Chris Giles

All eyes were on the Bank of England minutes of the June Monetary Policy Committee to see whether the replacement of Andrew Sentance with Ben Broadbent would change the balance on the Committee. It did.

Mr Broadbent voted with the majority not to tighten monetary policy, removing one hawkish voice. The Committee is now broadly split 7-2 against tighter monetary policy. Mr Broadbent’s vote was the first dovish tilt apparent in the minutes. Compared with the harsh Mr Sentance, who voted vehemently for rate rises every month most recently seeking a 0.5 percentage point rise, Mr Broadbent is very cuddly indeed.

The second dovish tilt came in paragraph 25Read more

Chris Giles

In doing the usual due diligence on the Bank of England’s pictorial forecasts – blowing up the images on screen, getting out a ruler, measuring the YoY growth rates, estimating the skew that represents a risk-adjusted forecast and shoving all the results into a pre-prepared spreasdsheet – you can produced this horrible chart of successive Bank of England growth forecasts.

All it really shows, in the grand scheme of things, is that the Bank’s growth forecasts were pretty good before the crisis and spectacularly awful more recently.

If you strip out a lot of irrelevant information, you get the following, which I think is pretty amazing. Read more

James Politi

Politics in Washington are notoriously unpredictable – but for anyone gaming whether or not the US will face a government shutdown on March 18 – here are a few good reasons why it won’t happen.

The most likely scenario at this point appears to be another short-term extension of the budget – somewhere between two and four weeks – that would give all sides a bit more time to negotiate.

Republicans in the House of Representatives are currently putting together a bill along those lines – and the Obama administration may well be open to accepting it. The White House has already suggested $6.5bn in cuts that could be applied towards that short-term extension without causing too much political furore.   Read more

James Politi

A war of words and numbers has broken out in Washington over the geekiest of subjects: which budget baseline should be used to calculate the level of spending cuts being negotiated by the White House and congressional leaders.

On Thursday afternoon, Gene Sperling, director of the National Economic Council, announced that the Obama administration was putting on the table an additional $6.5bn in spending cuts to woo Republicans into a deal before March 18, the new deadline for a government shutdown. At least everyone agrees on those basic facts.

Here’s where things get tricky. Mr Sperling said that with those cuts, the White House was meeting Republicans “halfway” compared to their own spending targets – a clear sign of the administration’s willingness to negotiate. Read more

James Politi

In Ben Bernanke’s testimony before the Senate banking committee today, there was plenty of talk about US fiscal and budgetary policy.

It’s the hot topic on Capitol Hill, with Congress moving this week towards a deal to cut spending by $4bn and avert a government shutdown – at least for two weeks.

Needless to say, in the question-and-answer session, lawmakers from both parties were desperately trying to get the Federal Reserve chairman’s approval for their positions.

Republicans are advocating for aggressive cuts in discretionary spending, while Democrats, in the words of Harry Reid, the Senate majority leader, want to apply a ”scalpel” rather than a “meat axe” to the US budget. Read more

James Politi

The US is little more than $200bn away – or about 2 months – away from reaching its congressionally mandated national debt limit of $14,300bn.

The need to increase it to avoid a potentially disastrous US default is the next fiscal battleground in Washington, after the lawmakers stop squabbling over a government shutdown.

Republicans want to use the opportunity to push for more spending cuts, while Democrats say this is not the place to negotiate.

On Thursday, Moody’s Investors Service offered its analysis of the likelihood that a major crisis will ensue, threatening America’s triple-A credit rating much earlier than even the most ardent fiscal hawks would imagine. Read more

James Politi

Goldman Sachs has waded into the raging political war over US fiscal policy, with a note explaining the economic ramifications of the battles on government spending, a possible shutdown of federal operations, and even the furore over collective bargaining rights in Wisconsin and some other midwestern states.

On the budget itself, Goldman economist Alec Phillips says the Republican plan approved by the House of Representatives last Saturday – with $61bn in spending cuts between now and September, would lead to a drag on US GDP growth of 1.5 to 2 percentage points in Q2 and Q3, before it tails off.

Mr Phillips also points out that the more likely scenario – a compromise with $25bn in spending cuts – would lead to a 1 percentage point hit to GDP growth in Q2, fading thereafter, with “negligible” impact on growth by the end of the year.  Read more

James Politi

The biggest open question for US fiscal policy in the long run is whether the political system can forge a consensus to rein in the long-term debt through some combination of spending cuts and tax increases.

But in the short-term, at least for the next ten days, it is whether the US government is facing its first shutdown since the mid 1990s.

On March 4, the “continuing resolution” funding the government for the current fiscal year, which runs through September, will expire.

Unless a deal is approved by the Republican House, the Democratic Senate, and the White House, all non-essential federal operations will have to close, which could, if the standoff is lengthy, have significant consequences for the US economy. Read more

Chris Giles

The Institute for Fiscal Studies, along with Barclays, are currently presenting their annual fiscal forecasts and Budget judgement. Most of the central headlines are comforting to the government. The economists think that on the basis of the official economic forecasts, the public finances are broadly on track – the hole in the public finances will be closed by 2015 or so.

The concern is that all the risks seem to be on the downside relative to official forecasts.

There are good reasons to worry that the economy might be hit harder from austerity than the Office for Budget Responsibility thinks, such as the difficulty the Bank of England will have in offsetting tight fiscal policy with loose monetary policy. Consumers are being hit hard from high import prices squeezing incomes. UK investment rarely bounces back sharply from recessions. And export performance has been disappointing and we don’t really know why. Read more

James Politi

President Barack Obama certainly made America’s fiscal health a pillar of his “state of the union” address, calling it a key element of his plans to secure US global competitiveness. “A critical step in winning the future is to make sure we aren’t buried under a mountain of debt,” Mr Obama said. “We have to confront the fact that our government spends more than it takes in.”

Mr Obama did indeed dedicate plenty of space to deficit reduction in his speech – but there were no major surprises in terms of specific proposals for budget cuts, and there was no push for a comprehensive deficit reduction plan along the lines of last year’s Bowles-Simpson debt commission, which proposed cutting politically explosive areas such as social security, Medicare, and individual tax breaks.

Instead, this is what Mr Obama proposed, which fiscal hawks may find underwhelming, but others may argue is perfectly consistent with a strategy designed to continue stimulating the economy now and begin to move in the direction of fiscal retrenchment at a later date. Read more

James Politi

President Barack Obama delivers his “state of the union” address to Congress on Tuesday night: it’s one of the biggest political events of the year in the US, in that it sets the tone for the legislative agenda and the big policy debates for the rest of the year.

 Fiscal policy is expected to be at the heart of Mr Obama’s speech in 2011. From what we know at this stage, he will use the opportunity to call for new investments to boost America’s competitiveness in global economy.

At the same time, he will make an appeal for the US political system to start considering serious deficit reduction proposals to rein in the country’s debt burden, which is expected to balloon in the coming decades if no action is taken.

One big question heading into the ”state of the union” is what the balance will be between new spending proposals – from infrastructure, to clean energy technology to education - and deficit reduction initatives. Read more

Ralph Atkins

Jean-Claude Trichet has called on eurozone leaders to step up their efforts to combat the region’s debt crisis, including slashing government deficits even more. The ECB president’s comments highlighted widespread fears that the crisis that last year rocked Europe’s 12-year-old monetary union could re-escalate in coming weeks as eurozone governments and banks raise funds in tense financial markets.

“In 2011, we must strengthen our efforts even more. We need to see further significant progress on the reduction of excessive fiscal deficits,” Mr Trichet told a gathering of Germany’s Christian Social Union, the Bavarian sister party of chancellor Angela Merkel’s Christian Democrats. Read more

This might be described as an anti-riot Budget: the pain is fairly equally spread. Wealthy pensioners are penalised. Benefits are reduced by €5-€10 per person per week, across several types including maternity pay, child benefit, jobseekers’ allowance and unemployment. Buying and selling homes is encouraged with a big reduction in stamp duty across all home values.

  • €6bn spending cuts in 2011; roughly €4bn in spending cuts and €2bn from tax adjustments;
  • Of €2.2bn costed gross savings, €1.6bn will come from the Health & Children, and Social Protection budgets;
  • HOUSING: Stamp duty will be 1% on properties up to €1m; 2% on the balance (down from 7% and 9%);
  • PUBLIC SALARIES: Ministers to take €10k pay cut; PM’s salary down €14k; public sector pay capped at €250k;
  • WEALTHY PENSIONERS: Pension tax relief limit falls from €150k to €115k; maximum allowable pension fund for tax purposes more than halved to €2.3m; life-time limit of tax-free pension drawdowns reduced to €200k. All these will save about €35m next year;
  • PENSIONS: No reduction in state pension this year; reduced tax exemption for employers and employees for pay-related social insurance (PRSI, like PAYE) contributions. Due to save €80m next year;
  • TAX: Reduce the value of tax bands and credits by 10 per cent; top marginal tax rate of 52%; corporation tax to remain 12.5%; workers on the reduced minimum wage will be tax exempt.

Irish shares have risen on the announcements Read more

Greece is poised to accept tough conditions, including widespread job cuts and labour market reforms, in order to secure the third and fourth loan tranches of its €110bn bail-out by the European Union and the International Monetary Fund. George Papaconstantinou, finance minister, said on Monday the socialist government tried “to preserve the country’s interests as best we could,” in discussions with the “troika” – representatives of the European Commission, European Central Bank and the Fund.

The troika’s latest monitoring mission came amid rising concern in Athens that a future transfer might be blocked – a move that could trigger an immediate default and a disorderly restructuring of Greece’s €340bn sovereign debt. “It’s a difficult negotiation every time . . . bearing in mind that the next loan tranche is at risk,” Mr Papaconstantinou said. Read more

Chris Giles

Today’s public finances figures show net borrowing roughly on track to reach the Budget forecast for the deficit in 2010-11, as the chart shows.

This should be good news as persistent slippage on the public finances has stopped and the very early evidence shows the consolidation is roughly on track.

But because of the dotty way the Treasury and Office for Budget Responsibility have looked at the public finances in the past, this is not good enough. In fact, on plausible assumptions, we need another £5bn of tax rises or spending cuts a year to meet the fiscal mandate of eliminating the current “structural” budget deficit within five years.

Why is good news actually bad in the weird world of government forecasting?

In a nutshell because Read more

James Politi

Peter Orszag is certainly not worried about ruffling feathers in Washington. Last month, the former budget director under Barack Obama surprised the White House by taking a public stand in favour of a temporary extension of Bush-era tax cuts for wealthy Americans, which the administration opposes.

And today, Mr Orszag, now at the Council on Foreign Relations, offered a critical view of the Federal Reserve’s plans for a second round of quantitative easing in a blog post for the New York Times.

Mr Orszag’s view is that QE2 may “create more problems than it solves”, based on the notion that the effect of the Fed’s fresh round of monetary easing will be similar to “having the Treasury sell short-term T-bills and using the proceeds to buy back 10-year bonds”. Read more

A speech just made by an ECB board member illustrates perfectly the divergent fortunes of the ECB, Bank of England and the Fed.

In the UK and US – where the recovery is more fragile – markets, economists and journalists are increasingly looking to their central banks for a monetary solution. Not in Europe. The economy is on a “good recovery track”, which can be ensured by fiscal responsibility and structural reform, says the ECB. So, no monetary solution here: responsibility is firmly back with the state. Read more

Chris Giles

As far as Britain’s economy is concerned, the spending review, just published, changes little. There was the “reprofiling” predicted first in the Financial Times, but it amounted to only £2bn a year of additional gross capital expenditure. This will not make the difference between stagnation and recovery. The Treasury is right: there is no Plan B.

The big news is pretty much as expected:

  • It’s not a good time to be working in the public sector. You have a good chance of losing your job, you will have a pay freeze over the next two years and you will see your take-home pay cut by an increase in your pension contribution averaging 3 per cent.
  • The chancellor has found another £7bn of further savings from social benefits, which have limited (to some extent) the cuts to public services.
  • After this small mitigation of cuts, departmental budgets will still face the most severe constraints in the post-War period. These will be noticed. They act to bring down the deficit significantly so that public borrowing is expected to be 2 per cent of national income by 2014-15.
  • Health, schools and overseas aid have been relatively protected. Recipients of benefits, public sector employees and local government are the big losers.
  • The government claims the measures are fair. Because fairness is in the eye of the beholder, it has chosen a method of presenting fairness to give this result. This is policy-based evidence-making on heat.

What has really saddened me is the presentation of the spending review. Read more

James Politi

The Great Recession of 2007-2009 hit hardest in two areas: sun-belt states such as Arizona and Florida that were exposed by the housing boom and bust, as well as rust-belt states like Michigan and Ohio that were already suffering from the erosion of America’s manufacturing base. Interestingly enough, Texas and the Midwest, which bore the brunt of the 1980-1982 recession, managed to escape most of the pain this time around. 

The worst-off communities in this cycle were the focus of a conference this morning organised by the Brookings Institution’s Hamilton Project, which conducts research on economic policy and counts Robert Rubin, former treasury secretary, and Roger Altman, former deputy treasury secretary, as senior advisers. Read more

Chris Giles

Today’s announcement that British higher rate taxpayers will no longer receive child benefit from 2013 represents the triumph of simplicity over fairness.

This will cause problems for the coalition government because it disproves the government’s claim that it always pays to work more, it will feel unfair to well-off single-earner families, it will feel wrong to some very well-off two-earner families and, unless the administration is perfect, it will recognise marriage in the tax system in the reverse way to that desired by the Conservative element in this government.

You have to ask yourself – has George Osborne picked the right spot on a difficult trade-off between simplicity and fairness? And all for £1bn of deficit reduction? Scrapping the benefit altogether and tweaking the existing means-tested benefits system would make more sense.

  • The cliff-edge. A family with three children with income currently of £43,875 (the personal allowance of £6,475 plus the higher rate threshold of £37,400) receives £2,456 in child benefit. In future, if that family works a bit of overtime and receives an extra £1 in income, it will lose £2,456 in child benefit. The tax rate is infinite at the point of the higher rate threshold. A day after David Cameron, prime minister, said: “It will be worth it for everyone to work, wherever they are in the income scale, whatever benefits they receive,” the coalition announces a policy which refutes that claim. Does the left hand of government know what the right hand is doing?

 Read more