Press Release 5.12.08
Osborne issues Euro warning
Shadow Chancellor George Osborne has warned that the current economic
crisis would be worse had Britain joined the European single currency.
He pointed to higher Eurozone interest rates arguing that the crisis
shows that control should be kept over interest rates, otherwise the
problems would "come to haunt us".
The party issued the following text of the speech.
"Thank you for inviting me to speak here at the North East Economic
Forum.
We meet here today at a time of anxiety and mounting anger: anxiety
as the recession and spreads from the financial markets to the high
street and the factory floor; mounting anger as the country asks how,
after fifteen years of economic growth, Britain can be so ill-
prepared for what is happening.
The North East, of course, is not immune.
=Nissan is cutting production at its Sunderland plant.
=BAE Systems is reducing its workforce in Newcastle.
And behind the big names lie small and medium sized businesses that
are part of supply chains, or innocent victims of the evaporation of
credit, or hit by the rising import costs of a devaluing currency.
I grew up with a family manufacturing business; I know the pressure
when orders fall off; I know the difficult decisions that have to be
made as savings have to be made; I do understand the pressure so many
of you are under.
And I am not going to pretend to you that next year will be anything
other than very difficult. We have had enough of Government
Ministers telling us Britain is better prepared than most, or that
the downturn will be short and shallow. We should be honest enough
to see ourselves as others see us.
The OECD predicts we will have the steepest rise in unemployment in
the G7. The IMF and the European Commission say we will have the
deepest recession.
The international markets have delivered their own verdict on the
fundamental weakness of the British economy with the precipitous fall
in the value of the pound.
'Euro wrong solution to Britain's problems'
This devaluation - bigger than any of the post war devaluations - has
led some to conclude that the answer is to abandon the pound altogether.
It didn't take long for the euro-fanatics in the Labour party to
seize on our economic difficulties for their own ideological ends.
As European Commission President Barroso said just this week:
"British politicians have already told me, 'If we had the euro, we
would have been better off'". The new Business Secretary, who spoke
to you earlier, says that the government "is right to maintain a long-
term policy objective of taking Britain into the euro"
That is exactly the wrong solution to Britain's problems.
Sterling's decline is the result of a damning verdict from
international markets on British economic policy. The right
solution is better policy to restore confidence in Britain's long
term prospects. Indeed the discipline that the markets impose on
governments is one of the advantages of not abandoning your currency.
These arguments remind me of the Christmas Tale and the ghosts of
past, present and future.
Let me explain why all three would come to haunt us if we were to
abandon the pound. For if Britain was in the euro the past boom
would have been bigger, the present bust would now be even deeper,
and we would have less control over the future recovery.
There is the past.
The mess that our economy is in is the result of a debt-fuelled boom
that Gordon Brown allowed to build up over the last ten years. It
was domestic policy failure that gave us those 125% mortgages and
more personal debt than any other economy in the history of the world.
But monetary policy in the euro area has been ever looser than here
in Britain so if we had joined the euro, credit conditions would have
been even looser and the bubble could have been even bigger.
Then there is the present.
Yesterday the Bank of England delivered the kind of rate cut that
Conservatives have been urging and that our economy needs. The
result is that interest rates in the euro area are now 0.5% higher
than they are here, and they have fallen far more slowly.
So, if we had joined the euro, rates would be higher now than they
need to be to stimulate demand in the British economy. If the last
decade has taught Gordon Brown anything it should be that you have to
keep control of interest rates and monetary policy.
And then there's the future.
The euro has never been primarily an economic project, it's a
political one.
Once you share a currency and a central bank the pressures for closer
political union become ever more powerful. We've seen those
pressures operating over the last few weeks with the concerted
attempt to deliver a euro-area spending splurge.
Given that we are already borrowing more than any major euro area
economy, that would be the wrong solution for Britain. Some euro
area politicians have stood up to the pressure - the German finance
minister said he wouldn't join the other "lemmings".
But monetary union will only increase the pressure for closer
political union.
That's not what the British people want, and under a Conservative
Government they can be confident that it's not what they'll get. We
fought against joining the euro in the past and we will not join the
euro - in the present or the future.
Instead, to take effective action you need first to understand the
root causes of the crisis - reckless over-borrowing and systemic
regulatory failure.
=Over the past ten years, Britain accumulated the highest levels of
personal debt of any country in the world.
=Our housing boom was greater than America's.
=And because of the failure to get to grips with government
spending, we came into this downturn with the biggest budget deficit
of any advanced economy.
So the truth is that this Government neither saw the boom coming nor
prepared for the bust.
As a result, we now need a long-term plan to fix the financial
system, cut debt, and get the public finances back on track.
What does this mean in practice?
First of all, it means recognising that this crisis was triggered
by a credit crunch, and so action is needed to get credit and money
flowing through the veins of our economy.
='Bank recapitalisation plan isn't working'
It's time for the Government to face the truth: the bank
recapitalisation plan simply isn't working. It may have rescued the
banks but it isn't rescuing the economy. Just yesterday, the largest
mortgage lender in the country Halifax announced that it would not be
passing on the interest rate cuts in full to its customers. This was
precisely what recapitalisation was supposed to prevent.
Recapitalisation was also supposed to ensure that banks would start
lending to businesses again, but it's clearly failing on that front too.
The FSB says one in three businesses is unable to obtain finance.
And the CBI says the situation may be even worse. According to them,
the number of firms reporting reduced and withdrawn lines of credit
has risen from one-third to over forty percent in the past month.
So it's clear that further action is now needed.
Of course, the banks should be doing more to pass on rate cuts. But
Gordon Brown and Alistair Darling also need to swallow their pride
and accept that their bank rescue package needs radical surgery. The
cost of government capital is too high.
It's clear now that the 12% the banks are paying for the preference
shares is stopping them lending out money to homeowners and
businesses at the low rates our economy needs. The interbank
guarantees are too expensive as well.
The Government tell us their plan is being copied around the world,
but that's not true.
In America and Germany and France, their banks are being charged far
less. No one is following the British model.
The Prime Minister has a choice.
He can either stubbornly stick to a plan that isn't working, stand on
his soap box and lecture the banks while they ignore him, and watch
the economy slide deeper into recession.
Or he can swallow his pride, admit he got it wrong, change the bank
rescue package to make it work, so that instead of more ministerial
grandstanding the banks actually start lending again and passing on
rate cuts.
But even that won't be enough.
We need further radical monetary action.
As David Cameron announced last week, the Conservative Party would
create a temporary new Government body - the National Loan Guarantee
Scheme - to directly underwrite lending from the banks to British
businesses.
This would guarantee billions of pounds of new loans to any UK
businesses, and it would do so for a commercial insurance fee, passed
on by the banks, that would properly protect the taxpayer.
So the government would use its balance sheet to get money flowing
from the banks to businesses here in the North East.
Our approach has attracted support from the key business groups.
The CBI, for example, has said our proposal "would be warmly welcomed
by business".
While the FSB have said "we welcome this tranche of measures to
improve lines of credit for small business".
If getting lending flowing again is the first priority, immediate and
direct government help for business is the second.
With unemployment levels in the North East already the highest in the
country and 280 small companies going out of business every week, we
need do be doing everything we can to help businesses survive and
help people keep their jobs.
That is why I would allow small businesses to delay their VAT
payments by six months.
That's a £10bn boost to help small firms with cashflow problems.
I would also cut employers' national insurance by one percent for the
smallest firms to encourage them to keep people on.
And I would introduce employment tax breaks for companies that, even
in this climate, are looking to hire new staff.
These policies would help businesses right now.
That brings me onto the third thing we need to do.
We need to get government borrowing under control.
I think there was a genuine sense of national shock last week when
people discovered that the government wants to double the national
debt to one trillion pounds.
Let me try to put that huge number in perspective.
The North East's share of that debt is a massive £42.5 billion pounds.
That's equivalent to £40,000 for every family - or two years worth of
earnings for the average person living in the North East.
The Conservative Party has been warning for years about the size of
the national debt and the scale of government borrowing.
We said that the government should have fixed the roof when the sun
was shining.
If we had set aside money in the good years then, of course, we could
use it now - as other countries with surpluses are now doing.
But this government didn't. And the result is Britain has run out of
money.
That's why David Cameron and I took a difficult decision to oppose
the temporary VAT reduction.
We believed that any potential benefit is more than outweighed by the
huge cost.
When we said this some weeks ago, not everyone agreed with us. But I
believe that the tough stance we've taken is one now broadly shared
by the British people.
They can see that a temporary 2.5% reduction in VAT at time when
prices are falling anyway is not very stimulating, particularly when
the public knows that it will be paid for by a higher national debt
and a permanent increase in taxes.
And look at the tax rises Labour is planning if they are re-elected.
A £2.6 billion rise in national insurance up for businesses.
An increase too in national insurance up for anyone earning over
£20,000.
That means over 300,000 people in the North East will be hit with
higher taxes.
Increasing the taxes on incomes and jobs at the very moment when we
hope to be coming out of recession puts a timebomb under the recovery.
Then there are the plans, leaked by the government themselves, to
increase VAT to 18.5% and even 20% - completely cancelling out any
stimulating effect of a temporary reduction.
Instead of Labour tax rises, what we need is spending restraint.
We need to impose discipline - and get a grip on public money.
A Conservative government will end the spendaholic culture that has
been a feature of this government.
We will need one of the toughest periods of spending restraint for a
generation.
And for the long-term, we need a totally different approach that will
entrench fiscal responsibility for good.
That is why we are committed to establishing a new, powerful and
independent Office of Budget Responsibility to assess independently
the sustainability of the public finances - so that you and your
businesses are not left footing the bill.
That is the only way to permanently reduce taxes - by introducing
spending restraint and getting the public finances back in order.
This then is our plan to help during the downturn.
=Taking action to guaranteeing lending to business and get credit
flowing again.
=Taking action to help businesses today with targeted tax cuts and
government support.
=And sorting out the public finances and permanently reducing taxes.
These policies sit alongside our plan to get the economy back on
track for the long-term.
To do that we have to learn the lesson that you cannot build a stable
economy on the pillars of finance, housing and government spending.
Never again should we leave our economy so narrowly based on just a
few sectors and a few geographical regions.
We need a new vision for the British economy: an economy that is more
productive, more competitive, more stable and more balanced.
We have to broaden our economic base to include more science, more hi-
tech services, more green technologies, more engineering and more
high-value manufacturing, drawing upon a much wider range of
industries, markets, people, towns and cities.
Because in the end, the simple truth is this: we will only find a way
out of this recession if we can find confidence in the future.
=Confidence in the future that when you buy a house its value will
rise.
=Confidence in the future that when you start a business, it will
make a profit.
=Confidence that when you take a job it will still be there in six
months time.
Looking forward, we need to create an environment in which new
businesses can grow and flourish - in every part of the country.
As I'm sure all of us here are aware, the North East today has a
lower number of businesses per person than the national average.
In the economy of the future, this has to change.
That means lower and simpler corporate taxes - and we would cut the
main corporation tax rate to 25 pence.
=It means an education system that equips children with the skills
they need for the modern economy - and our revolution in school
policy, based on the Swedish example, would help do that.
=It means a reduction in small business red tape and policies to
encourage start up capital and innovation.
=It means proper restraint in spending so that government lives
within its means.
=It means a financial system that assists efficient access to credit
not blocks it.
=It means an economy that is better placed to compete, better able to
spread the fruits of prosperity, and better prepared to weather the
storms of the global markets.
With your help and advice and input we are determined to build it.
Thank you."
========================
GUARDIAN 5.12.08
Treasury could lose money from 45% tax rate, says thinktank
Andrew Sparrow
After the pre-budget report last week, the Institute for Fiscal
Studies gave a briefing at which it said that the decision to create
a new 45% top rate of income tax would raise "approximately nothing".
Now it seems to have gone even further. It has just published its
full report on the distributional effects of the PBR, and it says the
new rate could even cost the Treasury money.
The Treasury says the new rate, for people earning more than
£150,000, plus changes in personal tax allowances for those earning
more than £100,000, will raise £1.6bn every year. But, partly for
reasons to do with "taxable income elasticity" - ie the notion that
the rich stop paying once tax levels reach a certain point - the IFS
is very sceptical about this.
There are also considerable uncertainties in forecasting the
underlying pre-tax incomes of the very rich in 2011-12 given that the
latest micro-data available on the incomes of the very rich dates
from 2005-06, and given that recent analysis showed a close
relationship between income growth amongst the very rich and the
performance of the stock market, which has been extremely volatile in
recent months. These issues, combined with the uncertainty over how
very rich adults will respond to higher marginal tax rates, must
surely mean that the HM Treasury's estimated revenue yield of £1.6bn
a year is subject to an extremely wide margin of error, and the
possibility must exist that the measure could lose the government
income tax revenue.
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