In the run-up to the must-win game between England and Slovenia, and the distinct possibility of an early flight home having exited the World Cup early and to a reception of much analysis, Wayne Bridge might well have been grateful that he ruled himself out of the England team.
Nick Clegg might well ponder that taking part in a catastrophe is not a great honour.
That the UK structural deficit needs to be eliminated is without dispute, see Look out, Look Out There’s a Deficit About. The question is, of course how? Is it to spend less or tax (earn) more? George Osborne’s body aims to do this mainly by the former but with some of the latter. But is it ‘fair’?
Of course, first define ‘fair’. Pretty nigh impossible, since it’s a word human beings use to justify that which they wish to do and politicians are past masters of that. If this budget is ‘fair’ then the wealthier you are the ‘fairer’ it is to dump on others.
Osborne has sought to reduce the spending by a combination of benefit cuts –freezing child benefit, and linking benefit rises to the CPI rather than the RPI – and pay freezes in the public sector. In one area the influence of the Lin Dems can be seen in restoring the link between earnings and the state pension that Margaret Thatcher removed. However, whilst in the last 20 years earnings have outstripped inflation whether that is likely to continue in a world where a return to the economic conditions of the last 20 years looks most unlikely remains to be seen.
It is frequently claimed by those trying to protect public sector pay and conditions that the current economic state is caused by greedy bankers. This is not the case, the structural deficit, by definition, existed before any banking crisis, again see Look out, Look Out There’s a Deficit About. The banks made a global system of smoke and mirrors work. Basically, the global trade imbalances whereby countries like China, S.E. Asia in general and Germany exported whilst countries like the UK and (especially) the USA imported was only made possible by consumer and government debt in the likes of the UK and the USA. Debt poses a risk for the lender. Banks were the lender and they thought they could manage risk by some sophisticated manipulation of mathematics that was flawed not in the manipulation but in the underlying philosophy. We do not live in a world of independent trails in the financial markets. Black Swan events are much more common than is expected.
That system of money management, money flowing from savers in the exporting countries to spenders in importing countries to but the goods from exporters, has ended and there is no sign of anything to replace it. Frugal German taxpayers were not minded to bail out spendthrift Greeks. Even though, the Greeks, I bet, buy lots of German goods. In 2005 German goods accounted for 13.4% of imports by value into Greece and was the basis of their imports. The Greeks buying more from Germany than they sold to Germany.
In the absence of this flow of money, if trade is to continue it has to be a trade in goods and service. That restructuring of trading arrangements does not happen over night. It takes a long time for goods and services to be designed that others wish to have.
The last 30 years has seen that the Regan-Thatcher paradigm of low taxes causing entrepreneurs to be entrepreneurial and create new businesses that produce new goods and services to the benefit of all has simply not worked. There is possibly no country on earth as entrepreneurial as the USA yet they run and yet as the following graph shows their trade deficit has got worse not better since the Reagan years.
The UK has a similar story, at least in goods. Despite a deliberate policy to reduce the value of sterling, which has fallen by some 20% since 2007, the UK still has a massive balance of trade imbalance. James Dyson originally built his vacuum cleaners and washing machines in Malmesbury, Wiltshire. In 2002, the company transferred vacuum cleaner production to Malaysia. Planning permission to expand the Malmesbury site had been refused, effectively leading Dyson to look elsewhere. A year later, washing machine production was also moved to Malaysia.
Although nearly 800 manufacturing jobs were lost, Dyson states that the cost savings from transferring production to Malaysia enabled investment in R&D at Malmesbury head office, and that the company employs more people in the UK than before the move to Malaysia.
That entrepreneurship has resulted in jobs overseas not in the UK or the US. Gordon Brown’s decision to cut capital gains tax as an incentive to entrepreneurship and George Osbornes’s refusal, or inability in the face of Tory back-bench pressure, to meet the LibDem desire to put it back where it was in 1997 under the guise of being a stimulus to entrepreneurship is not backed by the evidence. Whatever the reason for the demise of manufacturing jobs tax incentives are not one of them.
As for the tax perks the really rich are able to negotiate for themselves, being a non-dom or living in a tax haven, quite what value that has brought the UK overall is hard to determine. If you carry a UK passport you pay UK tax, making allowance for any reciprocal arrangements
Much is made of the Tories leaving a budget in surplus in 1997. But that was against a back-drop of high unemployment and crumbling public infrastructure. Budget deficits are not always bad things. After the Second World War European governments ran deficits due to the necessity of re-building a shattered continent. The way to judge the value of government spending is as with a company, what effect does it have on the balance sheet. Since 1995 the New Zealand authorities have produced such a balance sheet and one has been promised in the UK since 2003. One was supposed to have been produced this year but no sign yet.
But we don’t need one to understand Brown’s folly. His approach to public finances was two fold. First, to address the infrastructure issue he massively extended the Private Finance Initiative (PFI) introduced by the Tories. Private sector companies build a public asset (school, hospital, etc) and the government rents that for a period of time. In this way the initial capital is provided by the private rather than the public sector so causing less initial government spending. It is a natural progression from the privatisation of the 1980s whereby private rather public capital is used and so reducing the pressure on taxes and government borrowing. But it does mean that, just as with borrowing, there is a negative cashflow due to those payments to th eprivate sector. It is not a free lunch.
Secondly, in order to soak up the excess labour (the unemployed) that the tax-incentivised private sector had been unable to do there was a massive increase in public sector employment. Which means a massive increase in th epublic sector wage bill. This was made even worse by unbelievably generous salary increases, especially in those areas that are politically sensitive – education and the NHS. And really to no effect. Between 2003 and 2006 GPs saw their income rise by 58% whilst their productivity fell, according to the National Audit Office in the same period by 2.5% per year. Doctors add most value by the drugs they prescribe. However, since so much money is spent on doctors themselves the drugs are frequently un-affordable. According to the King’s Fund 70% of NHS spend goes on wages
http://www.bbc.co.uk/radio4/today/reports/politics/nhs_emails_20070131.shtml
When Nye Bevan spoke of stuffing doctor’s mouths with gold he didn’trealise that included members of the RCN and Unison as well!
So having saved some money on capital projects Brown splashed it around on wages. This did have a beneficial effect during the recession following the bursting of the dot.com bubble but such spending should stop when the economy recovers. With capital projects it can, once the hospital is built you stop paying for it to be built, with wages, as we saw in Osborne’s budget, such spending is difficult if not impossible to curtail.
The wage freeze news was taken badly. How much worse would a wage cut have gone down? This is where inflation steps in.
Sterling haven fallen and the UK importing so much results in inflation. This is likely to get worse as the era of cheep Chinese products looks like ending. The Yuan has been re-valued and Chinese workers are demanding higher wages. Osborne stated that inflation would be just on target by year-end at 2.7%. He expects it to move closer to the target 2% in the ‘medium term’, i.e. he doesn’t know when but hopefully in the next couple of years. By inflation rising the value of money falls so a nominal pay freeze results in a real pay cut. It should also make paying interest on government debt easier as nominal gdp rises due to increased prices and increased nominal profits. That is as long as people continue to buy and shops continue to sell. Or that the magic export led boom, that so far has failed to materialise, cuts in. But the UK’s major market is the Eurozone, which is going through its own growing pains, and inflation in the UK is likely to result in the increased price of exported goods. So we end up still on square one with higher inflation but no export boom.
The rise in VAT is seen as the main revenue earner. But how well will spending hold up. Especially as people are going to feel poorer, not least due to the almost inevitable fall in house prices. The LibDems, despite opposing such a rise, seem to have won a minor concession in raising the personal tax allowance. However, the objective of the LibDms to raise it to £10,000 and so make it more likely for people to come off benefits by making work worthwhile has become a long-term objective. Patently someone on the minimum wage requires less incentive to get out of bed than a millionaire.
A tax was announced on bank’s balance sheets. So the more loans you have (assets, matched by liabilities) the bigger your balance sheet and the more tax you pay. The governor of the Bank of England in his Mansion House speech made reference to banks holding more capital. So less money to lend and if you do lend it more tax to pay. And where do the banks get the money to lend from? Well the governor did mention that the Bank can still use monetary means to boost the economy. Since interest rates can’t be cut further that implies yet more quantative easing and yet more monetisation of government debt (the Bank already owns 25% of outstanding UK debt) and yet more inflationary pressure.
The other side of the quantative easing coin should have been to take money out of the economy by raising interest rates when inflation rises. The Monetary Policy Committee has argued against this due to there being ‘special circumstances’ – the rise of VAT from 15% to 17,5% in January 2010, for example. Presumable they will say the same in January 2011.
So what we can expect is more inflation and the budget deficit largely untouched. It may not grow as fast (if at all) but it is unlikely to shrink either. Although I suspect the structural deficit will be pronounced fixed and the deficit morphed into a cyclical one due to recession.
Because the central problem of excessive wage growth in the public sector has not been addressed. And after two years of pay restraint with inflation being higher than is desirable what wage pressures then build up as another election approaches.
Neither has the implications of the pension payments that derive from those wage rises and will increasingly kick in as the baby boomers retire. An increase in pension contributions to help address that cashflow matter would have been very helpful. Remember, one of the issues over his deficit is the interest payments. Money that rather than being spent on services being spent on payments. The same is true of pension payments. The public sector may whinge but they have got off incredibly lightly.
And of course, no budget is ever going to address the central problem of those global imbalances in trade.
And so we come back to ‘fairness’. The best I ever heard concerning this was froma friend of mine, who told me ‘You don’t get what you deserve, you get what you negotiate.’ Those benefiting from low capital gains tax have obviously negotiated well. Similarly the public sector, although you would never get them to admit that. It’s those in between, workers in the private sector, those who are supposed to bring about this new re-balanced economy who need lessons in negotiation