The Great Debate UK
from The Great Debate:
Britain’s austerity experiment is faltering
It was the Welsh sage Alan Watkins who remarked that a budget that looked good the day it was delivered to the British Parliament was sure to look terrible a week later, and vice versa. The avalanche of new information dumped by the Treasury is simply too much to grasp at a single sitting, and governments tend to bury bad news in a welter of statistics. And so it proved with finance minister George Osborne’s budget served up last week.
The immediate headlines stressed that rich Brits would pay less income tax – down from 50 percent to 45 percent – but it only took a day before even traditional Conservative cheerleaders like the Daily Mail were condemning Osborne for funding tax breaks for bankers and billionaires by stealing from those living in retirement. The paper’s cover screamed: “Osborne picks the pockets of pensioners.”
Osborne insists he is sticking to his “Plan A” to reduce the public deficit by sharply cutting state spending by 25 percent over the five-year parliament and imposing severe austerity. Because he believes his “Plan A” is on target, all he needed was a touch on the tiller. He therefore designed his budget to be fiscally neutral – that is, for every tax cut there was a corresponding tax increase. He put up tobacco and alcohol duties and sliced a little off corporation tax.
Osborne’s broader economic experiment, however, is fast faltering. If it were a drug trial, doctors would be urgently taking patients off the snake oil and feeding them the placebo. In 2010, he inherited from Gordon Brown’s Labour government a fast-rising recovery in economic growth, but now, after two years, GDP is headed south, and Britain is teetering on the edge of a government-inspired double-dip recession. In the last quarter of last year, GDP shrank by 0.3 percent.
As predicted, “Plan A” is not working. The number of jobless is 2.67 million (8.4 percent) and rising, the highest rate for 17 years, and the cost of paying the unemployed to do nothing is soaring. Inflation is running at 3.7 percent. Most galling of all, no doubt, for Cameron and Osborne, who were rushed into taking drastic measures when Bank of England Governor Mervyn King spooked them into believing the markets would punish them if they did not tackle the deficit right away, the rating agencies Moody's and Fitch have warned that notwithstanding the debt-reduction efforts, Britain could soon lose its AAA status.
Far from spurring the British economy to greater things, the Cameron coalition’s slash-and-scrimp policies have moved the government sector even deeper into debt. According to the latest Treasury figures, in February the current budget deficit rose to £11.1 billion. Borrowing rose to £15.2 billion. And the net public debt was £995 billion, or 63.1 percent of GDP. Critically for the coalition, even by the Treasury’s optimistic estimates, public-sector net debt as a percentage of GDP will continue to rise for another two years, maxing out at 76.3 percent just in time for Cameron to call a general election.
Debt reduction and austerity may be popular with the financial markets and Austrian economists, but British voters are fast beginning to tire of hard times. Cameron’s cry of “We’re all in this together” sounds a little hollow when he and his multimillionaire colleagues, such as Osborne – 23 of the 29 members of the Cabinet are worth more than $1.6 million – are so conspicuously not consuming the gruel they are feeding the rest of the nation. Cameron took five expensive high-profile family holidays last year, four of them abroad, all dutifully recorded in detail by Fleet Street’s finest.
from Breakingviews:
Euro-recession, not rebellion, is what boxes UK in
By Ian Campbell. The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
An E.U. protest vote by members of his own party has knocked the UK prime minister. For the moment, the Conservative party rebellion is largely symbolic.
But it could be the thin end of the wedge. David Cameron, just like Margaret Thatcher before him, risks being undermined by his party's euro-divisions.
But Cameron's more immediate European problem is that the euro crisis looks very likely to drag an already-weak UK into recession. Cameron, rightly dedicated to reducing public spending, could get caught in the crossfire. Fiscal policy revisions may be necessary.
Cameron's left-leaning political opponents blame too-tight fiscal policy for the UK's weakness. It's true that even before Europe took another turn for the worse, the UK was sliding towards recession. In August unemployment rose to a near 17-year high of 2.57 million. British households aren't spending. They fear losing their jobs and their finances are being doused by inflation of 5.2 percent while their incomes rise by less than 2 percent. Britain's recovery isn't going to begin at home. The trouble is, it won't begin in Europe either. And 47 percent of UK exports go to the euro zone.
Latest growth numbers for Europe are still worse than the UK's. Economic activity in the euro zone contracted in October at the fastest rate for 27 months. The risk of outright recession is high. Things are so bad the European Central Bank might even cut its interest rate.
So where does that leave UK policy-makers? The Bank of England has already acted, upping quantitative easing by 75 billion pounds at least in part because it sees euro zone troubles getting worse.
UK deficit cutting – lessons for the US
The news that China is engaged in talks over the building of a rival to the Panama Canal ought to set alarm bells ringing in Washington – and not just because of its obvious geopolitical implications. It is yet another sign that the Chinese have finally woken up to the fact that relending their hoard of dollars straight back to the USA is not a very smart policy, at least not as long as the Federal Government carries on spraying out greenbacks like a tipsy GI on furlough, and without Chinese support, the outlook for the Treasury bond market looks threatening.
Those who argue that it is a bad time for imposing austerity should be ignored – in the good times there was no sense of urgency, and in any case deficit reduction has to be a multiyear project. The Federal deficit is running at over 10 percent of GDP and the projections for the coming decade on unchanged policies are too frightening to contemplate.
That is the background to the Obama budget – in qualitative terms, it is very similar to the scenario faced by Britain’s new Coalition Government when it came to power last May. What lessons can America draw from the UK experience?
One caveat needs to be made at the outset. Since the mills of government grind slowly, the full impact of Britain’s austerity budget is only just beginning to be felt, so some judgements may be a little premature. However, start with Britain’s mistakes. It was a gross error to ringfence any spending items – and the choice of the National Health Service and Overseas Aid as protected species was particularly perverse, not least because it left the defence budget to sustain a sizeable cut while the country is still at war. America should nominate no sacred cows. The burden of the cuts has to fall overwhelmingly on the big spending programs: social security, Medicare and Medicaid, and defence.
Politically, cuts in spending might be easier to achieve if they were set in the context of an overarching vision – something Britain’s Premier has tried to achieve with his so-called Big Society, which appears to mean encouraging voluntary organisations of one kind or another to take over the provision of a whole range of services from government, saving the taxpayer many billions of pounds in overheads, while at the same time proving far more responsive to local people’s needs and aspirations. It has to be said that, so far, this Big Idea has been greeted with cynicism bordering on contempt by Britain’s political class and with total indifference by the rest of the population, but only time will tell. It is hard to imagine a Democratic president wholeheartedly embracing this particular strategy of making a virtue out of a necessity, but given the emphasis on voluntary groups (especially churches) something along these lines might be popular with the Tea Party, and could form the basis of a deal on taxes, which is sorely needed.
The approach to taxation ought to follow UK in at least one respect. Faced with the need to raise revenue to cover at least a third of the projected turnaround in the fiscal balance, any significant rise in taxes on income was ruled out from the start. Instead, the Coalition raised expenditure tax (aka Value Added Tax) from 17.5 percent to 20 percent. Although the American situation is made more complex by the presence of local sales taxes, it still should be possible to raise revenue either by a federal expenditure tax or by an increase in the tax on gasoline, which could be presented as a step towards lessening the country’s dependence on imported oil and/or a green tax to appeal to Obama’s own supporters.
Ideally, just as the Bowles-Simpson deficit reduction commission recommended, the rise in indirect taxation would be combined with the long-overdue abolition of most of the direct (i.e. income) tax exemptions which do so much to narrow the tax base and, more importantly, distort spending and saving patterns – and which make the U.S. tax code a nightmare of complexity (matched, however, by Britain’s tax code).
Taking power from the powerless
-Clive Stafford Smith is the founder and director of Reprieve. The opinions expressed are his own.-
It may be the most mean-spirited thing that David Cameron has yet said since he assumed the mantle of Prime Minister: “It makes me physically ill even to contemplate having to give the vote to anyone who is in prison.” It makes me physically ill to hear an elected official say such a thing.
On which tablet that Moses carried down from Mount Sinai does it say that prisoners should lose the right to vote? The European Court ruling condemning our practice does not pull its conclusion out of thin air: countries across Europe and around the world allow prisoners to vote. Even China only takes the right away from those condemned to life in prison, or to death. Because a prisoner is so often a person who has dwelt on the margins of society, he is the person who most needs the franchise.
Felony disenfranchisement — as the practice is called in the US — has ever been employed to take power from the powerless. When slavery was abolished, some states rushed to deprive convicts of the vote, as a proxy for race. They similarly imposed literacy and property requirements. Only the felony rule survives, and it serves its original, racist purpose. Whites make up 74% of drug users, but only 19% of drug prisoners – nationwide, African-Americans are seven times as likely to lose their right to vote. George W. Bush would never have been president, but for the racist removal of the vote – fully one third of black citizens cannot vote in Florida. The rule in Britain is similarly discriminatory against minorities. Perhaps the Conservative PM was well aware of this when he made his comment.
“Frankly,” Cameron continues, “when people commit a crime and go to prison, they should lose their rights, including the right to vote.” To be sure, they lose their liberty, perhaps the most precious of all rights. What further Dickensian abuses does Cameron propose? Should prisoners lose their right to petition the government for redress? Should they lose their right to be free from torture?
Cameron is pandering to the worst instincts of his party’s extreme wing, turning the issue into an anti-Europe, anti-Human Rights Act rant when the real question is how he can justify disenfranchising those who most need a political voice. It is the British who are out of step. The courts of Canada, Israel and South Africa have agreed with the European Court that the British rule marginalises the people who most need integration.
Cameron’s disdain for the victims of this law is also hypocritical. Various members of his cabinet have described their youthful abuse of drugs; perhaps they have now told the full truth, perhaps not. But presumably, if only they had been caught, they would have fallen into the “revolting” class whose exercise of the franchise makes the PM so ill.
“Even China only takes the right away from those condemned to life in prison, or to death.” Actually China is a Communist Dictatorship so it takes away the right to a meaningful vote away from all it’s citizens bar those in the senior ranks of the Communist party. This is not a good point of comparison – we enfranchise far more people than China.
Cameron is representing the vast majority of the British public who oppose giving prisoners the vote. He is not playing to any wing of his party – there is a broad coalition in Parliament that opposes giving prisoners the right to vote. The UK Parliament voted 234 to 22 to prevent prisoners being allowed to vote. Thirteen European nations have the same policy as we do – a blanket ban on prisoners voting. So the UK policy is not unique and is backed both by Britain’s Parliament and her people.
Tuition row: The beginning of the end for the coalition?
- Mark Kobayashi-Hillary is the author of several books, including ‘Who Moved my Job?’ and ‘Global Services: Moving to a Level Playing Field’. The opinions expressed are his own. –
Deputy Prime Minister Nick Clegg is on a mission to shore up support within his own party for the tripling of university tuition fees. The Liberal Democrats campaigned with a manifesto pledge claiming they would axe fees if they ever got into power. They got the power, but only via a coalition with the Conservative party, and though they claim that some Lib Dem pledges survived the coalition talks, the policy on tuition fees actually went the other way.
MPs will vote on the tuition fees policy tomorrow. Clegg has stated that all his ministers will support the government line, but though the ministers have been whipped into line, it looks like a large number of Lib Dem backbenchers are unhappy with their new reputation as the ‘Fib Dems’. Potentially a large number of them will vote against their own policy or abstain from voting altogether.
This rebellion over a key piece of legislation could be the beginning of the end for the coalition. A coalition government requires compromise, some favoured policies will be axed so that others survive and the result is a curious blend of the pledges made by two parties – often neither party will be entirely happy with their joint proposals.
But if the Lib Dems rebel on tuition fees now then one might expect the Conservatives to rebel over the tidbits thrown to their coalition partner, such as voting reform. If there is no agreement and the constituent parties rebel against the ideas their partner brought to the table then we don’t really have a coalition – just two warring parties. And if this forces an early election then Nick Clegg will see his party reduced to a tiny rump of MPs aimlessly wandering the backbenches, because even their own supporters have lost faith.
Clegg knows this, so he clings on to the lifeline of making the coalition work even though it positions him and his party as the opposite of what they campaigned for. Meanwhile he has to suffer the indignity of watching as the general population circulate YouTube videos of him promising to scrap tuition fees.
As yet I haven’t heard any references as to how the graduates are going to manage once they have left uni, apart from not having to repay the student loans until they are earning £21k. This is all well & good apart from the fact that all students graduating from uni will find it virtually impossible to get onto the property ladder. My son is at Med school at the moment and under the present system will still leave with a debt of approx £50k. Under the new system Medical graduates will have a debt of approx £70k. How many financial institutions will want to provide these graduates with a mortgage when they are already £50k-£70k in debt?
from Breakingviews:
Britain’s unkind cuts may help growth sprout
It was billed as a bloodbath, and it is. By slashing public spending by 81 billion pounds over five years, Britain's coalition government is reversing the big increases of previous years. The plan is billed as necessary pain to secure the country's financial future, but it is also ideological. The aim is to move from unaffordable levels of public employment and welfare to private employment and a balanced budget. The danger, however, is that the economy stalls.
The cuts to the civil service are drastic and will cause distress, even though most departments' budgets over the life of the parliament have been reduced by a fifth, not the threatened quarter. The BBC, the foreign office, the police, even the royal family: none have been spared. The government wants services to be delivered more cheaply -- which means by fewer people.
Britons know the public sector is not short of fat cats, and some fat cuts won't be the end of the world. Nevertheless, losing half a million public sector jobs is a heavy toll. If the private sector cannot absorb these workers, total UK unemployment may rise to a very high three million.
Taking the axe to many departments has allowed the government to lift health spending and maintain the schools budget. In welfare, however, it risks looking harsh. Ending child benefit for better-off families saves 2.5 billion pounds by 2015. But most of the overall 7 billion pound fall in welfare spending hits the least well off. Though the intention is to get people to swap welfare for work, the danger is greater social division.
The big macroeconomic risk is that the cuts cause a return to recession, thereby wrecking the government's fiscal calculations. That risk is real: house prices have not yet finished falling, and consumers are still deleveraging.
The Bank of England is likely to do its bit by cranking up the printing press and making money as cheap as possible. Nevertheless, tough years lie ahead. A country that was living far beyond its means now faces simultaneous big spending cuts and tax rises. The government will hope its decision brings clarity and a swift climb in private investment. A happy outcome is far from assured. But the decisive start is probably for the best.
What is Cameron offering India?
- Mark Kobayashi-Hillary is the author of several books, including ‘Who Moved my Job?’ and ‘Global Services: Moving to a Level Playing Field’. The opinions expressed are his own. -
Prime Minister David Cameron has loaded a 747 full of British business leaders and government ministers, all on a charm offensive aimed at securing deeper trade ties between the two nations. But what is he offering the Indians?
The Prime Minister is appealing to the ‘special relationship’, the centuries-old tie of the British Empire and Commonwealth. It’s true that many links remain. The Indian accounting, legal, and parliamentary systems all maintain similarities to the British systems, because the British were instrumental in creating these institutions.
But for how long will the old ties bind us? When will the empire strike back?
Many supposedly British brands are actually owned by Indian firms. Jaguar Land Rover cars, the steel manufacturer Corus, the Tetley tea you may have enjoyed over breakfast this morning. India is already a pervasive part of British life, and not just in the form of chicken vindaloo on a Friday night.
India was relatively untroubled by the global economic slowdown. Instead of hyper-growth, the economy grew at a gentler rate, but there is the difference. Their economy is still growing, and now at an accelerating rate. India is one of the famed BRIC nations, the bloc of Brazil, Russia, India, and China lumped together because of their fast-growing economies and huge populations.
And size does matter. There are 1.1bn people in India, and the labour force is approaching half a billion. The potential for more Indian companies to work with the UK is enormous, as is the market opportunity for British firms that can find a way to take their goods and services to the Indian people.
Bhopal and Lockerbie on the agenda for Cameron and Singh
With his admission last week that Britain plays second fiddle to America, David Cameron has an opportunity to get one over Barack Obama during his much trumpeted first Prime Ministerial visit to India.
That Britain is keen to forge a more strategic relationship with India is not in question. Who wouldn’t? The India of even ten years ago is a much different place to one that I see every time I visit. Whether we’re talking of the new Delhi airport, the Worli flyover in Mumbai, or the ever increasing number of middle class consumers armed with cash, there’s no doubt that India’s on the rise.
Facts and statistics aside, India’s influence needn’t be solely defined by economics. In real, I believe the biggest influence she can have rests in the realm of global politics.
Under Tony Blair, the British Government lead the charge to bring India to the top table. As cheerleader, Blair did the unthinkable; he changed the way India was talked about by stating his support for a permanent seat at the UN Security Council for India. Immediately, you saw India being invited to G8 meetings, where the world’s richest nations got together to decide the future course of global events. Like a new student in an old school, India observed attentively and said little.
However, as time has progressed; and as events have benefited India, Manmohan Singh is no longer the new student. He has an edge over Obama and Cameron. His experience in dealing with global finance and economics is proving to be a major strength for India. Not only is India at the top table, but it’s bringing its experience to bear by offering solutions to global problems, like it has with the debate around the imposition of a global bank levy.
But, what I believe is that Manmohan Singh has a lot to gain from this visit. Whilst it cannot openly speak of American double standards, it can certainly use this visit to flesh out some arguments that Cameron may wish to take the lead on.
Britain must adjust to new relationship with India
Last week, on his first Prime Ministerial visit to the United States, David Cameron conceded that Britain was the “junior partner” in the special relationship. Next week, I fear that at the end of the much anticipated visit to India, he may yet again, have to concede that Britain is the junior partner in this ever increasing important relationship.
I attended an event some years ago in which the then Director General of the Confederation of British Industry (CBI) — Digby Jones — evangelised the need for UK Plc to embrace India, not for nostalgic or historic reasons, but to secure their survival. He explained “in the fullness of time, the past 250 years will be seen as a mere blip, an anomaly, in which India was subjugated. The future belongs to a resurgent India”.
It’s difficult to argue otherwise, just take a look at some of the statistics that stand out:
• Almost 25 percent of the world workforce will reside in India within the next 15 years. The average age of its citizens will be a youthful 29 in 2020, whereas in Western Europe the average stands at 45. India’s demographic profile provides a huge opportunity for her in the next century.
• India has a middle class larger than the entire population of the US — some 300 million residents, armed with a disposable income and looking for new avenues to spend their cash. The spectacular thing is that India’s middle class isn’t confined to its big cities or metros as they refer to them, but to far flung corners of the country in what are second and third tier cities, representing new markets — the Holy Grail as far as some of the world’s biggest fast moving consumer goods companies are concerned.
• Just today, I read a tweet from someone I follow on Twitter about how the Indian Prime Minister’s Economic Advisory Council has forecast GDP growth at 8.5 percent this year and nine percent next year. Now, compare that with all the talk of Britain having avoided a double dip recession as a result of the growth in our economy at a measly 1.1 percent.
Friendly Cameron and King get mix right for now
By Ian Campbell
– The author is a Reuters Breakingviews columnist. The opinions expressed are their own –
Just in government and David Cameron’s relationships are in question. Eyebrows have been raised about the prime minister’s friendship with an Old Lady, sometimes known as the Bank of England. The affection appears reciprocated by Mervyn King, the Bank’s governor. But to think the Old Lady’s independence is compromised is probably to take things too far. The bank’s current low interest rate policy looks more than just a political favour.
The overly friendly talk has arisen because both sides have made comments that might be deemed injudicious. King appeared in May, before the election, to give his backing to Conservative fiscal tightening plans. Cameron, meanwhile, has often mentioned how he thinks tight fiscal policy should allow interest rates to stay lower for longer. The new government has also fixed up the Old Lady with greater supervisory powers.
Could this chumminess lead to the wrong monetary policy? King’s critics might think so. Inflation is 3.4 percent, well above the 2 percent target. Andrew Sentance, one of the monetary policy committee (MPC) members, voted for a rate increase in this month’s meeting. Adam Posen, another MPC member, acknowledged “a direct difference with the governor” on one thing. He sees not just one-off inflationary factors but also a slight “unanchoring” of inflation expectations. And yet Posen also sees the UK poised between two very different outcomes — either recovery or “the renewal of a severe recession”. Similarly, David Miles, a third member of the MPC, believes that now is not the right time to raise rates even though inflation is “uncomfortably” high.
The great uncertainty means no conspiracy theories are required to explain the MPC’s position. There can be little doubt King approves of the coalition government’s plans for fiscal tightening. The VAT increase may make inflation worse. Not for nothing, perhaps, was it deferred to January. But the overall initial impact on growth of fiscal tightening is likely to be negative. If government departments do indeed slash budgets by a quarter, unemployment may rise a lot. Private sector wages are already depressed. Big cuts should bleed inflation painfully away.
Fiscal tightening is essential. And low interest rates themselves look essential — to avert the nastier of Posen’s outcomes. The UK is getting the policy mix it needs.
Yeah, perhaps Mr Wapshott should explain in greater detail how he would fund the spending binge that he proposes.
Would he rob anyone with savings yet again, through quantitive easing, or does he have a better plan?
I guess we could always default on our debts, but that would also cause a lot of short-term pain.
So far, the government is still a long way off even balancing the books, and the budget deficit is hardly narrowing. So what we’re seeing so far is really not even “austerity”, it’s just a small concession towards sensible management of the country’s accounts. Something that the Labour government should have done years ago to stop us from getting into this mess in the first place!