UK News

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 James Saft:

Britain eats (leverages) its young

James Saft is a Reuters columnist. The opinions expressed are his own.

Four years, several failed banks and at least one global recession later, Britain has finally discovered what its young people need: 19-1 leverage.

Britain has announced a new housing initiative, the centerpiece of which is a plan to entice first-time buyers into buying newly-built properties with as little as 5 percent down.

Under the plan both builders and the government would contribute funds to partially indemnify lenders against what I am betting are the inevitable losses. Borrowers, who are almost by definition younger and less well off, will still bear all losses, but will be rewarded with the chance to take out the kind of loan which has proven time and again to be a bad idea.

This is utterly wrongheaded -- the best possible thing that can happen for first-time buyers, and arguably for most Britons, is for housing prices to fall to a level commensurate with earnings.

Why are houses in Britain so difficult to afford? Partly because of problems with supply, issues that the housing plan takes some steps, almost certainly insufficient ones, to address. And also because Britons, first out of necessity and then in the fever of greed, borrowed so much money in order to wedge themselves into what little housing was available that they drove prices up to unaffordable levels.

Again, as in Europe and the U.S., we have governments which, when confronted with problems that are fundamentally about debt, decide that piling yet more debt on top is the answer. Like the European Financial Stability Facility, which has proved utterly ineffective in supporting Italian debt, this plan too will fail, but not before many people will be tempted into taking on houses and debts they ought not to risk.

from The Great Debate:

Should Obama mimic David Cameron’s austerity?

By Nicholas Wapshott The opinions expressed are his own.

In medieval times, a key member of a monarch’s retinue was the food taster, a hapless fellow who ate what his master was about to eat. If the taster survived, the food was deemed safe for the king’s consumption. President Obama has a taster of sorts in David Cameron, the British prime minister, who has embarked upon an economic experiment that echoes the recipe of wholesale public spending cuts and tax hikes needed if both sides in Congress are to agree to raising the federal government debt ceiling. How the British economy is faring offers Obama an idea of what a similarly radical policy of cutting and taxing here would mean to the American economy.

Cameron’s election in May 2010 coincided with the start of the Greek debt crisis. The Bank of England governor Mervyn King warned him that the public debt in the UK was so large that Britain, too, might see its lending become impossibly expensive, so Cameron decided that there was no time to lose in putting the fiscal books in order. He decided to slash public spending by 25 per cent over four years and immediately raise value added tax on goods and services from 17.5 to 20 per cent. Such a radical remedy found favor with the rump of British Conservatives who felt that Margaret Thatcher’s free-market, small government, “sound money” policies of the Eighties had not been pressed to their limit. In turn, Thatcher’s prescription to reduce the size of the state derived from her favorite thinker Friedrich Hayek, the author of “The Road to Serfdom,” who believed like many Tea Party supporters that government intervention inevitably leads to tyranny.

Cameron’s experiment in applying a radical cure to the British economy caught the attention of a number of conservatives here, among them George W. Bush’s speechwriter Michael Gerson, who wrote in the Washington Post, “If Cameron’s approach works -- dramatically cutting deficits without stalling economic growth -- it will be an obvious, powerful example for America.” “If only the Obama administration and the U.S. Congress had been so courageous. Instead, they are choosing to put off these big decisions,” moaned Matthew Bishop, New York bureau chief of the Economist, in a piece co-authored with Michael Green in the Wall Street Journal. Even Treasury Secretary Tim Geithner thought the British experiment worth trying. “I am very impressed, as one man’s view looking from a distance, at the basic strategy [Cameron] has adopted,” Geithner told the BBC.

So, how is the British economy doing? Under Cameron’s Labour predecessor, Gordon Brown, Britain fell into depression, with the economy shrinking during the worldwide banking meltdown to minus 2.1 per cent in the last quarter of 2008 and the first quarter of 2009. By the time of the general election in May 2010, however, growth had slowly climbed to 1.1 per cent per quarter. With Cameron taking the reins and announcing his radical economic plan, the economy slumped back to minus 0.5 per cent in the fourth quarter of last year, before returning to growth of 0.5 per cent in the first quarter of this. But the latest economic growth figures, released this week, show a slowdown in economic activity, to a miserable 0.2 per cent growth between April and June. Cameron’s chancellor George Osborne has blamed the poor figure on widespread partying that accompanied the wedding of Prince William and the effects of the Japanese tsunami. The double-dip recession that Cameron’s critics predicted has not yet taken place, but the figures are clearly headed in the wrong direction.

What exactly is causing the slowdown in Britain is not clear. The cuts have only just begun. The total spending reduction over four years will amount to no more than 1 per cent of government expenditure, though even that Osborne believes will put 1.3 million public sector workers out of work by 2015, though he hopes private companies will create 2.5 million new jobs to make up. The faltering economic recovery suggests he is being optimistic. The independent Office of Budget Responsibility estimates that the decision to raise VAT will cause economic growth to fall by 0.3 per cent in the fiscal year 2011/12. The tax hike has already dampened consumer confidence, leading in turn to a wave of retail store bankruptcies.

In his address on Monday, Obama suggested cutting government spending “to the lowest level it’s been since Dwight Eisenhower” coupled with new taxes on “millionaires and billionaires.” He assured Americans “the cuts wouldn’t happen so abruptly that they’d be a drag on our economy,” though that is plainly wishful thinking. Looking across the Atlantic, it seems that he, like Cameron, may be too optimistic about the true cost of slashing government spending and raising taxes at a time when the economy is still recovering from the Great Recession.

from Global News Journal:

Quadriplegic in an age of austerity

Every time I write a story on European countries cutting public spending, I feel a frisson of panic. I can't help but fear my health, lifestyle and liberty could be a casualty of the "age of austerity".

On assignment covering the Sri Lankan civil war for Reuters four years ago, I broke my neck in a minibus smash. It left me quadriplegic, almost entirely paralysed from the shoulders down and totally dependent on 24 hour care. I was 25.

Nine months later, in a wheelchair, using voice recognition software and supported by government-funded personal assistants, I got back to work in Reuters London headquarters the day after leaving hospital. Now political risk correspondent for Europe, the Middle East and Africa, I write about the interplay of politics and markets. For the past year and a half, much of that has been the drive to cut government spending as Europe rebalances its books.

That hasn't done my personal mental health any good at all. I even had my doctor tweak my medication to make sure worry didn't produce a gastric ulcer.

Britain's new coalition government intends to cut more than many countries, some 25 percent over five years. Some details will emerge in an Oct. 20 spending review, but I may have to wait until the end of the financial year for details on how that will affect my care and that of others.

In many respects, I have already been very lucky. Stringent UK employment law meant it was hard to pension me off just because of my disability. Improvements in voice recognition software meant I could still write at roughly the same speed as before - crucial to continuing work as a newswire journalist.

Most important of all, decades of growth in Britain's social welfare system meant that - after a substantial struggle - enough state funding was available to look after me in my own home.

from Reuters Investigates:

This is going to hurt

In Britain, the coalition government is readying its “comprehensive spending review” later this month. Rather than get caught up in chasing which government departments or bodies will be cut, two of our reporters focused on a single council – in this case, the City of Birmingham, which happens to be the biggest local authority in Europe – and explored what it’s doing to prepare for the change ahead.

For a lot of people, the most visible sign of cuts in Britain will be at a local level, as services are pulled back and jobs are lost. In the leadup to the spending review details,  lobbyists in London have been doing great business. Check out their tactics for survival – although if you’re worried about your government contract but haven’t done anything about it, you’re probably already too late.

from The Great Debate UK:

In support of a “super law” to clamp down on tax avoidance

-Nizar Manek is a writer based at the London School of Economics. He blogs at Albino Whale. Follow him on Twitter. The opinions expressed are his own.-

In this current state of ‘austerity’, with a proliferating tax avoidance industry whose reason for existence it is to creatively exploit the ever-complicating fiscal spaghetti of taxing statutes – the new loopholes for avoidance which inevitably arise upon construction of new legislation, Benjamin Franklin would of course be wrong in his conclusion on certainty, that: "In this world, nothing is certain but death and taxes".

Of the certainty deemed necessary for tax legislation, it is well acknowledged that it necessarily makes revenue collection increasingly uncertain. Contrived avoidance schemes follow in the wake of specifically targeted legislation: tax law followed to the letter. Abuse of Low Value Consignment Relief, an EU tax relief on goods exported from the Channel Islands, for instance, results in a VAT loss of over 110 million pounds per year. We might consider a proverb of Sir Francis Bacon:

“If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts, he shall end in certainties”.

So it is with tax avoidance, estimated to cost 17.5 percent of the total ‘tax gap’ – around 7 billion pounds per year (the figure is disputed as an underestimate).  It was in 1996 when John Avery Jones, the eminent Judge of the Upper Tax Tribunal, argued (pdf) that the result of the unending pursuit of 'certainty' in taxing statutes is that "tax legislation is now more than four times as long as it was 25 years ago, but I do not believe it has achieved any more certainty, rather the reverse”. "There is nothing new in complaining about the complexity of tax legislation", he said: "Every generation does it".

Indeed, since 1997, Tolley's Yellow Tax Handbook, the guide to fiscal legislation, has more than doubled in volume, swelling to over 11,000 pages – at the same time, increasing the administrative burden faced by the tax collection bureaucracy.

The efficacy of a statutory General Anti-Avoidance Rule (GAAR), a ‘super law’ to clamp down on avoidance already adopted by a number of common law jurisdictions – Canada, New Zealand, Australia, and others, is now being considered by the newly established Office of Tax Simplification, due to report to the Chancellor. Following the 1998 Budget, the GAAR proposal disappeared, in part for lack of 'certainty'. It may now be attached to the 2011 Finance Bill, with or without success – and against much inevitable lobbying expenditure from business.

from MacroScope:

It’s all Germany’s fault

It is fairly commonplace at the moment for U.S. and UK financial analysts -- what continental Europeans call the Anglo-Saxons -- to predict the collapse of the euro zone,  a project they were mostly sceptical about in the first place.  MacroScope touched on this on two occasions in March.

The latest foray into this area comes from Alan Brown,  global chief  investment officer at the large UK fund firm  Schroders. But he does it with twist,  blaming what he sees as the eventual  collapse of the euro zone not on the structure itself nor  on the profligacy of peripheral economies, but on Germany's response to the crisis.

Brown reckons countries like Greece cannot do what is needed.

If Greece does all that it is asked to do, it’s debt/GDP ratio will rise to around 150 percent as debt continues to accumulate and the denominator declines as a result of a renewed recession and deflation. With debt at 150 percent and real interest rates anywhere near today’s level, Greece would have to run a primary surplus of around 8 percent  of GDP just to stabilise its debt ratio.

In the best of worlds, Brown says, German and other northern euro zone countries would solve the problem by stimulating their own economies to offset the deflationary impact of measures to improve public finances in the profligacies.

Increased demand from Germany (and other Northern European countries) would boost demand for goods and services from the South helping to maintain growth in the euro zone region as a whole and to reduce the current chronic current account imbalances.

Brown says the trouble is  that is not likely to happen. Germany has actually done the opposite, launching its own austerity programme.