Sunday, 4 August 2013

The Full Monty on Osborne's economic policy

In the five years that have elapsed since the global financial crisis  erupted in the summer of 2008 living standards in the UK have dropped sharply (in 2008 a single person earning £13,000 would have reached the minimum they needed to get by. if their wage had risen in line with average increases, they would now be earning £14,000 – which is roughly three thousand short of the £16,850 salary needed to cover the same basic standard of living today).  During this period we have had two governments who have been  attempting to nurse our broken economy back to health.  In  the first two years of the crisis we had the 'fag end' of a long running Labour government, who had little stomach for the fight.  The only Labour minister who came out of this period with any credit was Alistair Darling the who, despite constant interference from Gordon Brown (self styled saviour of the world), did an excellent job of first aid on a patient that was dead on its feet.  His sensible approach to encouraging consumption through sales tax reductions and the motor car recycling scheme combined with a massive blood transfusion of QE made sure that Britain survived the trauma of an imploding financial services industry and the cataclysmic effect this had on credit markets and the tax take.  The rest of the Labour government were in shock as they watched 13 years of neo-socialism unwind before their eyes. 

So in 2010 the Tory led coalition government entered the fray and after three years in power and five years of recession or depressed growth they have finally managed to coax some life out of the economy, although it's still too early to uncork the vintage Krug.  There is no question that our economy is recovering but have the policies of this government had any effect - positive or negative.  We shouldn't forget that the UK economy has been one of the best performing economies in the world over the last 200 years, so have three years of  Tory policies, watered down by their coalition partners, made any difference.  If we had done absolutely nothing would we be better or worst off?  So it's time for an audit to review the impact of Cameronism on our economy.  We can discount the good work done outside economic policy: equal marriage, press controls, education reforms, immigration rules and falling crime rates are helpful but are out of scope for this review.

On the economy we can restrict our analysis to four areas: fiscal policy (tax), deficit reduction, structural reforms (to re-balance the economy and make us more productive) and monetary policy (money supply and interest rates).  This highly scientific review grades the government on a new scale that aligns performance to well know military commanders the scale is as follows:

Nelson - massive positive impact
Wellington - steady by uninspiring
Montgomery - made no perceptible difference - my mother-in-law could have done as well
Raglan - poor with flashes of idiocy
Haig - unmitigated disaster with no redeeming features

Fiscal policy
The chancellor, George Osborne, has been pretty timid on fiscal policy. He has tinkered with both the top rate of tax for the richest and raised personal allowances a bit for the very poorly paid - neither of these policies made much difference, with relatively small numbers of people being impacted. Osborne was slightly braver on business taxation where he has reduced corporation tax, but much too slowly and at any rate many of our most profitable business pay no UK taxes on their profits earned here.  On sales taxes, he kept Labour's commitment to raise VAT (sales tax), a terrible decision given the economy's reliance on consumer spending.  Across the board on tax I would rate the coalition a ‘Montgomery’ on fiscal policy, my mother-in-law would have been equal to the task!

Deficit reduction
The numbers speak for themselves on deficit reduction.  There has been none.  Having been much too timid at the outset with the ‘ringfencing’ of health and welfare budgets and inflation linked public sector pay they have barely scratched the surface of the problem .  This is a great shame because where they have made deep cuts the quality of services have not suffered – take the Home Office, where spending on policing is down by 6.5% in the last year alone and the crime figures have also been falling!  There have also been heroic efforts to cut costs in Justice, Education (despite spending £5bn on free schools) , Defence and Local government.  But none of these can out-weigh the staggering cost of welfare and health that this government has chosen to ignore (some $320bn of the £694bn budgeted in 2012).  So, despite all the talk of austerity, I have got to mark the coalition government as another ‘Montgomery’ on this.

Structural reforms
I think everyone agrees that our economy is a bit lop-sides maybe we have too much emphasis on financial services and other business services compared to manufacturing, I am not sure about this but what is clear is that we have great regional imbalances, a shortage R&D and specifically we are not good at growing business from energetic niche players to global winners.  This is mostly because of our banking and venture capital sector is overbearing.   The tax rules that allow perfectly good businesses like Boots and Manchester United to be snapped up in leverage buy-outs rather than be grown on organically is shameful.  In addition to reforms in our banking and venture capital sectors the coalition should have also looked to deregulate our property industry that, due to archaic rules of consent and the accounting rule for valuations, is institutional dependent on inflation and low occupancy.  Marking the coalition on this is easy – it’s been a huge disappointment and the Business and Innovation secretary is mostly to blame, step forward Vince Cable you have earned the government a ‘Raglan’!

Monetary policy
The Bank of England has not changed interest rates for 5 years and we have continued the policy of quantitative easing. Between March and November 2009, the MPC authorised the purchase of £200 billion. Since 2010 the MPC voted to begin further purchases of £75 billion in October 2011 and, subsequently, at its meeting in February 2012 the Committee decided to buy an additional £50 bn. In July the MPC announced the last purchase of a further £50bn to bring total assets purchases to £375 bn!  So Osborne and the Bank of England have continued with the loose monetary policy that they inherited.  None of this has really solved our biggest economic headache, which is the banks still are unable to lend to appropriate businesses and this is killing off recovery, exports and employment.  So excepting the huge problem with banking supervision and poor lending I am going to give the coalition a Wellington’, and although my mother-in-law failed in her application for the job as governor of the Bank of England we shall have to see if Mark Carney can deliver!

So overall it's a Full Monty!  Just glad my mother-in-law is not in the line up! 






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