So What's New?

Didn't we go round these loops before?

After Tyler's disgraceful summer of idling, BOM is finally returning to the air.

So what's new?

Well, there's been much leaking and speculation re the forthcoming public spending review. The public sector unions are threatening a General Strike against job cuts, the police warn that cuts will mean the breakdown of law and order, the Navy and RAF reckon some as yet unidentified foe will roll over us unless we keep their boys' toys nukes and fast jets, and the arts establishment say subsidy cuts will usher in the abyss of a new dark age.

Indeed, according to our friends at the £3.5bn pa tax-funded BBC, we are teetering on the brink of Thatcherite destruction. The Italian hotel telly brought daily BBC World headlines that this or that economic stat was about to turn out much worse than expected (only to report later - much further down the bulletin -that said number had come in freakishly, inexplicably, better than expected).

So just as a sanity check, let's review the Economist's latest summary of consensus world growth projections (click on image to enlarge):

In case you can't read the numbers, for the UK the consensus GDP growth forecast is 1.5% for this year and 1.9% next. Sure, it's not a runaway boom, and sure, it might turn out to be lower than consensus. But a yawning abyss it ain't.

Tyler's specialpleadingometer is registering well into the red zone. The BBC may see the public sector union leaders as champions of civilisation, but those of us who remember the 70s, are thanking God for Thatcher's historic victories over King Arthur and Red Robbo. Today, it's only in cosseted public sector backwaters like the BBC that union barons still hold sway. Union membership across the economy as a whole has halved since the 80s.

The key point here remains just as it was when we left for the hols: public spending has to be cut in order to keep interest rates and taxes down so that the market economy can lift us out of the hole left by Commissar Brown. There really is no sustainable alternative.

But what about unemployment?

Hmm, yes.

The horrible truth is there is something very unfortunate about our economy. Those at the top - the bankers, the lawyers, the consultants etc - can do very well in the big wide world. They have something to sell that commands a nice premium price. But those at the bottom have nothing valuable to sell at all. Their poor skills command no premium, and their poor attitude means the low-skill jobs are all taken by Romanian migrants.

It's a serious problem to which there are really only two possible solutions.

The first is to tax our successful workers to support those left behind. The trouble is that's not very appealing if you're one of the successful workers already shelling out zillions in tax and wondering if you should relocate to Hong Kong.

The alternative is to somehow get the unsuccessful to work. And that means making it attractive for someone to employ them  - ie cutting employment taxes, cutting welfare for those of working age, and abolishing the minimum wage.

You know, I have the strangest feeling we might have covered this ground before.

Despite our prolonged break, it already feels like there's nothing new at all.

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www.gudanggrosiran.com Categories: BBC, economy

Her Majesty's Worst Ever PM

Little did she know...

[Many apologies - the initial version of this post omitted PM Heath altogether. Can't imagine how I left him out]

You can't help wondering what Her Majesty thinks of the arrogant dunderheads she's had to deal with since her Coronation in 1953. Since she came to the throne she's had 11 Prime Ministers, and almost without exception, they have all fallen short.

In her name, and without a shot being fired, they have surrendered large chunks of national sovereignty to a fascist superstate ruled over by the very people we'd spent the previous thousand years defending ourselves against. They have taken Britain into illegal wars bringing nothing but pain. They've watered down our criminal justice system and permitted a massive upsurge in lawlessness. They've dumbed down our education system, destroyed our work ethic, and undermined our cultural integrity. Her Majesty's great-great grandmother would have been seriously unamused.

But until now, she has at least been able to console herself with the thought that her subjects have benefited from an unprecedented rising tide of material prosperity. With one or two slight hiccups along the way, living standards have risen continuously throughout her reign. Overall, GDP per capita has trebled, an average annual growth rate of 2% pa. It has been an achievement without parallel in British history.

Moreover, every one of her Prime Ministers - every single one - has left average incomes higher than they found them.

Well, every Prime Minister until now, that is.

For the first time ever, Her Majesty has a Prime Minister who has presided over a fall in GDP per capita - and not a small fall either. Since the idiot Brown took over less than three years ago, per capita GDP has fallen by a catastrophic 5%.

Here's the complete Prime Ministerial record up to end-2009 (per capita GDP at basic prices; ONS data and BOM calcs):

Churchill (1953-55) +7%
Eden (1955-57) +2%
Macmillan (1957-63) +15%
Douglas-Home (1963-64) +4%
Wilson (1964-1970 and 1974-1976) +15%
Heath (1970-74) +12%
Callaghan (1976-1979) +7%
Thatcher (1979-1990) +26%
Major (1990-97) +13%
Blair (1997-2007) +27% (yes, on this measure, he beat Thatcher)
Brown (2007-2009) -5%

Please take a moment to absorb that list. Brown's record is miles worse that Callaghan's - despite all those Red Robbo strikes and the Winter of Discontent. And it's miles worse that Eden's - widely reckoned to be our worst post-WW2 PM.

Indeed, the damage suffered under Brown has been so extensive, average incomes have now fallen back to their level five years ago - the most dismal five years we've seen since the Coronation.

HM is no fool. She must be well aware what a complete dud Brown is. And just like the rest of us, she must watch the news, wondering HTF such an idiot can possibly be catching up in the polls.

But unlike the rest of us, she can't really leave if he gets back.

Instead, she'll have to sit there listening to another five years of his bullying lectures as her kingdom sinks into the abyss.

Off with his head!

PS The 1953 Coronation is Tyler's first memory. He watched it in a community hall alongside maybe a couple of hundred others. All staring at a 12 inch black and white telly. Kids today - they don't know they're born.

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www.gudanggrosiran.com Categories: economy, Gordo, politicos

Flat On Its Back

Whoops

"I would be astounded if the UK did not grow in the fourth quarter of 2009 and would have to seriously consider giving up economic analysis and forecasting."

So said a well-known City economist yesterday, on the back of a City consensus predicting robust fourth quarter GDP growth of 0.4%. Given that the ONS has now released its official estimate of 0.1% growth, it looks like he gets to stay on.

But only just.

The reality is that the economy remains flat on its back, 6% down from the peak. Despite Brown's much hyped reflationary measures, the UK has suffered a bigger recession than the OECD as a whole (6% GDP loss against an average 4%), and is emerging from recession more slowly, 3-6 months behind the curve.

And now what?

This quarter's growth - such as it was - came from just two key sectors. The government sector (24% of GDP) grew by 0.1%, and shopping (aka Distribution, 15% of GDP) grew by 0.4%.

Unfortunately, both of of these sectors now face what's politely known as retrenchment. Government spending faces the axe, and shopping faces two VAT rises in a year, plus higher interest rates.

Manufacturing? The BBC's preferred last hope for busted Britain? Well, that did grow by 0.3%, but it's still a staggering 14% below its 2007 peak, and in any event it only accounts for 13% of GDP.

So despite what our uniformly bullish City economists are now telling us, the outlook remains mixed to catastrophic.

But, hey, what do we know? Tyler learned many years ago not to rely on economic forecasting - or darts as you may know it. Admittedly, that was largely as a result of his own somewhat less than championship performance on the ocky, but he has yet to spot anyone with a noticeably more consistent technique.

Which is why we need a government that will concentrate on getting the public finances sorted out, not one that still thinks it can run counter-cyclical fiscal policy. As we discovered back in the 70s, governments simply don't have the foresight to manage that, and they're very likely to do more harm than good.

PS There were some classics on BBC R4 Today this morning. First, the Reverend Easton brought us news that 200,000 British children are still denied proper food and clothing because of "poverty", implying that doling out even more taxpayer cash would somehow solve the problem. Second, the Very Reverend Roger Harrabin confessed that his friends at the IPCC are only human after all, and may make mistakes - like lying about the Himalayas melting. But strangely, he did not go on to draw the obvious conclusion. Third, there was all round presenter bafflement at this morning's social survey showing that although we've all become totally chilled about gays - GOOD - we've also all become Conservatives - BAD. How can that possibly be? Surely everyone knows Tories are evil queer bashers, and always will be. Blinkered prejudice, eh? What can you do with it?

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www.gudanggrosiran.com Categories: economy

Yes We Can

Do we really need to go through all that again?

Tyler has lost count of the times he's heard supposedly well informed people say something like "no government has ever succeeded in cutting public expenditure" (eg see here). Of course, it's completely untrue - even UK governments have sometimes managed it. But the myth persists.

Unfortunately, it's a myth that could prove highly damaging to us over the next few years. Because by suggesting we can't expect to correct our huge fiscal deficit through spending cuts, it nudges our politicos even further towards the perceived easier option of tax rises. Which is precisely what M Portillo suggested over the weekend (although see this excellent riposte from Andrew Lilico).

Now PolicyExchange has published an extremely timely paper looking in detail at twelve historic examples where governments have tackled big fiscal deficits. Written by Andrew Lilico, Ed Holmes, and Hiba Sameen, it stresses that each case has its own particular features. But the succesful programmes do share some important common themes.

It's well worth reading the paper for yourself, but the points that jumped out at Tyler are:

• Fiscal consolidations can promote growth and recovery – particularly by enabling a looser monetary policy than would otherwise have been the case. Provided that spending cuts dominate over tax rises, tightening appears to be more likely to promote recovery than impede it (partly through lower bond yields - eg Sweden and Finland in the 1990s)
• Fiscal correction should be biased towards spending cuts. Successful consolidations have typically placed around 80% of the burden on spending cuts; 20% on tax rises (cf Labour's fiscal tightening following the 1967 devaluation which loaded too much on tax rises and proved unsustainable)
• Persistance: initial failure does not mean it can't be done (eg Canada had three failed attempts before succeeding)
  

It is an extraordinarily thorough paper, and just for future reference, here is the summary table listing the twelve cases examined, and showing how much spending was cut in each one (click on image to enlarge):
 

As we can see, all 12 involved real spending reductions, disproving the assertion we began with. The 1920s Geddes Axe (see this blog) was by far the most severe, but the 1976 IMF 4% cut was also pretty chunky.

The bottom line is that substantial spending cuts are always possible. Never easy, but always possible. And in terms of going for growth they are infinitely preferable to tax rises.

But what is needed more than anything else is will - the will to do it. And that's where right now we still seem to be some way off the pace.

The historic experience surveyed in this paper reminds us that the politicians rarely lead the public in this respect. There needs to be a palpable sense of crisis, of the the kind we oldies can recall from the 1970s. It was the emergency summons to the IMF that forced the policy action, but the sense of crisis had been brewing for much longer.

And for those who don't remember, the PolicyExchange paper helpfully provides a series of splendid quotes from the time:

• ‘Good-bye Great Britain. It was nice knowing you.’  Headline of Wall Street Journal article advising readers to withdraw from sterling investments, 29th April 1975.
• ‘England ist kein entwickeltes Land mehr.’ [‘England is no longer a developed country’] West German Chancellor Helmut Schmidt.
• ‘RIGSBY:This country gets more like the boiler room of the Titanic every day: confused orders from the bridge, water swirling around our ankles. The only difference is they had a band.’  Eric Chappell, Rising Damp, popular TV sitcom, 1977 (pic).

Those who forget the lessons of history are of course condemned to repeat them. But do we really have to sit through the entire back catalogue of 1970s sitcoms before we act?

PS This paper has a lot of nice charts - well worth a persusal. One of my favourites is this one which neatly summarises something we've blogged many times on BOM - the inverse relationship between longterm GDP growth and the share of public spending in GDP:

Now, what could be clearer than that?

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www.gudanggrosiran.com Categories: cuts, economy, fiscal policy

Going For Growth

Time to get serious

When it comes to the economic growth, the fundamental difference between socialists and free marketeers is that socialists believe you can buy growth with taxpayers' money.

So today we heard Gordo's Chief Secretary to the Treasury - the person whose very job is to rein in public spending - once again telling us that cutting public spending to tackle the fiscal deficit would undermine the prospects for growth.

Why's that wrong?

At the risk of boring you, let's just remind ourselves.

It's wrong because public spending droppeth not as the gentle rain from heaven: by an unfortunate freak of nature, it all has to be paid for. And the payment can only come from one place - whether it's taxes today or taxes tomorrow, taxpayers end up paying.

And what taxpayers have to pay in tax, they cannot spend on other things. And when workers have to pay more tax on the fruits of their labours, they labour rather less, producing fewer of those other things in the first place. And when investors have to pay more tax on their profits, they invest rather less. And when taxpayers have to pay too much tax, they up sticks and leave altogether.

Now, this might not matter too much if our current fiscal deficit was simply the result of a short-term cyclical downturn. But it isn't. It's primarily the result of this clothead government spending far too much money through the good times (the OECD says that of their forecast 14% UK government deficit next year, around three-quarters is structural, not cyclical).

Government borrowing?

Well, yes, in the short-term, sure. Why not.

But in the longer term (ie the other side of the next election), our creditors have made clear they expect to see some serious belt-tightening. They are simply not prepared to go on financing one pound in every four HMG spends, as is. Unless HMG mends its ways pronto, we will find ourselves facing penal interest rates, a international investors' strike, and a collapse of the currency. None of which would be awfully good GDPwise.

Which leaves just two options.

The first is inflation: the classic cop-out for a bankrupt government, and almost certainly Labour's unspoken gameplan - just like it was back in the 70s.

Unfortunately, inflation is most unlikely to stimulate GDP growth. It impoverishes savers, cranks up uncertainty, almost always gets out of hand, and has all kinds of other nasty effects beloved of economic theorists but far too tedious to set out here.

So if inflation is out, we're left with just one coherent long-term plan - cut public spending, as recommended so many many times before.

Which is why Cam's interview with Marr this am was moderately encouraging.

He told us there'd be a Tory budget within 50 days of an election victory - good - and unlike the plain Age of Austerity message he and George delivered at last month's Tory Conference, this morning he emphasised that his budget would "go for growth".

As many people noted at the time, growth was the vital ingredient missing last month. And cutting spending against the background of a growing economy is going to be a whole heap easier than cutting in the teeth of an ongoing recession.

So how do we actually go for growth?

All together now - CUT TAXES. Especially those on enterprise and employment.

And no, it won't be easy: with a fiscal deficit around 14% of GDP, there is no money for anything. But cutting taxes really is the only known way in which government's can stimulate sustainable long-term growth (see many previous blogs).

PS Just so we know, cutting Corporation Tax by one percentage point would cost £1bn next year.

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www.gudanggrosiran.com Categories: economy, fiscal policy

For Richer For Poorer

A previous Tyler family Big Hat Fest

The bride dazzled, the sun shone, the champagne flowed, and our son's wedding was just about as perfect as it could be. The Tylers have gained a wonderful daughter, and have at least doubled the size of their extended family.

Weddings are one of life's great set-piece events, and old-fashioned people like the Tylers think it's important to do them properly.

It isn't just the formal business of the day - the families gathering to bear witness to their children repeating those age-old but always moving marriage vows. And it isn't just the celebration itself, or even the wedding album (the Brag Book as the photographer insisted on calling it) - brilliant though they may be.

No, over and above all of that, there's something even bigger: weddings are a reaffirmation of family ties, stability, and continuity. And at a good wedding, that reaffirmation touches everyone there, as we hope it did on Saturday.

*****

Of course, being an economist, Tyler's mind is never far from money matters. And a wedding in the midst of recession naturally highlights the thorny issue of for richer and for poorer.

We're not talking here about the cost of the wedding itself - these things cost what they cost, and it was worth every single penny.

No, the issue that troubled Tyler was one particular relation whose previously thriving small business has recently folded. He and his family did not come, even though they have attended almost all previous such events. We fear he simply could not face the questions/sympathy/gloating he imagined he'd find. Or maybe it was the cost.

Either way, it was a great shame. But it does underline just how risky it is to be an entrepreneur.

Everybody knows about the entrepreneurs who end up making a fortune, but the vast majority never do. In fact, according to survey evidence, well under half survive even four years. And when we remember that most are dependent for initial funding on their personal or family resources - including second mortgages - we can see that their personal risks are much higher than those of an employee.

As it happens, today sees the publication of a new paper from the TaxPayers' Alliance on just this issue. Snappily entitled Tax and entrepreneurship - How the tax system impedes the creation of new firms and decreases employment, it was written by Matt Sinclair, the TPA's Research Director, and Dr Jonathan Scott, a Fellow at Queen’s University Belfast and a specialist in entrepreneurship and small firms. There's also a forward by a real live Dragon from the scary Den - Julie Meyer.

The paper runs through some of the evidence on what drives entrepreneurs, how they fund themselves, the risks they run, and their vital role in Britain's future prosperity.

It then focuses on our tax system, and how that increasingly penalises entrepreneurs:

"The tax system affects the decision over whether to become an entrepreneur in two key ways:

• It may reduce the amount of capital they can access from their own wealth or their family. In particular, existing research suggests that receiving an inheritance leads to higher levels of self-employment. Inheritance Tax, in particular, may reduce the extent that entrepreneurs can obtain finance without the risks that come with a bank loan.


• The tax system undermines the large rewards that justify the risks attached to starting a new
  business."

The paper points out that entrepreneurial earnings can be taxed several times over.

For example, money that is earned is taxed as personal income. Then, if that net income is invested in a start-up company, any earnings will be taxed at the corporate tax rate. Then, if the company is finally sold, its value will be taxed as capital gain. And finally, any residual value passed on to the next generation will be taxed at the IHT rate.

For most entrepreneurs that currently means 40% personal tax times 28% corporation tax times 18% capital gains tax times 40% inheritance tax. and compounded up over a lifetime, the TPA calculates that comes to an eye-watering total tax rate of over 90%.

We're right back to Denis Healey pip-squeaking territory. It's more than enough to make any rational entrepreneur take the first plane out.

Worse, rather than tackle the problem, this government has actually made it worse. The top personal tax rate is soon to increase to 50%, which means that the overall compound tax rate on entrepreneurs will shift up to 92%.

It's a great pity our struggling relation didn't come on Saturday. Nobody would have been chortling. We'd have been advising him to get out and try again - maybe here. And we'd still invite him and his family back to all the weddings.

For richer or poorer.

PS Many thanks to BOM readers for all the good wishes you sent. The day could not have gone better, and those of a certain age are already counting the grandchildren.

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www.gudanggrosiran.com Categories: economy, tax, the future