Tuesday, 26 July 2011

0.2 per cent is just good enough

The latest quarterly figures for GDP growth of 0.2 per cent are just good enough in political terms, especially given that special factors knocked off 0.5 per cent: Growth . They are below expectations and disappointing comparatively, but just enough to prevent Ed Balls creating a political firestorm.

Consumer demand is being hit by the squeeze on incomes. But what is not talked about very much is the underlying structural weakness of an economy that is so dependent on consumer demand, something like two-thirds of the total. Debt fuelled 'privatised Keynesianism' as Colin Crouch has called it is not going to return any time soon.

In terms of short term fixes, a cut in VAT has been recommended. That would stimulate consumer demand and have a positive effect on inflation. However, it would also cut revenues and that would undermine the deficit reduction policy which is already encountering plenty of difficulties.

Wednesday, 20 July 2011

Statement by the prime minister

Sometimes I wonder about the parallels between this current crisis and the Westland crisis which was supposed to bring down Margaret Thatcher as prime minister but which is barely remembered today (although it did unleash Michael Heseltine as an unguided missile). Actually Ed Miliband was more effective in the questions that he put to the prime minister today than Neil Kinnock was then.

Dave Cameron said that he had learnt from the experience of employing Andy Coulson and with the benefit of hindsight he would have done things differently. If Andy Coulson was shown to have lied, he would then apologise, but this 'conditional apology' was not good enough for Ed Miliband. I must say that I have never quite understood the fashion for apologies.

Ed Miliband was at his strongest when he pointed out that there were five opportunities for David Cameron to doubt Andy Coulson's suitability and the strongest of these was in relation to a New York Times article last September which led to the re-launch of the police investigation. Miliband suggested that the prime minister was caught in a tragic conflict between personal loyalty and the standards and integrity required in public life.

These are all powerful points, but Labour's relationship to the media has not been squeaky clean. The prime minister was able to castigate them as the 'slumber party' and pointed out that Rupert Murdoch had named Gordon Brown as a personal friend.

Nick Clegg's body language throughout was interesting, one of frozen immobility most of the time. Clearly the Lib Dems seen an advantage in distancing themselves over this issue.

Despite the saturation media coverage, I just wonder how interested those outside the political class are in all this. The crisis in the eurozone threatens to unleash a sovereign debt crisis and a second banking crisis which would be far more serious than what Ed Miliband described as a 'a catatsrophic error of judgment'. Which of us has not made poor personnel choices?

Sunday, 17 July 2011

David Cameron faces media storm

All my hopes of a quiet Sunday at home were shattered after first Rebekah Brooks was arrested and then the Commissioner of Metropolitian Police resigned. A classic media storm quickly developed with one reporter suggesting to me that 'the dominoes are falling' and David Cameron himself might be in danger.

Apparently, Dave did not hear of the news of the Commissoner's resignation until he was 1 hour 10 mins. into his flight to South Africa when he had a satellite phone conversation with Home Secretary Theresa May.

There is no doubt that David Cameron has made errors of judgment in relation to Andy Coulson, not least in failing to heed advice that he was given, although some of that advice appears not to have reached him. David Cameron also said last week in the House of Commons that some of the assurances he was given by Andy Coulson may not have been well founded.

Ed Miliband has made good use of the situation and has been able to take his L-plates off and for once look authoritative. Tom Montgomerie suggests mischievously in The Times today that this is bad news for Labour as he is now well entrenched. His poll numbers have certainly not improved all that much (yet) but he now may look less like the head boy asked at short notice to make a speech.

Yvette Cooper has probably been an even more effective performer and has insisted that David Cameron has questions to answer. As it so happens, the Prime Minister is in South Africa and will not return until after Parliament goes into recess (he is about to give a press conference), although some Labour MPs are calling for the House of Commons to be recalled. David Cameron said in his press conference this morning that it would be appropriate for the House to be recalled on Wednesday for a statement and questions.

What is really serious about this crisis is that it further erodes trust in institutions, not just the media, but even more important the Metropolitan Police. The Met has had problems in the past with corruption and institutionalized racism and these have been tackled to good effect. Crime in London has been falling. However, it is evident that some members of the force have had a closer relationship with the media than is desirable.

It is now becoming apparent that the Mayor of London had lost confidence in the Commissioner and in effect he went before he was pushed (Theresa May would have probably implied that he should go in the Commons statement scheduled for todday). Bozza and Dave had a number of conversations over the matter over the weekend which must have been interesting given their political rivalry.

The Liberal Democrats have come out of this quite well because they were not having informal meetings with News International but in part this because they were not regarded as serious players before the last election. Nevertheless, Nick Clegg has managed to sound sensible and authoritative.

It should be remembered that there is a serious crisis in the eurozone and a potential debt default in the US, either of which could trigger a second recessionary wave at a time when governments have no shots left in their locker. Voters will make their decision at the next election in terms of the economy and public services, not the phone hacking scandal.

Nevertheless, David Cameron's image has been dented. He is good at the big picture but the flip side of that is that he does not always master crucial details and up to now has been able to breeze through on the basis of self-confidence. Clearly he now faces a more difficult phase as this story will rumble on for months and years.

But George Osborne is not going to be moving into No.10.

Friday, 15 July 2011

The effects of an ageing population

The Office of Budget Responsibility has published the results of analysis of the long-term effects of an ageing opulagtion: Ageing

The headline conclusion is that further public spending cuts or tax rises will be needed after 2016-17. The pressures are estimated to be so great that a tax rise of 1.5 per cent of national income would be needed in 2016 to put public sector debt on a path to return to 40 per cent of national income by 2060. Such a rise would be equivalent to increasing value added tax to 24 per cent.

Ageing has little effect on taxation but would raise public spending by 5.3 per cent of national income. These rises would start in the 2020s and are driven by a sharp increase in the costs of health care, state pensions and long-term care. However, it should be noted that Britain's likely burden from ageing was no worse than in the US and better than in many European countries.

However, the OBR does assume relatively modest rises in health spending which seems somewhat unrealistic given the pressures that arise from advances in medicine. If the rate of growth of health spending was closer to the historical average, it would take up another 5 per cent of national income by 2060.

There are real intergenerational justice issues here, but people have a strong sense of entitlement to benefits in old age. Moreover, older voters have a much higher propensity to vote that younger voters, approaching 70 per cent.

Tuesday, 5 July 2011

Public sector pensions

Last Friday The Times carried an interview with a teacher from my old primary school, St.Margaret's Plumstead Common. This 59-year old complained, 'I'd like Michael Gove to come and spend a week doing my job .. When he does that he can come and tell me about cutting my pension.' Given that she is near retirement age, her pension is unlikely to be affected much.

Even if the Government's proposed changes go through in full, those in the public sector will still be much better off than those most of those in the private sector, many of whom do not have a pension worth speaking of or have to make their own provision in schemes which are vulnerable to stock market fluctuations. If vox pop and radio show texts are anything to go by, many in the private sector resent what they see as the privileged treatment of the public sector.

There are two answers to that view. One is that relatively good pensions form part of an overall renumeration package which public sector workers signed up to as part of their contracts. But that is an argument for phasing in the changes not abandoning them which is what is proposed anyway. And if the grass is greener on the other side ...

A second argument is that poor private sector pensions need to be tackled rather than reducing those in the public sector. Employers should be 'required' to provide them. In other words labour costs in the UK should be substantially increased which wouldn't do much for competitiveness.

Career average pensions could actually benefit the less well off and the unions seemed to be prepared to concede that point. As for working longer before pensions become available, trade unionists complain that they are being made to pay for the banking crisis.

But the banking crisis didn't lead to people living longer. It's one thing to pay a pension for seven years after someone has worked for forty years and another thing to pay it for thirty years.

Where the unions do have grounds for complaint is the increase in contribution costs at a time when the pay of their members is frozen for all except the lowest paid. In other words this means a further cut in take home pay.

It is actually not as much as the figures suggest because of the generous tax treatment of pensions - something that is never really discussed. Even so, it is substantial and it is here that the Government may need to give way, although by doing so they place at risk their deficit reduction strategy. But a hot autumn could damage the Government's standing. In other words, there might be a political price to pay for failing to give concessions.

It's a tricky tightrope and while David Cameron is good at tactics, he may be less good at strategy. Given the recent proposals on paying for care, one thing that does need to be thought about is whether those of pensionable age should continue to be exempt from National Insurance contributions.