Despite the revival of formal Cabinet Government, it is interesting how much the Coalition Government depends on informal arrangements and in particular the personal relationship between David Cameron and Nick Clegg. This emerged from a presentation to the Magna Carta Institute seminar last week by Professor Robert Hazell of the Constitution Unit at UCL.
Cabinet committees are being taken more seriously and there is a right to refer issues up to the Coalition Commitee, but this ultimate star chamber has met only twice. The Coalition Operation and Strategic Planning Group was intended to meet weekly, but has been replaced by informal processes. Cabinet Committees resolve interdepartmental issues, not coalition issues.
Much depends on the bilaterals between Dave and Nick. They usually chat on the phone on Sunday evening and have a regular meeting each Monday morning. The Quad is made up of the PM and Deputy PM, plus the Chancellor and the Chief Secretary to the Treasury. Sometimes it functions as 'Quad plus' when other ministers are brought in. There are slo bilaterals between Oliver Letwin and Danny Alexander, as well as Letwin's 'policy catch ups'.
Tuesday, 24 May 2011
Saturday, 21 May 2011
Why we should take debt seriously
There are those who argue that Britain's debt problem is not serious and simply a cover for David Cameron to slash the public sector. Two interesting posts by economist Mark Harrison argue the contrary case: Debt
Quite apart from anything else, having a large debt means that a great deal of money is spent servicing it. Britain has the lowest costs of any major country in terms of servicing its debt, but even so it cost a mouth watering £44 billion last year. Think of the opportunity cost of that.
Britain has been living beyond its means in terms of personal and public consumption for some time. How that burden is shared out between public expenduiture cuts and reduction in personal income is a matter for political judgement. However, 'rebalancing' the economy certainly involves a squeeze on personal incomes so that there is an export led recovery.
Of course, there is a political cost to that. But even if confidence in the Coalition's economic competence is declining, as polls suggest it is, voters evidently many reservations about Ed Miliband.
It may provide an opportunity for parties of the populist right like UKIP who have an alternative narrative about globalisation and Europeanisation. However, such parties are often not well led and it is difficult for them to succeed under a first past the post system.
The one leader and party that is riding high in Britain at the moment is Alex Salmond and the SNP. The Scottish question could potentially become the equivalent of the Quebec question in Canada: never resolved, but always a key factor in national politics.
Quebec has, of course, achieved considerable autonomy and even has a ministry of foreign affairs. The future for Scotland might not be separation, but it could come close to what was mooted in Quebec at one time: sovereignty-association.
Quite apart from anything else, having a large debt means that a great deal of money is spent servicing it. Britain has the lowest costs of any major country in terms of servicing its debt, but even so it cost a mouth watering £44 billion last year. Think of the opportunity cost of that.
Britain has been living beyond its means in terms of personal and public consumption for some time. How that burden is shared out between public expenduiture cuts and reduction in personal income is a matter for political judgement. However, 'rebalancing' the economy certainly involves a squeeze on personal incomes so that there is an export led recovery.
Of course, there is a political cost to that. But even if confidence in the Coalition's economic competence is declining, as polls suggest it is, voters evidently many reservations about Ed Miliband.
It may provide an opportunity for parties of the populist right like UKIP who have an alternative narrative about globalisation and Europeanisation. However, such parties are often not well led and it is difficult for them to succeed under a first past the post system.
The one leader and party that is riding high in Britain at the moment is Alex Salmond and the SNP. The Scottish question could potentially become the equivalent of the Quebec question in Canada: never resolved, but always a key factor in national politics.
Quebec has, of course, achieved considerable autonomy and even has a ministry of foreign affairs. The future for Scotland might not be separation, but it could come close to what was mooted in Quebec at one time: sovereignty-association.
Friday, 20 May 2011
Walking the tightrope
Both the Government and the Bank of England are walking a tightrope in terms of economic policy at the present time. The Bank is (quite properly) a relatively secretive institution, even if much more transparent than it was in the past and I am not claiming to have any special inside knowledge.
However, there are concerns by observers of the Old Lady that inflation has got baked into the cake. Electricity prices are expected to go up by 10 per cent in the summer and gas prices by 15 per cent, the latter driven by liquified natural gas demand from Japan.
It could be argued that increasing interest rates would actually do very little to drive down inflation and would impact on consumers by pushing up mortgage rates. The Bank does consider, however, that inflation will eventually diminish because there will be no further VAT rise; no further fall in sterling; and (hopefully) no big rise in energy prices.
Exports have been largely driven by sterling depreciation. It is particularly a matter of concern that imports by businesses resoponding to Bank surveys have not been affected at all despite a 20 per cent rise in their cost. Imports are predominantly intermediate ones suggesting that no domestic substitution is occurring. However, it is possible that the rate of growth in imports may have been slowed down.
The consequences of an unprecedented fiscal contraction in the UK economy have yet to be seen. However, big corporates do have tons of cash they could spend. Employment intentions are picking up, but a lot of it is part-time and self-employed.
There have been substantial differences on the Monetary Policy Committee (MPC), although these will diminish with the departure of ultra inflation hawk Andrew Sentance who even seemed to question the Bank's forecasts. Sentance's argument is in essence that it is really all about global imbalances rather than UK domestic conditions and the former will persist.
More generally, the differences on the MPC reflect considerable uncertainty about risks. Some members of the MPC are concerned about the credibility gap in terms of constant overshooting of the inflation target. People are arguably more concerned about growth and employment than inflation.
At the moment there is an unprecedented monetary expansion and at some point this will have to stop. However, there is believed to be some concern in Bank circles about the fragility of the economy and downside risks.
The Bank has in effect admitted that the output gap (slack in the economy) is smaller than thought and this means that any expansion may see limited productivity gains and create inflationary pressures. It is unfortunate that the output gap is one area in which data is less reliable, but it is evident that some physical capacity has been destroyed for ever. There are also some signs of skill shortages appearing, especially in engineering.
One uncertainty is the sterling exchange rate. Bank thinking is to prefer the current rate, but a mild appreciation seems likely. In any event it cannot be managed.
Growth has been driven by larger firms, but business has never been better at the company owned by one of my children and her husband. New workers have been taken on and the order book is full. However, they were not receptive to the idea of a chat with the Bank's regional agent.
However, there are concerns by observers of the Old Lady that inflation has got baked into the cake. Electricity prices are expected to go up by 10 per cent in the summer and gas prices by 15 per cent, the latter driven by liquified natural gas demand from Japan.
It could be argued that increasing interest rates would actually do very little to drive down inflation and would impact on consumers by pushing up mortgage rates. The Bank does consider, however, that inflation will eventually diminish because there will be no further VAT rise; no further fall in sterling; and (hopefully) no big rise in energy prices.
Exports have been largely driven by sterling depreciation. It is particularly a matter of concern that imports by businesses resoponding to Bank surveys have not been affected at all despite a 20 per cent rise in their cost. Imports are predominantly intermediate ones suggesting that no domestic substitution is occurring. However, it is possible that the rate of growth in imports may have been slowed down.
The consequences of an unprecedented fiscal contraction in the UK economy have yet to be seen. However, big corporates do have tons of cash they could spend. Employment intentions are picking up, but a lot of it is part-time and self-employed.
There have been substantial differences on the Monetary Policy Committee (MPC), although these will diminish with the departure of ultra inflation hawk Andrew Sentance who even seemed to question the Bank's forecasts. Sentance's argument is in essence that it is really all about global imbalances rather than UK domestic conditions and the former will persist.
More generally, the differences on the MPC reflect considerable uncertainty about risks. Some members of the MPC are concerned about the credibility gap in terms of constant overshooting of the inflation target. People are arguably more concerned about growth and employment than inflation.
At the moment there is an unprecedented monetary expansion and at some point this will have to stop. However, there is believed to be some concern in Bank circles about the fragility of the economy and downside risks.
The Bank has in effect admitted that the output gap (slack in the economy) is smaller than thought and this means that any expansion may see limited productivity gains and create inflationary pressures. It is unfortunate that the output gap is one area in which data is less reliable, but it is evident that some physical capacity has been destroyed for ever. There are also some signs of skill shortages appearing, especially in engineering.
One uncertainty is the sterling exchange rate. Bank thinking is to prefer the current rate, but a mild appreciation seems likely. In any event it cannot be managed.
Growth has been driven by larger firms, but business has never been better at the company owned by one of my children and her husband. New workers have been taken on and the order book is full. However, they were not receptive to the idea of a chat with the Bank's regional agent.
Wednesday, 18 May 2011
The economic outlook
The Magna Carta institute at Brunel University run by Justin Fisher held an interesting event on 'The Coalition - one year on' at the British Academy earlier this week. I plan to talk about some of the other presentations later, but here is a summary of what I had to say (my statistics generally come from the National Institute for Economic and Social Research).
The 'privatised Keynesianism' model identified by Colin Crouch in which the economy is driven by consumer debt linked to the housing market is no longer viable in the medium term, if at all. Consumer spending is forecast to fall by 0.6 per cent in 2011 (it still accounts for two-thirds of aggregate demand).
Consumers are being squeezed by inflation at 4.5 per cent with real disposable incomes falling. Indeed, I think that the Bank of England has de facto abandoned the inflation target. That may not be a bad thing, but they won't admit it is what they have done. Given fiscal consolidation, the economy needs a monetary stimulus and inflation also erodes the debt burden.
Real house prices are forecast to fall by 4.5 per cent in 2011, although the London market is still relatively buoyant, especially at the higher end where it is driven by foreign buyers. There is a fear of unemployment, particularly in the public sector. The Government's austerity rhetoric may have dented consumer confidence.
Export led manufacturing growth is forecast to be 6.9 per cent this year and 4.3 per cent in 2012. This is mainly driven by the weakness of the pound. All three political parties support rebalancing the economy and this is one of Nick Clegg's little known strategic objectives. However, much of manufacuturing is now essentially assembly operations and much of the value chain in industry has been wiped out. It should be noted that past government industrial policy interventions have not been conspicuoulsy successful.
The OBR's growth forecast for 2011 is now seen as rather optimistic and many commentators anticipate 1 to 1.5 per cent. It is unlikely that the economy will grow faster than the trend rate of 2.1 per cent until 2013. The higher growth rates recorded recently have little to do with government policy but reflect the fact that they have been hit less hard by the banking crisis (so far, but they are exposed to a Greek default). The German economy also has strength in high quality, high valued added manufacturing.
The output gap is probably larger than we thought whuich means that the sustainable output of the economy is lower than thought. Productivity growth is likely to be low and the economy will not grow as fast as it did without generating inflation.
It should be noted that the Coalition Government does not aim to eliminate the cyclical deficit (the cyclically-adjusted current budget) so in fact Conservative and Labour positions on the budget are less far apart than the rhetoric would suggest. There will be public spending increases in real terms over the Parliament, although as a share of GDP public expenditure will fall back to 40-41 per cent.
Given that the weakness of the recovery will depress tax revenue, even if (a big if) spending targets are met, net borrowing will fall to 3.6 per cent of GDP in 2015-16 rather than the projected 1.5 per cent. The current budget will run a deficit of 2.2 per cent of GDP compared with the 0.2 per cent forecast.
The Government has been criticised for the lack of a growth strategy, but there are limits to what governments can do to stimulate growth. The most useful measures such as skill formation only bear fruit in the medium term.
The 'privatised Keynesianism' model identified by Colin Crouch in which the economy is driven by consumer debt linked to the housing market is no longer viable in the medium term, if at all. Consumer spending is forecast to fall by 0.6 per cent in 2011 (it still accounts for two-thirds of aggregate demand).
Consumers are being squeezed by inflation at 4.5 per cent with real disposable incomes falling. Indeed, I think that the Bank of England has de facto abandoned the inflation target. That may not be a bad thing, but they won't admit it is what they have done. Given fiscal consolidation, the economy needs a monetary stimulus and inflation also erodes the debt burden.
Real house prices are forecast to fall by 4.5 per cent in 2011, although the London market is still relatively buoyant, especially at the higher end where it is driven by foreign buyers. There is a fear of unemployment, particularly in the public sector. The Government's austerity rhetoric may have dented consumer confidence.
Export led manufacturing growth is forecast to be 6.9 per cent this year and 4.3 per cent in 2012. This is mainly driven by the weakness of the pound. All three political parties support rebalancing the economy and this is one of Nick Clegg's little known strategic objectives. However, much of manufacuturing is now essentially assembly operations and much of the value chain in industry has been wiped out. It should be noted that past government industrial policy interventions have not been conspicuoulsy successful.
The OBR's growth forecast for 2011 is now seen as rather optimistic and many commentators anticipate 1 to 1.5 per cent. It is unlikely that the economy will grow faster than the trend rate of 2.1 per cent until 2013. The higher growth rates recorded recently have little to do with government policy but reflect the fact that they have been hit less hard by the banking crisis (so far, but they are exposed to a Greek default). The German economy also has strength in high quality, high valued added manufacturing.
The output gap is probably larger than we thought whuich means that the sustainable output of the economy is lower than thought. Productivity growth is likely to be low and the economy will not grow as fast as it did without generating inflation.
It should be noted that the Coalition Government does not aim to eliminate the cyclical deficit (the cyclically-adjusted current budget) so in fact Conservative and Labour positions on the budget are less far apart than the rhetoric would suggest. There will be public spending increases in real terms over the Parliament, although as a share of GDP public expenditure will fall back to 40-41 per cent.
Given that the weakness of the recovery will depress tax revenue, even if (a big if) spending targets are met, net borrowing will fall to 3.6 per cent of GDP in 2015-16 rather than the projected 1.5 per cent. The current budget will run a deficit of 2.2 per cent of GDP compared with the 0.2 per cent forecast.
The Government has been criticised for the lack of a growth strategy, but there are limits to what governments can do to stimulate growth. The most useful measures such as skill formation only bear fruit in the medium term.
Friday, 6 May 2011
A good night for Dave
Dave Cameron has reason to be pleased with the local election results so far. BBC projections put the Conservatives on 35 per cent as against 37 per cent for Labour and 15 per cent for the Lib Dems. This is not a bad outcome for a party implementing unpopular policies. The Conservatives are also likely to be able to celebrate a big majority in the AV referendum.
In Scotland the presidential style campaign run by the canny Alex Salmond has paid off with a clear majority for the SNP. Labour may be able to take sole charge of the Welsh Assembly, but even there the result is on a knife edge. The results hardly show that voters think that they have a convincing alternative narrative or that they see Ed Miliband as a future prime minister.
Once again it is the Lib Dems who are the whipping boys for the Coalition Government. As expected, they have lost heavily in the council elections, especially in the north. There will now be increased party pressure on Nick Clegg to differntiate himself from the Conservatives.
Some of the things said in the AV referendum have left a sour taste in the mouth. It may never be glad, confident morning again, but it is not the end of the coalition. The two parties are inextricably bound together.
In Scotland the presidential style campaign run by the canny Alex Salmond has paid off with a clear majority for the SNP. Labour may be able to take sole charge of the Welsh Assembly, but even there the result is on a knife edge. The results hardly show that voters think that they have a convincing alternative narrative or that they see Ed Miliband as a future prime minister.
Once again it is the Lib Dems who are the whipping boys for the Coalition Government. As expected, they have lost heavily in the council elections, especially in the north. There will now be increased party pressure on Nick Clegg to differntiate himself from the Conservatives.
Some of the things said in the AV referendum have left a sour taste in the mouth. It may never be glad, confident morning again, but it is not the end of the coalition. The two parties are inextricably bound together.
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