The Great Debate UK

Part-paid gilts should return

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REUTERS– Neil Collins is a Reuters columnist. The opinions expressed are his own –

LONDON, April 23 (Reuters) – The UK Government needs to raise four billion pounds a week, every week, in the financial year to next April, to bridge the gap between its tax income and its spending.

Raising such stupendous sums — getting on for 15 percent of each week’s British national output — has never been tried before, and nobody really knows whether it can be done.

The optimists point to the financial year just ended, in which the government raised 146.5 billion pounds, as evidence that this year’s plan for 220 billion pounds can be met.

Darling gambles with Britain’s credit

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REUTERS– Neil Collins is a Reuters columnist. Christopher Fildes is a guest columnist. The opinions expressed are their own –

LONDON, April 22 (Reuters) – The Treasury is the UK government’s finance ministry. There are many other government departments, but in the years since 1997, all have been turned into subsidiaries of the Treasury, the power base of Prime Minister Gordon Brown when he was chancellor.
His ambition was to micro-manage in every one of them. Today we saw the true cost of this disastrous experiment. All major countries have serious problems with their government deficits, but the most entrenched of Britain’s are home-made.
Britain’s public finances, which had been deteriorating for years, are wrecked. Even on his successor’s rose-tinted projections, they will not return to a balanced Budget for at least the next nine years.
Given that no Treasury projection for more than three or four years out bears any resemblance to reality, and given the there will have been at least two elections between now and then, this is a post-dated cheque drawn on the Bank of Fantasy.
Alistair Darling has learned at the feet of the master of obfuscation, double counting and footling detail. So we heard all about the green recovery, from a government that sees no contradiction between raising the cost of fuel and granting tax concessions to North Sea explorers. There may be more oil there, but for the state, this is now a dry well.
The Chancellor did not dare say what he and his advisers really think about the green-tinted scheme wished on them by Peter Mandelson, the Trade Secretary, to scrap your old banger for 2,000 pounds towards a new one.
At least they managed to limit the damage to a single year. If your car is not 10 years old by next March, it will be junked in the ordinary way.
Junk is what the last Treasury forecast has now become. It’s barely five months since Darling’s last emergency package. It looked like a work of fiction then, and now there’s no doubt. In his Budget a year ago, he was expecting to borrow 43 billion pounds in 2008/09, crowing that the previous peak was much higher, at 7.8 percent of gross national product. The sum would come down after that.
By November, there was no crowing. The projected borrowing requirement was 78 billion pounds, and was going up, to 118 billion in the following year, not down. Even those horrible figures have now been left far behind. Last year he needed 90 billion pounds, and in 2009/10, he says, it will be 175 billion pounds, or 12.4 percent of GNP.
The forecast is then for a fall, although not by much. In 2010/11 he – or his successor – will still be 173 billion pounds short of balancing the books.
So in three years the government will have borrowed 5,600 pounds for every man, woman and child in the country. That’s over 20,000 pounds for what the prime minister routinely calls the average hard-working family.
In any business, from a corner shop to a multi-national, this arithmetic would be immediately fatal to those who had put it forward. Their credit would be ruined, and the business’s credit could not be restored while they were still in charge.
Britain’s credit is ultimately expressed in the external value of sterling, as Brown himself has said. The pound has already been devalued informally by a greater amount than the two previous formal devaluations in 1967 and 1992.
The short-term effects have been mostly benign, but the possibility of a flight from the currency is always there. This Budget makes it a little more likely.
In this context, everything else is detail. The biggest detail is the attack on what Darling describes as “those who gained the most”. This is a sop to his fractious party in parliament.
From next April anyone earning over 150,000 pounds a year will be paying 51.5 percent on every extra pound earned, the highest rate in Britain for 21 years. They will also lose their tax-free allowances and half the tax relief on their pension contributions.
The small print betrays that the government is relying on these measures to bring in 7 billion a year, sometime in the middle distance. This looks as unconvincing a forecast as any in Darling’s portfolio. Well-paid labour is highly mobile nowadays, and will go where the prospects are high and the taxes low.
Nothing else in the 250 pages of the Budget Report is worth a row of green beans. Even the Treasury can’t put a price on the measure to reduce VAT on children’s car seat bases.
Despite its name, “enhanced capital allowances” will actually raise more money — 10 million pounds, or enough to run the government machine for about eight minutes.
Thrashing around for something cheerful to say, Darling kept telling us how much worse off other people were. To assert that “we and other countries have been battling against a succession of shocks which have hit the world economy” suggests that our luckless planet had crossed orbits with a large economic meteorite.
The former chancellor, now prime minister, assumed the sun would shine forever, and that he had somehow managed to suspend the usual rules of economics — or as he himself put it, “no more boom and bust.” In recent years, he produced growth by borrowing, pouring the money into the public services for ever-decreasing returns.
Each time he borrowed more than he had forecast. Now the bill has arrived, and it’s plain that neither he nor his successor has the slightest idea of what to do. Marc Ostwald of Monument Securities summed it up within minutes: “a Budget of tinkering with the public sector financial sector meltdown, with no substance or obvious strategy whatsoever.”
One day the Treasury will remember how to mind its own business, under a chancellor who grasps that until the public finances are put in order, nothing else will go right. The longer the wait, the worse will be the reckoning.

from UK News:

How necessary is the G20 summit?

From the cosy fireside chats and walks in the woods of 30 years ago, world summitry has expanded beyond all recognition, with this week's G20 meeting in London being billed in some quarters as the biggest gathering of leaders since 1945.

But the problems now are of course much bigger too. Long gone are the days when a few soothing words about co-operation on currencies would be enough to declare a summit a success.

from The Great Debate:

A new direction in global financial regulation

John Kemp Great Debate-- John Kemp is a Reuters columnist.  The views expressed are his own --

UK Prime Minister Gordon Brown's call today for a new G20 charter of principles on financial regulation  reflects an emerging consensus among policymakers that, once the immediate crisis has passed, the regulatory framework must be fundamentally redesigned.

In particular, policymakers are concerned with how to correct the basic moral hazard problem in which bankers have an incentive to extend too much credit, while private firms and households have an incentive to take on too much debt.

from UK News:

Easing the pain for small businesses

The government has unveiled a plan to guarantee up to 20 billion pounds of loans to help small businesses survive the credit crunch.

But there are concerns that will not be enough to get the banks lending sufficient funds to help businesses get access to cash.

from UK News:

A profound shift in party politics

David Cameron's decision to ditch a major Conservative pledge to match Labour spending plans pound for pound was hailed by commentators as an important step in the politics of the recession, opening up a clear gulf between the two main parties' economic policies but exposing the Tories to considerable risk.

Labour is expected to cut taxes, accelerate public spending and announce more borrowing in Monday's pre-budget report. Now their supporters can revive the spectre of "Tory cuts" to funding for schools and hospitals which helped the Conservatives lose the last two elections.

from UK News:

Boosting the economy: lower taxes, higher spending or both?

Prime Minister Gordon Brown has suggested he will push expansionary fiscal policies to help boost the economy. Brown's comments were the latest in a series from him and Chancellor Alistair Darling stressing the importance of boosting the economy, which shrank in the third quarter of 2008 for the first time in 16 years and is expected to contract more sharply next year.

Bank of England Governor Mervyn King has also put his weight behind "some fiscal stimulus", just as the Bank predicted in its quarterly inflation report that the economy would shrink sharply next year.

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