Osborne's personal debt time bomb

If you listened to Vince Cable at any time in the four or five years before be became a Coalition Minister, you would have heard him discussing the unsustainable level of personal debt in the UK - it's what earned him a reputation as an economic soothsayer.  Osborne said many of the same sorts of things - for example in his Mais Lecture in February 2010, listing high levels of personal borrowing as one of the causes of what he described as Britain's economic crisis.

Yet - as Duncan Weldon describes on the False Economy website, the OBR is forecasting that, as a direct result of Osborne's policies, household debt-to-income ratio - which had fallen steadily from 2007 to 2010 - is set to rise.  Between 2010 and 2015 household debt will increase by a third - from £1560bn in 2010 to £2126bn in 2015.  That represents a change from 160% to 175% of household income - in other words, the household debt burden will become substantially less sustainable.

Weldon draws a comparison with public debt:

Back in June last year, before Osborne’s policy changes, the OBR forecast (pdf) that public sector net debt (government debt) would be £1,294bn in 2013/14. After two budgets and a spending review they have revised that (pdf) to £1,251bn – a reduction of only £43bn

In other words, the burden of debt will shift from the public sector to households.  And since much of that debt arises from the bankers' crisis and the bail-out that followed it - and the cause of the deficit is the fall in tax revenue that followed the crisis, we are left with the inescapable conclusion that Osborne is basically providing further subsidy for bankers, and doing so in a way that means that one of the causes of the UKs economy's vulnerability is made worse, not better.

It's not sustainable or rational.  And in my view it demostrates further that Osborne's project is political and ideological, and not based on economic rationality.

The Steady Unravelling of Osborneomics

What’s the big headline message from the Budget? It’s that George Osborne’s economic experiment is, predictably, in tatters.

The Budget announcement provided the latest in a series of bad economic numbers for the Coalition.  Inflation running at 4.5% with, apparently, no prospect of its slipping back; a second consecutive Osborne Budget in which growth forecasts have been slashed; unemployment continues to rise.  The central premise of Osborneomics – that, once freed of the burden of public debt, the private sector will generate jobs in their hundreds of thousands, more than offsetting the jobs lost in the public sector – is looking more risible by the day.

Against this background, Osborne continued to promote regressive economic measures in a budget that benefitted corporations and non-doms, and at least gave the illusion of assisting motorists (one imagines that the 1p cut in fuel duty will very quickly be offset by the price effect of the Coalition’s Big Adventure in Libya).  And, according to indefatigable tax blogger Richard Murphy,  it’s looking increasingly clear that some of the biggest winners from the Budget will be tax evaders.

And elsewhere on his blog, Murphy provides the underpinning for the central critique of Osborneomics – that even if the deficit is the problem the Coalition says it is (and I’m on the side of those who argue that its importance has been hugely exaggerated), it’s a problem of tax revenues, not of spending.  Tax revenues fell off a cliff after the banking crisis of 2008 and the problem has been exacerbated by a huge problem of unpaid tax – the Tax Gap – with the numbers suggesting it’s far bigger than the Government’s (internally inconsistent) estimates suggest.  How will the long-term erosion of Corporation Tax and the gentle treatment of Non-Doms get to grips with this, at a time when cuts at HMRC ensure that tax enforcers are working with one hand tied behind their back?

In the face of this, the only rational conclusion appears to be that this Budget was not about economics, but about ideology and politics.  The few crumbs thrown at Middle England simply cannot disguise the fact that Osborneomics has locked us into a vicious spiral of cuts, falling output and increasing borrowing.  Osborne has form for talking up Ireland as a model economy but I guess this isn’t what he meant.

And the Liberal Democrat contribution to all this?  The cynic in me would like to think it’s the £100m for fixing potholes – an appropriate measure to represent a party of pavement politicians who have so clearly failed to hack the political big time.  Nick Clegg’s message to his activists suggests … clamping down on tax evasion, and the increases in tax allowances (more than offset, of course, by the VAT increase in January) But it’s difficult to see their role as anything beyond providing the lobby fodder that makes Osborneomics possible.

This post also appeared at Notes from a Broken Society

The great bankers' bonuses lie

Apologists for the banks - including Barclays head Bob Diamond in front of the Treasury Select Committee - claim that bankers' bonuses are awarded for "performance".  A piece in today's Independent by Ben Chu examines this proposition.

He references a table in the 2010 Barclays remuneration report showing the Total Shareholder Return since 2005:

In other words, £100 invested at the end of 2005 would be worth £53 against an overall FTSE average of £125.  It inevitably begs the question of exactly how Diamond justifies his £6.5 million bonus to shareholders whose investment has collapsed so dramatically in value.

And Diamond is not alone.  The Independent has looked at the performance of the other British high-street banks and has produced this table:

And concludes:

So if you’d invested £100 in HSBC in 2006 you would have, roughly, a £90 return.  Barclays, on this timeframe, would have given you around £65. £100 in Lloyds would have given you a measly £25. And £100 in RBS would have given you a pathetic £12. Meanwhile, £100 invested in an FTSE all share tracker would have given you a positive return of about £105
So here’s a question for shareholders: Are  you satisfied that those vast remuneration packages for bankers of recent years have been an appropriate reward for performance? 

The British establishment is not known for introspection, so those questions are probably not being asked.  They're certainly not being asked by the British government; despite a promise in opposition that no employee of a bank that had been bailed out by the taxpayer would receive a bonus of more than £2000. in Government the Tories have rolled over.  No wonder, since the financial sector bankrolls the Conservative Party.

So next time somebody says that bonuses reward performances, the honest answer is that they may reward greed and an inflated sense of entitlement, but if pay in the financial sector rewarded performance it would be the bankers rather than nurses and teachers who would be looking at pay cuts.

Osborneomics: a horrifying chart

Writing at Liberal Conspiracy, Duncan Weldon reproduces a chart comparing the fiscal stimulus and tightening in the UK with that in other major economies:

It demonstrates that in the current year, Osborne's fiscal policy is contractionary to a vastly greater extent than any other major world economy.  It's horrifying - it might be appropriate in an economy that is overheating but in one that is slipping into recession it's nightmarish.  Where does this leave the Coalition promise that private sector jobs will be created to match those lost in the public sector?

It also - comprehensively - gives the lie to Osborne's claim that Britain is in the international economic policy mainstream.

In Search of the Confidence Fairy

A piece by Nobel Laureate Paul Krugman in yesterday's New York Times exposes with characteristic elegance the huge gap in austerity economics.  He's writing about the current budget debate in the US, but every word applies equally here in the UK. He analyses why recovery in the US has been slow:

Before we get to that, let’s talk about why economic recovery has been so long in coming.

Some economists expected a rapid bounce-back once we were past the acute phase of the financial crisis — what I think of as the oh-God-we’re-all-gonna-die period — which lasted roughly from September 2008 to March 2009. But that was never in the cards. The bubble economy of the Bush years left many Americans with too much debt; once the bubble burst, consumers were forced to cut back, and it was inevitably going to take them time to repair their finances. And business investment was bound to be depressed, too. Why add to capacity when consumer demand is weak and you aren’t using the factories and office buildings you have?

The only way we could have avoided a prolonged slump would have been for government spending to take up the slack. But that didn’t happen: growth in total government spending actually slowed after the recession hit, as an underpowered federal stimulus was swamped by cuts at the state and local level.

So we’ve gone through years of high unemployment and inadequate growth. Despite the pain, however, American families have gradually improved their financial position. And in the past few months there have been signs of an emerging virtuous circle. As families have repaired their finances, they have increased their spending; as consumer demand has started to revive, businesses have become more willing to invest; and all this has led to an expanding economy, which further improves families’ financial situation.

But it’s still a fragile process, especially given the effects of rising oil and food prices. These price rises have little to do with U.S. policy; they’re mainly because of growing demand from China and other emerging markets, on one side, and disruption of supply from political turmoil and terrible weather on the other. But they’re a hit to purchasing power at an especially awkward time. And things will be much worse if the Federal Reserve and other central banks mistakenly respond to higher headline inflation by raising interest rates.

Again, it's a pattern we can all recognise.  In particular, he touches on that key indicator of how market capitalism has failed, by ensuring that living standards can only be maintained through debt - it's the failure to understand that increasing personal debt is a symptom of a deeper systemic failure that is one of the most frustrating and pervasive pieces of Bad Economics.

He continues:

The clear and present danger to recovery, however, comes from politics — specifically, the demand from House Republicans that the government immediately slash spending on infant nutrition, disease control, clean water and more. Quite aside from their negative long-run consequences, these cuts would lead, directly and indirectly, to the elimination of hundreds of thousands of jobs — and this could short-circuit the virtuous circle of rising incomes and improving finances.

Of course, Republicans believe, or at least pretend to believe, that the direct job-destroying effects of their proposals would be more than offset by a rise in business confidence. As I like to put it, they believe that the Confidence Fairy will make everything all right.

But there’s no reason for the rest of us to share that belief. For one thing, it’s hard to see how such an obviously irresponsible plan — since when does starving the I.R.S. for funds help reduce the deficit? — can improve confidence.

Beyond that, we have a lot of evidence from other countries about the prospects for “expansionary austerity” — and that evidence is all negative. Last October, a comprehensive study by the International Monetary Fund concluded that “the idea that fiscal austerity stimulates economic activity in the short term finds little support in the data.”

And do you remember the lavish praise heaped on Britain’s conservative government, which announced harsh austerity measures after it took office last May? How’s that going? Well, business confidence did not, in fact, rise when the plan was announced; it plunged, and has yet to recover. And recent surveys suggest that confidence has fallen even further among both businesses and consumers, indicating, as one report put it, that the private sector is “unprepared to fill the hole left by public sector cuts.”

It's a crucial weakness in the neo-cons' case.  With people facing the risk of unemployment and services being slashed (the British government may regard many public sector posts as "non-jobs" but the money those workers put across the counters of shops is certainly real), where is that confidence going to come from, least of all in an economy like Britain's which is so crucially dependent on services? Or where so much of those sectors where technology and innovation are important is sustained by Government research and other spending?

Such underpinning as there is for the Coalition's statements about the private sector being liberated by cuts to create jobs - and, God knows, there isn't much - seems to stem from a view of economics drawn from a sort of idealised Victorian economy in which the private sector bashed out widgets of various kinds and there was no inter-relationship between private and public sectors.  In our modern complex economy the two are inextricably mixed.  It's obvious, but it's a subtlety that seems completely to have evaded those making economic policy for the coalition.

George Osborne's bad economics

One of the main reasons behind this blog is the bad economics of George Osborne.  There are four fundamental reasons why his economic strategy doesn't add up:

The deficit is so big that we are in an economic emergency and we must take immediate action to reduce it – but the current deficit is, by the standards of the last two hundred years, not particularly large and is actually rather smaller than that run by the British economy for most of the nineteenth century.  Because Britain’s public debt matures later than that of most other Western economies – certainly than that of the oft-quoted Greece or Ireland – the comparison with other economies is not valid; ironically enough it is the much-maligned Gordon Brown’s management of debt repayment as Chancellor that has put us in this beneficial position.  The deficit is a problem if it is allowed to continue, but as Keynes explained, the best way out of it is stimulus to create employment, not to take £80bn out of the economy.  Comparisons with the family housekeeping are, as Keynes pointed out, economically illiterate. Government funding doesn’t work like that. And Cameron gave the game away when he said that even when the deficit had been dealt with (fat chance) public expenditure would remain constrained.  There are plenty of eminent economists – from Nobel Laureate Paul Krugman on the centre-left to the doyen of British monetarism and one of Margaret Thatcher’s favourite economists, Samuel Brittan, on the right -  who claim that the current policy is madness. This is about ideology, not economics.

Labour’s profligate spending took us to the edge of bankruptcy – complete nonsense. The problem we face is not a spending crisis, but a tax revenue problem.  Within the parameters of market capitalism  Labour actually did a rather good job, but the endemic failures of the system are bigger than the attempts of competent individuals to manage it. The basic problem arises from the more than £40bn that was sunk into bailing out the banks, brought low by speculators, and the economic shock that followed it, which , according to many economists, has resulted in a hit of between 10% and 15% to GDP – and as a result of which tax revenues have fallen of a cliff. Not only do cuts mean that the poor and vulnerable are made to pay for the bankers’ delinquency – while the bankers continue to pay themselves large bonuses (£7bn this year, or the equivalent of the cuts to the welfare budget announced yesterday), but the economic fact is that Osborne has got it the wrong way round – public expenditure cuts, which take demand out of the economy, will reduce the tax base further while increasing welfare spending.  A Tobin Tax on international financial transactions – most of which are speculative – would slash the deficit overnight.  There is an international appetite for it.  But the bankers would howl, and they’re in charge.  Which brings us on to …

The newly liberated private sector will create the hundreds of thousands of jobs needed to offset those lost in the cuts – which is even more ludicrous than the last one.  The historical evidence is obvious and overwhelming – every time a Government has indulged in cuts of this magnitiude, it has tipped the economy into depression.  While the much-maligned Brown and Darling were trying desperately to manage the crisis in the least painful manner possible, with a deftness that was lauded around the world, Ireland embarked on precisely the course that Osborne is following now.  Four emergency budgets later, the Irish economy is on its knees.  And it’s the same whenever slash and burn economics is tried.  It happened in Britain in the 1920s and 1930s, in New Zealand in the 1980s, in Ireland now.  No economy in the world, even in boom times, has succeeded in creating jobs at the rate that Osborne is forecasting in the UK in the next few years, least of all one that has taken £80bn of demand out of the economy.  It’s sheer economic illiteracy.

We’re all in this together – the most pernicious lie of all.  Osborne's strategy is deeply, profoundly regressive – the poorest and most vulnerable people on benefits will lose 10 per cent of their income.  (Incidentally the idea that New Labour promoted a benefits culture is frankly risible – the evidence base shows overwhelmingly shows that inequality widened dramatically after 1997, not least due to benefit cuts)Women, who represent the majority of workers in the public sector, will be hit particularly hard, as will families with children.  As budget votes in council after council are showing, cuts in local government funding will mean the evisceration of front line services. And it is demonstrably true that Labour councils, which tend to represent the poorest and most vulnerable parts of Britain, have been hit hardest.   Corporate taxation is reduced, and the Coalition – while referring to benefit cheats as “muggers” – does nothing to deal with big tax avoidance.  Vodafone owed £6bn tax from asset deals – Osborne looks the other way and it gets written off.  And a Government which in opposition pledged that no banker would receive a bonus of more than £2000 has given the green light to vast bonus payments in precisely those banks that were close to collapse in late 2008. 

In other words – dishonest, wrong and economically illiterate, based on the belief that you can soften up the electorate with tabloid prejudice and the sonorous repetition of the claim that there is no alternative.  When in opposition, Osborne famously said that the British economy should learn to follow the example of Ireland.  The Coalition is certainly doing that now.

This is an edited and updated version of a post that first appeared at Notes from a Broken Society in October 2010

So, who is to blame?

Bank of England Governor Mervyn King, appearing before the House of Commons Treasury Select Committe on 28 February, made some trenchant and widely-reported comments about the cause of the financial crash of 2008:

The governor of the Bank of England said that people made unemployed and businesses bankrupted during the crisis had every reason to be resentful and voice their protest. He told the Treasury select committee that the billions spent bailing out the banks and the need for public spending cuts were the fault of the financial services sector.
"The price of this financial crisis is being borne by people who absolutely did not cause it," he said. "Now is the period when the cost is being paid, I'm surprised that the degree of public anger has not been greater than it has."
King has repeatedly pointed the finger at the City since the crisis erupted in 2007, but this was the first time he blamed bankers for the coalition's spending cuts.

It's a view that conflicts with the views of many within government.  Such as, for example, Eric Pickles, who was quite happy to claim that public sector pay should be seen as equally responsible for the crisis. But Mervyn King is surely right.  The root cause of the problems we face is not, as the media and the Tories would have it, because Gordon Brown was a profligate spender in government; it's much more to do with tax revenues falling off a cliff as a result of the banking crisis, as well as the huge amounts required to bail the banks out.

And it's abundantly clear that the Tories do not want to get to grips with the need to regulate the banking industry, or to curb a bonus culture that has been responsible for encouraging short-termism.  Governor King's comments shine an unwelcome light on the Tories' ideological position.