UK

Chris Cook

The Office for Budget Responsibility is going to irritate lots of people this week. When it comes out with its assessment of the Budget, its multipliers and assumptions will come under attack. After years now (years!) of phoney arguments about the deficit, this will be A Good Thing. Indeed, all the Labour leadership candidates should embrace the new institution.

First, it should improve the credibility of the fiscal framework. No Briton can credibly claim that any fiscal rules could have any real disciplining effect: only an institution that can nip at the government can do that now. This framework offers the golden combination of clear red lines for governments and the flexibility to respond to as-yet-unforeseen economic circumstances.

Second, farming out forecasting should improve the quality of projections that inform fiscal decisions. As an excellent Social Market Foundation pamphlet puts it, an independent forecaster would help overcome some problems with internal forecasting:

  • Organisational bias in projection-making: promotion, reward and status may be linked - most likely implicitly – potentially excluding valuable contrarian opinions from influencing fiscal projections. This effect may be particularly strong if fiscal decision-makers have significant powers over the institution. Indeed, academic research has shown that in several European countries, official growth forecasts used for fiscal policymaking are biased toward being over-optimistic.
  • Policymakers risk being subject to group-think where all elements of fiscal policymaking are housed in the same institution with no institution charged with an “official challenge” role. For example a shared belief in what is actually unsustainable growth may be self-reinforcing and amplified if all the functions of a fiscal policymaking are combined in the same institution.
  • When combined with the credibility associated with longstanding institutions, such as that of HM Treasury, this can also lead to another behavioural economic phenomenon known as anchoring, whereby other, non-governmental organisations take the cue for their economic forecasts from HM Treasury. This is particularly likely to occur since no institution wishes to stand out against received wisdom: for any independent forecaster it is far less reputationally damaging to be wrong with everyone else than to be wrong on their own.

At the moment, being seen to have credible forecasts is particularly worthwhile: investors have, in recent months, fixated on suspect growth forecasts. But all of those benefits rely on the OBR actually becoming independent – something it currently is not.

The body – now established on an interim basis – is a Whitehall beast. Sir Alan Budd, OBR chief pro tem, leads a team of Treasury lifers, based in the Treasury, running Treasury models. This is all forgiveable: the apparatus was set up rapidly and has yet to find its feet.  It is important, however, that it does not become a permanent feature of the OBR.

The most important aspect of the institution’s independence is staffing. OBR staff cannot be borrowed from the chancellor, going back to the Treasury at the end of a stint at the slide-rule. Otherwise they will still be creatures of their political masters. The OBR needs its own recruitment stream. (I’m sure George Osborne will be alive to this issue: he has long had an interest in the independence of Bank of England monetary policy committee members.)

As David Miliband has written, the OBR should, moreover, answer to parliament – not to the Treasury. Furthermore, MPs and peers should be allowed to submit written questions to the institution and it should be ultra-transparent.

Chris Cook

The new UK government, which will present its first Budget next Tuesday, has pledged to learn its lessons from the retrenchment in Canada between 1994 and 2000. Good for them: Paul Martin did much right.  He realised that, if you are going to rein in a colossal structural deficit, you need a wide consensus. The Canadian regime has also recognised that consolidation requires you to cut where the fat is. It did not salami-slice every budget, but went for where there were savings to be found.

But the Ottawan lesson only goes so far. As Paul Krugman says, it doesn’t help the UK with the macroeconomics of cutting. Its retrenchment took place as the US was booming. The political pain of cutting would have been much higher, the process much more difficult and the results less successful if its giant cousin to the south hadn’t had its nose in the punchbowl.

Britain is going to cut its deficit in what will probably be a weak neighbourhood. German manufacturing has been roaring, but the eurozone is weak and vulnerable. The whole continent’s states are tightening their belts. So while the weak pound might help the UK build market share, the market might be sickly. George Osborne’s confidence that Britain can grow while consolidating looks like hubris.

So what is to be done? Well, the chancellor of the exchequer should press ahead with his ambition to rein in the structural deficit. I don’t really want the government spending more on pay and pensions to prop up output. Stimulus needs to be temporary programmes that come to a defined end. Raising structural spending, only to slash it when the economy recovers, is bonkers. So Mr Osborne should work out temporary packages to offset the deflationary effects of his structural cutting.

The FT has come to the view that Mr Osborne needs to prepare stimulus measures, and so has Martin Wolf. In his open letter to George Osborne, he asked the chancellor:

Are you going to stand by if the economy goes into a steep decline? … In such circumstances, the most effective instrument might be central bank financing of additional public spending. But your commitment to pre-programmed spending cuts would seem to rule this out. The alternative might be a temporary reduction in taxes, of the kind you condemned under the previous government. In any case, the UK should have a plan for growth of nominal demand at a rate of 6 per cent and preferably more, for some years. Who is to take responsibility for this and how?

There are major attractions to setting out plans for stimulus measures now. Moving towards a clearer rule-based system for discretionary fiscal policy would make it possible to take stimulatory action without spooking holders of gilts. You can make sure they’re ready to go where they’re needed. The Treasury should compile a list of names and addresses to which it could post cheques. In case the UK’s troubles are longer-term, the finance ministry should prepare a list of infrastructure projects it would like to build.

Setting out such contingency plans would require a bit of political bravery. Mr Osborne would be the first chancellor to admit that he is not, in fact, in charge of the economy and not its master. He would be required to admit there is uncertainty in the world and limits to his powers and foresight.

Now that would be new politics.

Chris Cook

The resignation of David Laws over his use of expenses has caused sadness among the commentariat – more than any other expenses-related casualty. This has baffled some in the blogosphere, who believe he broke the rules and so had to go.

The first reason for grief is simple: Mr Laws was an exceptionally able man with a staggering sense of public spirit. He left a serious City job to work in the Lib Dem research department. He appeared, as George Osborne put it, to have been put on Earth to take a job at the Treasury. By contrast, when Jacqui Smith was caught out, few cared enough to defend the not-very-convincing home secretary.

James Mackintosh

Given the difficulty telling the British political parties apart on serious issues, the creation of VoteForPolicies.org.uk is an eye-opener.

The site takes you through a blind tasting menu of policies, then tells you at the end which party you prefer, based on their policies rather than on where their leaders went to school or whether they are balding.

Surprisingly, the Green party is currently ahead with almost a third of voters. Even I – brought up in Green-infested Gloucestershire, and therefore deeply sceptical of the economic and political nonsense the party plasters everywhere – managed to pick one of their policies. Second are the Liberal Democrats, followed by Labour and the Conservatives.

The test is well worth taking. Unfortunately, it does not improve the level of debate that much: were voters actually to pay attention to it, party policies would become even more tactical and short-termist (although after the Tory tax and spend promises over the weekend, one has to wonder if political promises can get any more cynical).

James Mackintosh

Here’s the problem: the public does not realise that truly enormous cuts to public service and/or massive tax rises are required. The politicians are too scared to tell them, for fear of losing the election. So after the election, whoever wins won’t have a mandate to push through the big cuts needed. Cue strikes, disappointment, attempts by new government to delay action, a sterling crisis, and possibly even an IMF rescue.

Politicians are being advised by some to keep schtum. But the solution should be for politicians of all the parties to set out NOW how bad things really are. The deficit is 11.8% of GDP, and has to be cut. Even on Labour’s planned cuts, if it sticks to its promise of protecting frontline services and overseas aid, other services need cuts of 18%-24% over four years. This is a profound change to the way the country operates; the public needs to be prepared, and needs to debate the issues before the election.

But no party is willing to set out the precise cuts, because the other side will attack them – as we’ve seen from the “Labour investment vs Tory cuts” lie, and from David Cameron’s backing away from the Conservative promise of an “age of austerity”. As a result, half of voters don’t believe action is needed, with almost half arguing that public spending should rise. They are going to get a shock when the cuts start to bite, and they are not going to be happy.

It is time to call on the Queen. Heads need to be banged together. Gordon Brown, Cameron and Nick Clegg should be forced to set out their policies in detail: all agree, after all, that big cuts are needed, they just don’t publicise it (much). There is very little difference between Cameron and Brown on the speed of the cuts, for all that both sides are trying to make that the issue. The political decision voters should face is whether they want Labour cuts or Tory cuts: and the only way to get that is if the politicians are honest.

The primary role of the head of state is surely to guarantee that democracy functions. At the moment the democratic debate is not working properly, which could have profound effects on the future of the country. A summons to the palace for the three leaders would probably do it, but if not, a simple public comment: the Queen continues to have the most powerful platform in the country. But if she’s too bound by constitutional convention to intervene, it just goes to show that it is time to move to a new constitutional set up, with a proper head of state able to defend democracy.

James Mackintosh

UPDATE: It has just got even worse. Samantha Cameron is pregnant, with atrocious timing. A “bump” in the polls to come, no doubt. But even less chance of a proper debate about the election.

Forget trying to spot policies, stop worrying about who has lied the most, or whether your favourite council-funded childcare/education/dance therapy service is about to be scrapped to pay for the financial collapse. Britain’s election is all about leaders’ wives.

All three have been paraded in front of the TV cameras, with the past weekend finally seeing Miriam Gonzalez Durantez, the Spanish wife of Nick Clegg, joining the race to see who can best wow the nation. The media lapped it up, with interminable debates about what the role of wives should be in the election, alongside long profiles.

The Mail on Sunday went one further, digging up a “fashion” shoot with Samantha Cameron, wife of the Conservative leader, which the Telegraph this morning chose to put on the front page. What did we learn? Someone thinks the pictures might make people vote Tory. The editors of the two papers rather fancy her. And, wierdly, she appears to be wearing a 1970s sheepskin car coat back-to-front in one of the pictures. But nothing more significant.

James Mackintosh

So, from the dream team that brought Barclays through the financial crisis without a bail-out (as John Varley and Bob Diamond might like to be described), come proposals to buy an American retail bank.

Three reasons why Barclays, one of Britain’s biggest banks, should not be trusted with such a deal:

1. Barclays wanted to be Royal Bank of Scotland. It tried to buy ABN Amro, and was only stopped by a combination of RBS’s willingness to pay even more than the insane sum (€64bn) Barclays offered and a campaign by Atticus Capital, the New York hedge fund, to make it see sense. Had Barclays succeeded, it would be Varley, not Sir Fred Goodwin, who was having his windows broken.

2. Barclays almost became a combination of Lloyds TSB and Bank of America. If it hadn’t been for Alistair Darling and the FSA, Barclays would have bought Lehman Brothers the weekend before it went bankrupt, in a sweetheart deal brokered by Hank Paulson, then Treasury secretary, and Tim Geithner, then head of the New York Fed and now Treasury secretary. Had Barclays succeeded, Varley would be joining Eric Daniels of Lloyds (now Lloyds Banking Group, following its disastrous HBOS takeover and state bail-out) and Ken Lewis (ex) of BoA (the not-so-proud owner of Merrill Lynch) in the competition for the title of worst takeover deal ever. [EDIT: Note that a large chunk of the most toxic assets would have been left for Wall Street to pick up; bad assets embedded in the balance sheet would still have been terrible news for Barclays, but perhaps - perhaps - it could still have avoided falling under state control.]

3. Barclays is already too big to fail. Allowing it to grow bigger simply exposes the British taxpayer to further contingent risk, which quite clearly Britain is not capable of taking on.

In addition, the dismal history of British banks in the US gives good reason for caution: most famously HSBC, but RBS of course had big operations there and NatWest Bancorp was never successful.

Rather than letting Barclays buy more, it should – as with other big banks – be forced to shrink, ideally by making it pay its true cost of capital, which would render many operations of all the banks unprofitable.

James Mackintosh

Britain’s Dangerous Dogs Act of 1991 is the standard example of a knee-jerk response to tabloid panic, introduced by a government enveloped in sleaze which expected to lose the next election (although John Major won, in defiance of the pollsters). The only worse example was the “cones hotline” – the number now goes through to the Highways Agency 24-hour information line – introduced by Major shortly after the 1992 election.

Spot the similarities with today’s struggling government. Amid Britain’s worst economic performance in living memory, the biggest deficit in living memory and (vague) threats of a downgrade to government debt, what does the country really need? Yes, another clampdown on dangerous dogs.

James Mackintosh

I’ve always taken the view that rightwingers are funnier than leftwingers. There are exceptions, of course – Armando Iannucci, Mark Thomas, Bird & Fortune – but leftwing attempts at humour are often stifled by political correctness and the desire not to offend. My view is changing thanks to the online poster wars. The Conservative attempts to counter the hugely funny send-ups of David Cameron’s posters by leftwing bloggers just haven’t worked. Compare and contrast My Labour Poster, a spin-off from the Conservativehome blog, and My David Cameron (also known as Airbrushed for Change), the far more amusing efforts by Labour activists to spoof the David Cameron posters, which were widely picked up by the mainstream press. Compare and contrast:

With the hopeless efforts posted to My Labour Poster. These are perhaps the worst, from a dismal selection:

The problem is that almost all the Tory efforts try to make serious political points – exactly the problem leftwing humour used to have. The fact that Gordon Brown sold off large chunks of Britain’s gold reserves when the price was low might be a (small) stick to beat him with, but just isn’t funny. And the 45 minutes claim (about the dodgy dossier) isn’t much of a political point from a party which also thought the invasion of Iraq was a good idea. There were two which caught my eye, though. This one isn’t really party political, but pokes fun at a Tory MP, Nicholas Winterton, who is moaning about the expenses reforms preventing him travelling first class:

And this one is reasonably amusing, too, even if what you learn from it is mainly about the prejudices of the creator. It also managed to annoy Labour, which is presumably the point (see Labour councillor Luke Akehurst’s attack – he objects to Labour voters being equated to “working class oiks who didn’t go to Eton or even whichever place Osborne went to = people on benefit = work-shy benefit-fraudsters”) The Tories need to bring back Saatchi’s creative genius. “Labour isn’t working” won’t cut it with unemployment still well below the Thatcher peaks, but surely they can do better than the weak posters they’re coming up with? As an aside, my colleague Caroline Daniel pointed me to a story she wrote about “nice” politicians back in 1998, which contained this comment:

Yet according to Ian Christie, deputy director of Demos: “One purpose of socialism ought to be to allow more people to sit around in cafes having fun with each other. Instead, the left often has a sense that they are doing more important things than the right, that they shouldn’t hang around being funny but need to be earnest and active. Yet social cohesion can be promoted by laughter and companionship.”

Perhaps now, after 13 years of Labour government, the Tories are finally worked up about the important things they want to be doing; dull and serious might work at policy conferences, but it is no fun. And the policies, such as they are, don’t seem to be winning over as many voters as Tories would wish.

James Mackintosh

Perhaps the pound is not doomed after all. Yesterday I wrote that Jim Rogers, co-founder with George Soros of the Quantum Fund, had warned that the pound could collapse “within weeks”.

It turns out he said nothing of the sort:

I did not issue this nor did I say any of it. I am trying to get it corrected. It is outrageous.

In his emails to me, Rogers also points out that a year ago he was quoted out of context, as he said at the time.

It seems Rogers has been sadly misused, and I can only apologise for passing on the press released comments – readers can draw their own conclusions on why it was issued.

Still, I wouldn’t go buying sterling because of this.

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Politics, economics, high finance and morality – this blog addresses the issues being considered by the FT’s comment team, and their thoughts.

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Christopher Cook is an FT editorial writer. Before joining the FT in 2008 as a Peter Martin Fellow, he worked for three years for the Conservative party.

Lorien Kite is deputy comment editor, a post he took up in 2009 after four years as a commissioning editor on the analysis page. He joined the FT in 2000.

Ian Holdsworth became assistant features editor in 2009 and was previously chief production journalist for the features pages.


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