Cutting Taxes and Axing Osborne

In 2010 the Tories had plan A, deficit reduction, and by and large the British public bought the idea, which was simple, “We have to cut the deficit because sky-high public debt will kill growth and investment and lead to long term depression”.  Some of this proved to be wrong but enough of the narrative still works.  In all polls that ask the question “who do you trust to manage the economy?” the Tories are in a comfortably lead. We Brits have a long memory and the Brown / Balls bubble will not be forgotten and more recently Ball’s idiotic call for a plan B made him the laughing stock of Westminster.

Despite the Tory’s hard talk on deficit reduction the reality is that progress has been hampered by the coalition’s bargaining (with the illiberal Lib Dems), which ring fenced welfare, the NHS and pensions from the ravages of austerity.  Nearly all the cuts imposed in this Parliament have been born by spending departments that receive less 40% of the entire public sector budget.  There have been some interesting results – less spending on police has reduce crime, less spending on “enterprise” has helped growth take off, lower spending on Europe has made Europe even less popular and a huge increase in international aid has seen our stock in the world fall dramatically!

Float my boat?

The image of a rising tide lifting all the boats is a picture politicians like to paint – a fair recession and recovery, the reality maybe that the posh yachts and the scruff dinghies may be okay but the smartly kept but modest day boats may be stuck in the mud for a while yet!

Who will float my boat?

Five years after the Great Recession there is a sense that the world’s economy no longer adheres to normal rules, the tide is moving in a mysterious way.  In a recession wages are meant to be sticky and as a result of this unemployment rises sharply as workesr price themselves out of the market.  Following a recession, typically, productivity and wages pick-up quickly and eventually unemployment should fall.  This time around rates of employment have remained quite high through the recession, wages and earnings have fallen sharply and productivity has not bounced back; so why?

All work and no pay

The next generation are taking over, after 25 years of being the sole bread winner in the family two of my three daughters are about to step into the world of work – well let’s hope so!  Being equipped with a degree is no longer a passport to wealth and prosperity it may not even be enough to secure a job.  One of these daughters has taken the option to take a year out from University to gain experience working for a number of business as an intern during a "year in industry", which is sandwiched between her 2nd and 3rd years.  She secured three internships, where she is working for no money to gain experience; some might say this has been a pretty poor introduction to the world of work.  The reality is that she has the opportunity to work for three outstanding companies and has already been offered a permanent position!  This “year in industry” seems an eminently sensible idea, she gets to see different businesses and roles close up and they get the chance to check her out.

Get on yer bike!

My daughter’s situation is a microcosm of the whole job market, which has been a buyer’s market since 2007.  Those of us who work in the private sector have had to survive wholesale downsizing, salary freezes, smaller or no bonuses and a broader squeeze on company benefits (pensions, etc).  This reduction in take home pay has reduced demand and slowed growth; but this flexibility has allowed the UK economy to maintain relatively high levels of employment.  Now the economy is growing again the somewhat vexed question is - how long will it take for this increased economic activity to feed through into higher take home pay and rising living standards?  I say vexed because living standards have fallen by as much at 5% over the last 5 years and in real terms by much more.

The Great British Bail-in

There is an old boy in our local community who has, over the last 15 years, restored a scruffy over-grown wood into a beautiful heathland with heathers, gorse and wonderful roan trees.  This labour of love has been completed with some support from the village but without the time, leadership and effort of one man we wouldn’t be able to enjoy the great amenity he has created.  He has done this because he can afford time but he has given this time so lovingly.





Not out of the woods

 As with this wood so with the national economy;  in 2008 the British economy and our way of life was hanging in the balance.  The financial bust created a structural deficit that amounted to 6% of the national economy (caused by the banking collapse) and on top of that we had the recession the rest of the developed world suffered adding some 4% to the downturn.  There is no precedent for a the UK economy taking a 10% hit to its national income in two years.  Following the bust we have been through a very painful process of rebalancing the economy so we can start again.  The rebuilding process has been achieved by a section of society is the same stoic and silent approach that the man in wood has brought to his restoration.

Living in the past

The last few days of summer traditionally bring us some warm weather before the autumn gales roll in off the Atlantic Ocean, and this year is no exception.  The orchards are dripping with fruit and the late flowering Asters and Dahlias provide a splash of colour before we drift into a world of grey and cold. To soak-up this fleeting moment fruitfulness before the mists roll in one could hardly pick a better spot than Brighton; nestling at the foot of the South Down a short distance from the Garden of England (the weald of Kent) the town is perfectly placed for an early autumn break.

Brighton Pier

Sadly for those planning to enjoy the last warm weather of the year they will have to share the town with the Labour Party gathering for their annual party conference.  For a modern new look Party Brighton is a strange place to pick, reminiscent of old fashioned 70s conferences where Trades Union bosses owned the agenda with a block vote and a Sterling crisis was the most likely ex-curricular distraction.  On second thoughts maybe the conference organisers have got the location spot on; Ed Miliband’s Labour party is starting to resemble the Harold Wilson era more and more.  Wilson was adept at the politics if not government, endlessly shifting his position to remain in power, his governments achieved little and left the UK in a parlous state.  Ed Miliband has a similar style – all grease paint but no show.  So it should be of no surprise that, as deftly as a well-trained circus act, the Labour Party have switched horses from a strategy that demanded a “plan B” for economic recovery to new mount that demands action to improve living standards.

Mondeo Man Trap can win Cameron the next election

The tide has turned on the British economy; after the tsunami of the credit crunch we have been beached on the mudflats of no/low growth of for four years.  There have been moments when it seemed the after-shocks would create move waves, the Euro crisis being the most obvious risk.  There have even been moments when recovery seemed to be ebbing our way only to evaporate into the stinking sands of a flat-lining growth.  In December last year I blogged that we were at the beginning of the end and amazingly I think I called the low water mark correctly and 8 months on the sparkling waters of recovery our flooding in bringing relief to many parts of our economy. 

Low water - but the tide is coming in!

This change in the tide is very welcome but growth is still weak and localised.  Most of the benefits are being felt in London and its hinterland and only in pockets outside the south east of England.  More worrying our neighbours in Europe are still up to their knees in thick mud and going nowhere fast.  With a new governor at the Bank of England and only 20 months of the coalition government to run people in high places can't afford another false start, they need a full spring tide to come flooding in to all parts if our economy. 

Zero to Hero the UK's flexible economy

News this week that there may be as many as 1 million workers on ‘Zero Hours’ contracts in the UK has come as a bit of a shock to the liberal elite.  A Zero Hours contract is where the employee signs up to an employment contract, which has no guaranteed pay or hours of work, these contracts are used by retailers and hotel industry, which need a ready supply of unskilled workers without the risk of taking on more fixed costs. 

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. 

Carney's Conundrum declining productivity

Understanding the mystery of our terrible productivity performance since 2007 in the UK is at the heart of Mark Carney’s concerns (this is a topic of great interest  to Mr Carney).   His analysis of this productivity fall is important to get right as it will determine whether the Bank of England decides to pursue a looser monetary policy or not.  Many economists believe that, after a brief period of decline at the start of a recession, productivity should pick up pretty quickly as a slimmed down labour force is raises production per head.  Before examining why our productivity has declined so much we should look at some numbers.

The NHS - an accident waiting the happen

The current state of our hospitals and specifically Accident and Emergency (A&E)  is a car crash waiting to happen.  The problems in A&E are blamed on the number of visits, which have risen by 50% in England in a decade and recently waiting times and other performance metrics have been on the wane.  GP consultations are up by a third since the mid 1990s and the number of routine operations carried out by hospitals, such as knee and hip replacements, has still jumped by 60% since the mid 1990s.  The case for the defense as promulgated by the NHS’s management is – “we are having to do more with less or the same resources”.

The problems started with Tony Blair’s reorganization in 2004, which decided that GPs could no longer cope with out of hours work, this forced many non-critical cases to report to Accident and Emergency units in their local hospitals.  The College of Emergency Medicine estimates up to a third of patients turning up at A&E could be treated by a nurse or GP without going to Hospital. The BMA constantly tell us how hard there GP members work and that they are good value for money but the reality is very different.  The number of GPs per head of population has in fact remained pretty constant over the last 10 years.  The has been a slight increase in patient visits per year but in many cases GPs are paid to take on specific treatments and this probably drives consultation numbers.  More importantly, whilst the GP contribution to the NHS has been in decline for years their take of the financial pie has grown exponentially.  This is the  main problem in the NHS is the disproportionate funding that is soaked up by our GPs, who add little value and are now grossly over paid.  The sad truth is that (very) General Practice is becoming an anachronism, the growth of science and knowledge is forcing our best consultants to specialise:  once we had ENT consultants now they specialise in ear, nose or throat – what chance has a GP in this increasingly technical and specialist world?  

The Blair contract had the effect in its first two years of reducing productivity by an average of 2.5 per cent per year. In 2006 GPs worked on average seven hours less per week than in 1992, partly because of the removal of the responsibility for out of hours care. In 2005-06 the annual average pay of a GP partner was £113,614, an increase of 58 per cent on the pre-Blair deal of 2002-03. Since then there has been some slow down in wage inflation but this is about to change.  In addition to ballooning salaries, family doctors will be paid a further £26,000 to commission NHS services. Last year 210 GPs earned more than £250,000 and a Daily Mail investigation (needs to be treated with caution) has revealed that some GPS are earning up to £380,000 a year.   Out of the 250,000 doctors registered and working in the UK some 140,000 are GPs costing the NHS some £17bn a year (in salaries alone) or over 17% of all money spent on healthcare – an awful waste of money when the modern day GP is little more than a freight forwarding business shuffling patients around the system!

What the NHS needs is:

1. Fewer and less expensive GPs
2. More out of hours care provided by the district nurse equivalent
3. A more regional structure NHS England is just too big to be managed effectively
4. Competition for various treatments (heart, cancer, hip replacements, etc)
5. Tax breaks for private health care that needs to soak up more demand
6. Patient fines for self inflicted damage - drink , drug and  smoking related injuries / ill health

George Osborne - Trick cyclist extraordinaire

In his budget speech the chancellor styled himself as the driver of a three wheel vehicle -  “our economic plan combines monetary activism with fiscal responsibility and supply side reform”. The main drawback of this plan is that it’s missing a wheel.  This Three wheeler economic plan has no demand side plan, and given that 63% of GDP comes from private consumption this is an oversight of heroic proportions.

George Osborne finds no room for manoeuvre

The great Captains of history all understood that that generalship is about having choices, without choices the commander becomes predictable and outcomes become dull. There are countless examples of this kind of leadership, from Earl Haig (the Butcher of the Somme) to Monty.  England has produced more than its fair share.  Occasionally the gene pool throws up a one-off, someone who is able to break the mould and produce the proverbial rabbit from the hat – one thinks of Henry V, The Duke of Marlborough, Nelson and Geoffrey Howe.  How Howe I hear you say? 

Consumer spending - the key to recovery

The coalition government have been pilloried for the lack of an industrial policy and for the terrible performance in productivity and exports , but the truth is that these are pretty irrelevant.  When looking for pertinent commentary that illuminates rather than obfuscates the current economic situation in the UK and globally look no further than The Economist.  While the Chancellor, George Osborne, prattles on about ‘the march of the makers’ and turning the UK into a magnet for corporate in-ward investment, The Economist is happy to point out the elephant in the room. 

The case for a Bad Bank

The Government's asset purchase scheme has 'spent' £375bn buying up gilts (UK Government Bonds) from our distressed banking sector, what they call Quantitative Easing (QE). The scheme was meant to be self financing but this week The Bank of England stressed that although likely deliver a £17bn profit, its possible that losses made on the sale of the gilts would rise to £75bn, producing a net loss of £8bn to the public finances in 2020.  As well as pointing out some long term risks they also confirmed that more QE is unlikely to beneficial, what a surprise!

QE - keeping the lights on!

In a parallel universe within the Bank the Deputy Governor, a Mr Bailey, confirmed that despite this massive commitment to asset purchasing our 'too big to fail' banks may still need a further injection of Capital, he said “I agree there is a need to strengthen the capital position,” he told MPs.  .  He hinted that the extra Capital might be necessary before Lloyds and RBS are returned to the private sector.  Some 'experts' suggest the figure could be as high as £50bn

The Bank of England and the Labour Government missed a big opportunity to resolve our banking crisis back in 2009 when they decided to prop up the banks rather than buy up the distressed assets to create a Nationalised 'Bad Bank'.  The coalition Government have also kept their heads firmly in the sand on this since 2010.  The result is that after four years on and with £375 billion spent on QE we still have a broken banking sector. 

If the Government had broaden the asset types for the QE programme we could now be in a situation where Lloyds, RBS and Barclays could be providing the credit and lending services that our economy so desperately needs.  Meanwhile the Bank of England could be managing the run-off of asset sales from 'Bad Bank'.  It's now emerging that this 'Bad Bank' construct maybe needed to bail-out the UK's over-blown and poorly regulated Private Equity business. When it rains ......!

Yet another Bank of England study (my they have been busy) has confirmed that many UK businesses have been left “fragile and susceptible to default” by private equity’s leveraged buy out (LBO) model.  In the first decade of this century Private Equity sector used leveraged finance to 'buy' many of our best UK companies, actually what they did was to borrow a load of money and then pass these debts on to the balance sheet of the acquired business.  Companies like Boots, Manchester United, Saga, Debenhams and all suffered the same fate.  These businesses are now loaded with the debt estimated at £160bn. See the chart on the left.

When people think of Zombie business we image small run down family companies hardly able to meet the pay-role, the reality is much more serious.  We now have some of our best business over loaded with debts that they will take years to pay off.  This is killing productivity and we are losing the opportunities to expand exports and employment at home because of the greed in our financial service industry.  This may is some way explain the UK's terrible productivity performance sine 2008.

But setting up a 'Bad Bank' the government could free both our banks and our leading businesses from the effect of the credit boom and bust setting the economy on a course of recovery.  The next question will be how do we get our money back from the Private Equity millionaires who have done their bit to wreck our economy.

George Osborne in the last chance saloon

As George Osborne approaches his next budget everyone has a view on what the Chancellor should do revive our economy.  There are only two areas of broad consensus; first that there needs to be a change of direction and second that there needs to be a change of Chancellor.  I have been wondering for some time whether George Osborne can be hailed as the worst Tory Chancellor since Winston Churchill and we will know for sure next week – he has one final chance of redemption.

On being elected in 2010 the Coalition needed to do four things:

1.  Cut government spending to resolve the structural deficit, created by the collapse of the Banking sector revenues and the associated property bubble, estimated at about £130 billion annually
2.  Re-balance the economy away from financial services towards manufacturing and exports

3.  Reduce the private debt that was built up due to lax regulation of the Banks over many years

4.  Encourage the private sector consumption to fill the output gap  created by a shrinking state

So how are they doing against these four targets? 

Spending - They have hardly dented the over bloated State.  Having, wrongly, decided to ring fence Health and Welfare from the cuts they have then been overly cautious cutting back other departments.   Rather than making structural changes that lower long term costs, Osborne has focused cuts to capital expenditure.  This is a lazy approach to reducing debt as capital spending, although easy to spot,  is a tiny proportion of all Government expenditure and reducing it may well enforce the need for greater investment in the future.  The small cuts that have been made have been matched by rising interest on the debt and spiralling welfare cost.

Re-balance - With the weakness in the Eurozone (over 50% of our export trade) there have been no incentives to help domestic consumption or exporters open new markets.    Why British businesses are not productive enough to win more market share at home and abroad is a vexed question.  We should not have expected the chancellor to find a complete answer in three years but he should have made a credible start. The lack of a cohesive trade and industrial policy are very evident.  Flip flopping polices on: North Sea exploration, Scale fracking, national infrastructure projects and energy replacement and transport have created a sense of listless incompetence. The net result is that the trade gap is as wide as ever and the structural deficit is becoming a fixture.

Private debt - The Banks are still in disarray with corporate lending still at historically low levels.  The failure to separate out the toxic assets into state run “bad banks” has encumbered the much needed restructuring work in Lloyds, RBS and Barclays.  The Asset purchase scheme has been exclusively focused on Gilts and the opportunity has been missed to purchase other assets (some debt forgiveness) that would have given our banks a chance to clear the decks and get lending.

Private sector consumption – The main target of his tax increases have been the working middle class.  Asking this group to fund his inflation linked welfare increase and deficit reduction programme has killed a recovery in consumer spending.  The over-use of QE has also reduced disposable income for savers and pensioners, further reducing private expenditure.  By reducing disposable incomes for these two critical groups he has removed all hope of growing our way out of the crisis.

So having wasted three years what should he do now?

The liberal press, the Opposition and the BBC have all argued for the Keynesian solution – increase our indebtedness to fund Government spending on capital projects.  It should not be a surprise that I favour a slightly different approach

The first this to square aware is that recession in the public sector is no bad thing, it might be possible to off-set this with growth in the Private sector but having a positive balance on this is not the primary concern. Whilst we should be completely focused on growing private output we should not expect this to flow through, in the short term, to any growth in GDP.

The most important of the four objectives must be deal with the structural deficit and to do this we need to focus away from tax increases although I would reinstate the 50% top rate in the short term.  We need to make reductions in all areas of government spending and these reductions should be structural (not just capital expenditure) I would target real cuts in Health, Welfare and Defence.  I would also bring forward the privatisation of Lloyds and RBS by setting up a nationalised ‘bad bank’ for the distressed assets of these banks.

To galvanise some private sector output I would reduce VAT to 15% (funded by the privatisations) for a limited period and I would stop QE and let interest rates rise a little to give savers and pensioners a little more money in their pockets.

Finally, I would develop an industrial strategy that would be intent of solving infrastructure issues at home in energy, transport and housing that could then drive exports based on the acquired knowledge and skills.  We should be incubating industries that can feed off the national investments we need to make in Nuclear Energy, High Speed Rail and affordable housing.  Too often we have made investment decisions that suit our competitors abroad rather than feathering our own nest.  It time to start playing to our rules!