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 Breakingviews:

UK’s problem: it’s the best in Europe

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

UK GDP stalled in the fourth quarter, contracting by 0.2 percent. That’s bad. But which major west European economy will perform best in 2012? It’s the UK again, the IMF predicted this week.

Britain’s main problem is that it’s doing best in a troubled continent. If it achieves the meagre 0.6 percent growth the IMF predicts in 2012 it will have grown twice as fast as France or Germany and have evaded the 0.5 recession the IMF forecasts for the euro zone as a whole. The euro zone’s fiscal pain is the main obstacle to a firmer British recovery.

UK cuts, it’s true, aren’t helping growth in the short term. Since April austerity has kicked in hard, booting 193,000 unfortunate public sector employees out of work. Unemployment has risen to 2.7 million and will go higher.

But it is Europe, more than government cuts, which has dragged the UK back into negative territory. Half of British exports go to the euro zone. In December the CBI’s export order balance dropped to a 23-month low. Export weakness helps explain why industrial production plunged by 1.2 percent in the fourth quarter. Service industries, more domestically oriented, held up better.

December economic surveys point again to slightly firmer UK growth. The problem is that the European risk isn’t about to go away. In Italy and Spain the IMF foresees deep recessions, GDP declines of close to 2 percent this year and more shrinkage in 2013. What will that do to southern Europe’s debt servicing capacity?

from Breakingviews:

RBS has tough fight to put value in wholesale arm

By Margaret Doyle

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Royal Bank of Scotland, the state-owned UK lender, is cutting its investment bank, again, and is merging it with its international payments unit. The new division aims to make more than the 12 percent groupwide cost of capital. It must do at least that to have any value. But it is a big ask given regulatory and political headwinds.

The cash equities business was never a strength for RBS - not even after the purchase of Hoare Govett which came with the disastrous ABN Amro acquisition of 2007. The fixed income business is stronger. Indeed Greenwich Capital Markets, acquired with NatWest, is something of a jewel in what is otherwise a pretty tarnished crown. Helped by Greenwich, America contributes the largest share of RBS’ investment bank revenues, almost one-third of the total. It also earned a healthy 24 percent return on equity in 2010.

Sadly, the strengths are shrinking. Greenwich was a big player in now-diminished U.S. mortgage trading and returns will come under further pressure because Basel regulations require RBS to assign more capital to fixed income. Moreover, new UK rules that will ring-fence retail banks from riskier wholesale arms raises the latter’s cost of funding. Analysts at Credit Suisse forecast that, without restructuring, return on equity at the investment bank would have shrunk to 6 percent.

The restructuring outlined on Jan. 12 might be enough to boost returns above the 12 percent. But for the time being, potential buyers are likely to bid only at a sharp discount to the 15 billion pound book value of the investment bank. If RBS can show it can jump the 12 percent cost of capital hurdle, it might find buyers ready to pay a more acceptable price. But there is still plenty that could go wrong. UK politicians’ propensity to want to bash bankers could throw a spanner in the works, though commercial imperatives - for the time being at least - appear to have the upper hand.

Soldiering on with the investment bank may be RBS’ best option, but that doesn’t mean it’s an attractive one.

from Breakingviews:

Tesco’s ambitions earthed by UK retail reality

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

When Philip Clarke took over from the Sir Terry Leahy as Tesco’s chief executive in March 2011, he seemed to have one of the sweetest corporate inheritances around. The company was strong in its British home market and growing well elsewhere, although the U.S. expansion remained a work in progress.

But the Clarke era has seen five consecutive quarters of declining like-for-like UK revenues at the once-almost-almighty retailer. The latest announcement, of a 2.3 percent decline (excluding petrol) over the Christmas 2011 trading period, was a shock. It caused a 13 percent drop in the share price on Thursday.

It’s tempting to think that Leahy left Tesco in less good shape than it appeared from the outside, or that Clarke has mucked things up. Is the company’s strategy – low costs and a steady expansion of formats, product lines and total retailing space – flawed? Was Leahy more charismatic and less efficient than it appeared? Does Clarke lack the inspirational touch?

All of these things may be true. And Clarke can be held responsible for the 2011 price cuts of 500 million pounds, the equivalent of 20 percent of last year’s UK trading profits. But the new man can hardly be blamed for a weak UK economy or competitors who have been strengthened by learning from Tesco. And final judgment on Clarke’s initiative should wait for the end of the full programme for UK revival, which includes investments as well as price cuts. Meanwhile, Tesco’s longstanding effort to build up sales of general merchandise inevitably makes the company more cyclical.

Clarke’s Tesco may always suffer in comparisons to the Leahy era. Such has been the success of the company over the last two decades, it is so big in the UK that profitable market share gains are increasingly hard won. And while its international markets offer higher growth, they also present more challenges. But Tesco’s model is not broken and it is important to note that total sales – in the UK and overall – continue to advance. The Leahy legacy is intact.

from John Lloyd:

No Union, please, we’re English

The opinions expressed are his own.

In France, it is les Anglais. In Germany, die Engländer. In Italy, gli Inglesi. In Russia, Anglichane.

The peoples of the United Kingdom, for most other peoples, are habitually “English.”

Not unnaturally. The English part of the UK accounts for close to 90 per cent of the country’s population; the language is English; the capital is London, long the English capital; the accents heard are overwhelmingly English; the long-held stereotype of the country is an upper-class English gent, snobbish, prudish and insular.

This suits at least some of the English, who often do the same as foreigners when referring to their nation state.  Frequently, without any malice, they have assumed that Britain is co-terminus with England (until recently, England supporters waved the Union Jack—which represents all of the British nations--at international football matches). Once, years ago, when speaking to a former senior Royal courtier, I mildly corrected his use of “England” to “Britain.” He wagged a humorous finger at me (a Scot) and said: “Now now, none of that Scots nationalism!” – which is, when you think of it as an answer to my objection, incomprehensible, except in terms of a certain English mindset. Yet, though illogical, it was also thoughtlessly generous: the English nation had dissolved itself into the state, and by waving the Union Jack, gave an implicit invitation to the other nations of the British state to do likewise – though only the Northern Irish did.

Ironically, had I held the views he ascribed to me, I would not have corrected him. From the point of view of  the nationalists of the UK – Scots and Welsh nationalists, Irish Republicans – the more that people at home and abroad think Britain is England and vice versa, the better they like it. It underscores their belief that the Union is an artificial thing--England with a few possessions historically acquired by conquest, trickery or both.

That view – that the United Kingdom really is England, and that any self-respecting people who would not call themselves English had best get out of it – is now acquiring deeper roots. The outgoing head of the Civil Service, Sir Gus O’Donnell, has expressed his worry about the possible breakup of the United Kingdom: he regards it as the most poisoned of the chalices he passes to his successor. What had been, for much of my life, the preserve of misty eccentrics (except in Ireland), has now entered the political arteries of the world’s oldest parliamentary democracy, and may cause a seizure.

from Breakingviews:

The real UK plan B: protecting against euro chaos

By Hugo Dixon and George Hay The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Pundits say Britain needs a plan B to boost growth. What it really needs is a contingency scheme to handle a euro explosion. The central planks should be for the government to keep adequate fiscal firepower in reserve to handle a crisis and to shore up the country’s banks.

The two points are linked. If the government used all its fiscal headroom now in an attempt to prevent a double-dip recession, it might find it had no capacity to react if things go from bad to worse across the English Channel. Debt is already forecast to peak at 78 percent of GDP in 2014/2015, according to the Office for Budget Responsibility. But that assumes the euro zone finds a solution to its problems. If not, the UK will be dragged into a deep recession and its debt will balloon: the tax take would fall, social expenditure would rise and money would be pumped into the banks.

If the single currency breaks up, there will probably be banking panics across the euro zone. Britain’s lenders would also be vulnerable. That’s partly because they hold 15 billion pounds of the sovereign debt of Greece, Portugal, Italy, Spain and Ireland. But the main problem would be their 144 billion pound exposure to those countries’ private sectors. A euro collapse would turn many good loans bad. Royal Bank of Scotland, Barclays and Lloyds Banking Group would be the three banks most in the firing line.

Extra capital alone wouldn’t stop these banks running out of cash in the aftermath of a breakup. The government and Bank of England would also need to provide them with a liquidity backstop, as they did in 2008. As then, support could have two elements: the Treasury could guarantee new issues of wholesale bank debt; and the BoE could restart its Special Liquidity Scheme, which allowed lenders to swap illiquid assets for government bonds for a period of three years.

One option would be to wait until a breakup before doing any of this. But the UK might then find itself on the back foot, having to fight a full-blown panic. It would be better to get at least part of the contingency plan moving now.

Measuring up the Tartan curtain

Visiting Scotland this week to see Alex Salmond sworn in as first minister, the newspapers were full of talk about  “independence lite”. The idea was that an independent Scotland would be free to choose as from a menu, selecting which issues to manage itself and which ones to pool with the rest of Britain.

Listening to Salmond in Holyrood and speaking to him afterwards in his official residence in Bute House,  there was little sign of soft-pedalling.

Elected unopposed as first minister by MSPs at the touch of a button in the modern parliament, Salmond stood up and promptly added demands for control of excise duty, digital broadcasting and a say in European affairs to the list of powers he is seeking from Westminster via  the Scotland Bill.

In our interview, Salmond stressed that an independent Scotland would have its own forces and foreign policy and expect control of almost all of the oil in the North Sea.

The problem for parliament in Westminster is failure to grant Scotland additional powers could persuade more Scots to think that a breakaway is in their best interests.

The vote on May 5 has created a constitutional headache for British Prime Minister David Cameron. Freed from the spectre of the Alternative Vote, he now finds himself cast in the role of defender of the United Kingdom.

Salmond plans talks with George Osborne and Nick Clegg in the next few days, but says that Cameron will have to deal with the issues himself at some point.

Should Scotland become independent?

As Scotland prepares to celebrate 10 years of devolution on July 1, the question of whether the nation should gain full independence from the Union refuses to go away.

An opinion poll has found that 58 percent of Scots support the Scottish government’s wish to hold a referendum on independence in 2010.

This does not mean that the people of Scotland actually want to break free, however. The poll, carried out by ICM for the BBC, also showed that only 38 percent of the 1,010 respondents said they were in favour of Scotland becoming an independent country, while 54 percent said they would vote against the idea.

Respondents were also asked if they believed it was likely or unlikely Scotland would become a completely independent nation within 20 years, with 10 percent saying they thought it was likely and 28 percent quite likely. A larger proportion were not as convinced — 34 percent said it was quite unlikely and 24 percent said it was very unlikely.

The issue of Scottish independence is a hot topic south of the border too. Many feel that Scottish MPs should not be allowed to vote on laws that affect only England, while the multi-billion pound annual subsidy Scotland received from the Treasury also gets many people hot under the collar.

What do you think? Should Scotland separate itself from the United Kingdom? Would it be able to manage on its own?