George Osborne’s austerity is costing UK an extra £76bn, says IMF New analysis of figures throws doubt on chancellor’s forecast

October 14, 2012 dnmufcLeave a comment

Heather Stewart
The Observer, Saturday 13 October 2012 21.08 BST

George Osborne’s drastic deficit-cutting programme will have sucked £76bn more out of the economy than he expected by 2015, according to estimates from the International Monetary Fund of the price of austerity.

Christine Lagarde, the IMF’s managing director, last week caused consternation among governments that have embarked on controversial spending cuts by arguing that the impact on economic growth may be greater than previously thought.

The independent Office for Budget Responsibility implicitly used a “fiscal multiplier” of 0.5 to estimate the impact of the coalition’s tax rises and spending cuts on the economy. That meant each pound of cuts was expected to reduce economic output by 50p. However, after examining the records of many countries that have embraced austerity since the financial crisis, the IMF reckons the true multiplier is 0.9-1.7.

Calculations made for the Observer by the TUC reveal that if the real multiplier is 1.3 – the middle of the IMF’s range – the OBR has underestimated the impact of the cuts by a cumulative £76bn, more than 8% of GDP, over five years. Instead of shaving less than 1% off economic growth during this financial year, austerity has depressed it by more than 2%, helping to explain why the economy has plunged into a double-dip recession.

Labour seized on the IMF’s intervention as a vindication of shadow chancellor Ed Balls’s argument that the cuts programme is self-defeating. “The IMF’s analysis should be a wake-up call for David Cameron and George Osborne,” said the shadow chief secretary to the treasury, Rachel Reeves. “It’s time the prime minister and the chancellor listened to the evidence, accepted their plan isn’t working and changed course.”

TUC general secretary Brendan Barber said: “The chancellor has repeatedly used the IMF as cover for his austerity strategy, despite warnings that deep spending cuts in the midst of a global turndown would make a bad situation worse. Now that the IMF has admitted spending cuts could hit the economy at least twice as hard as it previously thought, the government has all the evidence it needs to change course.”

Neal Lawson, director of left-wing pressure group Compass, said, “the cuts were never going to work, but these calculations show the effect is bigger than anyone judged. The economy isn’t suffering from government borrowing but a severe lack of demand that only the government can fix.”

Osborne told reporters in Tokyo that the IMF does not allow for the boost provided to growth by the Bank of England’s £375bn of quantitative easing. “The point I would make about their study of the fiscal multipliers is that they explicitly say they were not taking into account offsetting monetary policy action. In the UK, I would argue we have a tough and credible fiscal policy to allow for loose and accommodative monetary policy and I think that is the right combination.”

But many economists believe the dent in growth caused by austerity policies may be larger than first thought, because the financial crisis has left banks starving firms and households of credit; and with many countries cutting back simultaneously, it is harder to fill the gap created by cuts with demand for exports.

Former monetary policy committee member Danny Blanchflower said: “In a way, the surprise is that it’s taken everybody so long to work it out: Keynes knew it in the 1930s. This is the ‘long, dragging conditions of semi-slump’, and the multipliers are likely to be larger when you’ve got banks that aren’t lending and you’re coming out of the longest recession in 100 years.”

Adair Turner, chairman of the Financial Services Authority, said that the Treasury should have pumped even more into Britain’s banks during the credit crisis to leave them in a stronger state. “The recovery from recession has been far slower than most commentators and all official forecasts anticipated in 2009,” he said. “That reflects our failure to understand just how powerful are the deflationary effects created by deleveraging in the aftermath of financial crises.”

The OBR, set by Osborne to give an independent assessment of the economy, will publish a report on Tuesday explaining why it has consistently overestimated economic growth, and is expected to touch on the issue of whether the cuts are taking a greater-than-predicted toll. At its last forecast, in March, it predicted 0.8% growth this year; the IMF now expects the final figure to be -0.4%.

• This article was amended on Sunday 14 October to add the word “implicitly” to clarify how the Office for Budget Responsibility used a “fiscal multiplier” to estimate the impact of the coalition’s tax rises and spending cuts.

Little Britain: why the UK is no longer a superpower | Business | The Guardian

June 9, 2012February 12, 2013 dnmufcLeave a comment

The heart of the Square Mile in London looks the same as it did 100 years ago. The Mansion House is off to the left and Cheapside still rises gently up the hill towards St Paul’s Cathedral. Closer inspection, though, shows that the Royal Exchange is now a high-class shopping mall, where City workers can browse at lunchtime for Hermès scarves and Gucci handbags. It is no longer the hub of the City, let alone the beating heart of the most powerful nation on Earth.

London remains one of the globe’s three financial centres, dominating that slice of the day after night falls in Tokyo and before day breaks in New York. But the City’s centre of gravity has moved several miles east to Canary Wharf on the Isle of Dogs, where most of the investment banks now have their European homes, and west to the cluster of hedge funds behind discreet nameplates in Mayfair. Only a few of the biggest financial institutions are now British-owned, the so-called Wimbledon effect, where London hosts the world’s best but lacks domestic champions of its own.

It has been three-quarters of a century since Fred Perry was the last Briton to capture the men’s singles title on the grass courts of SW19, in the era when sterling could seriously be considered the world’s premier reserve currency. Some would say the pound never recovered from the first world war. From the moment the UK finally came off the gold standard in 1931, the story has been one of devaluations of the currency once in every generation in an attempt to price uncompetitive exports back into global markets: officially in 1949, 1967 and 1992; as a result of market forces in 1976, and again in 2007, when the onset of the global financial crisis saw the pound depreciate by 30%.

Lombard Street has changed, too. Of the five big high-street banks, one is operated out of Hong Kong, one out of Madrid and two out of the Treasury in Horse Guards Road. The financial crisis of 2007-8 resulted in two banks – Lloyds and the Royal Bank of Scotland – being part-nationalised by the government, with all the others taking advantage of various Bank of England schemes that allowed them to trade in worthless “assets” for gilt-backed securities and to fill their coffers with newly minted electronic money.

The cotton and woollen mills are long gone, as are many of the companies in the electronics and motor vehicle sectors that flourished briefly in the 1930s and again after the second world war. The decline of British manufacturing is symbolised by the fate of Longbridge in Birmingham. At the end of the 1960s, it was the largest car plant in the world, employing 250,000 people, but after the collapse of MG Rover in 2005, most of the site was sold off for commercial and residential use. There are still a few car workers at Longbridge, but they are employed by the Shanghai Automotive Industry Corporation. The old Morris plant at Cowley, on the outskirts of Oxford, has survived and is still churning out the Minis that, along with Mary Quant dresses and the Beatles, were the symbols of the swinging 60s. The plant, though, is owned by BMW of Bavaria. It is a similar story for Jaguar and Land Rover, run by the Indian company Tata.

Gone, too, is the oil that briefly, in the 1970s and 1980s, offered the promise of a windfall to finance industrial regeneration. The oil wells are all but dry, so Britain is no longer a beneficiary of high crude prices caused by strong demand from the emerging world and the gradual decline in production from fields where oil is cheap to extract. Oil and gas are imported from Russia and the Middle East, nuclear power stations are coming to the end of their lives and Britain has only a handful of working coalmines. The words used by Sir Edward Grey in 1914 now have a more literal meaning: the lights are about to go out.

In the hundred years from 1914 to 2014, the century since the outbreak of the first world war, the UK will have declined from pre-eminent global superpower to developing country, or “emerging market”. The symptoms of this vertiginous plunge in the world’s rankings are already starkly apparent: a chronic balance of payments deficit, a looming shortage of energy and food, a dysfunctional labour market, volatility in economic growth and a painful vulnerability to external events.

Since the start of the crisis, the UK has borrowed more in seven years than in all its previous history. It has impoverished savers by pegging the bank rate well below the level of inflation, and indulged in the sort of money-creation policies normally associated with Germany in 1923, Latin American banana republics in the 1970s and, more latterly, Robert Mugabe’s Zimbabwe.

Then there is the large number of unproductive workers engaged in supervisory or “security” roles, on the streets, in public parks, on the railways and at airports. There are the wars fought without the proper resources to do so, and the awareness among military commanders that, in the absence of any military conflict, their forces will be shrunk further, there being no attempt objectively to assess the nation’s enduring defence needs. There is the ramshackle infrastructure existing in parallel with procurement contracts that run billions of pounds over budget and are then cancelled.

If these are the big indicators of imminent relegation, the smaller ones are too numerous fully to catalogue. Thus the UK government has unveiled a “tourism strategy”, in the manner beloved of developing countries the world over, and the annual allocation of places at state schools has disclosed such an enormous shortage that the authorities have resorted to lotteries and other forms of rationing, rather like the “rolling blackouts” seen in post-colonial countries that have allowed their power stations to decay.

On 21 March, chancellor George Osborne, in his Budget speech, acknowledged that the UK was now in competition not with Germany or the US but with emerging economies: “Do we watch as the Brazils and the Chinas and the Indias of this world power ahead of us in the global economy; or do we have the national resolve to say: ‘No, we won’t be left behind. We want to be out in front’?”

Elsewhere in his speech, he made this telling aside: “[We are] working to develop London as a new offshore market for the Chinese currency.”

Not only is the UK supposedly averse to offshore financial centres, believing them to be hotbeds of tax evasion and money laundering, but deliberately setting out to create one has been the act of developing nations around the world, from Panama to the Seychelles, not of mature, developed economies.

This summer will be the third time that the Olympic Games has been held in London. On the first occasion, in 1908, the UK was the world’s superpower. On the second, in 1948, the UK was the one country in western Europe not completely devastated by six years of total war, but it came a poor third to the US and the Soviet Union in geopolitical influence. By 2012, the UK has joined the ranks of the nations that see the Games as a way of showcasing themselves or of getting the taxpayer to fund extravagant regeneration schemes that would not have been seen as financially viable in other circumstances. Neither Herbert Asquith nor Clement Attlee felt the need, as David Cameron apparently did at the Davos meeting of the World Economic Forum in January 2012, to cajole business leaders to come to the UK for the 16 days of the London Games so that they could eye up investment opportunities. The foreign journalists who flew into London to do their pieces about Swinging Britain in the 1960s and Cool Britannia in the 1990s will now come to write long think pieces about what a de-developing country looks like.

A developing economy – or strictly, in the case of the UK, a de-developing economy – exhibits certain features. It cannot find work for all its young people, and contains a large number of unemployed graduates, traditionally a major source of social tension. Despite this, it imports workers from abroad to fill the gaps left by its own dysfunctional education system, and it supplies beer money, in the form of cash benefits, to its hard-to-employ native workers. Its economic policies lack clarity: on tax, on inflation, on public expenditure. It is particularly vulnerable to price movements in major world commodities. Above all, and perhaps in summary of these symptoms, it is weak, dependent on outsiders for finance, skilled workers and energy supplies.

The UK accounts for just 3% of the goods exported globally, down from 4.4% at the turn of the millennium, and is a net importer of industrial products, food and energy. Put simply, it used to be a great manufacturing nation but is one no longer. The City has replaced manufacturing as the hub of the economy. Those in charge of the finance sector rook their customers and shareholders to become filthy rich. Pay and rewards are skewed heavily towards the top 1% of earners. Everybody else has to put up with wage restraint, but is able to consume more by virtue of the City’s willingness to load everybody up on debt and the Bank of England’s willingness to facilitate asset-price bubbles by keeping interest rates low. Most work is in low-skill jobs, with large dollops of public spending used to create for graduates white-collar jobs that would, in previous eras, have been held down by school leavers. This process is going to continue; by 2040, and perhaps sooner, the UK will have dropped out of the list of the 10 biggest economies in the world.

Does this matter? In one sense, no. Provided the UK gets richer decade by decade, it does not matter that other countries will be getting richer more quickly. Given that countries such as India, Brazil, Indonesia and Turkey lag behind in terms of incomes and technological knowhow, a period of catching up is both inevitable and desirable. Furthermore, it wouldn’t matter were these emerging giants to become richer than us in absolute terms. Were the average Turk or Brazilian to be wealthier than the average Londoner, Ulsterman or Yorkshirewoman, that would be unimportant, provided UK living standards continued to rise and the economy continued to generate the surplus wealth needed for both commercial investment and the purchase of social goods such as medical treatments and other types of welfare.

But this is a big proviso. The danger is not that we will lose our place in some global club or other. Such an outcome may dent the pride of our leaders as they are denied a place in a prestigious venue, but would be of little concern to ordinary people. The genuine worry is that we will endure falling real living standards – actually get worse off.

It has happened before, but only for short bursts, in 1974, 1976, 1977 and 1981. It happened again in 2010 and 2011, which suggests it is becoming something of a modern-day habit. To arrest and reverse our current “submerging” status, we need a development model. There is no miracle cure, but there are lessons to be learned, not just from the postwar history of the developed world, but also from the emerging market economies that are rapidly approaching in Britain’s rear-view mirror.

It is not just a question of adopting a different system of taxation or limiting the ability of the commercial banks to create credit – however commendable those individual ideas may be in themselves. One hundred years of pretending to be a “big beast” have to end now. There has to be an acceptance, like that in Germany, France and Japan in 1945, that the country has hit rock bottom and needs to change. In football, this happens all the time: a new manager goes to a struggling club and proceeds to clear out the dead wood. This has never happened to the UK, and even now the country does not seem ready for the sort of cathartic moment that the defeated Axis powers had at the end of the second world war. Even now there is a belief that all will be well, that something will turn up, that Britain will muddle through. The temptation, as ever, will be to look at the events of the past decade as another occasion where disaster was averted by a whisker. The reality is different: this is the moment when the UK has to face the truth about its diminished status in the world.

• Extracted from Going South: Why Britain Will Have A Third World Economy By 2014, by Larry Elliott and Dan Atkinson, published by Palgrave Macmillan on 14 June at £14.99. To order a copy for £11.99, with free UK p&p, visit the Guardian Bookshop.

It was British banks, not British borrowers, that crashed our economy

May 5, 2012 dnmufcLeave a comment

Friday, 4 May 2012 at 12:28 pm

The Defence Secretary Philip Hammond tells The Daily Telegraph today that ordinary people are blaming the banks for Britain’s economic bust when they should be blaming themselves.

“People say to me, ‘it was the banks’. I say, ‘hang on, the banks had to lend to someone’. People feel in a sense that someone else is responsible for the decisions they made. Of course, if banks don’t offer credit, people can’t take it. [But] there were two consenting adults in all these transactions, a borrower and a lender, and they may both have made wrong calls. Some people are unwilling to accept responsibility for the consequences of their own choices.”

Mr Hammond, who was part of David Cameron’s economic team in opposition, also suggested that it is the public’s desire to pay down huge debt levels now that is holding back the economy.

I’m skeptical about this for two reasons. First, and most important, the UK’s banking crisis was not a consequence of bad loans made to British households or companies. Second, it is far from clear that UK households were disastrously overly indebted in the years preceding the crisis.

Let’s deal with the banks first.

Ben Broadbent, the former Goldman Sachs economist who now sits as an external member of the Bank of England’s Monetary Policy Committee, last month gave a speech in which he showed our largest banks got into trouble in 2008 because of their bad loans made to the rest of the world, not their UK lending.

This chart demonstrates the point:

75% of the banks’ losses were from their non-UK lending books. As Broadbent points out, the major UK banks were hit 15 times harder by losses on non-UK mortgages than duff UK home loans.

There’s no question that UK banks became perilously overextended in the years after the turn of the millennium. Their total assets reached 350% of our annual GDP, almost doubling over a decade. But let’s be clear: this massive expansion of lending was not a consequence of loans to British households. Much of it was lending to other banks (both here in the UK and abroad) as their casino trading arms engaged in an orgy of socially useless speculation.

This chart, again from Mr Broadbent’s speech, shows that lending to the British non-financial sector remained pretty constant as a share of GDP over the decade, at around 80%:

So what can we draw from this? Britain’s largest banks went bust, helping to plunge the UK into the deepest slump since the 1930s, because they overextended themselves. But bad loans made to British households were a minor part of their total losses. The banks did not go bust because ordinary Britons borrowed too much.

Now let’s address the idea that – even if it didn’t cause the banking bust – British households borrowed too much in the boom years and that these debt levels are now weighing down on our economy, stifling recovery.

This has become conventional wisdom. Proponents point to graphs such as these (courtesy of Fact Check), showing that debt as a share of household disposable income in the UK rose to 170%, much higher than in other advanced countries:

Case closed? Not necessarily. Ben Broadbent has some very interesting things to say on this area in his speech too.

He pointed out that the majority of the extra debt incurred by British households was mortgage debt, as this shows:

Secured lending here is mainly mortgage borrowing.

And when one considers mortgage debt one also needs to consider the other side of the balance sheet: housing values, which exploded over the decade.

When one factors in rising house values, the net financial position of UK households during the last decade looks much less alarming:

As Broadbent points out, UK households’ net financial wealth was no lower in 2008 than it was in 1992.

Ah, but didn’t we have a massive housing bubble? Hasn’t much of the value of those “assets” been wiped out, proving that we did borrow too much after all? The answer to that is that we don’t know yet.

House prices have fallen from the pre-crisis peak by around 15%. But that is nothing like the collapse witnessed in bust housing markets such as the US and Spain, where values are down by something close to 50%:

House prices may be on their way down again here in the UK, and this will cause further problems for the banks, but this is by no means certain. In the past I’ve argued that the only way is down for the market, with prices still well above historic income to value ratios. But now I’m beginning to think that there’s such a shortage of housing supply in this country that values could well remain elevated, despite the weak economy.

Reasonable people can take different views on this subject.

It is also reasonable to point out that unsecured lending – credit card debt – rose in the years running up to the recession and that this is likely to be weighing on consumer spending now as people seek to pay off debt:

But be wary of those who confidently assert that our present economy malaise is a consequence of high household debt levels. And certainly don’t accept for a moment that British banks fell over in 2008 because they lent too much to us.

Cameron didn’t learn from Lamont on recession – early sharp cuts hurt

May 5, 2012 dnmufcLeave a comment

The real mistake was not getting the forecast wrong, but getting the economics wrong. Look back to the last recession.

guardian.co.uk, Friday 4 May 2012 10.00 BST Norman Lamont

‘Norman Lamont said that he would not raise taxes or cut spending right away, thus allowing the recovery to take hold.’ Photograph: Martin Argles for the Guardian

The UK economy fell back into recession in the first quarter. But talk of a double-dip recession misses the bigger picture – we’ve now had 18 months of essentially no growth, and more than four years after the start of the recession, the economy is well over 4% below its pre-crisis peak. The latest forecast from the National Institute of Economic and Social Research isn’t for another deep recession, but for no growth this year, and that we won’t get back to pre-recession levels until some time in 2014 – six full years on. Already, this is this is the slowest recovery on record, comparing poorly with what happened after the Great Depression.

The official forecast at the time of the June 2010 “emergency budget” was that we would now be growing at over 2.5%, with unemployment falling sharply. This was hopelessly optimistic. But getting the forecast wrong was not the government’s main mistake. Everyone gets forecasts wrong – we were too optimistic as well, albeit not by nearly as much. The point is that the government got the economics wrong. What the last 18 months has given us is as clear a test as you could ask for (in the messy real world of economics) of two competing worldviews.

The first was that, as the chancellor said then, “reducing the deficit is a necessary precondition to growth”: cutting the deficit quickly would restore consumer and business confidence, and allow lower interest rates, which would lead to growth. In other words, you can’t spend and borrow your way out of a recession.

The second, advocated by the likes of Martin Wolf and Paul Krugman, was the view that this was precisely wrong: the government deficit was the counterpart of excess private sector saving, as households tried to reduce their debts and businesses – knowing that the demand wasn’t there – held back from investment. Cutting the deficit too sharply would just make things worse. In other words, you can’t cut, tax and save your way out of a recession. As for low interest rates, they too were the result of a depressed private sector, trying to save too much and invest too little.

What have we seen since then? Not just low growth, but also, as a direct result, continued very high deficits. Indeed, in the past year, the deficit on current spending hardly changed, with almost all the reduction in the total deficit coming from cuts in investment spending. Hardly surprising therefore that it was the construction industry that was the biggest drag on growth in the latest figures.

But despite this continued high borrowing, long-term interest rates have remained very low, the result, as even a quick look at the data reveals, of a lack of investment opportunities far more than “confidence”. The markets have indeed spoken. As Wolf says, “they are saying: borrow and spend”.

What should the government do? There are plenty of alternatives, none of which involve abandoning the necessary medium-term goal of fiscal sustainability. Boosting investment spending now would boost growth, create jobs and would have no direct effect on the government’s primary fiscal target. Alternatively, or additionally, a “balanced budget expansion”, as advocated by the Social Market Foundation and the IMF, could achieve the same objectives. Either way, with long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, not investing now is simply to ignore the most basic principles of economics.

The prime minister, of course, is not listening: his response to the GDP figures was to reiterate that “the solution can’t be more debt”. But perhaps he should look back to the last recession. In the then-chancellor Norman Lamont’s recovery budget of 1993, he famously, and controversially, raised taxes. But not immediately. He explicitly said that he would not raise taxes or cut spending right away, thus “allowing the recovery to take hold”. In fact, the government didn’t start cutting the structural deficit at all until 1994-95; by which time the economy had been growing for 18 months, by then at a very healthy pace of over 3%.

So Lamont grasped the basic economics, and got the timing right. I should know: I was his (civil servant) speechwriter. So should David Cameron: he was his (political) special adviser. Sadly, he appears to have learned the wrong lessons.

Guardian Letter 03/05/2012

May 3, 2012 dnmufcLeave a comment

The banks are multinational and too big to fail. Mrs Thatcher saw to that. Increasing uk interest rates before 2007 would have had no effect. It would have caused a uk recession but the banking crisis would have still happened here. Uk banks would simply borrow somewhere interest rates are low (not parking reserves in Bank of England) and atill lent into dodgy high yield markets such as US sub prime. The madness with derivatives would have still happened. In 2008 net borrowing was 2.6% of GDP, net debt was 36% of GDP and structural deficit was 2.6% of GDP. The next year net borrowing and trebbled (6.7% and then 11.1% last year) as had the structural deficit (rising to 6.3% and then 8.8%). Net debt rose from 36% of GDP in 2008 to 43% and then to 52%. These changes have bugger all to do with labour spending and everything to do with the costs of the worldwide bank induced great recession. In 2008 there was a Worldwide financial crash. The cause is the fundamental basis under which the money supply has operated since the 1980s. Basically the only way we currently allow the money supply to widen (allowing growth) is for private banks to create new money as debt. This is how 97% of all new money (£2.6 trillion of it since 1997) has been created. This has nothing to do with labour (it has to with Mrs Thatcher and Mr Reagan if were looking for blame) and is how all G20 countries now work their economies. There are very good reasons we should return to the system we had before the 80s as the cause of our problems is the debt and inequality that allowing the banks to create debt causes. What should happen is massive QE to buy back government debt and then the Bank should destroy the debts. Fortunately this process is fairly advanced now with the wholly publicly owned Asset Purchase Facility owning a third of all outstanding government debt the OECD think this will rise to 40%. In our current liquidity trap with the money supply contracting due to the banks, private sector and households all deleveraging there is no danger in doing this and it will be done. However, To prevent inflation this needs to be matched with a corresponding decrease in bank leverage levels – making the banks safer. The result is a money supply, not based on debt that ensures less recessions and financial crashes. This is how the money supply operated for thirty years after WW 2 – a period of high growth, no financial crashes and only two very mild recessions. Also much more equality and very high growth in real terms earnings and living standards. The Tories get over 50% of their funding from bankers. They have done nothing to reform the banks and have removed the bankers bonus tax. What we need is public outcry to force the seperation of retail from casno banks now – not in 2019. We need a statutorylimit on bankers earnings at 25 times minimum wage. We need a financial transaction tax. We need a banning of tax havens such as the Crown protectorates. We need a full ban on over the counter derivatives. Bankers and media magnates should be banned from political patronage. Guilty bankers should be thrown in jail.