Cometh The Hour, Cometh The George?

FRIDAY, MAY 22, 2009

Cometh The Hour, Cometh The George?

Think of England George

This week's reports from the IMF and Standard and Poors (see yesterday's post) have piled the pressure on George.

The IMF says he must be much tougher than Darling in tackling the build-up of debt. And he must place the emphasis on cutting expenditure rather than raising taxes.

S&P threatens to remove the UK's coveted AAA credit rating if:

"... we conclude that, following the election, the next government'sfiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term." 

So the heat is on, and George is the man strapped in the flaming seat.

What must he do?

First, as we've repeatedly and tediously blogged for years now, he must set out an explicit Medium Term Fiscal Strategy. It needs to incorporate a robust and quantified set of fiscal rules covering government borrowing, debt, and most crucially, spending. That last element was the gaping hole in Brown's famous fiscal rules, and George must close it.

The Strategy must set out a clear, and inevitably, stoney path for cutting the burden of government expenditure. A path which must be linked to, and driven by, a sustainable projectory for borrowing and debt. Spending must be driven by affordability, not grandiose social engineering projects.

Second, he must establish an independent fiscal monitoring authority to keep a very public eye on him - as he has promised to do (Another quango? Yes, but a critical one, fully funded by closing scores of others - eg the Equality and Human Rights Commission. And if we're that strapped, Tyler and a group of like-minded zealots might be able to cobble something together pro bono).

Third - and by far the most difficult - he must actually cut spending.

And unfortunately, that last task has just been made all the more difficult by the MPs expenses scandal. For how can these duck feather-bedded MPs possibly wield the axe on the poor and heavy laden? Where is their moral authority?

Take welfare. That comprises around one-third of all public spending, so it cannot possibly escape the cuts. But unlike say healthcare, where you can take refuge behind the argument that "efficiency" will deliver painless cuts (as Philip Hammond did on yesterday's Newsnight), cuts in welfare benefits mean someoneloses real hard cash.

Consider one of BOM's very first money-saving ideas - a redefinition of the poverty line (see this post).

The current definition of poverty is 60% of median income - ie households living below 60% of median income are defined as being poor (actually, it's 60% in so-called "equivalised income" terms - don't ask, but if you must, see here). And government welfare payments are driven by the desire to ensure nobody is below 60% (that's what they mean by "abolishing" child poverty).

But there's nothing magical about 60%. Years ago, it used to be 50%, and that was when median incomes were much lower than they are now.

We all know the argument: the old grinding financial poverty of popular imagination was long ago consigned to history. By and large, today's state benefits are more than enough to buy food, shelter, clothing, tellies, DVDs, and washing machines. And the issue with many of the poor is not money, but lack of ability to manage their own lives. Bigger hand-outs do not help with that.

So we suggested returning to 50%. And our fag packet suggested that would save around one-third of the welfare bill - a staggering £60-70bn pa. In one bound we'd be out of the debtors' prison free.

Is George up for that? Are our moat-owning, property-flipping, cosseted chauffeured MPs ready for the howls of outrage that would greet such an attack on the poor?

Yeah. I think we can see how that one will play out.

But if you rule out welfare, and you rule out the NHS, and you rule out schools, and you rule out overseas aid, pretty soon there's nothing left to cut.

Except of course, the second duck home allowance.

George, we need you to grit your teeth, close your eyes, stop reading the Grauniad, stop watching the BBC, and think of England.

THURSDAY, MAY 21, 2009

Stable To Negative

Are we sure this is a Magic Punch Bowl?*

Another day of grim debt news.

The latest monthly borrowing stats are appalling. Net debt has now surged to 53% of GDP, up from 36% just two years ago.

And this morning credit rating agency Standard and Poors has moved HMG's credit assessment from stable to negative, something that immediately whacked the financial markets. S&P now says there's a one in three chance of an outright cut to the UK's credit rating as debt approaches 100% of GDP. That would jack up the cost of government debt, and it's something we didn't even suffer during the 1970s.

In a different part of the forest, Tyler lunched yesterday with a senior and highly respected City-type. We'll call him Mr X, although his real name is gggg ggggg(redacted by Fees Office).

Surveying our watering hole, Tyler noted that since last visiting at the start of the year, things seemed to have picked up. Were we on the mend? Was Mr X tripping over any of those green shoots?

Mr X then proceeded to list scores of said shoots - equity markets up, credit markets up, easier funding, leading indicators turning, even the property market is bottoming. Yes, with June just around the corner, shoots are bustin' out all over. All highly gratifying... time for another drink?

As the FT's Martin Wolf noted yesterday:

"... policymakers have thrown the most aggressive fiscal and monetary stimuli and financial rescues ever seen at this crisis. Finally, this effort has brought some success: confidence is returning and the inventory cycle should bring relief. As Jean-Claude Trichet, president of the European Central Bank, remarked, the global economy is “around the inflection point”.

And in its latest UK assessment, the IMF gives at least a slight nod of agreement:

"... output is likely to continue to contract in the near term, although at a decelerating pace... with quarterly growth picking up gradually through 2010... the significant economic stimulus in train in the UK and other large countries should support the recovery."

So that's all lovely then. Large ones all round.

What an earth is going on? Green shoots in the financial markets, and a credit downgrade for HMG?

Well, the truth is that what's good for the financial markets isn't necessarily so good for HMG (aka UK taxpayers).

The IMF spells it out for us.

First, there's the tricky issue of the printing press. Easy money is great for financial markets in the short-term, but not so great for future inflation. Does that press actually have a reverse gear? And even if it does, how can we be sure the Bank of England knows how to operate it?

The IMF recommends a reassertion of Bank independence, and "transparent communication" on how precisely the Bank intends to drain off all the dosh now sloshing around. But all we've had so far is a stream of opaque analysis attempting to explain why the chunky 17.4% year-on-year growth in the money supply (M4) shouldn't worry us because it somehow doesn't count.

Then there's the disastrous condition of our public finances. In the short-term, government deficits may pump up the economy and underpin the equity market. In the longer term there's the small matter of repayment.

And on that, it's worth quoting the IMF at length (mainly because we agree with it):

"... the success of the current policy package hinges on the continued trust in the sustainability of the fiscal position. A continued strong commitment to medium-term fiscal consolidation is hence crucial... commitments would be strengthened by:

• Targeting a more ambitious medium-term fiscal adjustment path... The focus... should be to put public debt on a firmly downward path faster than envisaged in the 2009 Budget.

• Providing greater clarity on the specific measures needed... The emphasis in current plans to weigh the adjustment toward expenditure reduction is appropriate in light of international experience that expenditure-based consolidations are more durable.

• Allocating any upside surprises to growth or revenue to reduce deficits more aggressively and limit the accumulation of public debt.

• And finally, building a broad public consensus on the critical need for sizeable fiscal adjustment to assist in meeting fiscal challenges."

As we've blogged many times, we need a clearly stated medium-term fiscal strategy, anchored by a robust commitment to cut spending.

Unfortunately, we don't have such a strategy. All we have is a prospective credit rating downgrade.

*Footnote It was William McChesney Martin, the longest serving chairman of the Federal Reserve who told us that the central bank’s role is to “take away the punch bowl just when the party starts getting interesting”. Given our dire straights, I reckon time's up already.

We Can't Have An Election Because...

So let's see if I've got this straight. We can't have an immediate election because...

• Chaos would ensue (Gordo yesterday)
• The parties are agreed they have a sacred duty to put things right beforeasking voters to choose... er... between the parties (Hattie this morning)
• Parliamentary committees must opine on weighty matters before voters canpossibly be trusted to make their own judgement (Tony Wright, last night)
• MPs need time to decode the latest message from Alpha Centauri (Limpid Opec, two thousand light years from home)
• We will all lose our jobs (assorted Hon Members)

On the off-chance that you haven't read Peter Oborne's Triumph of the Political Class, you should do so now (and just for a giggle, see this review from staunch Labour insider Michael White).

What comes across ever more loudly in this scandal is that it really is them and us. They don't trust us to grasp highly technical issues, such as what they'reactually paying themselves, or how many tubes of Rolos it's appropriate to claim for in a single month.

Will an election make any difference?

Well, it will relieve us of the worst, most discredited government since WW2, so that's a plus. And we should get a crop of untainted more independent members, which will be another plus.

But sadly, it won't transform the way we're governed.

Our first-past-the-post Westminster system ensures the primacy of party. As we've blogged before, with no separation of executive and legislature, the majority of MPs have no incentive to hold government properly to account.

Our Big Government elected dictatorship will simply carry on, albeit in a slightlyless grubby set of clothes.

PS According to Nick Robinson, many "perfectly decent MPs" are so fed up with the way they're being pilloried, they're thinking of throwing in the towel. We'll believe it when we see it, but maybe if enough of them did so, it would force an early election. I for one would be much more inclined to vote for a candidate who had helped force an early poll.

WEDNESDAY, MAY 20, 2009

Your Support Needed

No chaos here

http://burningourmoney.blogspot.com/