Archive for June, 2010

Industrial language

Tuesday, June 29th, 2010

Business Secretary Vince Cable put  industry under notice yesterday saying “we don’t want to go round the country waving a chequebook”.

Meanwhile over at The Time’s  CEO Summit Rolls-Royce Chief, Sir John Rose,  issued a stark warning that Britain’s manufacturing had slipped into complancey as a result of debt supported growth and called for ‘absolute consistency’ from Government in terms of investment and partnership working so that business could make investment decisions over the next 25 years.

OK, you’ll consistently get nothing!

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… it is now!

Tuesday, June 29th, 2010

There is a strain in the coverage of the PM’s triumphant return from the G8 and G20 Summit which makes reference to the wisdom of allowing Dave and his ‘best friend’ Angela Merkel to watch the England v Germany match in the same room.

Given England’s poor performance through the first round  one has to admire Team Cameron’s faith in the Squad that they would gamble on an England victory to provide the kind of pics to assuage Hun bashers in Fleet Street and his own party.

Although it can’t be clearly seen in the picture above the broadcast pictures showed Andy Coulson behind Dave’s left hand shoulder.

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Had ‘yer chips

Friday, June 25th, 2010

The Telegraph today is reporting that Francis Maude has announced that 600 Government websites are to be shut down at a saving of £100m to the Exchequer.

It was suggested that the http://www.lovechips.co.uk/the website run by the Marketing Department of the Potato Council would be one of those cut,  wiping out one of the lasting achievements of the former Office of the Deputy Prime Minister.

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Special delivery service

Friday, June 25th, 2010

The Chancellor announced to cheers on Tuesday that the Royal Mail would be receiving an injection of private sector cash. In a suprise Keynsian move, however, David Cameron wrote to 6 million public sector workers the following day explaining why there would be a two year pay freeze and why 725,000 of them would lose their jobs.

At the price of a first class stamp we work out that the letters amounted to cash injection of £2,460,000 for the Royal Mail.

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Budget analysis

Wednesday, June 23rd, 2010

Seizing the opportunity

For any government, the first budget – when there remains an element of public good will towards the new administration – represents an almost unique opportunity to get unpopular decisions out of the way early on. Thereafter, radical changes, with the possibility of large numbers of “losers” as well as “winners”, risk being played out too close to polling day.

Such is the scale of the challenge facing this Government – a £155 budget deficit this year, following the longest and deepest recession on record – that George Osborne has already taken more unpopular decisions than most Chancellors.

Following a downgrading of the UK’s growth forecasts from the new Office for Budget Responsibility last week, and set against the continental backdrop of rising speculation over Greece and Spain’s continued ability to borrow money, the Government is determined to avoid even the slightest question mark over the UK’s solvency by setting out a strict path to get back to black as soon after 2015 as possible.

Despite the sustained softening-up exercise since the election – something the Conservatives tried last year in Opposition, but gave up on when the voters got frit – the scale of the spending cuts and the tax rises remains almost unprecedented. The initial announcements of £6.2 billion of cuts this financial year, and the £10.5 billion of last-minute Labour schemes which have either been cancelled or frozen, almost pale into insignificance.

By 2014-15, the overall tax take will be £8 billion a year higher than under Labour’s plans, while overall public spending will be £32 billion a year lower. Overall, this implies real terms cuts to departmental spending – except on Health and International Development – of 25% over four years.

However, the Chancellor said that the effect across departments would not be uniform, and that the effect of spending cuts on departments such as Education and Defence may be lessened if further savings can be identified from the social security and welfare budgets. In spite of these cuts, Government current spending will rise from £637 billion in 2010-11 to £711 billion in 2015-16.

For those hoping for a few giveaways to soften the blow, there was precious little on offer: just a pledge to freeze council tax for a year if local councils co-operate, an increase in the income tax threshold for the lower paid, and an early re-linking of the basic state pension to earnings.

Back to black

Just a week after publishing its forecasts for growth, spending and debt under Labour’s plans, the new OBR has rapidly revised them to take account of the measures in the Budget.
In the short term, the economy is predicted to grow more slowly, by 1.2% this year and 2.3% next year, down from 1.3% and 2.6% respectively. But in the medium term, forecasts for growth of 2.8% in 2013 and 2.6 % in 2014 have been revised up to 2.9% and 2.7% respectively.

Of equal concern as the short-term dip in predicted growth is the OBR’s upwards revision to the unemployment rate forecasts from next year. The unemployment rate in 2011 is now forecast to be 0.1% higher, at 8.0%, and 0.2% higher in 2014 than previously forecast, at 6.5%.

However, the results of the tax rises and cuts announced today mean the OBR has been able to revise down its estimates of Government borrowing for every year between now and 2014-15. Whereas, under Labour’s plans, Government spending would still have been adding to the national debt by £71 billion in 2014-15, under the plans set out in the Budget, net borrowing is now set to fall to just £37 billion in that year.

Just as significant is the revision to the forecast of the structural deficit (the part of the deficit not accounted for by the effects of the economic cycle). Under Labour’s plans, this was forecast to be 2.8% of GDP in 2014-15, but under the plans in the Budget it will have been almost eliminated by then, at just 0.8% of GDP.

Holding the Coalition together

Waking up this morning, the Chancellor will no doubt have been encouraged by the ICM poll in the Guardian, which found that nearly three quarters of voters (including 64% of Labour voters) agree that the priority should be spending cuts rather than tax hikes.

But public opinion is notoriously fickle, and Osborne will know that his popularity is likely to plummet as the cuts begin to take effect.

However, today is also a big test for the Lib Dems and their willingness to remain in the Coalition. To emphasise the shared responsibility for the cuts, the Treasury has let it be known that the big items in the Budget were signed off by Nick Clegg and Danny Alexander, as well as the Prime Minister and Chancellor.

And the Deputy Prime Minister tried to head off any stirrings of dissent among the more left-wing elements of his party by writing to all Lib Dem MPs last night, saying that the Budget is “one of the hardest things we will ever have to do” but that the alternative of “rising debts, higher interest rates, less growth and fewer opportunities” is worse.

That didn’t stop the taunts from the Labour Party, sensing the unease among some Lib Dem MPs at their coalition with the Conservatives, that they have swallowed their principles to go into Government.

But that was why it was essential for George Osborne to include measures to which the Lib Dems could point – in particular the increase in personal allowances and the hike in CGT – as a demonstration of their policies being enacted.

Progressive and fair?

Overall, the Government is at pains to sell the Budget as a package of “progressive” measures with “fairness” at its heart. The Chancellor repeated his mantra that “we are all in this together”, with Treasury aides pointing to the levy on the banks and the retention of the 50p top rate of income tax as evidence of the part the wealthy will have to pay in reducing the deficit. Equally, they argue that the poorest have been protected to an extent by the increase in the income tax threshold.

However, the VAT increase raises questions about the Government’s popular mandate to implement such a measure. During the election campaign, none of the three main parties ruled out a hike in VAT, but they all stuck rigidly to the well-worn non-denial: “we have no plans to raise…”. The Lib Dems even ran a poster campaign claiming the Tories had a £13.4 billion black hole in their spending plans, which would require a 3% rise in VAT, leaving the average family £389 worse off. There will no doubt be some Conservative and Lib Dem MPs who feel uneasy at such a major change being introduced which did not feature in their respective manifestos.

More pain to come

Was the Budget as “bad” as was predicted? Does this bring the Government’s honeymoon to a juddering halt? Possibly, but we’ll have to wait and see. The spending axe has swung today, but we won’t find out which branches have been felled until the publication of the Spending Review in the Autumn.

In between lies a summer of hard bargaining between the Treasury and Government departments to determine how the cake will be divided.

This will require not just the usual talk of Government efficiency savings, but a fundamental reassessment of what government should deliver. It was Rahm Emanuel, President Obama’s Chief of Staff who said: “Rule one: never allow a crisis to go to waste. They are opportunities to do big things.” And the “big thing” now in Mr Osborne’s mind is a once in a generation opportunity to review the activities of the state.

The resulting Spending Review, to be published on 20 October, will set out detailed spending plans, department by department, for the rest of the Parliament.

Tax cuts in the distance?

By setting out a Budget for the whole Parliament, and taking some pretty tough decisions early on, George Osborne is undeniably taking a gamble. But in doing so, he hopes not only to reassure the markets that the Government is serious about tackling the deficit, and reassure business that the Government is on its side, but also to offer the prospect of easier times to come.

If, as seems to be the case now, the economy recovers more rapidly than predicted, or if the structural part of the deficit turns out to have been smaller, then come 2015 and the next election, the Chancellor will have some latitude to offer some pre-election sweeteners. Who would bet against an offer of tax cuts in the Conservatives’ 2015 Election Manifesto?

Budget decisions at a glance

• VAT. The standard rate of VAT will rise from 17.5% to 20% on 4 January 2011, set to raise £12.1 billion in 2011-12.
• CGT. Capital Gains Tax will remain at 18% for basic-rate taxpayers, but will rise to 28% for higher-rate taxpayers from midnight tonight. The 10% rate for entrepreneurs will remain, with the level of Entrepreneurs’ Relief increased from £2 million to £5 million.
• Income tax thresholds. The plans to increase the personal allowance by £1,000 in April, briefed out last night by the Treasury, were confirmed today, taking approximately 880,000 lower-paid workers out of income tax altogether, at a cost of £3.5 billion in 2011-12. (Those earning £40,000 or more will see the benefit wiped out by the 1% increase in employees’ National Insurance Contributions due to take effect in April 2011.) The plans are the first step towards the Government’s aim of raising the threshold to £10,000.
• The higher-rate income tax threshold will be frozen in 2013-14.
• Corporation Tax. The Budget sets out a road map for reducing the headline rate of Corporation Tax in stages to 24% from 2014-15, starting with a cut to 27% in 2011-12. The small companies’ rate will be reduced to 20% from April 2011.
• Bank levy. From January 2011, the Government will impose a levy on bank balance sheets, expected to raise £2.3 billion a year in 2012-13. There will be exemptions for smaller banks. The French and German Governments have also committed to imposing a bank levy.
• Council Tax. A one-year freeze, in partnership with councils, as pledged in the Coalition’s Programme for Government. Some local authorities are likely to complain that they can’t afford to make further savings without cuts to services, given that they have already borne the brunt of the Chancellor’s £6bn of in-year cuts announced last month.
• National Insurance. One half of the Conservatives’ election pledge to “stop” Labour’s planned 1% increase in NICs in April 2011 was sacrificed to pay for the increase in the income tax personal allowance, but the effects of the increase in the employers’ rate of NICs will be softened by an increase in the employers’ threshold of £21 a week from April 2011.
• Tax breaks for new firms. For three years, new businesses outside London, the South East and the Eastern region will be exempt from the first £5,000 of employers’ NICs on the first ten new jobs they create during their first year of operation.
• Excise Duty. The Chancellor announced no changes to duty on alcohol, tobacco and fuel. Changes to the system of alcohol duty will be announced in the Autumn Spending Review, with the possibility of duty increases on so-called “problem” drinks.
• State pension. The basic state pension will be re-linked to earnings from April 2011, a year earlier than many people had expected.
• Pensions tax relief. There will be no immediate changes. The Chancellor said he would work with industry on alternative ways of raising the revenue due to accrue from Alistair Darling’s plans to restrict tax relief, potentially by reducing allowances.
• Public sector pay and pensions. Public sector pay will be frozen for two years, except for the 1.7 million workers who earn less than £21,000.
• John Hutton will report in September on early steps that can be taken to save costs in public service pensions. By the next Budget, next year, he’ll set out recommendations for longer term reforms of public sector pensions.
• Welfare payments. Tax credits, public service pensions and most benefits will be uprated by CPI rather than RPI in the future. Child tax credit will increase by £150 in 2011-12, and child benefit will be frozen for three years from 2011-12.

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What a mistake to make

Tuesday, June 22nd, 2010

Any similarity to John Terry’s failed coup and James Purnell’s we’re right behind you moment is purely intentional.

John Terry was firmly slapped down by England Manager Fabio Cappello with a simple “this was not a revolution, a mistake by another player – no more”.

Like Terry, Purnell had ‘gone for a beer’ with a few of his Cabinet team mates following a disastrous international engagement and had agreed to go over the top at a pre-arranged signal followed by a number of colleagues in sequence. Both found themselves abandoned at the last minute.

Unfortunately for Purnell the manager, another dour type with an accent that’s sometimes hard to understand, went on to lead Labour to its worst defeat since 1983.

Here’s hoping England do better against Slovenia tomorrow

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New fiscal watchdog sets out Budget backdrop

Tuesday, June 15th, 2010

Today, the new independent Office for Budget Responsibility (OBR) has published its Pre-Budget forecast, forming the backdrop against which George Osborne will deliver his Emergency Budget next Tuesday.

 After years in Opposition accusing the, then Labour, Government of fiddling the figures, over-optimistic growth forecasts and hiding public sector liabilities off balance sheet, the role of the OBR is, says George Osborne, vital to the task of restoring confidence in the nation’s finances.

 The forecasts contain both good news and bad.  On the bright side:

  • Government borrowing is expected to be lower than predicted in March – some £8 billion less this financial year, £4 billion less next year and a total of £22 billion less over the next 5 years.
  • The unemployment rate is set to fall from next year, having peaked this year at 8.1 per cent. 

 But the bad news is that:

  • As expected, the OBR has downgraded Alistair Darling’s growth forecasts.  Instead of Darling’s prediction of growth at 3.25% in 2011 and 3.5% in 2012, the OBR’s central forecast puts growth at 2.6% in 2011 and 2.8% in 2012.

 Just as significantly, the OBR has increased its prediction of the size of the structural deficit (i.e. the part of the deficit not accounted for by the effects of the economic cycle) for every year between now and 2014-15.  In the current financial year, the structural deficit is now said to be higher than set out in the March Budget by 0.6% of GDP (nearly £9 billion), rising to 0.8% next financial year. But this falls to just 0.3% higher (or just over £5 billion) in 2014-15. 

Politically, the revised forecasts matter for both Labour and the Conservative-Liberal Coalition.  Alistair Darling sees the lower borrowing figures as a vindication of his record as Chancellor and his restraining influence upon the spending plans of Gordon Brown and Ed Balls, both of whom were said to have been pressing for pre-election giveaways.   Darling has also warned that lower borrowing means the Chancellor has no need to introduce a widely-expected hike in VAT, and that lower growth means now is the wrong time to cut public spending further than existing plans. 

 For the Coalition, the figures matter for two reasons.  First, because the forecasts – in particular the size of the structural deficit – have a direct impact upon the annual spending totals George Osborne is expected to reveal in the Emergency Budget next week.  And second, because the Coalition is desperately trying to forge a narrative of Labour’s economic record which they can use to ‘define’ the risks of a Labour Government at elections to come. 

Just as David Cameron warned last week that the state of the public finances is “worse than we thought”, so George Osborne has been repeating that message today, saying: “The structural borrowing is a larger hole than we thought, and we’ve got to deal with this situation… The really important bit is the structural deficit, that is the bit that doesn’t go away when the economy begins to grow.”

However, before claiming victory, both sides should note the caution with which the OBR has deployed these forecasts.  They are, Sir Alan Budd has said, “our best shot at an impossible task.”

What does this all mean for the Emergency Budget next week?  The Coalition’s Programme for Government set out plans to “significantly accelerate the reduction of the structural deficit over the course of a Parliament, with the main burden of deficit reduction borne by reduced spending rather than increased taxes”.   

 Today, Sir Alan Budd is said to have confirmed that the plans laid out in Alistair Darling’s March Budget would have “eliminated the bulk of the structural deficit by 2015”.  But with the OBR putting the structural deficit higher than previously predicted, there is potential for George Osborne to argue both that further tax rises and greater spending cuts are needed, while sticking to his preferred spending cuts to tax hikes ratio of 80:20.

 A final thought: has the great innovation of the OBR taken the politics out of Government economic forecasts? In a word: “no”.  The British Chambers of Commerce believe “the expectation of growth in excess of 2.5% in each year from 2011 onwards may prove difficult to achieve”, while Treasury special advisers are reported to have been briefing that the OBR’s projections are over-optimistic in a number of areas.

 Whatever the accuracy of these projections, they will inevitably have a short life-span.  After the Emergency Budget has been delivered, all the forecasts will have to be revised!

 The figures

 Summary of new central forecast

  2010 2011 2012 2013 2014
GDP (% change

Year-on-year)

 1.3 2.6 2.8 2.8 2.6
CPI inflation (Q4) 2.3 1.6 2.0 2.0 2.0
Employment (millions) 28.8 29.0 29.3 29.6 29.9
ILO unemployment (% rate) 8.1 7.9 7.4 6.8 6.3
Claimant count (Q4, millions) 1.5 1.4 1.3 1.2 1.1

Source: OBR, Pre Budget forecast, June 2010.

The new fiscal forecast

  2010-11 2011-12 2012-13 2013-14 2014-15
Net borrowing (£ billion) 155 127 106 85 71
Net borrowing (% of GDP) 10.5 8.3 6.6 5.0 3.9
Cyclically-adjusted net borrowing (% of GDP) 8.0 6.1 4.7 3.5 2.8

Source: OBR, Pre Budget forecast, June 2010.

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Hot and high PR in the desert

Friday, June 11th, 2010

 

David Cameron’s trip to Afghanistan is being billed as the most popular ever by a serving Prime Minister.

It’s not clear whether this is due to differing approach to presentational skills favoured by Cameron and his predecessor – Dave resurrecting his dark shirt and jeans from the election campaign and Brown relying on suit jacket and salmon pink tie despite desert conditions – or the fact that Cameron doubled the day allowance for troops in Helmand and backdated it to the General Election.

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Life on the dole

Friday, June 11th, 2010

Nick Palmer, former MP for Broxtowe, who  lost his seat in May, has become the first  former MP to sign on for unemployment benefit.

After his first interview at the job centre Palmer said of his interviewer, “I felt almost like giving him a hug”.

Which I suppose is a novelty for staff.

It should be pointed out that Palmer, who is a former PPS to Margaret Beckett, wants to understand how the system treats job seekers and the appropropriateness the jobs they are sent to apply for.

He also wants to show that claiming benefits is nothing to be embarassed about which may be good advice for the 750,000 public sector workers the CIPD warned yesterday will face redundancy by 2015.

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Select Committee election results

Thursday, June 10th, 2010

Conservative chairmanships

Culture, Olympics, Media and Sport

  • John Whittingdale ELECTED UNOPPOSED

Defence

  • James Arbuthnot ELECTED
  • Douglas Carswell
  • Julian Lewis
  • Patrick Mercer

Education

  • Rob Wilson
  • Lee Scott
  • Graham Stuart ELECTED
  • Andrew Turner

Energy and Climate Change

  • Philip Hollobone
  • Tim Yeo ELECTED

Environment, Food and Rural Affairs

  • James Gray
  • Stewart Jackson
  • Anne McIntosh ELECTED
  • Neil Parish

Foreign Affairs

  • John Baron
  • Sir John Stanley
  • Richard Ottaway ELECTED

Health

  • Sir Paul Beresford
  • Peter Bone
  • Stephen Dorrell ELECTED
  • Nadine Dorries

Northern Ireland

  • Laurence Robertson ELECTED UNOPPOSED

Treasury

  • Michael Fallon
  • Andrew Tyrie ELECTED

Welsh Affairs

  • David Davies ELECTED UNOPPOSED

Public Administration

  • Bernard Jenkin ELECTED
  • Chris Chope
  • Ian Liddell-Grainger

Procedure

  • Greg Knight ELECTED UNOPPOSED

Labour chairmanships

Business, Innovation and Skills

  • Adrian Bailey ELECTED
  • Geraint Davies
  • Barry Sheerman

Communities and Local Government

  • Clive Betts ELECTED
  • Nick Raynsford

Environmental Audit

  • Barry Gardiner
  • Joan Walley ELECTED

Home Affairs

  • Alun Michael
  • Keith Vaz ELECTED

Political and Constitutional Reform

  • Graham Allen ELECTED
  • Hywel Francis

Public Accounts

  • Hugh Bayley
  • Brian Donohoe
  • Margaret Hodge ELECTED
  • Michael Meacher
  • Iain Wright

Science and Technology

  • Andrew Miller ELECTED
  • Graham Stringer

Scottish Affairs

  • Ian Davidson ELECTED UNOPPOSED

Transport

  • Louise Ellman ELECTED UNOPPOSED

Work and Pensions

  • Anne Begg ELECTED
  • Karen Buck

Liberal Democrat chairmanships

International Development

  • Malcolm Bruce ELECTED UNOPPOSED

Justice

  • Sir Alan Beith ELECTED UNOPPOSED

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