Monday, September 26, 2011

Shadow Chancellor Ed Balls has proposed a set of five policies to stimulate growth. These are:

- preponing long-term investment projects
- to reintroduce the bank bonus tax in order to generate funds with which to support house construction and job guarantees
- a temporary suspension of employer contributions to national insurance for small firms that take on new workers.
- reducing VAT for a fixed period
- reducing VAT further for home maintenance and improvement

There is a mix of good and bad in these proposals. The first is needed, and is in any event in line with what some members of the government favour. The first half of the second bullet point deserves consideration as a means of raising funds; the second part is more suspect - why should the government be better at investing than the private sector? The proposal to cut national insurance has merit, though the requirement that it should be done for firms that take on extra workers might be hard to implement.

Then we come to VAT cuts. A temporary cut in VAT was introduced by the last government as a means of stimulating the economy. It is probably a costly way of having a limited impact. The last government did it because it was constrained by the political fall-out from its decision to scrap the 10 per cent rate of income tax. The present government is bound by no such constraints. If there are to be reductions in tax, they should take the form, not of a VAT cut, but of a hike in personal income tax allowances. That would put more income into the hands of the people most likely to spend it - and so it would likely be much more effective in stimulating the economy.

Wednesday, September 21, 2011

Reports that the government is considering injecting an additional £5 billion of expenditure on capital projects come hard on the heels of last Wednesday's speech by Deputy Prime Minister Nick Clegg at the LSE, and also follow Business Secretary Vince Cable's recent references to 'stimulus'. The economic situation has certainly taken a severe turn for the worse, and such stimulus should - at one and the same time - reduce the danger of falling back into recession and (so long as the capital projects represent sound investment) enhance our ability to reduce the budget deficit. The sum that is being considered would also bring coalition policy very much into line with (the then Chancellor) Alistair Darling's proposals at the time of the last general election. Political consensus would be welcome indeed.

Thursday, September 15, 2011

In a coordinated move, five central banks, including the Bank of England and the Federal Reserve, have provided commercial banks with extra loans. This is in response to renewed reluctance on the part of the commercial banks to lend to each other.

In the UK, we have seen this reluctance reflected in the recent rise of the LIBOR - currently at 0.92, up from 0.85 a month ago. (It was 0.76 at the start of the year.) The banking system seems once more to be at risk of ossifying. At the root of this is the sovreign debt crisis in some European countries - while the possibility that Greece (in particular) might default on its public debt remains, banks that have lent to Greece are vulnerable, and other banks will not lend to them.

The fundamental problem is persistently put off rather than tackled. The extra loans will help, but only for the time being. One of two end points now looks inevitable. Greece defaults, or its problems are absorbed within a monetary, fiscal and political union of European states. Neither is particularly palatable. But it is time to stop kicking the can a little further on down the road and hoping that the underlying problems will go away (or come on someone else's watch).

Wednesday, September 14, 2011

Jose Manuel Barroso has proposed the issue of joint bonds by the group of 17 countries that have the euro as their currency. One might be forgiven for drawing the analogy between this and the type of derivative that became a toxic asset as the subprime crisis unravelled. As Ian Hunter once sang: once bitten twice shy.
Deputy Prime Minister Nick Clegg has today delivered an important speech at the London School of Economics.

"This is about economics, not ideology, not stubbornness. And our plan doesn't put a straitjacket on policy ... Deficit reduction was only ever intended as a means to an end ... Our troubles have very much been a demand crisis. The banks’ sudden withdrawal of funds, asset price falls, volatility in the markets – all hit demand. And even if we had the least regulated, most skilled, most competitive economy on the planet, if no-one spends any money, that’s not enough. Clearly, with debt so high – private and public – we have to be realistic about the restraints on boosting demand ... Investment in infrastructure stimulates demand not overnight, but more quickly than many supply side measures. And it raises productivity well into the future too ... If you modernise this kind of infrastructure you stimulate activity in the shorter term and you build systems high growth industries can use for years to come ... Last year the Coalition produced the UK’s first ever National Infrastructure Plan to deliver the world-beating infrastructure our businesses need from High Speed Rail, to Cross Rail, to green energy, to the best superfast broadband network in Europe. And we’re galvanising around that plan with renewed energy. A gear shift in government to unblock the system and get the money out the door ... We’re drawing up new money-raising powers for councils to do that where they can borrow against future growth from locally raised business rates ... We’re going through the nation’s capital spending plans to hand-pick up to 40 of the biggest infrastructure projects, the ones most important to growth, which will be given new special priority status. Each will be rigorously examined by Ministers to make sure there are no delays, no blockages and the economy feels the benefits as quickly as possible. That includes, for example, high speed broadband rollout, work to transform the efficiency of the national grid, major improvements to the rail network, like Crossrail and Great Western Electrification and projects to reduce congestion on our road network."

This is certainly a change in rhetoric. It sounds as though it might also herald a change in the phasing of the government's budget deficit reduction plan - about which we may hear more in the autumn statement on 29 November.

Monday, September 12, 2011

The ring fence around retail banking that has been proposed by the Independent Commission on Banking should serve to protect the sector in future from the type of meltdown that occurred in 2007-08. By effectively separating out retail banking from highly leveraged activity in the investment banking sector, the risks generated by the latter sector remain largely within that quarter. This should help ensure that any future crises would necessitate salvage by the taxpayer only of the (now easily identifiable) retail banking arm of each banking company.

Some representatives of the banks have argued vociferously against the proposed reforms. Since the proposals serve to limit their degrees of freedom, this is not surprising. They argue that the proposals will lead to an increase in their costs - which they would pass on to their customers thereby jeopardising the economic recovery. The extent to which the banks could shift the burden of the new legislation onto their customers in this way depends on the extent of competition within the sector. The Commission's proposals for enhancing competition therefore deserve somewhat more comment than they have thus far received in the media. These are that mechanisms should be devised to make it easier for consumers to switch between banking accounts (through automatic transfer of information about direct debits etc.) and that the newly created Financial Conduct Authority should adopt a pro-competition stance. The Commission also notes that the divestitures currently planned and ongoing, respectively, in the Lloyds Banking Group and the Royal Bank of Scotland should serve to promote competition. These proposals are somewhat anaemic - where they go beyond a commentary on what is already going on they are vague - and they may need strengthening as they pass through the legislative process.

Subject to that caveat, there is much to commend about the Banking Commission's report. It should be welcomed.

Monday, September 05, 2011

The speed of the budget deficit reductions in the UK has been a matter of much debate since before the last general election. Extracts from Alistair Darling's new book, published over the weekend, highlight the middle path that he advocated. Now the argument for the government to ease back on the brakes comes from another, and rather surprising, source - Bill Gross, of Pimco, has argued that the austerity package needs adjusting in order to ensure that growth is delivered, and has suggested that this can and should be done without damage to the UK's credibility in the eyes of the markets.

The Chancellor claims that he has no Plan B; but Plan A can of course be morphed. As the economic outlook becomes increasingly worrying, and as the clamour for change increases, expect to see policy adjust sooner rather than later.