Budget 2010 - first impressions

Alistair Darling's Budget has come at a time when the economy appears to be recovering from a sharp and deep recession.  Indeed, it is possible that economists may yet be surprised by the strength of the recovery, at least initially.  At the same time, the public finances are meeting Treasury projections which is another sign that things have stabilised.  This Budget offered no changes of direction, which was a good thing.  It highlighted some of the differences with the Tories.  And the Conservative response may have given a hint of a campaign message.


The latest data show that the UK economy is returning to growth.  Past recessions indicate that the recovery will not be smooth.  However, UK businesses have yet to rebuild their inventories and that could provide a boost to growth figures at some point this year.  That may ease the pressure on public finances, at least in the short term.


The outlook for the public finances, including debt, has not really changed much since the Budget last year.  The annual deficit is projected to rise sharply and then more than halve over the next Parliament.  Tax receipts have come in ahead of expectations while government spending has been in line; that adds up to a slightly better position this fiscal year (2009/10) than was expected in December.  It looks too that unemployment will not rise as much as was feared; that adds up to lower benefit payments over the next year.  Also interesting is that the structural deficit (that part of the debt that will not fall with the economic cycle) is projected to fall from 8.4% of GDP to 2.5% over the next five years.  Moreover, these estimates have been revised down again (they were revised down in the Pre Budget Report last year).  That implies a slighly more healthier long term financial position.  The overall picture is that Labour remains on track to improve the public finances without risking the recovery.  We should be encouraged that this message has not changed.


The Chancellor focused on jobs with further measures to encourage youth employment including the guarantee of a job after six months unemployment.  This focus is important.  It is a key difference compared to the Conservatives, as shown not only by their lack of attention on jobs now but by their attitude in the past two recessions.  On those occasions, unemployment rose over three million.


The government took some further steps forward on bank reform.  Of interest is that the government is looking at changing the way shareholders vote on executive pay.  At the moment they vote on what the company has already decided, and the vote is not binding.  Budget documents suggest they may be required to vote on pay terms in advance.  More in a later post.


Finally for this post, David Cameron in his response referred to the pre-announced tax rises as tax bombshells timed to go off after the election.  Is this going to be a Tory election slogan, with echoes of 1992?  Perhaps.  But the counter charge is show us what extra spending you would cut instead.


Stephen Beer, 24/03/2010

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Unemployment falls - again

It was a surprise, but unemployment has fallen again.  The unemployment rate is 7.8% in the three months to January.  The number of people claiming Job Seekers Allowance fell by just over 36,000 last month.


Economic commentators have been struggling to find the words to explain this today because the expectation was that unemployment would rise.  It still might rise further from here.


Some believe unemployment will rise because spending cuts will mean public sector job losses.  While job losses in that sector is a risk but the timing is important.  Spending cuts (even if extra cuts are announced in the summer) will take some time to take effect, by which time the recovery may be leading the private sector to create more jobs.  So the net effect may be muted.  Saying that in no way underestimates the hardship people face when losing their jobs or when their jobs are under threat.  That goes to underline that the country needs a pro jobs government - there will be a clear choice on this at the election.


Stephen Beer, 17/03/2010

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General Election and the City

The outcome of the next UK General Election is the focus of much attention by the City.  The conventional wisdom is that a hung parliament might generate uncertainty because:
  • It may take time to form a government, the composition of which may not be clear at first;
  • A government with a small majority or a minority government may find it more difficult to give more detail on spending cuts/tax rises or even to increase the reduction in government discretionary expansion;
  • There may be another election soon afterwards as the government of the day either attempts to form a working majority or falls in a vote of no confidence.
Rather than speculate on headline opinion polls, it would be better to focus on opinion in marginal seats ie where the election will be decided.  I have yet to hear of any financial institution commissioning such a poll.  However, Channel 4 and YouGov have done so.  The results were released last week.
The poll is of 60 marginal seats – not the most marginal but those that the Conservative Party has to win to form a majority.  A year ago, the Conservatives had a 7 point lead.  Now, the lead is 2 points.
The poll details (with analysis) can be found here.
The prediction is that the Conservatives would win 95 seats, which would not produce a majority ie it implies a hung parliament.  However, the Conservatives would be the largest party; with 305 seats (they need 326 for a majority).
A hung parliament would not necessarily cause the fiscal uncertainty that some predict.  The requirement for markets will be not so much further tightening (in the next fiscal year, government discretionary expansion will be cut significantly; non discretionary spending will rise but maybe less than the Treasury predicts if unemployment does not rise as forecast) as measures that demonstrate government is committed to tackling the debt position.
From time to time there is speculation about the election date.  It is most likely to be 6 May but this is not set in stone.  The House of Commons Library has produced a helpful note on election timings (including when an election has to be called and the timetables for different dates).  It can be found here: http://www.parliament.uk/commons/lib/research/briefings/snpc-04454.pdf

Stephen Beer, 07/03/2010

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Obama sends bank reform proposals to Congress

The Financial Times reports that the Obama administration has sent its Volcker Rule bank reform proposals to the US Congress.  The report states that the summary text limits a bank's overall liabilities in the US financial system to 10%; a new element to the proposal.  The text also provides some more detail about which bank trading activities will be permitted.


This is an important step - it's unfortunate that there has been so much rush to oppose the Volcker Rule.  Again and again we hear statements that what's needed is better regulation and that bank reform would be too complicated (we don't hear this from the Bank of England or the Financial Services Authority however).  And we hear the old chestnut that limiting the size of banks is pointless.


Once again bank reformers have to repeat: we need both better regulation and structural reform.  It's not so much the size of a bank as its importance to the whole financial system that matters.  Better regulation is not sufficient.  Banks can be separated; it was done after the 1929 stock market crash.


The question is whether global political leaders have courage in the face of bank lobbying and the will to use their political power.


Stephen Beer, 03/03/2010

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Michael Foot

The passing away of Michael Foot gives rise to all sorts of reflections.  The tributes to his life have focused on his integrity and decency and those are great things for which to be remembered after a long life and career in politics.


It was only last weekend that I picked up for the first time his biography of Bevan; I turned straight to the pages recounting Bevan's 1957 Labour Conference speech against unilateral disarmament.  I was gripped.  Foot managed to combine a biographer's informative account with a deep (and painful) personal reflection that puts the reader in that Conference Hall.


Stephen Beer, 03/03/2010

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