fiscal consolidation

Chris Giles

The hyperbole over the new Office for Budget Responsibility is overdone. It is welcome because it removes some of the temptation for chancellors to massage the forecasts. It should add something to confidence in UK sovereign debt markets. And it should help restore some trust in government. But I will spend a little longer on criticisms, since  the welcome aspects were covered in depth today in the FT’s interview with George Osborne, the chancellor.

The Financial Times reported this morning that the new Con-Lib government has established the Office for Budget Responsibility in order, as Mr Osborne put it, to “change the way Budgets are made forever, [and] … restore confidence in the numbers that underpin the budget”. Er.. not quite.

  • The OBR does not stop politicians misrepresenting fiscal policy. I am not often shocked by the words coming out of politicians mouths, but I was genuinely surprised and disappointed by both Mr Osborne and David Laws, chief secretary to the Treasury,  on the morning they were announcing what is billed as a revolution in transparent government.

 Read more

The UK’s new coalition has just announced a new austerity measure: a five per cent pay cut for ministers. It is a token gesture, but a sign of things to come.

There’s been a slew of austerity measures in the past few days from deficit-ridden economies: Greece, Portugal and Spain have all made announcements. Italy, Ireland and the UK have dipped their toes in, too. Read more

Chris Giles

I’m not sure the coalition agreement lives up to the billing. Compared with budget plans the government has inherited from its Labour predecessor, the agreement includes no specific new spending cuts, lots of public spending pledges, copious tax cuts and a commitment to faster deficit reduction. Unless there are huge spending cuts or tax increases planned but not yet announced, far from contracting, the deficit is about to deepen.

Mr Osborne will have to announce public spending cuts of £57bn a year by 2013-14 from a  non-protected budget of about £260bn – cuts of about 22 per cent. The next few months will see the government progressively coming clean about these figures, blaming its predecessor for the mess it has inherited, and softening the public up for the brutal cuts to come. Read more

Chris Giles

Sitting in the Inflation Report press conference, it is clear Mervyn King has been liberated to talk about fiscal deficits.

He is delighted the new government will cut spending quickly. Read more

Chris Giles

If we get a Conservative/Liberal Democrat government in the next day or so, pity the UK Treasury. It had been preparing to tell the new chancellor that the public finances were in a terrible shape and new tax increases were extremely difficult to avoid. That pep talk seems to have become quite a bit more difficult.

There was no doubt at the gathering of central bankers here in Zurich today that Britain was the big unanswered question when it came to the next big global risk. Read more

Chris Giles

Britain has watched Europe’s sovereign debt crisis from the sidelines without a clear government, without a credible fiscal policy and without contagion from the markets.

This luck will not last if fiscal policy remains unchanged for long. Read more

Fancy a bit of light relief after all that voting? Try to fix the UK deficit yourself with the FT’s interactive game, and see how bad the economy really is!

Chris Giles

If anyone had hopes that the final leaders’ debate would provide answers to the huge issue of cutting the budget deficit, they would have been sorely disappointed. All three leaders ducked the issue.

Although they were asked to spell out the coming spending cuts, all stuck to a familiar script of evasion and bickering.

Nick Clegg highlighted tiny spending cuts in defence from and biometric passports which are nothing like the sort of scale of cuts he recognises are needed. He even damaged his part’s reputation for slightly greater candour on spending cuts by getting close to pledging to protect hospitals and schools from cuts in his opening statement.

Gordon Brown did not mention spending cuts at all  in his first answer and repeatedly insisted that the £6bn of spending cuts the Conservatives propose for 2010-11 would  threaten a double-dip recession, while the more than £12bn of tax increases in 2010-11 had no effect on the economy.

David Cameron gave the impression that the Conservatives had spelt out difficult choices ahead and then mentioned a pay freeze in the public sector, an area which saves about £3.5bn and to which all parties have signed up to something very similar. Of the rest of the £46bn or so spending cuts a Conservative chancellor would need to introduce for the next three years, we heard nothing.

According to the on-screen worm judging the popularity of each leader in real time, Read more

Ralph Atkins

Jürgen Stark has warned of a “full-blown sovereign debt crisis” unless governments take ambitious steps to bring public finances under control, saying the UK, US and Japan face even greater challenges than the eurozone.

His comments were sparked by the escalating crisis over Greece’s public debt, but he played down the idea of the ECB offering Greece a lifeline in an extreme scenario by buying its government bonds. This was not an issued being “discussed at present,” he told journalists. Read more

Chris Giles

The UK election is dominated by the ramifications of no political party gaining a parliamentary majority and the cross-party co-operation that might follow. A different form of future co-operation was raised by Sir John Gieve, former deputy governor of the Bank of England, today – that between the Bank of England and the Treasury.

I am deeply indebted to my colleague James Mackintosh, the FT’s investment editor, who heard Sir John this morning. It certainly makes interesting reading and goes a lot further than Sir John went in his final speech as deputy governor last year. Read more

Chris Giles

In his press conference this morning, Gordon Brown had a nice line about the Conservatives. He said: ”Novices cannot be trusted with the recovery”. His abuse of statistics throughout the press conference simply screamed: “The prime minister cannot be trusted”.

Here are two examples. Read more

Chris Giles

Now that all the party manifestos are out, they make pretty rum reading. Those outside the UK might think that when you are running an 11 per cent-of-national-income budget deficit, this might dominate politics and the parties would be falling over themselves to tell the public how they planned to sort it out. Not a bit of it. Today’s FT shows the main parties are all at least £30bn short of describing the public spending cuts that will be needed in the first three years of government alone, just to meet the Treasury’s forecasts. And a longer piece goes into the detail of Britain, a country drenched by the deficit.

The trouble is, as an economist friend of mine told me yesterday, this is an equilibrium position. If one party conceals the truth from the electorate or thinks the others will, it makes sense for them all to follow. No one wants to be portrayed as offering misery and gloom if they win. Read more

Robin Harding

Leave aside for a moment the question of whether you think deflation is a crucial economic problem for Japan (I do but I recognise that others don’t). One of the most frustrating things about the debate is that no one will join up the different policies that would be needed to end it.

Here’s financial services minister Shizuka Kamei via Bloomberg/BusinessWeek:

Japanese Financial Services Minister Shizuka Kamei called for stimulus spending of at least 11 trillion yen ($117 billion) to rid the country of deflation. “Japan’s economy is not at the stage where it has a strong recovery that can pull the nation out of this deflationary spiral,” Kamei said at a news conference in Tokyo today. “Immediate implementation of this year’s budget alone isn’t sufficient.”

So Mr Kamei thinks that if the government spent enough money deflation would get better (Mr Kamei tends to think this will solve a lot of problems).

Here is finance minister Naoto Kan via Xinhua:

“Of course, we understand that each organisation is independent, ” Kan said at a news conference. “But at the same time the BOJ and the government have in a way been united, particularly in connection with addressing deflation.”

Mr Kan is always keen to co-opt the BOJ and paint it as solely responsible for deflation, fixing it at the government’s behest. All the government and the BOJ are really united on is their belief that ending deflation is the other side’s job. The government would like aggressive monetary policy from the BOJ; the BOJ would like structural reform from the government.

To demonstrate that, here is BOJ governor Masaaki Shirakawa in his January speechRead more

Chris Giles

British newspapers have an honourable tradition of playing April fools jokes on their readers on 1 April. It always cheers me up when I spot them. Today, British business leaders showed a wonderfully understated sense of humour by writing a spoof letter to the Daily Telegraph, which was also the splash in the paper.

The letter opposed Labour’s proposed rise in national insurance as a tax on jobs that will endanger the recovery and praised Conservative plans to cut government spending in 2010-11 instead. So much, so normal. But the gags come in the reasoning, where the cream of British business has gone out of its way to show its funny side. Read more

Chris Giles

As far as the economy and the election is concerned, I have been struck for some time by the similarities with the 1992 election. After finding some contemporary analysis of the 1992 election, on which I worked as a cub researcher, my memory has been playing tricks on me. There are even more similarities than I remembered:

 Read more

Chris Giles

After a rather inspiring hour of TV debate, here was my take. Who won? No-score draw, I reckon. Will it change anything? No. Was it worth it? Not really. For another take go to the Westminster blog, which is plumping for Vince Cable as the victor.

So boxed-in are the three candidates for chancellor by the budgetary arithmetic that there was broad agreement on the main tasks facing the next occupant of Number 11.

All agree that cutting the budget deficit is a top priority and it will require a tougher spending settlement than those under Mrs Thatcher in the 1980s. None wanted to tell the audience in the studio or at home what deep cuts they had in mind although they each had some small examples to give the impression they were tackling the problem.

They all accepted that pensions for public sector workers should be trimmed and those employed by the state could not have a guarantee of their jobs. They all agreed taxes would rise and did not rule out changing income tax or value added tax. A brain drain of the richest was an exaggerated threat, they chorused, suggesting their priorities lay elsewhere. The government should address inequalities and bankers’ bonuses were outrageous. Banks should lend more and this was one the necessary ingredients for securing growth in the economy.

That much was agreed, so the disagreements were relatively minor.

Alistair Darling and Vince Cable rounded on George Osborne for Read more

Chris Giles

Forget the waffle about cutting £12bn of waste out of government from the  Conservatives and £11bn of efficiencies from Labour. We now have a firm policy from the Tories: to cut £6bn (or 2.8 per cent) from government departments’ 2010-11 budgets. The savings will be used to fund reductions in national insurance contributions for employees and employers. What can we say about this policy:

  • Deep, clear and immediate budget cuts. The £12bn headline reduction in “waste” is, in reality, a simple cut of £6bn in departmental expenditure limits for 2010-11

 Read more

Alistair Darling said today the Ministries would provide details on £11bn savings by 2012/13. Below is a breakdown by Ministry. But you can save yourself the detail: almost all of the departments list the same cost reduction plans (with worrying similarity). Almost all of the savings are expected to come from:

  1. Reducing the cost of procurement, often via ‘collaborative procurement’
  2. Reducing the cost of arms’ length bodies
  3. Streamlining back-office functions
  4. Reducing the use of consultants
  5. Property/estates costs
  6. Energy savings

In savings-size order:

 Read more

Chris Giles

Will Alistair Darling’s budget tomorrow reinforce the image of Labour as a tired government ready to lose or as a party that understands the challenges of coming years and knows what it would do with power? Although  the Budget looks likely to have been written by losers, there is still a chance the chancellor is a winner at heart.

If he is, Mr Darling will have to tick quite a few boxes in my courage checklist. I do not expect any big economic or fiscal numbers to change, so courage is defined by how much he is willing to tell the British public about the government’s existing fiscal plans: Read more

Chris Giles

France, Japan, the US, the UK and peripheral eurozone countries will face six years of austerity starting in 2012, just to get their public finances back into some sort of order. So says the OECD, the Paris-based international organisation in a highly sensible paper compiled for the G20 countries.

The most interesting aspect of the paper is its recommendations on the speed of deficit reduction. It calls for consolidation plans, “contingent on the recovery”. That, of course, is easy to say, and less easy to do. But it has a good stab:

“Countries with weak demand growth and policy interest rates at close to zero should consolidate at a slower pace, whereas countries with high growth and greater scope for further relaxation of monetary policy, if needed, should improve budgets more quickly. Likewise, countries with low budget deficits and public indebtedness can afford to consolidate more gradually than countries with high deficits and/or high debt, especially if financial markets are not confident about their authorities’ commitment to consolidation”

And the danger of spillovers from one country to another are highlighted. Read more