Two more reviews of yesterday’s “theatre”. Neither gives the production anything but a ‘thumbs-down’.
Christina
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CITY AM 10.12.09
Pre-Budget report:
Britain is sleep-walking towards a fiscal meltdown
EDITOR’S LETTER - ALLISTER HEATH
SO there you have it. Britain’s bankers are in line for an extraordinary dose of collective punishment, everybody is being hit by a jobs-destroying hike in National Insurance contributions – and this is just the beginning. The government would like us to believe that this will be enough to bring the public finances back on track; the reality is that the national debt is set to surge to close to £1.5 trillion and there will be many more tax hikes to come, as well as real, truly painful spending cuts.
The bankers are being hammered now; for the rest of us it will be a case of pain deferred until the general election is safely out of the way. The public sector has grown far too big compared with the size of our economy; the only way to avoid a financial crisis will be to readjust our expectations of what the state can provide for us and how much it will cost.
The populist mob scored a huge victory yesterday with the punitive 50 per cent extra windfall tax slapped on all bank bonuses over £25,000. If you want to see why the tax is unjust, picture the following scenario: a successful 30-year old commodities trader at a hedge fund on a basic salary of £50,000 and a bonus of £50,000 will be unaffected; a similar individual doing exactly the same job at a bank will be hammered; and a colleague on a basic of £100,000 but whose poor performance didn’t warrant a bonus will escape scot free.
And how exactly did commodities trading cause the crisis? It didn’t. The vast majority of those affected by the tax were not even remotely responsible for the boom and bust. A bonus of £25,000 is a great deal of money; for many mid-ranking staff it will represent a key chunk of their income. Many will see their personal finances devastated if bonuses are not paid as a result of yesterday’s raid. Effort and hard work are being punished in an extreme manner – and all for a relatively miserable £500m in extra tax receipts, the figure the Treasury claims it will make on its tax raid. [But see my calculation yesterday. Against that £500m is the income tax lost on those bonuses not paid! - a not dissimilar amount -cs]
It is obviously the case that many banks will now think twice about basing or relocating their staff or operations to London, eventually costing the Treasury far more than £500m a year. In thousands of cases, there is only a marginal difference between basing someone in London or in another financial centre; the idiocy of yesterday’s tax grab is that an employee in New York will either be paid much more than a similar employee in London doing exactly the same job – or else their employer will have to hand over a massive cheque to the UK government to retain internal wage parity. Again, this is deeply unfair – and sends a very clear message to global financial firms that they should not base staff here if they can at all avoid it. Depressingly, the Tories have also bought the new anti-City, soak the rich consensus. Their objections to the bonus tax yesterday were merely technical. Together with all the other tax hikes on the City, Londoners will see their options and opportunities reduced, something which I now fear is unlikely to change in the event of a change of government.
Undoubtedly the greatest sleight of hand in yesterday’s pre-Budget report was its reliance on completely unrealistic growth forecasts. Last year was the worst for the UK since comparable records began in 1948; the 4.75 per cent fall in output was steeper than anything we saw at the height of the Great Depression. Alistair Darling is forecasting growth of 1-1.5 per cent in 2010, which is sensible. But he is predicting 3.5 per cent a year thereafter, which is impossible, especially given that the UK’s sustainable rate of growth will be permanently lower thanks to the punishment being inflicted on the City, the 52 per cent top rate of income tax/national insurance and the general erosion of incentives to work, save and invest. And without the growth, the deficit will be even larger, requiring even more drastic surgery.
For all the talk of belt-tightening, the PBR forecasts still incorporate a surge in current expenditures: these are set to rise from £607bn this year to £729bn by 2014-15 (last year’ spending level was just £563.8bn; so much for restraint). If current spending were only to increase in line with inflation and therefore stop growing in real terms, then the total would be £665bn by 2014-15, a significantly more manageable number (I am grateful to Chris Watling of Longview Economics for the number-crunching). Chancellor Alistair Darling missed a great opportunity to slam on the brakes yesterday; no real Keynesian could sleep at night with a budget deficit predicted to hit £178bn in 2009-10 and £176bn in 2010-11 (both up by £3bn since the Budget).
Much of the private sector has suffered lengthy pay freezes; regrettably, the public sector needs to take some of the same medicine to keep costs under control, rather than enjoy the relatively lenient 1 per cent cap on pay growth proposed yesterday. It is a matter of deep regret that the key area of government spending which Labour proposes to cut is the capital investment budget, which is set to fall from around £70bn this year to £45bn by 2013-14. All forms of government will unfortunately need to be cut – but it makes little sense to promote consumption expenditure over infrastructure spending, especially at a time when the UK is still suffering from a lack of a proper transport system. The PBR’s tax hikes, while substantial, were swamped by rises in spending: an extra £4.3bn in 09/10 and £4.9bn in 10/11, which as Citigroup points out is being driven by higher debt payments. [It costs to borrow money! -cs]
The European Commission says that the UK’s structural fiscal deficit (stripping out the recession-induced cyclical component) will be over 10 per cent of GDP in both 2009 and 2010 – more than every other EU country. We are in deep trouble – yet yesterday’s PBR did nothing to stabilise our public finances. Unless we see a real change of gear after next year’s election, the markets will finally run out of patience and short the UK, with devastating consequences. Time is fast running out.
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TELEGRAPH 10.12.09
Britain will pay dearly as Labour plays politics
Telegraph View: The pre-Budget report served an invaluable political purpose. It showed that Labour will, in attempting to save its skin, put sectional interest before the country's interest.
If further proof were needed that Labour is no longer fit to govern, yesterday's pre-Budget report supplied it. The nation's finances are in their most parlous condition in modern times. This year, the economy is contracting more than it did in 1931, the year of the Great Depression. Five years from now, the national debt will – on the Government's own figures – climb to £1.47 trillion. What we needed yesterday from the Chancellor of the Exchequer was an economic recovery plan, framed in the national interest. What we got was a political survival plan, framed in the party interest.
The most extraordinary aspect of Alistair Darling's statement was its absurdly cavalier treatment of the deficit, a debt that is growing almost twice as fast as he predicted. Last year, he said that borrowing this year would hit £118 billion – the actual figure is £178 billion. A year ago, he predicted that by 2014 borrowing would stand at £54 billion – yesterday, he conceded that it would actually be £96 billion. Let us assume that these latest forecasts prove accurate (admittedly a very big assumption). Britain will be left with an unprecedented debt mountain. Only one country in the G20 – Japan – will have a worse debt-to-GDP ratio.
So, how does the Chancellor plan to tackle it? We are no nearer knowing that today than before he got to his feet. Public spending will continue to rise next year, up another £31 billion. And after that? There was the vaguest of commitments – not actually to cut public spending, but only to reduce the rate of its increase (in sharp contrast to yesterday's Irish Budget, which took an axe to the state payroll). Pay cuts for the public sector? Not a bit of it. From 2011, public sector workers will see pay rises "capped" at 1 per cent a year for two years. Those in the private sector who have seen their pay frozen or even reduced will be unimpressed. Meanwhile, those "front-line" services so dear to Labour – schools, hospitals, the police – will have their budgets cocooned. The stated reason for this ostrich-like refusal to face the hard reality of a debt-crippled economy is that the Government does not want to choke off the recovery by removing its fiscal stimulus too early. That is a defensible position. What is not defensible is its failure to set out a clear plan for public spending cuts thereafter. There is only one reason for that: the imminence of a general election.
Electoral politics dictated virtually every decision Mr Darling made, or avoided. The 1p increase in national insurance contributions (which the Chancellor did his best to obscure in his statement) is punitive. It will hit everyone earning more than £20,000 and the impact on employers will be onerous. Such a tax on jobs is perverse in a recovering economy. It will push up the tax take as a percentage of GDP to a 25-year high – but, of course, it will not kick in until after the election. The Tories have been presented with an open goal: they must pledge to halt this measure.
What does come in before the election is a generous 2.5 per cent increase in the state pension (at a time of historically low inflation) and a 1.5 per cent increase in child and disability benefits. These rises are not motivated by altruism – they are designed to put the Tories on the spot. How could they be so heartless as to block such payments to the old, the young, the disabled?
Other tax changes are cynically targeted at middle-income earners, and not on Labour's core. Freezing the higher-rate threshold means that tens of thousands of teachers, police officers, senior nurses and middle managers will be hauled into the 40 per cent tax net. The freeze on the inheritance tax threshold is there simply to establish another "dividing line" with the Tories, whose pledge to raise the threshold to £1 million has rightly proved to be their most enduringly popular policy. And, of course, there was the much-trailed one-off tax on bank bonuses: a measure that is piddling in terms of the revenue it will generate, but enormous in its psychological impact on the City of London, which remains the powerhouse of the UK economy. Bashing the bankers may encourage a warm glow in many voters, but it will prove foolish and costly if – alongside the new 50p tax rate – it drives some of our most talented wealth generators overseas.
The markets seem to have taken this whole reckless exercise in political opportunism in their stride. They are doubtless working on the assumption that what happens between now and the election is political posturing that can be discounted. The serious business of rebuilding our wrecked economy will not start until after polling day. [That is why the continual postponement of a desperately needed election for purely party advantage is so despicable -cs]
Nevertheless, the pre-Budget report served an invaluable political purpose. It showed that Labour will, in attempting to save its skin, put sectional interest before the country's interest. It showed that it does not have the courage to take the really hard decisions. And it showed that Labour has finally dropped any pretence of being the party of the aspirational middle classes, a stance that allowed Tony Blair to lead it to three general election victories. As George Osborne observed in his highly effective response to the Chancellor: "If you want to get on in life, if you want to own your own home, if you want to save for a pension or leave something to your children, then the Labour Party is not for you any more." Yesterday, Labour completed its retreat from the centre ground of politics. It is now for the Tories to show they can occupy it.
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