DeAnne Julius is a former member of the Monetary Policy Committee of the Bank of England
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DeAnne Julius is a former member of the Monetary Policy Committee of the Bank of England
Since Mark Carney took over from Lord King as governor of the Bank of England a year ago, the members of the Monetary Policy Committee have been unnaturally harmonious. Perhaps it has been a honeymoon period granted the new governor. If so, this has been a rather long honeymoon: the most recent meeting in June was the 12th consecutive time that there has been a unanimous vote by the MPC. Many commentators expect another 9/0 vote at this week’s meeting. By contrast, prior to Mr Carney’s arrival at the BoE, the MPC had a split 6/3 vote in five consecutive months over whether to increase asset purchases. Read more
The battle of the London airports is heating up. Although the Airport Commission, headed by Sir Howard Davies, is not due to give its final recommendation until after the 2015 general election, the two big contenders locked horns last month over their consultation processes and noise impacts.
At this stage, Heathrow has the loudest voice, and perhaps the most business support, but Gatwick provides a real, and under-appreciated, challenge. As more evidence is produced, the underdog may yet win the prize. Either way, the competition between them will sharpen the debate and likely result in a better outcome. Read more
The accusations of overcharging for the electronic monitoring of criminals by two of the UK’s largest outsourcing companies have revived questions about the risks and benefits of using the private sector to deliver public services. But it would be wrong to use the cases of G4S and Serco, and their contracts with the Ministry of Justice, to condemn the industry, especially before an investigation of the circumstances has concluded.
In 2008 I led a government review to define and assess the UK’s fast-expanding “public services industry”, the name given to the sector that provides facilities to the government and runs, for example, prisons and social care homes on behalf of the state. It revealed a growth sector with more than 1m workers and an expanding volume of exports. Our review of the research also found that, on average, there is a 10-30 per cent saving on the cost of public services, with no apparent decline in the quality of provision. Indeed, in many cases, the quality of service improved. Read more
In September 2014, Scottish voters will decide whether to leave the UK and become an independent state. It will be a straightforward Yes-No referendum, but each person’s vote will be based on a mixture of rational and emotional considerations. The currency question touches both, and therefore it could be the deciding factor in this historic decision. Read more
Credibility is seeping away from the Bank of England’s Monetary Policy Committee. The minutes released last week revealed fundamental differences of view at best and muddle at worst within the committee. They showed that three of the nine votes cast were in favour of a change in policy. Read more
British savers and pensioners are among the biggest losers from the Bank of England’s long-running programme of quantitative easing. This is because the main way QE affects the economy is by holding long-term interest rates below market levels. Annuities are based on long-term rates and, for a 65-year-old man, the income from an average annuity fell by almost 12 per cent in 2012.
The Bank has claimed that such loss of retirement income is offset by the stimulus QE provides to the stock and bond markets in which pensions are invested. However, the extent of this offset is limited for funds that are in deficit and for many people with personal pensions and savings who have been advised to shift their resources out of volatile assets and into fixed-interest accounts. Retirees and others who are living off their savings will continue to suffer financial repression as long as interest rates are held down. They receive a double whammy if inflation remains high, pushing real interest rates further below zero. Read more
Look around the world and big risks abound. One or more countries may drop out of the eurozone. Violence may spread across the Middle East. The US Congress may yet drive the country off its fiscal cliff and into recession. An island dispute between China and its neighbours may flare up, provoking the US to intervene in the Pacific. But in my view, the single greatest risk is that one of these events or some other throws the world into another global financial crisis, a “GFC II”. Read more
The three independent reviews of the Bank of England’s performance before and during the financial crisis must have been sobering for the court, its governing body. In polite but pointed language the reviews confirmed that the BoE was ill prepared to recognise or deal with the crisis in its early days. They provided many detailed recommendations but also made it clear that a full-scale cultural change is needed to address the root causes of the UK central bank’s problems. This will be a high priority for the next governor. Read more
With economies stagnant and interest rates near zero, central banks are trying new ways to induce banks to lend and companies to borrow. Promoting financial stability and restarting growth are the priorities, not inflation control. This creates two major problems. First, economic theory is lacking, but it is difficult to move cautiously given the relentless clamour for policies to promote growth. The second problem is how to coordinate monetary and financial policy.
In Britain, the current separation of the Monetary Policy Committee and Financial Policy Committee risks policy gaps and inconsistencies. But it is not too late to change this situation, by creating a single, accountable Monetary and Financial Policy Committee, with a solid quotient of external members and a dual mandate for inflation control and financial stability. Read more
Public anger over high levels of executive pay has provoked new government proposals in Britain for binding shareholder votes on remuneration committee reports. This will mark a revolution in corporate governance as shareholders would vote both on the past year’s awards and on the coming year’s plans for salary increases, bonuses and long-term share awards. Boards will find it difficult to deal with such intervention in complex pay structures. A ‘no’ vote is a blunt instrument which will not provide a clear steer on where to go next. Read more
These figures are worse political than economic news. The Labour opposition will seize upon them as showing that the government’s austerity programme is too strict and is killing off growth. They will renew their calls for a fiscal loosening through a cut in VAT and a slowing of welfare reform. The governing coalition may also suffer new strains as the Liberal Democrats seek to position themselves as more caring and in touch with ordinary voters than their Conservative colleagues. While Britain is unlikely to face the political ruptures that have been provoked by austerity budgets in Spain, France and most recently the Netherlands, a weakening of coalition support and cohesion is likely over the next few months. Read more
The most controversial announcement in Chancellor George Osborne’s budget was the cut in the top rate of income tax from 50 per cent to 45 per cent from next year. Most of the opposition party’s response was directed toward this single measure, although it accounted for a mere £50m of estimated lost revenue in its first year. Mr Osborne must have calculated that the economic gain would outweigh the political pain.
He was supported in his economic case by an impressive new study by HM Revenue & Customs, based on the actual tax returns of the 300,000 people with incomes above £150,000. They comprise around one per cent of UK taxpayers, and account for around 30 per cent of income tax revenues. Read more
You would be forgiven for being confused about the state of the British economy. The recent economic news is mixed and experts are divided in their views of the future.
On the positive side, the Bank of England’s latest inflation report forecasts a bumpy, but sustained pick-up, in economic growth in 2012. However, Moody’s recently changed its outlook on the government’s triple-A rating from ‘stable’ to ‘negative’ indicating a 30 per cent chance of a downgrade over the next 18 months. In the face of this uncertainty, UK companies are hesitant to invest the £730bn on their balance sheets as of last September, as Martin Wolf notes in his column on Friday.
Imminent budget decisions loom for the Chancellor. His first priority must be to keep his side of the policy bargain. There should be no relaxation in the aggregate fiscal stance. Any giveaways must be funded by new taxes or cuts elsewhere. Second, he should use his public platform to reverse the unfortunate perception that the coalition is anti-business and more concerned about redistribution than growth. This means pressing ahead with reform of the planning system which has been identified through independent research as the single biggest obstacle to small business expansion and job creation. It also means providing more certainty – perhaps a moratorium – on taxes that affect internationally-mobile investment and high-income professionals and entrepreneurs. Read more
The big debate of 2012 will be over the role of government in the economy. Although this sounds like an economic issue, it is really about politics. There is no economically optimal size of government. The ongoing financial crisis provides stark evidence that the current model of high public sector spending financed by growing public sector debt has hit the buffers.
The US election campaign is already taking shape around this issue, but the US may be able to fudge the issue for a little longer. There are still willing buyers of US debt in Asia and, if 2012 brings more financial shocks, the dollar will benefit from safe haven flows. But Europe is running out of time and it starts from a worse position. Taxes are already so high that they depress growth. This problem is compounded for eurozone members, which cannot adjust by depreciation. Meanwhile welfare spending and public sector employment now benefit so many voters that it is hard for politicians to win backing to cut them.
The social contract that underpins democracy requires compromise. But the political debate will grow more confrontational in 2012. This will be the year that the financial crisis turns into a number of political crises. Read more
George Osborne has a tricky task in front of Parliament on Tuesday. He will have to admit to a much gloomier outlook, while sticking to the multi-year deficit reduction plan that he laid out last spring. His challenge is to square this circle credibly.
The new OBR forecast is certain to show a lower growth profile for the economy than that of the March budget. Quarterly outputs have been weaker and employment growth has stalled. Banks are rebuilding their balance sheets but lending to small businesses is still weak. The eurozone crisis has deepened, with a resolution not yet in sight. With such an unrelentingly negative backdrop, it is no wonder that business and consumer confidence are sinking.
Restoring confidence and reassuring the markets should be Mr Osborne’s twin objectives. A two-pronged approach will be necessary. Confidence can be built by laying out a medium-term growth strategy based on an investment revival. The markets can be reassured by stressing fiscal policy stability in the UK, which contrasts so strikingly with the policy uncertainty and political turbulence abroad.
Policy stability means sticking to the announced public expenditure cuts and pension reforms that will have a big cumulative impact on curbing government debt. It does not mean inaction or callousness in the face of slower growth. A tight fiscal stance provides the space for the Bank of England to continue with a loose monetary policy. It will help cushion the effects of the downturn. But just as Gordon Brown’s watchword while he was chancellor was ‘prudence’, Mr Osborne’s should be ‘stability’. Only time will tell if he lives up to his word better than Mr Brown did. Read more
Which should come first: growth or austerity?
Debate is raging over whether government policy should favour short-term growth or short-term austerity. The British government has chosen austerity and the bond markets have rewarded it with low interest rates. But, a left-leaning think-tank claims to have the support of “100 leading economists” for its Plan B with higher public spending to boost the economy. Nevertheless, the UK should stick to its current path of cutting deficits.
Britain’s currency is not the global monetary anchor, nor is sterling considered a safe haven in turbulent markets. With a quarter of Britain’s debt held by foreigners, the country’s borrowing costs are directly determined by the confidence that the global bond market has in its policy. Last year 23 per cent of government spending was financed by borrowing. Entitlement programmes consume 29 per cent of the budget and represent the largest component of the structural deficit. Either these must be reduced or taxes will have to be raised. But already tax rates on individuals are among the highest among developed countries. These stark facts are the reason that the coalition government has wisely chosen to put austerity first in order to create the conditions for growth later. Economists may debate, but the markets will decide. Read more
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