Sunday, January 31, 2010

Profoundly Dangerous

Another warning from history

According to Climate Commissar Miliband:
"There are a whole variety of people who are sceptical, but who they are is less important than what they are saying, and what they are saying is profoundly dangerous. Every­thing we know about life is that we should obey the precautionary principle; to take what the sceptics say seriously would be a profound risk."
It is the cry of commissars since the dawn of time - do what I say or risk destruction. It is the same profoundly dangerous arrogance that throughout history has unleashed on mankind famines, purges, wars, and even genocide.

Why can't this preposterous little man simply admit he may be mistaken? Surely the evidence is now crystal clear that the so-called settled science of climate change is nothing of the sort. The exaggerations and outright lies are becoming obvious to all. As is the fact that much of what we've been told about global warming has come from a deeply conflicted industry whose financial prospects depend entirely on scaring us all to death.

What we need more than anything is a grown-up discussion about all this. It's simply not good enough for the Commissars to demonise us sceptics as maniacal flat-earthers. And for Miliband to dismiss the excellent and expert Prof Stott as having his "head in the sand" (as he did today on the World This Weekend), is frankly ludicrous (and see Stott's latest post here).

As for the precautionary principle, if that was the no-brainer he claims, we'd all still be living in caves. Progress has always depended on people being prepared to take risks.

Sure, we could slash our carbon emissions by the 80% he has ordained, but - quite apart from the fact that our emissions comprise less than 2% of the world total so would make virtually no difference to global anything - the cost to our living standards would be catastrophic. As we blogged here, the TPA estimates that that existing "green" taxes and energy regulations already cost the average British family nearly £1,000 pa.

Stalin's forced collectivization of agriculture provides a chilling example of where Miliband-style government leads. Despite intense opposition from bourgeois elements (aka the people who actually had to do the work) Stalin and the commissars were absolutely confident that collectivization would hugely expand food supply for the workers. Two years into the programme he boasted that they had "over fulfilled the five-year plan of collectivization by more than 100 per cent", and spoke of comrades being "dizzy with success". They had science and technology on their side, and they were right.

Unfortunately for the Soviet people, Stalin and the Commissars turned out to be wrong. The abolition of private farms led to a collapse in food production, and millions died from starvation. Even Stalin himself later admitted to 10 million deaths, and others put the number closer to 20 million.

That's what happens when commissars decide they're right and doubt is a treasonable act.

PS The rather scratchy vid above is from Russia's state funded English language TV news station, RT, and it's obviously got an axe. But the interesting thing is that RT's axe is to deny the 30s Ukranian famine was an instrument of premeditated genocide, as the Ukranians themselves apparently believe. What nobody denies is that collectivization was a commissar-made disaster of historic proportions.

Saturday, January 30, 2010

Cuts: 57 Varieties

Let's not go there

This  morning on BBC R4 Today, Evan Davis asked Darling why he won't tell us what he's going to cut. In the light of the ongoing Greek lesson, surely that would be the best way to retain market confidence?

Darling repeated his recent claim that he's already told us: £57bn of cuts already announced. Sounds pretty impressive, and Davis failed to challenge him.

But as we blogged here, that £57bn relates to annual savings that will not appear until four years from now. What's more, they remain largely unspecified: all we know from the Pre-Budget Report is that they comprise roughly one-third specified tax rises - including the new tax on jobs - roughly one-third unspecified capital investment cuts, and roughly one-third unspecified current spending cuts.

In other words, Darling's cuts could be virtually any of 57 different varieties. Schools, hospitals, roads, teachers, nurses, old people, babies - you name it, any or all could be facing the axe. He has not squared up to the tough decisions, which are all about what specifically are you going to cut?

Yet the Tories have still done little better. True, they have specified a handful of items for cutting, but all together they only add up to £7bn pa savings - not nearly enough.

Still, at least the Tories sound like they understand the problem. Yesterday at the annual Swiss Egofest, Cam gave another speech emphasising the risks to confidence and interest rates if we don't do the necessary. He pointed out that the advocates of early cuts are fast becoming the mainstream:
"World-leading economists. The Governor of the Bank of England. The OECD. The Conservative Party. All of us are agreed on the importance of being clear about the risk the deficit poses and of the importance of making an early start.
This emerging consensus isn't built on conjecture - it's based on experience. Historically, fiscal consolidation - particularly when markets are losing confidence - leads to higher, not lower economic growth.
Just look at what happened in the 1990s in Canada, in New Zealand and in Sweden. Each had huge deficit troubles, each dealt with them decisively - and each grew faster as a result. Sweden turned a 10 per cent deficit into a surplus in just five years, staving off a fiscal crisis and helping to deliver years of strong economic growth."
All of which sounds spot on: serious and early cuts in order that we can rebuild confidence and return the economy to sustainable long-term growth.

Except that he subsequently spoiled it by wandering off-piste:
"...early action doesn't have to be particularly extensive, it just has to be early, and it has got to be action.'
Yet another of those 57 varieties - early cuts but not extensive cuts.

Let's just remind ourselves of the essential facts here.

HMG is currently borrowing 13% of GDP every year, which is way beyond what is sustainable over more than a year or two. Why? First, because the markets won't go on lending at anything like the same rate of interest. And second, because we can't afford to go on borrowing on this scale - even at current interest rates, £200bn+ pa of gross gilt issuance means an addition to annual debt interest costs of getting on for £10bn pa - cumulative.

So we need action that is both early and extensive.

And as Cam says, the evidence from other countries (and indeed our own experience in the early 80s) is that spending cuts to tackle fiscal deficits are the precursor to faster GDP growth, not the gateway to depression.

It's all about confidence - the confidence of investors in the future, and the confidence of governments to make tough choices among the 57 varieties. And then to stick to them.

Friday, January 29, 2010

Credit Card Government

Hope you've got those scissors ready George

It looks very much like the Cradle of Civilisation is going down. According to this morning's FT:

"...anxiety over Greece rose in financial markets, driving Greek bond yields up to 7.25 per cent, closing on Hungary, a non-eurozone state bailed out by the EU and the IMF in 2008.

Greek yields have risen by more than one percentage point this week and by three percentage points since October.

George Papandreou, Greece’s prime minister, blamed “malicious forces” for stories about Athens seeking funds from China and elsewhere, which helped trigger the turmoil...  investors warned they might shun Greek debt, accusing Greek ministers and bankers of mishandling the bond issue, which left some funds nursing heavy losses."
Luckily for the Greeks, the EU will not let them fail, and is putting together a bail-out. Unluckily for the Greeks, the EU (aka the Germans) will insist on huge and immediate spending cuts and tax increases. The Greek government has lost control of the situation, and Greece may well be made an example of, specifically to encourage the other PIGS, especially Portugal and Spain.

Dr Doom puts it this way:
"If Greece goes under that's a problem for the eurozone. If Spain goes under it's a disaster."
Jose Luis Zapatero, Spain's premier, assures us there isn't a problem:
"Spanish public debt (52pc of GDP) is 20pc lower than Europe's average; our treasury spends 5pc of revenues on debt costs, less than France and Germany."
Which is very interesting.

Because on that basis, Spain looks like a paragon of fiscal virtue compared to you know who.

We've looked at the following comparison chart before, but this time we've added Spain. It shows the OECD's latest estimate of structural fiscal deficits (ie the bit of the government deficit that will not disappear automatically when the recession ends). And as we can see, when it comes to borrowing, the UK is by far the worst of the bunch, worse even than the PIGS:

Now, it is true that Portugal, Italy, and Greece are all currently worse than us in terms of debt outstanding, but we're catching up fast (see yesterday's blog on the Ring of Fire). And as Zapatero says, Spain's outstanding debt is actually lower than other countries, including us. According to the OECD, Spain's gross government debt is currently 67% of GDP (2010), whereas ours is 83% (remembering of course that this is just our official debt, excluding all the off-balance sheet Enron items).

And Zapatero also points to the importance of the debt interest burden - how much of the government's revenue has to go on paying interest costs. In Spain's case it's a relatively comfortable 5%, and that was roughly where we were before the bubble burst. Unfortunately, our debt interest burden is now escalating wildly. According to the Pre-Budget Report, it will reach 8.6% in 2010-11, and the IFS estimates it will reach 9.5% the following year.

Again, we've blogged this many times, under its more usual soubriquet The Doomsday Machine. The point that needs to be underlined is that for the last several years, our government has effectively enjoyed a debt holiday. The golden legacy inherited by Labour in 1997 included buoyant tax revenues and falling gilt yields (strongly reinforced by, yes, their decision on Bank of England independence - a confidence building measure that brought an immediate dividend in terms of lower gilt yields). Unfortunately, that holiday has now come to a sudden juddering halt:

Make no mistake, this is a turnaround of historic proportions. For four whole decades following WW2, British taxpayers struggled under the burden of the War's massive cost. An average 12% of our taxes - one pound in every eight - went not on providing public services, but simply on paying debt interest.

My friends, we are now headed right back to where we started. And this time, in a world of globalised PIMCO markets, and no exchange controls, we are going to find that the consequences in terms of HMG's borrowing costs are much worse than they were in the 40s and 50s.

George, please, pleeeease, don't blow it in July. As the FT reports, the interest rate on Greek debt has jumped 1% in a week, and is up 3% in the last three months. If you fail to grip the problem at the first attempt, that could easily happen to us - or much worse.

Do you really want to be remembered like poor old Badger, forever frozen in the TV lights outside HMT on the day the Pound finally did expire? Much better to be remembered as a tough bastard, hated by everyone, but the man who sorted our credit card bill and got us back on track to prosperity.

PS Global beer giant SABMiller is one of the big employers near Tyler Towers. Unfortunately it is now joining the corporate stampede from the UK. Their CEO says: "One of the things that attracted SAB Miller to move its HQ to London and to list on the LSE in 1999 was the liberal and predictable tax regime. That's no longer the case. Today the tax system is not predictable and there have been numerous increases, particularly when it comes to personal taxation. This means that as a global company we are no longer able to attract our best global talent to the UK. Why would someone move from Hong Kong where the marginal tax rate is 15 per cent and come to the UK where it is closer to 52 per cent. Taxation was a key part of our decision to locate a new global procurement business not in the UK but in Zug in Switzerland." George, that ticking noise is getting a lot louder.

Thursday, January 28, 2010


We've just taken a quick look at the National Audit Office's new report on the BBC. They've probed the costs incurred in covering major sports and music events, and they come up with some interesting stats.

How many BBC staff went to the bunfight in Beijing in 2008?

A staggering 491 - even though all the main pictures (including that fake opening ceremony) were supplied by Chinese TV.

Glastonbury - 277

The Proms - 145

But as always, the really interesting bit is what they choose to pay the... er, "talent". And as always, the tax-funded state broadcaster refuses to tell us:
"Following legal advice, the BBC Trust has asked that the National Audit Office not disclose the aggregate figure for talent costs for each event. It believes that in this case such aggregate disclosure, when combined with other information the Trust believes to be either in the public domain or potentially available, could constitute disclosure of talent fees for individuals, which would be in breach of the Data Protection Act."
All the NAO will say is:

"The cost of talent (presenters and commentators) can be a significant element of coverage expenditure, particularly for the events covered by BBC Sport. The cost of talent was either two or three per cent of total coverage costs for music events and between six and 20 per cent for sporting events."
They also tell us that the combined cost of staff and talent at Beijing was £3.6m (plus another £2m on travel and accommodation). And the total coverage cost was £15.6m. So the talent cost was in the range £0.9m to £3.1m.

That's for three weeks work.

And who were "the talent" exactly? Alan Partridge of course, but who else?

Yes I know I've said it before, but WTF do I have to pay for it?

Resting On A Bed Of Nitroglycerin In The Ring Of Fire

Are you sitting comfortably? Then we'll begin.

As you may have already seen, the world's biggest and most influential bond manager has just passed a further and even more terrifying judgement on our precarious financial position (see this blog for previous warning). He now says:
"The UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower."
He describes us as sitting in “The Ring of Fire”:
"These red zone countries are ones with the potential for public debt to exceed 90% of GDP within a few years’ time, which would slow GDP by 1% or more. The yellow and green areas are considered to be the most conservative and potentially most solvent, with the potential for higher growth."
And here's his pic:

Now OK, we're not the only ones in The Ring. But we are the ones whose debt position is deteriorating most rapidly, simply because we have the highest annual borrowing. And some of our Ring companions, like Greece, are already starting to smoulder alarmingly.
The thing is, PIMCO's Bill Gross is not some small government fanatic like Tyler. He's not saying this because he's trying somehow to bludgeon HMG into cutting back the state. He's saying it because that's what PIMCO's analysis shows. And yes, he's almost certainly already sold his gilts so to that extent his statement can be seen as self-serving. And his chart is obviously dressed to impress. But if you think he's blagging, just read his newsletter.

So what does HMG have to say?

Treasury Minister and all-round decent man, Stephen Timms says:
"That company has made rather similar comments in the past. It is entirely untrue. We have continued to see a good level of demand for gilts. I only point to the fact that our auctions have been well covered and I am confident that we will continue to meet our needs."
Well, Tyler would probably say the same in Timms' shoes.

But the head of the government's Debt Management Office - the guys actually responsible for selling the £200bn+ of gilts HMG will need to flog every year from now to eternity - doesn't sound quite so sure. He tells the FT he's worried about the end of Quantitative Easing, the Bank of England's programme to fund the fiscal deficit by printing money:
“We are in a transitional phase in as much as nobody in the market knows what the next step of the Bank of England will be. That transitional phase is always going to be a pivotal moment for the market. We are moving from one state to another and that could increase the short-term uncertainty un-til it is clear what the MPC has decided on as their next course of action. It could mean we move into a different pricing environment.”
A different pricing environment, huh? That's certainly another way to describe a Ring of Fire.

Let's hope George and Cam are taking this in. Because although nobody expects the current bunch of clowns to do anything sensible about our debt, the markets won't be so forgiving with the new team. They will be looking for action, not talk.

Wednesday, January 27, 2010

Politics Of Envy - Latest

Never mind about them - it's the poor we need to sort out

For this morning's edition of BBC R4 Today, there was only one possible lead story: a new report on inequality commissioned by Commissar Harperson (but paid for by us). And to give you a flavour, here's how the BBC's print edition (aka the Grun) headlines it:
"A detailed and startling analysis of how unequal Britain has become offers a snapshot of an increasingly divided nation where the richest 10% of the population are more than 100 times as wealthy as the poorest 10% of society...

...Much of it will make uncomfortable reading for the Labour government, although the report indicates that considerable responsibility lies with the Tories, who presided over the dramatic divisions of the 1980s and early 1990s."
Ah, yes, back to the old favourites - wealth as the embodiment of capitalist exploitation, and the Tories are evil. But at least the report has some nice charts.

Let's kick off with this one, which shows weekly net incomes (ie after the deduction of direct taxes, and the addition of cash benefits) as they are distributed across the UK's 25 million households (actually, these are "equivalised" households containing a commissariat standardised 2 adults and no children - see chart footnote - but don't let that distract you from the big picture):

As we can see, the top 1% of households (aka the 99th percentile) have a weekly net income of at least £2 grand (£104 grand pa). The top 10% (aka the 90th percentile) are on at least £806 pw (£42 grand pa). In contrast, the bottom 10% (aka the 10th percentile) are on £191 pw or less (£9,900 pa) - remembering of course, these are notional 2 adult households (the single adult equivalent would be £6,650).

Still with this? OK, the gap between the incomes of the top 10% and the bottom 10% is one of the most widely used measures of income inequality deployed by the poverty lobby: it is known as the 90:10 ratio. And from the chart we can see that it's currently standing at 4.2 to 1 - ie £806 pw is 4.2 times £191 pw.

What should we make of that? The report has no doubt:
"[This represents] high levels of inequality by comparison with those in the UK a generation ago, when, for instance, the ratio... was just over 3 to 1... most of this increase occurred during the 1980s."
The 1980s - it's That Evil Woman again, the one who destroyed the workers paradise we all enjoyed so much during the 70s.

Just in case you missed it, pre-Thatcher Britain had become the sick man of Europe. Our growth rate lagged far behind everyone else's and the economy had stagnated. And a key reason was that successive governments had taxed and regulated high earners to buggery, totally undermining enterprise and effort. We were equalised in poverty and national decline.

The report continues:
"A similar gain in the shares of those with the highest incomes occurred in other English-speaking countries in the 1980s and 1990s, but not in continental Europe. Earnings and income inequality in the UK are now high in international terms, compared with other industrialised countries."
Weeellll.... that's often said, but the facts are rather less clearcut. Here are the latest OECD stats on that 90:10 ratio:

Yup, there's the UK on 4.2 all right (in red). But it's right next to the overall OECD average, which in Tyler's book is not "high in international terms compared with other industrialised countries".

So to recap, the fact that measured income inequality has increased since the 1970s simply tells us we wanted to progress from our wrecked Austin Allegro economy. And on this widely used 90:10 measure, inequality in Britain today is bang in line with the OECD average, neither better nor worse.

So does this report actually tell us anything useful?

Yes. It reminds us that we have an appalling problem in our state education factories. As we've blogged many many times, they are failing large numbers of our children, especially those at the bottom. Here's a very striking chart from the report, showing points scored at GCSE (5 grade C's - the absolute rock bottom minimum "pass" - is equivalent to a points score of 200):

That long tail of failure is a shocking indictment of Labour's equalising education policies - especially when you factor in a suitable adjustment for their dumbed down exam system, and the fact that this chart is based on total GCSE scores (ie not restricted to those whose A-C GCSEs include Maths and English).

Whatever Hattie and the BBC may say, we simply cannot afford a return to politics-of-envy style taxes and income policies. Especially in current circumstances, they are a recipe for national penury. If we are serious about helping those at the bottom - and Tyler is - by far the most important thing we need to fix is our woeful state education system.

This is now down to Cam. As we've said many times, on Day One he must tell Gove to get on with the school reforms pdq. And when the unions threaten to strike, and when the BBC and the Grun start screaming, Cam will have to be Tough Tough Tough.

School choice and vouchers - whatever label they go by - are totally non-negotiable.

PS I've just seen Reverend Easton's sermon based on this report. Apparently, equal societies are happier societies - a fact so well known, his Reverence didn't feel the need to offer any evidence (see previous BOM posts on so-called happiness economics eg here and here). Which reminds me, I really must find out why the suicide rate in Sweden is twice what it is here. I guess it must be all that pickled fish. Or maybe they've actually all been murdered by those white supremacists who caused such grief for Wallander in the last series. And come to that, how come everyone in Wallander is so miserable all the time? I mean, it's a great TV series, and Ken is superb, but it's Sweden FFS! Equality central! You'd think they could lighten up a bit. Maybe Rev Easton should go over and give them a couple of sermons.

Tuesday, January 26, 2010

Flat On Its Back


"I would be astounded if the UK did not grow in the fourth quarter of 2009 and would have to seriously consider giving up economic analysis and forecasting."
So said a well-known City economist yesterday, on the back of a City consensus predicting robust fourth quarter GDP growth of 0.4%. Given that the ONS has now released its official estimate of 0.1% growth, it looks like he gets to stay on.

But only just.

The reality is that the economy remains flat on its back, 6% down from the peak. Despite Brown's much hyped reflationary measures, the UK has suffered a bigger recession than the OECD as a whole (6% GDP loss against an average 4%), and is emerging from recession more slowly, 3-6 months behind the curve.

And now what?

This quarter's growth - such as it was - came from just two key sectors. The government sector (24% of GDP) grew by 0.1%, and shopping (aka Distribution, 15% of GDP) grew by 0.4%.

Unfortunately, both of of these sectors now face what's politely known as retrenchment. Government spending faces the axe, and shopping faces two VAT rises in a year, plus higher interest rates.

Manufacturing? The BBC's preferred last hope for busted Britain? Well, that did grow by 0.3%, but it's still a staggering 14% below its 2007 peak, and in any event it only accounts for 13% of GDP.

So despite what our uniformly bullish City economists are now telling us, the outlook remains mixed to catastrophic.

But, hey, what do we know? Tyler learned many years ago not to rely on economic forecasting - or darts as you may know it. Admittedly, that was largely as a result of his own somewhat less than championship performance on the ocky, but he has yet to spot anyone with a noticeably more consistent technique.

Which is why we need a government that will concentrate on getting the public finances sorted out, not one that still thinks it can run counter-cyclical fiscal policy. As we discovered back in the 70s, governments simply don't have the foresight to manage that, and they're very likely to do more harm than good.

PS There were some classics on BBC R4 Today this morning. First, the Reverend Easton brought us news that 200,000 British children are still denied proper food and clothing because of "poverty", implying that doling out even more taxpayer cash would somehow solve the problem. Second, the Very Reverend Roger Harrabin confessed that his friends at the IPCC are only human after all, and may make mistakes - like lying about the Himalayas melting. But strangely, he did not go on to draw the obvious conclusion. Third, there was all round presenter bafflement at this morning's social survey showing that although we've all become totally chilled about gays - GOOD - we've also all become Conservatives - BAD. How can that possibly be? Surely everyone knows Tories are evil queer bashers, and always will be. Blinkered prejudice, eh? What can you do with it?

Monday, January 25, 2010

15% Gets Wasted - Official

We've just had a very interesting new estimate of public spending waste (HTP Matt Sinclair).

According to a detailed study of spending in London, 15% of what taxpayers spend on public services gets wasted. In London alone that amounts to £11bn pa, and if extrapolated across the entire country suggests total waste is running at £75bn pa.

Now, here on BOM we've quoted a number of overall waste estimates over the years, and most of them come out even higher at around 20% (eg see this blog). But the interesting thing about this new estimate is that it comes from HMG.

Specifically, it comes from a operation called Total Place, which has been set up by the Treasury, and is jointly sponsored by the Department for Communities and Local Government (DCLG), and the Local Government Association. Here's how it describes itself:
Total Place is a new initiative that looks at how a ‘whole area’ approach to public services can lead to better services at less cost. It seeks to identify and avoid overlap and duplication between organisations – delivering a step change in both service improvement and efficiency at the local level, as well as across Whitehall.
What they are focusing on in particular is how Labour's complex web of quangos, agencies, and top-down initiatives collide at local level in a maelstrom of duplication and inefficiency - again, something we've blogged many times. And this 15% is the estimate of waste just on the public services delivered to us locally here in the UK (ie excluding things like defence, overseas aid, EU budget, as well as most of the entitlement spending on welfare benefits).

So that's £75bn pa.

Or £3,000 pa for every single household.

Or the entire annual tax take from VAT.

Just flushed away down the bog.

PS Do we have a solution? Yes we do - radical decentralisation of our public finances, with local authorities made responsible for both running and funding our local public services. We will be blogging about this at greater length within the next few weeks.

How To Stop Britain Going Bust Again

Getting this guy away from the controls would be a good start

I've just read George's piece in today's Times, How to stop Britain going bust again. And you know what? It's good.

He says we must turn away from "the failed model of debt-fuelled growth that led us into this mess", and develop "a new British economic model that learns from the mistakes of the past".

Yes, of course, talk is cheap. But here's what we like:
  1. First and foremost, the "new economic model requires government to live within its means... The overriding objective of fiscal policy must be to provide [a] credible deficit reduction plan... That credible plan must eliminate a large part of the structural deficit over the next Parliament, starting in the coming financial year."
  2. "Britain’s new economic model must be built on saving and private sector investment, not the unsustainable public spending and consumer debt of the past ten years. Exports and business investment provide the key to a sustainable recovery... We need to become competitive again. Simpler taxes with lower tax rates, removing employment taxes on new businesses employing new staff, stopping the remorseless rise of red tape on small businesses."
  3. "The private sector must take the lead, but government must help with a modern planning system... and providing modern transport infrastructure. Above all, with a record one in five young people out of work, government must provide the education, training and welfare reform we need to get Britain working."
  4. We need "a new banking system... a regulatory system that commands confidence, with the Bank of England in charge instead of the old failed tripartite regime... Britain becoming a champion of internationally agreed structural reforms of the kind President Obama proposed last week, rather than remaining wedded to the old unstable structures that the current Government has encouraged."
And what do we not like?

Well, despite the manifold climate swindles that are now coming to light on a daily basis, George still wants to spend more of our money on "green investment"; there's still no indication of what spending he'll cut, or how he'll stop himself raising Vat; removing "a large part of the structural fiscal deficit over the next Parliament" may not be ambitious enough to head off the rise in interest rates; and there's no mention of serious money-saving public sector reform, such as fiscal decentralisation, or breaking up the NHS, or even ending national pay bargains.

Still, for all that, this is a distinct whiff of that old time religion - government to be be hacked back, both in terms of spending and regulation; growth to be driven by the private sector, fuelled by lower taxes and a bonfire of controls; working age benefits cut to reduce indolence and vice; structural reform to stop too-big-to-fail bankers gouging taxpayers via open-ended guarantees.

All he's got to do now is deliver.

Which we will be watching very closely.

PS Does it matter that tomorrow's ONS report will (probably) show our recession ended in 2009 Q4? Well, clearly it's better that we're no longer heading down, but apart from that, there won't be much to shout about. We will still have lost around 6% of our GDP since the peak, and we'll be 10% below where Clown Brown predicted we'd be by now. What's more, GDP growth from here on is likely to be pretty sluggish, even with our improved competiveness from sterling's collapse. Apart from anything else, government spending has to be cut, taxes are heading up, and there's no way interest rates can stay down at current levels. So let's see how much puffing the Clown attempts.

Sunday, January 24, 2010

You Don't Say

Public sector pay and benefits have always featured heavily on BOM. Which is hardly surprising, given that the bill is now running at over £200bn pa, and pay levels in some parts of the public sector have escalated so astonishingly under Labour.

In 2007, the TaxPayers' Alliance started a campaign to publicise top public sector salaries, collecting data via published quango accounts and hundreds of FOI requests sent to local authorities. The results have been published in a series of public sector rich lists (eg see here) which have attracted considerable interest and comment, not least among ordinary taxpayers.

For quite a while, the government maintained it was a campaign got up by right-wing fanatics, and that the public sector needed to pay top dollar to attract top talent. Tyler himself was given a stern lecture by an ex-Labour cabinet minister on how such mindless campaigning served only to undermine "some of the valuable work" done by the TPA.

Which makes it all the more jaw-dropping to hear this today from our old friend A Darling:

"What is being paid [in the public sector] has sometimes lost the relationship it ought to have with what someone actually does. Once that happens, it’s not only unfair, it’s actually grossly inefficient...
In some quangos, local authorities and other organisations, the level of pay, especially at the top end, and bonuses have reached the stage where they don’t pass what I call the next-door neighbour test. If you can’t justify them to your neighbour, you’ve probably got it wrong...
It is not altogether clear to me why we pay very large salaries to people to do the same jobs as were being done 10 years ago for rather less.”
To which our response is you don't say. And which particular bunch of blithering idiots were at the controls while this was happening?

And what are said repentething idiots intending to do about it now?

Well, according to the report, it's pay cuts.

Yes, that's right. Not for Darling a mere pay freeze (as proposed by us eg in this blog), but actual outright cuts.

So is he going to follow the Emerald Isle, with its across-the-board public sector pay cuts of up to 15% (see this blog)?

Don't hold your breath.

Or anything else.

The last time a Labour Prime Minister tried to cut public sector pay it sparked a mutiny in the Navy. And he wasn't about to fight a General Election entirely dependent on his union paymasters for money.

No, public sector pay may be continuing to rise at a healthy clip while private sector pay is suspended over a nasty black hole (chart), and Darling may feel compelled to express discomfort, but that's as far as it will go. This is yet another little problem for George's in-tray.

Saturday, January 23, 2010

Lowest Class - Vicious, Semi-criminal

The Major has long believed in the criminal class. That is to say, he believes there is a criminal class, and it carries out most of our crimes. As you may imagine, this week's headlines have given him the opportunity to remind us all of his bracing views:

"You do realise the scumbag who robbed Mr Hussain had 50 previous convictions. 50 for God's sake! And they still haven't locked the bastard away! We should have banged him up years ago - permanently. Three strikes and you're out - that's it! And as for those two little savages who tortured the kiddies in Doncaster, it is beyond belief that the so-called authorities hadn't locked them up in an approved school. I mean, everyone seems to have known they were out of control and dangerous, and yet bugger all was done. Why the hell do we put up with it? The only way of dealing with the criminal class is to lock them away."

"But Major," I said, "this is 21st Century equal opportunities Britain, not Victorian London. They can't help being criminals... they haven't had the chances you've had. What about rehabilitation? What about re-educating these people to be productive members of society?"

The Major snarled. "Are you trying to wind me up? For one thing, I've had to make my own opportunities in life. And for another, nobody has the faintest idea how to rehabilitate the criminal classes. It simply can't be done - or at least it can't be done with enough certainty to make the rest of us safe. Locking them up is all we can do, and I'm just amazed we don't insist on it."

"But Major - even if I agree with you about adult criminals - these two appalling boys in Doncaster are kids themselves. It's not their fault."

"Well, you can say that if you like, but dangerous wild animals still have to be locked up. Anyway, it's the parents we need to focus on. According to the papers, the mother was a drug addict, the father a violent alcoholic, and they lived entirely on benefits - benefits, I might add, that have been hugely boosted by this brainless socialist government of yours. It is literally insane that we actually pay the criminal classes to have kids. Is it any wonder we get things like this happening?" He fixed me intently with his good eye. "I've said it before - we need to stop them breeding... by all means at our disposal."


In 1898-99 the businessman and philanthropist Charles Booth published his famous poverty map of London. It mapped the city's streets in terms of their social composition, identifying seven separate classes.

At the top were the Upper Middle and Upper Classes, described a "wealthy" and marked on the map in yellow. Right at the bottom - below the Comfortable, and the Poor, and the Very Poor, were the Lowest Class, marked in black and described as "vicious, semi-criminal".

Has anything changed?

Yes, sure, the material poverty has long since disappeared - swept away by Beveridge. But if there's one thing the last 50 years should have have taught us, all the socialist largesse in the world cannot make people live better lives. In fact, it all too often tends to deprave and corrupt (we've blogged before- eg here -how things came seriously unglued when the 1950s Prog Con extended the welfare state way beyond Beveridge's minimalist safety net).

As we saw when we looked at Shannon Matthews' council estate in Dewsbury (see this blog), there are now whole areas of the country plagued by high crime, poor education, high unemployment/incapacity/lone parent welfare dependency, and family dysfunction. Booth could doubtless produce some very striking maps.

But what to do about it?

Indeed, can we do anything?

According to the Major's theory, we ultimately have to stop these people breeding, by all means at our disposal.

But for those of a more sensitive disposition, there is a gentler approach we should try first - the one we hope Mr BrokenBritain Cam has in mind.

According to the Charles Murray underclass theory, the essential problem is that over-generous welfare benefits have encouraged the growth of a jobless criminal underclass, especially through the creation of single parent families with no male role model in the household. We could reverse all this simply by cutting back on benefits, especially child benefits. In particular, we need to stop rewarding single women for having kids.

Ah, you say, but that wouldn't have stopped those yobs in Doncaster, because the parents were married, and there was a male role model on the premises. It's just that he was the wrong type of model.

And you're right. Changing the welfare system would not necessarily have helped in that particular case. Maybe they really are members of the irreducible criminal class, the ones identified by Booth long before the welfare state.

And for cases like that there may be no alternative to the Major.

PS It was sickening to see the abominable Balls slithering around on Newsnight, trying to explain why his published summary of the Edlington serious case review is so grossly misleading. According to Newsnight, who have a leaked copy of the full review, details of the child protection system's most catastrophic failings have been deliberately suppressed. Our expensive childcare service gives every appearance of being a dangerous shambles, and taxpayers have a right to know the facts.

PPS As it happens, almost all Tyler's Victorian forebears were poor or very poor - just like yours probably. But Tyler likes to think his great great grandparents were the respectable working class, and even when they were struck down by illness and job loss, they stayed honest. Well, that's what he likes to believe anyway.

Thursday, January 21, 2010

Power Without A Plan

As Benedict Brogan reminds us this morning, if Cam has a secret plan for government, he is keeping it damned quiet. We still have no idea how he and George plan to deliver the massive spending cuts required to fend off financial and economic melt-down.

And just to put our plight into its broader horrific context, take a look at the somewhat dense chart above (click on image to enlarge) from this week's McKinsey report on Debt and Deleveraging. For each of ten OECD economies, it shows the ratio of total debt (ie government debt plus private sector debt) to GDP - otherwise known as a country's leverage ratio. And it shows how that ratio has changed over the last two decades.

As we can see, the UK (light green line) has clocked up by far the biggest increase in debt of any country bar possibly Spain. And we are now right at the top of the debtor's league, more indebted than any other country bar Japan. And most of it accumulated on Brown's watch.

Now as we've blogged before (eg see here), the bulk of this debt was not incurred by the government directly. It was incurred by individuals and companies. But by effectively nationalising the liabilities of our banks, the government has now taken much of the debt onto its - ie taxpayers' - shoulders. Moreover, right now, it is the government itself which is doing most to add to the national debt mountain through its ballooning fiscal deficit.

So back to the Plan, or lack of it. To recap (see this blog), Cam and George will need to close a structural fiscal deficit that is both the biggest in the developed world, and the biggest in our own peacetime history. It is estimated by the OECD at 10% of GDP - around £150bn pa.

Labour has so far pencilled in cuts and tax increases amounting to just over 3% of GDP - although one-third of that comprises tax increases (mainly the new tax on jobs via NICs), and they have outrageously failed to provide any detail on what specific areas of public spending will be cut (other than admitting that capital expenditure will be slashed).

George has so far promised specific cuts totalling £7bn, but has failed to explain whether they are in addition to Labour's cuts, or simply a bit of detail within Labour's existing totals. And Cam has compounded the problem by excluding the NHS and overseas aid from the cuts (thereby loading all the pain onto the other 80% or so of spending).

So what are they actually going to do come 6th May? Yes, Cam will stand in the sunshine on the steps of No 10, looking great with Sam by his side, and deliver his homily. But what happens once he goes inside and that wonderful old door closes behind him?

Here's what: the tradesmen's entrance from No 11 suddenly bursts open and an ashen faced George races in waving the secret Treasury file spelling out the real options:
  1. Lean and mean - immediate 20% cut in all Departmental Expenditure Limits, increase in State Pension Age to 70 by 2015, outright abolition of Child Benefit and other working age benefits, 5 year freeze on all public sector salaries and pension entitlements.
  2. Siege economy - whack up taxes - double VAT, 30% standard rate of income tax, 60% higher rate, 35% Corporation Tax - manage loss of competitiveness by leaving EU and imposing Bennite tariff wall.
  3. Weimar Republic - rescind Bank of England independence, fire up the presses, inflate the debt away
  4. Whistling in the dark - do none of the above and hope the economy somehow grows us to salvation before the markets take fright
Most helpfully, the McKinsey report looks at how these approaches have panned out in the past (32 separate episodes since the Depression).

Whistling in the dark, aka growing out of debt, is the most attractive, involving least pain, and least loss of GDP in the process of deleveraging (ie reducing the ratio of debt to GDP). Unfortunately, McKinsey could find only three cases where that has happened, and they all involved WW2 or oil booms.

Weimar Republic, aka high inflation, has been the way out in a quarter of cases, so it's definitely a runner. But it doesn't always pan out altogether for the best, as Weimar showed all too clearly. And with today's skittish globalised bond markets it could easily end in a Götterdämmerung of high interest rates and collapsed sterling. Which might not be that great.

Massive default is a possibility not explicitly covered in the secret Treasury file - yet. But McKinsey reckon it too has been deployed in a quarter of cases. We'd just need to decide if we wanted to rank alongside Mexico and Argentina, and give up any hope of international credit for a generation or two.

Still, the clear winner - the approach that's been deployed in half of all cases - is what McKinsey call simply belt-tightening. The most common response of over-indebted countries is to borrow and consume much less.

Of course, individuals and companies know that, and many are already taking action to cut their debts. But governments are not always so bright. Or so decisive.

So as they contemplate maybe putting together some kind of plan, Cam and George might care to note a specific concern McKinsey raise:
"Current projections of government debt in some countries, such as the UK... may offset reductions in debt by households and the commercial sectors. We therefore see a risk that the economies may remain highly leveraged for a prolonged period, which would create a fragile and potentially unstable economic outlook over the next five to ten years."
I hope someone at the Treasury remembers to highlight that point with a particularly flourescent marker.

We cannot afford any more faffing around.

Wednesday, January 20, 2010

The East Is Red

New sky-scrapers: old fears

You may have missed Piers Morgan does Shanghai last night, but the message was pretty clear: not for the first time in our history, we 're about to succumb to the yellow peril. The Chinese can now do pretty well everything we can, except 100 times bigger, 100 times better, and 100 times cheaper. We are well and truly Pek Ducked.

By a strange coincidence, the Governor of the Bank of England also spent last night fretting about our relations with the East. Only he presented it as "Soduku for Economists", which proved a tad less gripping than Morgan's glitzy high-rolling version.

The Governor's basic point will be familiar: because China now produces virtually everything we in the West consume, and because they save virtually all their incomes rather than spending it on our overpriced stuff, there is now a huge imbalance in the global economy. The only way we can survive is by borrowing from them and hoping they don't want the cash back any time soon. Sort of idea.

Specifically, whereas we and the Yanks are running massive current account deficits (ie we're still spending way more than we're earning), the Chinese are running a near $400bn pa surplus. And  the western economies are now in hock to the Chinese government for a staggering $2 trillion plus. For us, the Great Account Ledger in the East is most decidedly red.

To be fair to the Governor, he pitched the problem as a global one. We may be in hock to the Chinese, but they need us to buy their goods. And if the whole teetering stack of international debt should somehow topple over, we'd all be in trouble. So we'd better find some global solutions pronto.

But however you spin the global issue, the Governor is in no doubt about the UK's grim future - we are going to have to stop eating and tighten our belts by seven or eight notches. Or in Governorspeak:
"The need for a rebalancing of our economy has been apparent for some time. The proportion of our domestic output that we save has fallen by around a third over the past decade, as the share of consumption, especially public consumption, has risen sharply. Looking ahead, monetary and fiscal policy together must help to bring about a switch of demand from private and public consumption to net exports and business investment as the recovery takes hold.

A key element in raising the national saving rate is the elimination over time of the structural deficit in the public finances. Of course, there is a perfectly sensible debate about the appropriate timing of the withdrawal of the temporary fiscal stimulus... but uncertainty about how and when fiscal policy will respond has a direct bearing on monetary policy. And markets can be unforgiving."
And just to make sure we all get the message loud and clear, he added:
"The patience of UK households is likely to be sorely tried over the next couple of years. There is little scope for growth in real take-home pay, which may remain weak even as output recovers. It is clear that inflation is likely to pick up markedly in the first half of this year."
Patience sorely tried - I'm afraid that's spot on. And the Governor's bleak warning was heavily underlined this evening on Sky, when the ever excellent Jeff Randall interviewed HSBC's CEO, Michael Geoghegan.

Geoghegan is one of the few top British businessmen who really do bestride the world, and can talk authoritatively about the UK, China, and all points in between. Which is why it's so alarming that he's about to pack his bags and relocate HSBC's HQ back to Hong Kong. He told Jeff the UK has recently become much less attractive to banks like his:
"I think when you start moving taxation for political reasons, the trouble is that it is an industry that can move. I know a large number of bankers are moving out of the UK... they are moving out possibly for personal reasons. They can move because they have opportunities in Switzerland and other places to set up their businesses... the UK because the City has all the rights to win and it would be a terrible shame for it not to benefit from all the expertise that is in our industry...

...Hong Kong has surpluses... it raises enough taxation every year to pay for running Hong Kong and it makes surpluses. I think one has to look at how money is spent in a country, if taxation is being raised because the expenditure wasn’t correct, that then is going to impact on the UK as a financial centre."
So does it worry him that the UK is facing the growing challenge from the East already laden down with debt?
"It does and it disappoints me. People talk about China, the excesses of China, the excesses of Asia and then you see the savings rates of Asia. People save first, they educate their children and then they spend. If you want to go and see where consumer goods are least used and bought, it’s in Asia. If you want to see where the most money is spent on education and health, it will be in Asia. You’ll see the people, the hours they work and the products they produce and I know that the UK can produce a lot more products. People say well the renminbi [Chinese currency] should be stronger. No, actually we should be more efficient. If we could be as efficient here in the UK as other manufacturers are around the world and cut away a lot of the government bureaucracy that makes it very expensive to do manufacturing in the UK...

I think there has to be a full understanding that we cannot have the style of living that we’ve had in the UK on somebody else’s money. The government can’t spend more than it actually collects in taxes, people can’t really live without savings and to do that, there has to be a mindset change and maybe the politicians and the electorate will say we actually want this to happen in this country."
Ah yes, a mindset change.

The trouble with mindset changes is they're a great idea, but they don't happen unless there has been pain. A lot of pain.

And right now, as we've blogged before, most of us have simply not had that pain. Mortgage rates are low, house prices are sailing on as if nothing ever happened, even the job losses somehow seem to have stopped.

You and I may believe we're in cuckoo land, and that the longer we leave the belt-tightening, the worse it will be, but why should the average punter listen to us? Life's not so bad... maybe the Great Helmsman was right after all... maybe he has saved us... maybe we can just keep calm and carry on.

Right, that's it - enough depression for one evening.

PS I realise we've said it before, but Randall's 7.30pm prog on Sky News is streets ahead of anything the BBC broadcasts on business and the economy. Now, what was that about needing a tax-funded broadcaster because otherwise we'll lose all our quality news coverage?

Tuesday, January 19, 2010

Inflation Tax Kicks In

Remember when the massed ranks of the left and much of the economics commentariat told us that Britain was on the brink of a deflationary black hole, and that the only way of saving ourselves was to slam the printing presses into overdrive?

Hmm, yes, well, this morning we heard that CPI inflation has gapped up by the biggest monthly increase since records began (1996). RPI inflation has increased by the biggest monthly amount since 1979 - ie back amid the wreckage left by the last Labour government.

Since the collapse of Lehman's in September 2008, the UK price level as measured by the CPI has increased by 2.4%. It perhaps doesn't sound much, but it's happened during the deepest recession since the 30s, and the figures do not yet include this month's 2.5% increase in VAT.

So who are the victims?

Ultimately, all of us who depend on the long-term health and success of the British economy: banana republics have never been much good at delivering anything but bananas.

More immediately, anyone on a fixed income is squarely in the line of fire. And most of all, that means pensioners and savers.

As the Telegraph points out, a saver on the standard rate of income tax now needs to earn at least 3.63% on a deposit account, otherwise the net of tax return will be negative in real inflation adjusted terms. Yet currently, there isn't a single easy access account that pays that, and most pay well under 1%.

We're right back to the inflation tax: anyone with a bank or building society savings account, and anyone with a private pension is going to get seriously whacked.

Care? As we've blogged many times (eg here) socialists hate savers. Savers constitute the rentier class living off the backs of the workers. They deserve whatever they get, right up to and including being stood up against the wall and shot.

Of course, the Bank of England - the guys who've actually implemented this madness - they're supposed not to be socialists. In fact, if memory serves, there was once some vague idea that they'd be independent of government.

Monday, January 18, 2010

Big Brother Watch

Mr and Mrs Tyler have just returned from the official launch of Big Brother Watch. As you probably know, this is a new campaign set up by the same people that brought you the TaxPayers' Alliance. It aims to fight intrusions on the privacy and liberties of ordinary Britons, and speaking as someone who has been stopped and searched three times under s44 of the 2000 Terrorism Act (eg see here), Tyler says it's come not a moment too soon.

In truth, Big Brother Watch has been up a running for a few months already, under its energetic Director Alex Deane. But tonight was the official kick-off, featuring speeches from David Davis (yes, that David Davis), and national treasure Tony Benn (still going strong at 85).

Tyler first heard Benn speak back in 1976, at the height of the sterling crisis. He was the senior cabinet minister who wanted us to turn our back on the IMF and become fortress Britain. He held his audience spellbound, even though many of us were deeply hostile to his vision of a self-sufficent socialist workers' paradise.

This evening he showed he could still hold an audience, and he showed something else too: unlike almost every other politico you ever come across, he's apparently genuine interested in what you do, as opposed to reeling off an interminable list his own achievements. Highly disarming.

If you haven't already done so, take a look at the Big Brother Watch website. And do send off for a pack of free Big Brother Watch stickers for deployment against the creeping state intrusion into our lives.

Sunday, January 17, 2010

And The Governance Was Without Form, And Void

Yesterday the Major had another of his increasingly frequent seizures. Comrade Brown claiming to be the champion of the middle class was just too much:

"How dare he! He's spent the last 13 years hunting us down like dogs! He's taxed us to buggery, destroyed our pensions, stuffed us with debt, banned our children from the top unis, dishonoured our womenfolk, seized our lands, burned down our golf clubs... and now he has the sheer brass neck to say he's our friend! Gaaaaaah!!!"

Of course, you and I understand that Brown was simply delivering another helping of meaningless pre-election drivel that will convince no one. But the poor Major takes these things to heart. He still clings to a quaint old-fashioned notion that Prime Ministers are meant to speak truth unto the nation - even when it's unpalatable.

And maybe Brown has dragged his office down to new depths of moral decrepitude, although following Bliar, that seems improbable. Much more worrying is his obvious and painful inability to fill the space. However you look at it, he simply isn't up to the job. His presence has created a dangerous dysfunctional void at the heart of government.

This morning we get an alarming new account of the void from a group of 60 senior civil servants from across Whitehall. They've contributed to a study by the Institute for Government, and here are some of their comments:
“What comes out of No 10 is lots of barmy ideas. It’s the worst possible kind of policy making, which is ‘here is a problem, let’s have a kneejerk reaction to it tomorrow on what we’re going to announce’ and quite frankly the less contact with No 10 the better.”

“All the worst bits of policy making come from the centre. It’s these people who think you change the world by publishing a strategy. And you don’t change a thing by publishing a strategy, it makes no difference whatsoever.”
“It’s no great secret that Gordon is not strategic...a cacophony of silence and confusion... The centre [No 10] is certainly dysfunctional and the Cabinet Office is fragmented.”

“It’s worse than under previous prime ministers. With Blair they did invite you to meetings, but not with Brown. They contracted into a little bunker. I had a very good working relationship with Downing Street under Blair but that changed when Brown came in and it contracted to a very small circle of people. You just got orders from Downing Street, not consultation, and that is still continuing today.”

Now OK, these people are civil servants and they have their own axes to grind - including greasing up to their prospective new masters. But what they say squares very closely with what we see out here: a stream of increasingly preposterous announcements about meat soon coming off ration and happiness for all, the grabbing of every available grandstanding opportunity, and a total failure to address any of the huge pachyderms rampaging round our wrecked national room.
So what to do?
Well, ditch hopeless Brown asap, of course. But apart from that?
The Civil Servants have a suggestion:
“The office of the British prime minister holds a concentration of formal power greater than that of almost any other country in the developed world.
In contrast, the fragmentation and lack of co-ordination at the centre of the civil service — the Treasury, No 10 and the Cabinet Office — leads to an administrative centre that is relatively weak. This curious situation has created a strategic gap at the heart of British government which inhibits the ability to set overall government priorities and translate them into action.”
Hmm. I think we can see what they want. A stronger centralised bureaucracy to balance the huge power of the PM.
To which we say, not on your nellie.
Yes, we can all agree that the British PM has far too much power - more than any of his counterparts in other major developed democracies. But no, we don't want to counterbalance that with a stronger unelected bureaucracy, thank you very much.
What we need - as we've said before - is first, a stronger legislature to counterbalance the power of the executive (we still favour a directly elected President, formally separated from our elected MPs - like the US), and second, radical decentralisation - most especially on the fiscal front.
Centralised power on the extraordinary scale we've got in the UK is always a threat to our liberties and our prosperity. But when the hot seat is filled by an inadequate like Brown, our entire system of government simply seizes up.
Now, WTF do we find a bold radical leader who is big enough to fill the space, but humble enough to know he has to give his power away?

Saturday, January 16, 2010

Without Touching The Sides

Worth £30 mill of anyone's money

When cuddly Alan Sugar was chairman of Tottenham Hotspur, he precisely captured the big problem with football club economics: all the money gets pooped out to overpaid prima donna players, passing straight through the club "without touching the sides".

Which is why one of the key "metrics" employed in analysing football club finances is the wages/turnover ratio. During Sugar's time at Tottenham the average wage/tunover ratio across the Premier League soared from forty-something percent up to a scary sixty-something:

We can all see how it happens - revenues ultimately depend on footballing success, and footballing success ultimately depends on the prima donnas on the pitch. Nature therefore ensures that the money gravitates down through the alimentary canel and deposits itself in their greedy ingrate offshore accounts. And that's how in 2001-02 the Italian clubs ended up paying a totally bonkers 99% of revenue in wages.

And talking of greedy ingrate prima donnas, it's bank bonus season again.

So what percentage of bank revenues do you reckon get paid out in pay and bonuses? 60%? 70%? Given all the noise and fury, you might even guess an Italian job 99%.

But no. A recent analysis by the Wall St Journal reckons that although bankers pay and bonuses will soar by an average 18% this year, the overall cost of compensation and benefits will total an extraordinarily modest 32% of bank revenues, down from 40% in 2008 (figures refer to the 38 largest US banks and securities firms, but you have to guess the position won't be very different here).

Wha!??! you squawk. That can't be right! The WSJ must be lying on behalf of its evil capitalist paymasters!

Hmmm... maybe. But most of these banks are public companies and the true information will be in the public arena soon enough to make lying unattractive.

The fact is that bankers' pay is sky high not because they as individual bankers are holding their employers to ransom, but because bank revenues are up so strongly. Revenues have jumped 25% not in comparison with miserable 2008, but in comparison with booming 2007. Here are some current headlines:

Now, you and I and most of the non-banking world, understand that this extraordinary earnings boom is not down to the prima donnas on the pitch, but to us - the poor bloody taxpayers. We're the ones who've provided the loans, guarantees, and low interest rates from which the banks are profiting so handsomely.

And we did it not so the prima donnas could get wedged even more comprehensively, but so the banks could rebuild their capital reserves and start lending again to those famous hard-working families and viable small businesses. We are being taken for schmucks.

So what to do?

The idea of the moment is St Obama's new $90bn tax on banks. Yes, it's political, and yes, the cost may eventually get passed onto bank customers, but actually - and Tyler is amazed to hear himself agreeing with the Saint - it's A Good Idea Ltd.

As we've blogged many times, we taxpayers ultimately have no choice but to guarantee the banking system, and it's only right that they pay us a proper insurance premium to compensate us for the risk. Yes, the costs may get passed on to the customers, but as in any line of business, customers should always pay the true cost of the service - we should not subsidise banking any more than we should subsidise manufacturing.

And good for George for today embracing the insurance idea - he should step a plane across to Washington soonest to coordinate some details with the yanks.

But, as we've also blogged many times, we need to go further (eg see here). We cannot afford banks that are too big to fail, and it is a dangerous delusion to think we can solve the problem through better regulation. As we saw from the clownish antics of the FSA and the SEC during the bubble years, our regulators will never be that smart.

One widely canvassed idea is to increase the cost of being big. Either through higher percentage insurance premia/bank taxes for megabanks, or through more onerous reserving requirements, Big could be made so expensive that it became commercially unattractive. The banks would then break themselves up into smaller units which we could afford to see fail.

There is some merit in that idea. But we do need to remember the key historical lesson retaught to us by the Crock - failure can never mean retail depositors losing out. Otherwise the entire banking edifice collapses in a maelstrom of pavement queues and piles of cash stuffed away under mattresses. Only a bank's equity holders and wholesale depositors/bond holders can be allowed to go down.

Another idea - one we've supported many times (eg here)- is to split High Street retail banking away from investment casino banking, ie a new Glass-Steagall Act. The High Street banks would continue to enjoy a taxpayer guarantee on the bulk of their liabilities, but would be subject to significant retrictions covering both borrowing and lending. The casinos could do pretty well whatever they liked within the law, but if they got into trouble they could not come crying to taxpayers for a bailout. They'd be left to sink.

One thing's for sure, the banks cannot be allowed to carry on biz as usual. We taxpayers have had enough. And if the Saint and George are to be believed, our politicos have at least now realised they need to take some action. Another dose of political posturing will not be enough.

PS Other people's pay is endlessly fascinating. The world's highest paid footballer last year was reportedly a certain Mr Becks Golden Balls Beckham on €32.4m (£28.7m), although the vast bulk of that came from off-pitch ads for pants (pic). The highest paid on-pitch was Lionel Messi of Argentina and Barcelona, on €28.6m. Britain's best paid banker is reputed to have been Roger Jenkins of Barclays Capital, who is said to have coined £75m in 2006 (although in fairness, that slumped to a derisory £40m in 2008).

Friday, January 15, 2010

The First Available Exit

So George will start cutting on Day One:
“The message could not be clearer – if you find yourself on the wrong road, you take the first available exit instead of carrying on. With the date of the general election increasingly likely to be after the beginning of the next financial year, that means we will need to make early in-year reductions in existing plans.”
Good. Much better to let the spending departments know now, before they start spending the money, that they'd better not plan next year on the basis of Labour's announced budgets. And the first available exit is a great image.

Unfortunately, George still hasn't clarified either where the major cuts will fall or how big they'll actually be.

All he told us yesterday was that "excessive spending on things like advertising and consultants" will go, and "spending on tax credits for people earning over £50,000, and spending on Child Trust Funds for better off families will all have to be cut during the financial year."

Fine. But he told us all that last October (see this blog), and it still only totals £7bn. What's more, big chunks of of that £7bn - including the public sector pay freeze - cannot begin until the year after next (ie 2011-12).

And just to repeat, £7bn comes nowhere near the scale of cuts we need. As we blogged yesterday, our so-called structural deficit is around 10% of GDP, which is £150bn. And that has to be the sighting shot for spending cuts (see here for the Economist's take on how poorly our politicos are performing on this).

Now, to be fair to George, Labour have already announced some measures to address that £150bn gap. So maybe he figures he's already got them in the bank.

Unfortunately, as we blogged here, Labour's various fiscal measures don't get going until next year, and they add up to just over 3% of GDP by 2014-15. Even setting aside the fact that one-third of that comprises Labour's further disastrous tax on jobs (ie the National Insurance increases), and the fact that most of the planned spending cuts have not been specified, it's not nearly enough. George needs to find another 6%+ of GDP, or more than that if he wishes to rescind the NI increases. So far, his announced £7bn amounts to just 0.5% of GDP.

Of course, he may be thinking that if he can talk the right kind of talk, the markets may let him off the hook. Maybe they'll be prepared to go on lending on something close to current terms (4-4.5% interest rates on gilts) and give him more of a breathing space.

But if he is thinking that, as we noted yesterday, he's dicing with death. The markets have so far been patient because they have been persuaded George will deliver real painful cuts pretty well immediately. Tyler's researches in various watering holes beyond the village of Westminster suggest there would be considerable displeasure should he fail.

Meanwhile, defence is being lined up for big cuts whoever is in power (see this blog). And this morning we hear that Cam will attempt to ease the pain of that by raiding his already ringfenced aid budget.

The idea seems to be that some of the work currently done under the MoD budget in places like Afghanistan could be funded from the aid budget instead. In fact it sounds like some of the aid budget could even be used to fund security activities here in the UK. Cam says:
"We have a defence department, a foreign affairs department and a Home Office and they all work separately. We want to be thinking, how do defence and development work together?

When we think about what we do overseas, we have to think about how it can affect people at home....
A National Security Council will mean we think of those things. The different departments will all sit around and say ‘What is in our National Security interests?’"
Aid driven by national security rather than altruism. That puts a very different complexion on Cam's aid ring-fence pledge.

As regular BOM readers will know, we have always been very sceptical about our £8bn pa aid budget, believing it to be misdirected and riddled with waste (see all previous posts gathered here). So we welcome any plan for root and branch reform - including the recognition that no spending programme is sacrosanct. But it's still impossible to see this latest move as anything other than a violent swerve to escape a most ill-advised spending pledge. A sort of first available exit.

And if he can do this to the aid budget pledge, he can surely also do it to his much more ill-advised NHS pledge. He could easily use some of that to fund part of the social care or welfare budgets.

Let's keep our fingers crossed - somewhere out there amid all the obfuscation, wishful thinking, and downright porkies, it's just possible that reality is starting to bite.