I am sure George Osborne’s second Budget will soon be forgotten. The public will not thank him much for avoiding the scheduled rise in petrol duties – being hit by a bullet is more noticeable than dodging one. And the growth agenda – laudable though it is in its intentions – is hardly new for British chancellors.
In the minutes after an admirably clear speech from the chancellor without last year’s duplicitous use of numbers, the striking thing about the newish and independent Office for Budget Responsibility is the number of times it has taken the approach – “We hear what you are saying, but forget it”.
- Growth: The OBR had the opportunity to endorse the “plan for growth” by raising its estimate of the long-term potential growth rate of the economy. It said forget it:
“We do not believe there is sufficiently strong evidence to justify changing our trend growth assumption in light of policy measures announced in Budget 2011″.
- Growth forecasts: The OBR downgrades
There is often a trade-off in practical economics between getting the answer to big questions roughly right and being precise with answers to more limited questions but getting the big picture wrong.
“Roughly right” always wins in my book.
When the Treasury claimed its tax and benefit measures were “progressive”, that result came because it omitted difficult to assess changes such as cuts to housing benefit. Any fool knows that changes to these hit lower income families. By answering a limited but precise question accurately and passing it off as an assessment of the full Budget effects, George Osborne, the chancellor had actually assumed that housing benefit changes have no effect on anything except the exchequer. That was nonsense and soon exposed by a “roughly right” analysis by the Institute for Fiscal Studies.
Today, two news organisations have had a go at answering questions about household income prospects. Read more
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
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
With the political fate of the $858bn deal to extend Bush-era tax rates beginning to clear – the Senate is expected to advance the legislation in a first procedural vote on Monday - the winners and losers of the proposed legislation are also becoming more apparent.
Victorious in the battle are clearly the wealthiest Americans, who will benefit from current tax treatment of income, as well as capital gains, dividends, and their inheritance, through 2012. There are also some strong provisions designed to boost business investment, which have been cheered by corporate America. And there is some reason for comfort to middle and lower income Americans, who will benefit the extension of a series of individual tax credits that were part of last year’s $787bn stimulus bill. Depending on whether you talk to Republicans or Democrats – each of these provisions could be critical to strengthening the US economic recovery.
But not everyone is happy with the outcome. Read more
In the last few hours I’ve had ten separate emails from the White House announcing that various senators, Congresspeople, governors and mayors are backing its tax deal. I’ve never seen anything like it. They must be seriously worried about whether it will pass (or at least the political backlash from their own side).
Sorry, make that eleven. Read more
$1,000bn: that’s the estimated fiscal stimulus if current US tax deal discussions come to fruition. Economists have upped their 2011 growth forecasts by 50-70bp on the news; traders have brought forward their estimates of a fed funds raise as yields rose significantly. The policy couldn’t be more different from yesterday’s austerity measures in Ireland.
US citizens at both ends of the pay spectrum would be better off under the deal, paying less tax and therefore having more to spend. Under the current deal – which has some way to go before it is passed – the 2 per cent employee payroll tax cut would be kept, saving some families about $2,000 and costing about $200bn. The main, $800bn part of the deal would extend Bush-era tax cuts across all income groups – including the very wealthy, who are more likely to save the additional income.
Robin writes: 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
Conventional wisdom in Washington is that Ben Bernanke, Federal Reserve chairman, is pretty much alone in his quest to deliver a jolt to the US recovery.
With concerns about the deficit running rampant, Congress is unlikely to push through any significant fiscal stimulus anytime soon, particularly if there is a shift in power with strong Republican gains in the midterm congressional elections. As much as the Obama administration may want to move forward with new economic programmes, it is clearly hamstrung by the headwinds on Capitol Hill.
But not all may be lost…..
A research note by Michael Feroli, economist at JPMorgan, just highlighted some interesting ways in which fiscal policy could achieve what Charles Evans, president of the Federal Reserve Bank of Chicago, recently described as a crucial policy objective: lower short term real interest rates. Read more
Better late than never. After months of congressional wrangling, Barack Obama, US president, finally signed into law a bill designed specifically to help small businesses.
Although their importance is sometimes overstated – many small companies make their money off the health of large corporations – they are nonetheless an important source of economic output in their own right, and that energy has definitely been lagging in this economic recovery.
The Obama administration’s answer to the problem is a $30bn fund that allows banks to receive capital injections with increasingly favourable interest rates the more they can prove that they are lending money to small businesses. This should offer some relief against the lack of credit that is hampering some small companies. In addition, there are also some $12bn in tax breaks in the legislation, which will hopefully lead to more hiring.
“So this law will do two big things. It’s going to cut taxes, and it’s going to make more loans available for small business,” Mr Obama said. “It’s a great victory for America’s entrepreneurs.”
But whether or not this moves the economic needle in any way is very much open to debate. Read more
Probably the biggest open question in US fiscal policy is whether or not Congress will extend – in part or in full – more than $3,000bn in tax cuts enacted in 2001 and 2003 by George W. Bush.
With the provisions expiring at the end of the year, pressure is mounting on lawmakers to take some action in order to prevent all Americans from experiencing tax cuts on January 1 - an outcome which Goldman Sachs economist Alec Phillips this week warned would pose a significant downside risk to the US economy.
And yet, we learned yesterday that the Democratic majority in the Senate decided to throw in the towel and push back any debate and vote on the issue until after the midterm elections, prolonging the uncertainty for several more months – at least. Why ? Read more
Structural deficits disease is pretending you know the precise size of the hole in the public finances, basing the entire fiscal strategy of government on an estimate of the unknowable output gap, using a measure of that structural deficit which contains many cyclical elements and allowing perverse conclusions to be drawn from data. So what is the cure?
John Kay beat me to a pretty good answer in the FT today, when he said the basic question that should be answered is:
“What is the level of taxation that is needed to support current and future expenditure plans on a sustainable basis?”
Where I would disagree with John is that to provide a credible answer to this question, you still need to look into a crystal ball. But crucially, what you do not need to do is come up with spuriously ‘precise’ estimates of the output gap and the structural deficit. Read more
By the end of this week it looks like President Obama will have proposed a $180bn economic package – $100bn on R&D tax credits, $50bn on infrastructure spending, $30bn on accelerated capital allowances – although the White House seems determined not to call it a stimulus for fear of scaring the Congressional horses.
How effective might the measures be in boosting the economy?
R&D tax credits
There’s little doubt that it makes sense to make the R&D tax credit permanent given that Congress has been passing temporary extensions to it for more than a decade. It makes the budgetary numbers more honest and gives business more certainty.
As a stimulus measure, however, its impact is limited precisely because the R&D credit has always been temporarily extended and Read more
There were some very good presentations at the Monetary Policy Forum, organised by Fathom Consulting this morning, all of which highlighted what a difficult job the Bank of England’s Monetary Policy Committee has at the moment. Cogent arguments can be made both for loosening and tightening monetary policy.
Charles Goodhart, former Bank chief economist, MPC member and general guru, said that were he on the MPC now, he would wish he could do a Rip Van Winkle, go to sleep until 2012, and wake up once some of the uncertainty over the recovery is removed. Why? “Because the next year and a bit will be fairly horrific”.
The reason things look so difficult for monetary policy is that the outlook for the inflation-growth trade-off has worsened. When Fathom plug the latest data through their replica of the Bank of England’s main economic model they first find that the Bank seems to be seriously over-optimistic on growth as their chart shows.
Now, neither Fathom nor anyone else can accurately replicate the MPC forecasts because the published versions rest on judgments by the Committee members as much as the model’s outputs. But the argument put forward Read more
With worries about the huge US budget deficit running rampant in Washington – just look at Friday’s midsession budget review by the White House, which forecast deficits in excess of $1,400bn this year and next - fiscal policy options are clearly limited for Congress and the administration.
And so the attention of policymakers and politicians is quickly turning to longer-term tax policy issues, like the looming expiration of some $3,000bn of tax cuts enacted by President George W. Bush in 2001 and 2003, as I explain in today’s paper.
Last week, the big story was that Kent Conrad, the Democratic chairman of the Senate budget committee, broke with the administration’s official line that the tax cuts should only be extended for Americans earning up to $250,000, and allowed to expire for the wealthy. Read more
Top brass in the OECD will be meeting with George Osborne and others tomorrow, to lay out a roadmap to “new growth” in the UK economy.
In United Kingdom: Policies for Sustainable Recovery, recommendations range from regulation to education, and from workers’ health to the green economy. The report recommends continued fiscal consolidation, while protecting areas such as R&D. Choice excerpts from the recommendations include: Read more
Peter Orszag, the all-powerful White House budget director, will be the first senior member of President Barack Obama’s economic team to leave the administration, probably in a few weeks’ time.
His departure, while not unexpected, leaves a significant gap that Mr Obama will surely try to fill as soon as he can given the urgency with which America’s dire fiscal position needs to be tackled.
Despite Mr Orszag’s young age of 41, he is considered one of the most influential budget director in decades, playing a pivotal role in engineering Mr Obama’s two signature pieces of legislation so far: the stimulus bill and healthcare reform.
This will make him tough to replace, and the most likely candidates at this point are Read more
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
Peter Diamond, the Massachusetts Institute of Technology economist, is arguably the most interesting of the three nominations by President Barack Obama to the Federal Reserve Board of Governors.
Janet Yellen, president of the San Francisco Fed, is a consummate monetary economist close to Don Kohn in her views on interest rates, and has already been at the heart of many of the US central bank’s decisions during chairman Ben Bernanke’s tenure. Read more