WEDNESDAY, MAY 26, 2010
OECD Tells George To Brace Up
That's where 13 years of Labour leaves you
The OECD published its six-monthly World Economic Outlook today. And you know what? It's not all bad news.
They say that world growth is picking up faster than they expected last time, and it's been driven by China and the other emerging economies, rather than by yet more fiscal blow-outs here in the West.
So world trade is picking up again, and basket economies like the UK have a real chance of earning their way back to solvency.
Right, that's the good news over with.
The bad news is that when it comes to government borrowing we are still theworst economy in the whole of the OECD, bar Ireland (see chart above). The OECD forecasts that HM Government will borrow 11.5% of GDP this calendar year, and a further 10.3% next. Which compares with the laughably optimistic figure of 8.5% forecast by Darling for 2011-12.
The OECD's assessment?
"A weak fiscal position and the risk of significant increases in bond yields make further fiscal consolidation essential. The fragile state of the economy should be weighed against the need to maintain credibility when deciding the initial pace of consolidation, but a concrete and far–reaching consolidation plan needs to be announced upfront. While monetary policy should remain expansionary over the forecast period to support activity against the background of low levels of resource utilisation, the process of normalisation of interest rates needs to start soon in response to the expected gradual rise in underlying inflation."
Translation: public sector borrowing needs to be gripped soonest; George needs to announce a quantified plan for getting the public finances back in the black and keeping them there (aka a new set of explicit fiscal rules); the Bank of England needs to increase interest rates now before inflation balloons completely out of control.
Oh, and George will also need one of these:
PS The more we hear and see of young Mr Laws, the more impressed we are. We thought he was pretty good under fire in the Commons today, and in matters fiscal, he seems a whole lot drier than many a Tory front bencher. Hopefully he'll provide some much needed resolve when the shooting starts for real. We like him.
TUESDAY, MAY 25, 2010
Tackling The Welfare Problem
"My Government’s legislative programme will be based upon the principles of freedom, fairness and responsibility...
The tax and benefits system will be made fairer and simpler... People will be supported into work with sanctions for those who refuse available jobs and the timetable for increasing the State Pension Age will be reviewed."
Thus spake Her Majesty today.
As we mentioned a couple of days ago, the welfare bill is now running at £200bn pa, around 15% of GDP, and increasing rapidly. The chart above shows how it has soared over the last century since the Liberals began the huge expansion of welfare just before WW1.
And under successive governments since then, it's grown into a serious problem. The blunt truth is that we can no longer afford it, and Dave is quite rightly set on cuts.
But what cuts? And how can we cut without having people starve in the gutter?
Here's how that £200bn breaks down between the three key "client" groups (2008-09):
- Old people - £90bn, mainly in the shape of the state pension.
- Sickness and disability - £40bn, including the 2.5m people of working age who are on those notorious incapacity benefits.
- Families and children - £30bn, plus another £20bn in the form of tax credits which also largely goes to them.
The remaining £20bn goes mainly on housing, spread between all three groups. Unemployment support comes in at just £5bn - the rest having been redefined as something else.
So what to cut? In truth, there are no easy answers, and there will inevitably be losers. But the current level of welfare benefits is targeted on 60% of median income, which is now around £23,000 pa*. By no stretch of the imagination is that starving in a gutter, and given our dire fiscal straights, a 60% target is no longer sustainable.
And all those old people are going to have to be even older before they can retire. Given their increasing tendency to have 100th birthdays, the state pension age is going to have to rise to 70 soonest. Because if Her Majesty can still work at 84 -and wear that huge crown - working to 70 without the crown ought to be a breeze for everyone else.
The poverty line redrawn at 50% of median income; state pension age raised to 70; and forced sterilisation for anyone who has children they can't afford to support. Well, no, OK, the last one was the Major's and might not make it through to the final programme.
Nobody would start from here, but Dave does sound like he might be ready to take some real decisions. Let's hope he gets on with it.
*Footnote - The government's poverty benchmark is median household net income on an equivalised basis. Que? That's median household income, adjusted for household size and composition (equivalised), net of income tax and National Insurance, and gross of social security receipts (for more detail see here). Gross of social security receipts? But surely that means the target is chasing its own tail, and the higher the government makes social security, the higher will be the poverty benchmark, and the higher will be social security payments to close the gap, and the greater will be the cost. Well, yes, that's right - it's one of the very many bonkers features built into our current system of poverty relief.
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