominated the economic and political landscape.

Privatisation had been selected because it was a policy success selected in a survey of PSA members. The story told last night was a familar one: privatisation had not been a significant part of the Government's original plans, but had developed into a political and administrative programme. There were a variety of motivations: raising money; reducing the role of the state in the economy; curbing the trade unions; widening share ownership (although this did not really succeed in the longer run); building political support etc.

The general tone of those involved was rather self-congratulatory and they explained the failure of the programme to do enough to boost competition in terms at the pace at which decisions had to be taken and the influence exerted by the existing managements of the industry who did not want competition at any price. Breaking up an industry would have extended the time line for a privatisation from two to five years and would have meant that the key BT sale, which really started the process, would have not gone ahead.

While I did not obtain any major new insights, there were some interesting points of detail which I may deal with in a subsequent posting.

Tuesday, 16 November 2010

The thinning blue line

There was quite an acrimonious exchange between police minister Nick Herbert and a Radio 5 Drive Time presenter yesterday. This was provoked by the announcement by the Chief Constable of Manchester police that nearly a quarter of his staff would have to be let go over the next four years.

Nick Hebert insisted that this would not make any difference to front line policing in Manchester, but it is difficult to see how he reached his conclusion, even if a greater percentage of staff was deployed on the streets.

Herbert's argument was the problem was that only 11 per cent of the police were out on the streets at any one time. This sounds quite shocking until one realises that most of them will not be on shift at any one time and others will be in the station interviewing suspects or supervising custody.

Herbert argued that there was too much red tape in the police and while this may be the case, a lot of it is generated by the need to present evidence in a form that will stand up in court. This is where backroom staff play an important role and if one cuts back their numbers some of the work will have to be done by frontline staff.

As a vox pop on BBC showed, voters in Manchester were not happy about these developments. I think that the policing issue is one where the Coalition Government could be in some trouble, particularly with traditional Conservative supporters.

Sunday, 7 November 2010

Doubts about public expediture plans

The Institute of Government has pointed out that although by 2014-15 public spending as a share of national income would be back to the same level as it was in 2006-7, the composition of that spending would be very different. Expansions in the share of national income spent on pensioner benefits, the NHS and overseas aid would be funded through reduced spend on education, law and order and defence.

At Fathom Consulting's quarterly Monetary Policy Forum, the former Home Office permanent secretary Sir John Grieve said 'it seems most improbable' that the government would hold fast to its plans. Rachel Lomax, a former permanent secretary of three government departments, said the public might not accept large cuts in police and prisons that had not been flagged before the election.

The Public Accounts Committee has expressed doubts over the Government's ability to make genuine efficiency savings. Whitehall failed to make the mere 3 per cent savings set out in the 2007 comprehensive spending review. Two years into the three year programme to release £35bn in cash from efficiency, only £15bn of savings were reported. Of those, the National Audit Office, it judged only 38 per cent, or less than £6bn, to be value for money savings.

The committee is concerned that in order to reduce costs, departments will rely soley on cutting frontline services. The committee says it was concerned at the implications of evidence from the Treasury 'that it will simply reduce departments' budgets and then walk away from the responsibility for the delivery of the level of savings required across government.'

Of course, cutting back office services can have its impact. There are two EU committees working in a technical area which have been highly dependent on the UK and the Netherlands for their work, although with general political support from other North European countries. The UK may now not be able to afford to be involved. Up to now UK interests have been very well looked after because of its involvement.

Thursday, 4 November 2010

The Treasury story

In this article I take a look at the Treasury under George Osborne in contrast with its role under Gordon Brown: Treasury