The Great Debate UK

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.

from MacroScope:

Give me liberty and give me cash!

Come back Mr Fukuyama, all is forgiven.

In his 1992 book "The End of History and the Last Man", American political scientist Francis Fukuyama famously argued that all states were moving inexorably towards liberal democracy. His thesis that democracy is the pinnacle of political evolution has since been challenged by the violent eruption of radical Islam as well as the economic success of authoritarian countries such as China and Russia.

Now a study by Russian investment bank Renaissance Capital into the link between economic wealth and democracy seems to back Fukuyama.

Looking at 150 countries and over 60 years of history, RenCap found that countries are likely to become more democratic as they enjoyed rising levels of income with democracy virtually 'immortal' in countries with a GDP per capita above $10,000.

" Only five democracies above the $6,000 income level have died. Even democracies above the $6,000 level have a 99 percent chance of sustaining their political system each year. The only exceptions were the military coups in Greece in 1967 ($9,800), Argentina in 1976 ($8,180) and Thailand in 2006 ($7,440), and the events in Venezuela in 2009 ($9,115), as well as Iran in 2004 ($8,475)," RenCap global chief economist Charles Robertson writes.

The $6,000 per capita GDP seems to be a crucial level, marking the point where a country is likely to shift to democracy. Tunisia, which early this year triggered the wave of uprisings against autocracy across the Arab world, recently crossed that threshold.

Conversely, democracy is most fragile at the lowest income levels and when incomes are shrinking. The world's populous democracy, India, is a notable exception as its per capita income was under $800 from 1950-1967, and only exceeded $2,000 in 2003.

Aid: In favour of zero-tolerance

By Laurance Copeland

After one year, the progress report on the Coalition reads “Moving in the right direction, but with a lot more to do”.

Nonetheless, it is a prisoner of its commitment at the outset to leave two departmental budgets untouched: the NHS and international aid. It is not simply the amounts of money involved (colossal in the case of the NHS, relatively small for aid). It is also the signal it sends that there is such a status as sacrosanct, which immediately begs the question from policemen, firemen, teachers, the legal system, the armed forces: why isn’t our budget sacrosanct too?

This week we learned that Dr Liam Fox is opposed to fixing in law Britain’s aid budget at 0.7 % of GDP.  I can understand his disquiet, but I would feel far more sympathy if he favoured instead enshrining in law a more sensible level for international aid – say, 0.0%, or thereabouts. It is not really a question of what we can afford – personally, I would be quite happy to see 0.7% of GDP set aside in a fund to support international disaster relief (think of the 2005 Asian tsunami or the Haiti earthquake) – it is simply that ongoing international aid is at best a waste, at worst it actually damages the poor people it is supposed to help.

The justification for aid is, presumably, that it is intended to alleviate the suffering of those at the bottom of the income distribution in countries which are themselves too poor to be able to help.  However, when you actually look at the list of recipients of aid from the UK, you find that it includes a number of countries which ought to be capable of providing a tolerable standard of living for their own population without outside assistance e.g. Angola, with its vast natural resources (oil, gas, diamonds etc) and, unbelievably, Russia, which is even better endowed both with raw materials and with billionaires.

It was reported a few weeks ago that HMG was considering crossing countries like these off its gift list – not before time, you may think – but that leaves on the list a number of other recipients whose status might well be questioned, notably India.

On the one hand, even after a decade or so of rapid growth, India still probably holds the greatest concentration of misery on the planet. Yet at the same time India feels able to afford not only one of the world’s largest and best-equipped armed forces, with a well-developed nuclear capability and delivery systems to match, but also maintains a gift list of its own, including among its clients Myanmar, Afghanistan, Bhutan and a number of African countries.

The budget must help SMEs to survive and grow

By Bobby Lane, Partner at Shelley Stock Hutter LLP. The opinions expressed are his own.

Everyone in my practice, and no doubt anyone advising the five million UK small and medium-sized enterprises (SMEs), welcomed the Prime Minister’s latest show of support for them at the recent Conservative Party conference.

Yet this “power to SMEs” speech is something we have heard from politicians on all sides of the house in the past. In 2009 when discussing the pre-budget report, Alistair Darling talked about providing “real help when businesses need it most” and “better access to credit”. We are now in 2011, and my clients will confirm they are still waiting.

Declaring war on the “enemies of enterprise” and being on the side of “go-getters” may be rousing rhetoric from our current government. However, my concern is that we have heard it all before and the time for talking has long passed.

Access to finance is, in some instances, harder than ever to obtain — especially if you are starting up. In addition, the cost of employing staff is due to increase in April this year and the full effects of the spending cuts are still on the way. In my view the government has to act quickly, decisively and significantly by introducing hard and fast measures that will assist all SMEs within the UK — both to survive and assist in their growth.

The national insurance contribution holiday that was introduced to assist start-ups in some areas was a step in the right direction, but should be extended to include the whole country. The creation of new enterprise zones may also go some way to provide support to start-ups.

The Enterprise Finance Guarantee (EFG) scheme has received much bad press, but has gone some way to help businesses and should be reviewed further to identify ways of encouraging the banks to lend more under the scheme. With the banks’ credit committees still nervous to lend to any business that does not tick every box and then some, the government could look at increasing the initial size of the guarantee provided from 75 percent to 100 percent and then scale it back to 75 percent over the period of the loan.

A budget for Growth?

By Thomas Story, Tax Director, BDO LLP. The opinions expressed are his own.

George Osborne has promised that measures to boost sustainable growth will be central to this week’s Budget. To meet this objective, the Chancellor faces the challenge of accelerating the reform of business taxation within the severe constraints imposed by the overall fiscal position and the political imperatives of the coalition government.

Many previous reforming Chancellors have benefited from a more benign fiscal outlook to facilitate fundamental fiscal reform (Nigel Lawson and Gordon Brown spring to mind). The daunting fiscal deficit means that any tax reforms must be achieved within a tax neutral framework; Geoffrey Howe’s Budgets in the early 1980s are a closer precedent but the need to accommodate both parties to the coalition agreement provides additional dilemmas in 2011.

The emergency budget in June 2010 set out the road map for corporate tax reform which outlined a vision of a more competitive tax framework with the aim of making the UK the location of choice for international business. This set out underlying principles including a commitment to a simpler taxation system with lower headline rates but acknowledged that these must be achieved for the present without any overall reduction to the levels of corporate tax receipts. In practice, this can only be achieved by restricting targeted tax reliefs.

The main rate of corporation tax is already scheduled to be cut from 28 percent to 24 percent over four years, which will be partly funded by reductions in capital allowances on plant and machinery. To maintain this momentum, the Chancellor must be tempted to go further, perhaps by announcing a target corporation tax rate of 20 percent or less. This may be achievable if there is a substantial improvement in levels of corporate profitability provided, of course, that the growth targeted by the Chancellor can, indeed, be sustained over the next four years.

To date, the other main thrust of corporate tax reforms have been to simplify and restrict the scope of rules addressing Controlled Foreign Companies (‘CFC’s) and overseas branch profits. The common themes of these reforms is to promote the UK as a location for international groups by introducing a more territorial basis of taxation and ensuring that anti-avoidance rules apply only where profits are artificially diverted from the UK.

It is understandable that the emergency budget focused on these areas given the pressing need to enhance the attractiveness of the UK as a location for large international groups. Further details of these reforms can be expected in this budget. The Chancellor must tread carefully to fulfill these objectives while taking account of the growing public intolerance for wholly artificial tax planning.

Budget will force ‘squeezed middle’ to muddle through

By John Evans, CEO of Incahoot.com. The opinions expressed are his own.

It’s a cold November morning last year, and in the Today programme studio Ed Miliband sits across the desk from John Humphrys.

John: “So Mr Miliband, can you tell us exactly what you mean by the ‘squeezed middle’?”

Ed: “Well John, we mean those above and below the median salary and, in particular, those earning less than £45,000 and therefore on the basic rate of income tax. This is a separate group from what we would normally call the ‘middle classes’.”

If that definition seemed vague, five months later we are getting a clearer picture of who falls into this group – and it’s clear they will suffer the most when the Budget is announced.

While some of the Budget’s finer details will only be revealed on 24 March, what appears certain is that favourable tax breaks will only benefit the wealthy, and the less well off.

It’s not such good news for those earning from £40,000 to just under £44,000. The reduction in the higher-rate threshold will mean basic-rate taxpayers with incomes just below the current £43,875 figure will become 40 percent taxpayers this year. I’ve seen figures bandied about in the press that lowering the threshold to £42,375 could add around 700,000 individuals to the 40 percent tax bracket. This would push the total number of higher-rate taxpayers to nearly 4 million.

Permanent revolution trains kids for unemployment

By Laurence Copeland. The opinions expressed are his own.

I am unsure about Britain’s education system. Most of the time, I think it is a matter of one step forward, two steps back – but then there are times when I wonder about the forward step.

This morning I heard the glad tidings about the latest ideas for grabbing a much-prized relegation slot in the world’s education league table (predictably enough, the Americans can be relied on to provide stiff competition).

The latest brainwave currently being surfed by a bunch of MP’s is to introduce “financial education” in schools, including for example courses in How to Understand Your Phone Contract. This is not a premature April Fool story. It is completely consistent with the long-established drive to push education in directions which the powers that be, in their infinite lack of wisdom, regard as more relevant, more practical, more immediately useful.

It is hard to imagine a philosophy less likely to equip youngsters for the modern world. My own view, which would once have been accepted on all sides, is that school is where kids are introduced to the ideas they will carry with them for the rest of their lives, enriching them psychologically, culturally and, yes, ultimately in pecuniary terms too. Not nowadays, however. Today’s establishment attitudes to education are so dominated by short term considerations they would shame the lads in front of the trading screens down in the City.

Consider for a moment the implications of the latest proposal.

It is claimed that phone contracts are very complicated. This is absolutely true (though I suspect that most teenagers can find the best deals an awful lot quicker than adults, including the poor teacher) – but since when has the fact that something or other is complicated been sufficient grounds for inclusion in the school syllabus?

from FaithWorld:

Muslim Brotherhood treads cautiously in the new Egypt

(A girl waves an Egyptian flag at sunset in Cairo February 14, 2011 /Suhaib Salem)

The Muslim Brotherhood is treading cautiously in the new Egypt, assuring the military government and fellow Egyptians that it does not want power and trying to dispel fears about its political strength. The target of decades of state oppression, the Brotherhood wants to preserve the freedoms it is enjoying under the new military-led administration that took power from Hosni Mubarak.

So far, signs are encouraging for the Brotherhood: an eight-man judicial council appointed to propose democratic changes to the constitution includes one of its members. But experts say the Islamists remain wary of the military. That partly explains why they have gone out of their way to say they are not seeking power -- a reiteration of a position they have long espoused to avoid confrontation with the state.

The Brotherhood has said it will not field a candidate for president and will not contest enough seats to clinch a majority in parliament. The message, experts say, is partly aimed abroad, especially at the United States, which has expressed some concern over the role the Brotherhood might play in the post-Mubarak Egypt.

The Brotherhood might win 25 to 30 percent of the vote in a free and fair election, said Mohammed Habib, a member of the Brotherhood's Shura Council and its former deputy leader. "The Brotherhood want to reassure the Egyptian people and the Arab and Islamic world that they do not seek power, or want to compete for power, as much as what matters to them is that there is freedom and democracy," he said.

Read the full analysis here.

from The Great Debate:

Digital media and the Arab spring

By Philip N. Howard, author of "The Digital Origins of Dictatorship and Democracy: Information Technology and Political Islam," and director of the Project on Information Technology and Political Islam at the University of Washington. The opinions expressed are his own.

President Obama identified technology as one of the key variables that enabled and encouraged average Egyptians to protest. Digital media didn’t oust Mubarak, but it did provide the medium by which soulful calls for freedom have cascaded across North Africa and the Middle East. It is difficult to know when the Arab Spring will end, but we can already say something about the political casualties, long-term regional consequences and the modern recipe for democratization.

It all started with a desperate Tunisian shopkeeper who set himself on fire, which activated a transnational network of citizens exhausted by authoritarian rule. Within weeks, digitally-enabled protesters in Tunisia tossed out their dictator. It was social media that spread both the discontent and inspiring stories of success from Tunisia across North Africa and into the Middle East.

The protests in Egypt drew the largest crowds in 50 years, and a second dictator fell from power. The discontent spread through networks of family and friends to Algeria, Jordan, Lebanon and Yemen. Autocrats have had to dismiss their cabinets, sometimes several times, to placate frustrated citizens. Algerians had to lift a 19-year “state of emergency” and are gearing for demonstrations over the weekend. Even Libyan dictator Muammar Gaddafi has had to make concessions to activists brave enough to raise street protests against government housing policy.

But perhaps the most important casualty in terms of global politics is the U.S. preference for stability over democracy in North Africa and the Middle East. This preference, expressed in different foreign policies, seems untenable when groundswells of public opinion mobilize for democracy.

What are the lessons for the West? First, Islamic fundamentalists may terrorize parts of the region, but a larger network of citizens now has political clout, largely because of social media. The Muslim Brotherhood is no longer the only way to organize political opposition. In a digital world, older ideologically recalcitrant political parties may not even be the most effective way to organize effective political opposition.

from FaithWorld:

Concern about Islamists masks wide differences among them

(Hamas supporters hold up copies of the Koran at a protest in Gaza City December 26, 2010/Mohammed Salem)

Part of the problem trying to figure out what Egypt's Muslim Brotherhood or Tunisia's Ennahda party would do if they got into any future power structure in their countries is knowing what kind of Islamists they are. The label "Islamist" pops up frequently these days, in comments and warnings and (yes) news reports, but the term is so broad that it even covers groups that oppose each other. Just as the Muslim world is not a bloc, the Islamist world is not a bloc.

I sketched out a rough spectrum of Islamists in an analysis today entitled  Concern about Islamists masks wide differences. This topic is vast and our story length limits keep the analysis down to the bare bones. But the overall point should be clear that any analysis of what these specific parties might do that ignores their diversity starts off on the wrong foot and risks ending up with the wrong conclusions.

(Electoral posters of candidates of the banned Muslim Brotherhood in Alexandria on November 27, 2010 for the 2010 parliamentary electionS/ Goran Tomasevic)

While reading and talking to experts about Islamism these days, I either had the television on (zapping between BBC, CNN and Al Jazeera English) or listened to radio stations like BBC and NPR. When the Muslim Brotherhood came up, there were often suggestions -- explicit or implicit -- that it would seize power in a Leninist-style coup or whip up the masses to install a theocracy  in a replay of Ayatollah Ruhollah Khomeini's 1979 Islamic revolution in Iran. Experienced generals sometimes  end up fighting the last war. Clever analysts can reach for the wrong historical parallel to the situation they're tying to explain. Could it be that reflexes like these are clouding our view of what the Brotherhood and Ennahda actually are?