Monthly Archives: November 2008

Cameron and the death of the gold-plated public sector pension

November 27, 2008 5:06 pm by Jim Pickard

Maybe it was deliberate kite-flying. Maybe David Cameron thought that he was only talking to a handful of northern businessmen. Either way the Tory leader indicated this week – at a meeting of the Greater Manchester chamber of commerce – that he was minded to move away from public sector final salary schemes: “We’ve got to end the apartheid in pensions,” he said.

There is cold logic behind the position: the state may struggle to keep supporting the ever-growing cost of public sector pensions: a £650bn liability over 20 years.

But for millions of workers – whose pay has barely risen in recent years – decent pensions are arguably their greatest incentive to keep on the state’s payroll. What does Cameron hope to gain electorally from voicing this argument?

Continue reading: “Cameron and the death of the gold-plated public sector pension”

Posted in Conservatives, David Cameron, UK politics | Permalink

Was Cameron off-script?

November 27, 2008 4:46 pm by Alex Barker

The Tories are rapidly distancing themselves from the suggestion — made by their leader — that public sector pensions should be phased out.

It is worth reading the full transcript of what David Cameron said in a Q&A session at the Manchester Chamber of Commerce:

We have got to end the apartheid. We are getting into a situation now where pretty much everyone in the private sector has gone to defined contributions and the final salary schemes are closed. In the public sector you have still got a lot of people on final salary schemes including members of parliament.

MPs are going to have to lead by example. We have got to close the MP’s final salary scheme because we have got to be able to turn around to the rest of the public sector and say that over time it does makes sense to move towards defined contribution.

There is an issue of fairness between the private sector and the public sector but there is also an issue of economic efficiency. We do not want to make it so hard for people to move from the public sector to the private sector or from the private sector to the public sector.

My vision over time is to move increasingly towards defined contribution rather than final salary schemes.

This is something (sic) where the government has been remarkably feeble partly because they are in hock to the public sector unions.

Now compare it to what his spokesperson said afterwards:

We know public sector pensions are a big challenge. Nothing has been ruled in or out. Of course the law requires accrued rights to be protected. Before the next election we will outline the policy in more detail.

We have always said that moving MPs onto a defined contribution scheme will help in time with public sector pensions, which everyone sees as a pressing issue. Clearly any changes would involve extensive discussions with interested parties.

Posted in David Cameron | Permalink

The problem with the Crosby plan

November 27, 2008 11:41 am by Jim Pickard

James Crosby’s report on Monday recommended state guarantees for £100bn of new mortgage-backed securities to help get banks lending to home-buyers once again. I pointed out here that Crosby himself had reservations about this idea when he wrote his interim report in the summer.

Treasury officials tell me that the situation has become more desperate since then. But surely the fundamental pros and cons remain the same.

Mervyn King seemed unimpressed with the idea when he spoke on Tuesday, describing securitised mortgages as a ”form of lending that for rather good reason has fallen out of favour”.

The final Crosby report says the government guarantee would only be used for new mortgages, not for re-financing existing ones. It would be available to banks and building societies. Only “prime” mortgages would be eligible: excluded are high loan-to-value loans, second charge loans or those to people with impaired credit histories.

How else would taxpayers be protected? The answer seems to be the ratings agencies.

Continue reading: “The problem with the Crosby plan”

Tags: Alistair Darling, Bank of England, Banks, Credit Crunch
Posted in Treasury, UK economy, UK politics | Permalink

Merkel tells Brown to be responsible

November 27, 2008 11:28 am by Alex Barker

Germany is leading the fightback against Gordon Brown’s drive to stimulate the world. Angela Merkel is distinctly unimpressed by the case for a tax cuts, in spite of sitting on a big budget surplus. In a speech to the German parliament she endorsed Brown’s diagnosis of the problem, but dismissed his proposed solution.

“Excessively cheap money in the US was a driver of today’s crisis. I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the US and elsewhere and whether we could find ourselves in five years facing the exact same crisis.”

If you thought that was undiplomatic, take a look at the views of her confidant and adviser. Steffen Kampeter, the budget expert in Ms Merkel’s Christian Democratic Union, said:

“I see the danger of creating a new bubble. Massive interest rate cuts and massive borrowing may bring about new problems.”

“How good is a policy package if it has to be changed every other week? How good is it for confidence? The latest British decisions on VAT [value added tax] and income tax, for instance, are inconsistent. Better to wait a bit longer and put forward more durable solutions.”

Merkel said leaders must resist the temptation to “overcome the crisis” and instead “build a bridge so that we at least can start recovering in 2010″. Is this what David Cameron would be saying if he was prime minister now?

Posted in Recession, UK economy | Permalink

An ode to Lansley: six good things about a recession

November 26, 2008 1:03 pm by Alex Barker

The correction came within hours. But the damage was done. Andrew Lansley, shadow health secretary, discovered there are better ways to extend a political career than discussing the merits of a downturn. Labour claimed it was “shameful” for him to say that “on many counts, recession can be good for us”.

But was the real problem his failure to give more than one example? Shouldn’t he have gone further and made a comprehensive case? Don’t all economies, just like politicians, need a correction once in a while?

As politicians are unwilling to recognise the full worth of an economic slump, we will. Behold six good things about a recession. See it as an electoral platform for the inveterate optimist, or a pro-cyclical election pledge card.

Continue reading: “An ode to Lansley: six good things about a recession”

Posted in Recession | Permalink

Spot the difference

November 25, 2008 9:45 pm by Alex Barker

It proves once again the enduring truth of the last 50 years: that Labour governments always run out of money.

Alan Duncan speech to Conservative party conference, October 1, 2008

It is confirmation of the time-old truth that in the end all Labour Chancellors run out of money

George Obsorne response to the pre-Budget Report, November 24, 2008

Posted in UK politics | Permalink

When Darling says to buy

November 25, 2008 4:03 pm by Alex Barker

House prices will be rocketing at 6 per cent a year after 2010. No, that’s not estimate of your local estate agent. It is the considered opinion of the Treasury. Once you get past the gloom in the pre-Budget report — which estimates there could be a 25 per cent peak to trough house price fall relative to incomes — there is a fabulously sunny medium term forecast.

The next 12 months will be grim (stamp duty down 40 per cent). But the market will stop falling at the end of 2009 as lending returns to more normal levels, the Treasury predicts.

“Thereafter, the economy and the housing market are expected to pick up, with house prices assumed to grow by 6 per cent per year broadly in line with long term average growth in house prices.” Fill your boots!

Posted in UK politics | Permalink

Who could argue against the 45 per cent income tax band on the rich?

November 24, 2008 8:48 pm by Jim Pickard

The new income tax band on people earning £150,000 is a classic elephant trap for the Tories. Today, afraid of looking like the party of the rich, they could find no criticism for the new 45 per cent rate.

The measure only hits about 300,000 people. In this climate, this is a policy which will attract little opposition.

Except: what about Labour donors? Will there be a backlash among the millionaires who have helped bankroll the party in the past? They are already dwindling…will they become extinct?

Posted in Labour, UK politics | Permalink

Why it may be impossible to spend billions on new social housing

November 24, 2008 8:24 pm by Jim Pickard

Alistair Darling promised about £1.5bn today on “thousands of new and modernised social homes as well as regeneration projects.”

The money may soon be there. Spending it is easier said than done, however. Last week I reported on how the credit crunch has hit housing associations. Many are struggling with their finances and development is drying up.

The National Housing Federation – which represents over a thousand registered social landlords – today warned that funding rules need to be changed as soon as possible.*

Continue reading: “Why it may be impossible to spend billions on new social housing”

Tags: Alistair Darling, Budget, Gordon Brown, Housing
Posted in UK politics | Permalink

Why so cheery Alistair?

November 24, 2008 8:20 pm by Alex Barker

Are Alistair Darling’s growth forecasts a bit too rosy? The Treasury provide a useful table to help us work it out. The short answer is that the chancellor is more optimistic than the City — but not as much as his predecessor Gordon Brown.

The Darling and City analysts are equally pessimistic about the recession in 2009. But the chancellor sees a stronger bounce back ahead. Economists predict about 1.2 per cent growth in 2010, yet in Darling world Britain will be sailing along at 1.5 to 2 per cent growth.

George Osborne attacked the forecasts for being “vastly more optimistic than most independent forecasts” while Vince Cable labelled the predictions as “incredible”.

But Cable, a politician rarely accused of being too sunny, also thinks the economists are wrong.

He sees a conspiracy of optimism stretching from the City to Whitehall that is putting a gloss on a grim situation. “There is no objective basis for thinking the recovery will be that fast,” he said at a briefing last week. “What do they think will drive growth?”

UPDATE: Just found the Treasury estimates for “contributions to GDP growth”. In 2010 they reckon private consumption will be up 1 per cent while government, business investment and net trade will each provide 0.25 per cent. Is that realistic?

Tags: Alistair Darling, Gordon Brown
Posted in Treasury, UK economy | Permalink

Observations from the PBR

November 24, 2008 7:04 pm by Jim Pickard

We won’t do a comprehensive analysis of the pre-Budget report here: there will be plenty of analysis elsewhere on FT.com. But just three observations.

1] The central assumption for RPI next year is -2.25 per cent: ie deflation. That doesn’t necessarily mean that CPI – which excludes house price inflation – will go negative.

2] Darling seemed to admit for the first time that the UK could be worse hit than other countries by the impact of the credit crunch: “Because of the size of our financial sector we are likely to be affected more directly by a global financial recession.”

3] The chancellor is optimistic that “we expect the recovery to be underway” by the end of next year, when the lower VAT regime ends. This seems unrealistic.

Tags: Alistair Darling, Budget, Credit Crunch, Gordon Brown
Posted in UK politics | Permalink

Sir James Crosby on government guarantees for mortgage-backed securities

November 24, 2008 6:45 pm by Jim Pickard

The long-awaited report on finance in mortgage markets – by Sir James Crosby – was published today alongside the PBR. This is a big deal. Ministers have been talking for months about how Crosby could hold the key to reviving becalmed mortgage markets.

According to Alistair Darling’s speech, Crosby (pictured) is recommending government guarantees for new mortgage-backed securities. For a temporary period.

I haven’t had time to read the full report yet. But I did read Crosby’s interim report earlier this year. Interestingly, it said the following things about government guarantees.

“I should stress that I may yet recommend that the Government should not intervene in the market, on the grounds that such intervention would create more problems than it would solve.”

“In the specific case of a guarantee, and alongside the potential benefits, the Government would also need to consider the fiscal, debt management and legal implications, and the extent to which a transfer of risk to the Government might distort incentives and create moral hazard, rather than help investors and issuers price that risk more accurately.”

UPDATE

Sir James is now convinced. The former HBOS chief executive wants guarantees of £100bn to be attached to new issuance of mortgage-backed securities.

“Only the government can assess the case for any such intervention in the context of the many competing demands for its financial resources,” he says.

But he adds:

“My strong recommendation is that the most effective form of intervention would involve the government auctioning its own guarantees in a form that could be attached by lenders to AAA tranches of mortgage-backed securities issued to fund their new lending.”

Tags: Alistair Darling, Bank of England, Banks, Budget
Posted in UK politics | Permalink