News update
Mon 29th
-Iain Duncan Smith suggested wealthy pensioners should voluntarily hand back their universal benefit payments
-The commons public accounts committee said the Chancellors £310bn plan to boost economic growth through infrastructure projects was unrealistic about how much private capital there was and said that taxpayers could end up shouldering the cost. This follows IMF comments on a week private sector
-Gov proposing to encourage communities to drop opposition to local fracking in exchange for cheaper energy bills
-Surgeons commissioned by government to determine when patients should be offered treatment in acknowledgement of the postcode lottery
Tues 30th
-A majority of the public believe the governments economic plans have failed according to a com-res survey
-EU votes for ban on pesticides
-Cabinet launches attack on ring-fenced NHS budget, uprising within the cabinet is being dubbed the ‘national union of ministers’ by the treasury
-Cuts may be hit hard on early years as Department of Education looks to cut 2.5bn but the schools budget remains protected
-Prisoners have to work harder to earn privileges, 10,000 is the 2015 target for no. of inmates working in jail
Weds 1st
-largest privatisation programme since 1980 is to be implemented by coalition as 1 in 6 civil servants could be transferred into the private sector including the nudge unit and possibly the ONS. They are to become ‘mutuals’ like co-ops, part owned by workers, the private sector and government.
-Osborne faces being forced to set aside up to £9bn for a stand alone bank crisis fund for the EU after being cornered in Brussels, previous allies Germany and Sweden agree with the principle.
-The £5bn work programme will reallocate contracts to different private firms if the current private firms don’t get people back into work quicker
-Following awful radio interview for Miliband on VAT tax cut causing an increase in borrowing, the tories say it will lead to 18.8bn more borrowing
Short 15 mark policy plans
Homes
-New government backed mortgage guarantee – effectively the tax payer underwrites the risk of up to 20% of mortgage values
-Budget 2013 declared changes where you can now buy a home up to £600,000 with only a 5% deposit – the treasury says this will support building 190,000 new homes but it also risks creating a housing bubble and Labour calls it a ‘subsidised mortgage for the rich’ as they buy 2nd homes. Balls goes on to compare this to the bedroom tax which hits the poorest
-Help to Buy scheme reminds us of Thatchers Right to Buy scheme and is a loan scheme – Liberal peer Lord Oakeshott says the gov has done well with private housing but needs to turn to public housing situation
Childcare
-Working parents get 20% tax relief on childcare costs which equate £1,200 per child
-Tax free childcare vouchers – 20% off first 6k of childcare costs
-£200m for low income families so 85% of childcare costs are met under new universal credit 2016 – more generous than the 70% under the existing tax credits system but the resolution foundation says only 4 in 10 low paid families will actually see this 85% met by the government and that the criteria means low income families may miss out
Pensions
-400,000 more people are made eligible for the basic pension
-New flate rate of £144 a week means thousands more qualify including 85,000 women for the first time
-6 million workers to face higher NI payments as the practice of ‘contracting out’ the state second pension to employers is ended – basically with this if you were going to retire soon you could contract out your money to your pension scheme while paying less NI – this is ending – hitting richer people more.
-Ending this contracting out will generate an extra £5.5bn in national insurance contributions
Bank lending
-Funding for Lending scheme gives banks cheap funds in return for commitments to lend to business and households but there has been a 2.4bn contraction in lending in the past year. Scheme is to be extended and ‘put on steroids’ as the credit creation programme is failing small business
-State backed business bank is to be created as credit is not getting through to smaller banks. Designed to widen sources of finance for small business, this spring it will invest £300m alongside private backers
-Project Merlin was an agreement between the government and 4 major high street banks about banking activity incl. lending and pay and bonuses
Economic gloom
Upon entering office, Osborne said he wanted the UK’s AAA credit rating to act as a ‘benchmark’ for his performance as Chancellor. Compared to Osborne, Chief Secretary to the Treasury Danny Alexander at the time described the credit rating as ‘not the be all and end all’. Moody’s downgrade of the UK’s credit rating to AA1 and many other services comes at a painful time for the Chancellor, for whom the Spring budget will be crucial in appeasing backbenchers and fellow ministers already looking around for a replacement.
Following 2 years of u-turns and delays, with 70% of budget cuts yet to come into force yet, Osborne is reluctant to make another u-turn on the governments economic plans. Promising ‘we won’t change course’ Osborne seemed out in the cold among his Tory peers until Cameron came to his semi-rescue responding that the credit rating demonstrated that ‘we have to go further and faster on reducing the deficit’.
However, recent discussions on the 2015-16 budget proposals have highlighted frosty relationships in the cabinet as Cable, May and Hammond among others argue with Osborne over his proposals. The estimated £448m cut to the Home Office is equivalent to 9,800 police officers and the proposed £1.4bn cut to local government many argue will eventually lead to councils only being able to provide services they are legally required to.
As the ONS confirmed its figures for 2012 Q4 it was a reminder for the Chancellor of targets missed. The 2011 budget forecast that investment would be +2.9% while instead it was -0.6%. Furthermore as Osborne planned to ‘rebalance the economy away from a reliance on government and household spending’ it was projected that household consumption would decrease 1.7% while instead it rose 1.8%.
Another sad story for Osborne this week were the results of his high tech enterprise zones. 24 zones promised to create 30,000 jobs by the end of parliament however after a year of being set up, only 1,700 jobs have been created and some zones have barely any tenants.
Looking forward, Osborne in meetings with backbenchers was warned several times not to repeat the ‘omnishambles’ of the last budget and after coming under fire for making each budget a different fiscal plan creating uncertainty in the economy, it’ll be interesting to see what the Chancellor proposes on 20th March.
Coalition prison policy
The UK spends 2.8% of GDP on public safety and order. This is a rate higher than the US or any EU country. Up my 40% in real terms, prison expenditure steadily rose through the Labour years of 03-09. However 6 out of 10 prisoners return to crime on release. Re-offending is the biggest problem facing Britain’s prison system and despite prison population growth from 44,628 in 1992 to 85, 450 in 2012 and longer sentences, the problem has not gone away. With the Justice Select Committee concluding that ‘prison is a relatively ineffective way of reducing crime’, why are we still spending £40,000 a year on keeping people in prison?
Rehabilitation is needed to ‘break the cycle’, in 2003 55% of prisoners reported committing offences connected to their drug taking. 71% of children in custody have been involved with, or in the care of social services before. The facts go on. The current Justice Secretary is Chris Grayling (who got the post following the 2012 reshuffle) has announced that he will go ahead with the ‘rehabilitation revolution’ championed by his predecessor Kenneth Clarke.
Grayling has tried to strike the balance between being hard and soft on crime. His appointment was seen by many as a way to appease the Conservative right and he talked tough at the beginning however since then, his policies have focused much more on addressing the re-offending problem.
Grayling has proposed a mentoring system to help prisoners reintegrate back into society. The idea is that all short-term prisoners meet a mentor who would then be paid based on the results so whether or not the prisoner re-offends. The ‘payment by results’ pilot scheme has had a high take up from short-term prisoners with almost 6 in 10 of those released from jail taking part. Nearly half of prisoners themselves say they will need help to find a job when they leave prison. Over a third say they will need help to find somewhere to live when they are let out. So the current moves by Grayling seem to be a step in the right direction.
The cheapest and most effective method of reducing crime was rehabilitation, said Cameron, who promised that in future, all prisoners, not just those on longer sentences, would be eligible to take part. In future it would be the “norm” to use private companies and charities to deliver such programmes, and those providers would be paid on results, he said.
News from the week
Opinions on the UK economy this week
In the past few weeks a lot of opinions and perspectives on the state of Britain’s economy have been revealed. See the important bits from the important people/institutions:
FSA Chief Lord Turner:
FSA Chief Lord Turner has called for new ideas to kickstart the economy. Turner warned that quantitative easing, the electronic printing of money used to pump £375bn into the economy so far, might lose its usefulness.
“We need to be ready if these measures prove insufficient to consider further policy innovations and further integration towards different aspects of policy, to overcome the powerful economic headwinds created by deleveraging across the developed world economies,” Turner said. He agreed with the chancellor, George Osborne, who has warned about creating “the stability of the graveyard” when reforming banks.
Deputy Governor of the Bank of England:
Paul Tucker has said the monetary policy committee, which sets interest rates, wanted to make credit cheaper, but was wary of adding to the £375bn of quantitative easing (QE) in case it triggers a rise in inflation.
“I think Funding for Lending can help. I was very keen that it be introduced. There are no silver bullets. People rightly point out that there may be weak demand for credit. Of course that’s an element. But the Bank should do what we can to alleviate problems in credit supply, consistent with staying within our remit as a central bank.”
**The Funding for Lending scheme is designed to stimulate the economy by making cheaper loans available to firms and individuals, 5 of the UK’s six biggest lenders have signed up**
IMF
Earlier this week the IMF predicted that Britain has relapsed into recession and should “smooth its planning adjustment over 2013 and beyond”.
The IMF has cut its growth forecasts for Britain and warned in its annual fiscal monitor on Tuesday that Britain will miss deficit reduction targets this year.
The government’s target of reducing the cyclically adjusted annual deficit will be missed after the IMF estimated it will be reduced by 1.25% and 1.5% this year and next.
The IMF expects the UK economy to shrink by 0.4% this year.This compares with its forecast of 0.2% growth in July. Next year, the UK economy should grow by 1.1%, the IMF said, down from its previous forecast of 1.4%.
The IMF said it was difficult for the UK to reduce its annual deficit when tax receipts had declined in response to low growth, but it should continue to make strides to bring spending and income into balance.
Ed Balls
“Twelve months ago, the IMF forecast growth of 1.6% in 2012 and said a plan B would be needed if growth were to be lower than expected. A year on, with Britain in a double-dip recession and growth forecast to be -0.4%, there can be no question that a change of course is urgently needed.
“The IMF has rightly warned that the government’s policies risk causing permanent damage to our economy and growth is needed to get the deficit down. And, like Labour, they’ve said a Plan B should include temporary tax cuts and additional infrastructure investment. It’s time David Cameron and George Osborne finally listened and took action to kickstart our economy before even more damage is done.”
Following Mervyn Kings talk at LSE
King has urged the government to impose the stricter cap proposed by Vickers, instead of the weaker limit chosen by George Osborne after lobbying from the financial sector
“The case for price stability is as strong today as it was 20 years ago,” he said, adding that to abandon inflation targeting would be to “throw out the baby with the bathwater”. However, King argued that there might be some situations where it would be right for policymakers to “aim off” the inflation target in order to prevent a jarring financial or economic crisis.
Simon Jenkins, journalist for the Guardian
Those who warned three years ago that the risk of double-dip recession was so high as to require a plan B were right. The Treasury, the Bank of England and the IMF were wrong. The fact that the Treasury has had to propose six ineffective business lending packages in a row, and the Bank has had to pretend to pump £375bn “into the economy” is proof of that failure. I do not believe for a minute that George Osborne and his advisers, had they correctly predicted the recession, would be following the present policy. At least the IMF is now admitting its mistake.
Government and Bank economists are continuing to allow politicians to cop out of reflating demand for fear of a U-turn. Economists are like physicians in the days when they believed in leeches. They take no responsibility for gross errors that would get doctors struck off, and even transport officials suspended.
General Secretary of the Public and Commercial Services Union
What this government is doing to the economy, to public services and to people on benefits or in care is a disgrace. They told us in 2010 that all this pain was to tackle an unavoidable crisis. Now the IMF is lining up with us to say that austerity is becoming counter-productive. And it’s obvious: if you cut people’s pay, cut benefits, and cut the investment that creates jobs, you won’t get growth – and without that you can’t close the deficit.
David Cameron calls this the “aspiration nation”. It is. Where once we had rights to housing, healthcare, education, welfare, decent pay and pensions, now we can only aspire to them.
With another two and a half years before the next election, a new coalition is forming: the dispossessed – people who have lost their job, their local library, the home care for an elderly relative, the chance to study at college or university.
Later this month, the union will be marching in London ‘for their jobs, pensions and pay’.
Sir Mervyn King Channel 4 interview
Some of it was on-message, helpful to the government, some of it not – Sir Mervyn King’s (Governor of the Bank of England) interview on Channel 4 News was fascinating. There had been a lot of media training – none of the academic essays he can sometimes speak in.
He gave George Osborne the green light to dump the fiscal rule on debt reduction by 2015 – “if it’s the world economy” that’s the problem and slowing growth is missing the debt target OK? He said it was “arguable to move in that direction.”
On banking reform though, the normally gnomic, rarely controversial governor effectively raised the flag of rebellion for the parliamentary stages of the banking reform bill. Sir Mervyn said he wanted the Vickers report implemented in its original, tougher form - and opposed the dilution of those reforms in the white paper.
Pick of the Papers, Sunday 16th September
1) Welfare bill won’t work, key advisers tell Iain Duncan Smith (The Guardian) (Welfare)
Committee condemns ‘unfair’ plans for part-time workers amid growing controversy over universal credit
2) Michael Gove to replace GCSEs with O-level style qualifications (The Guardian) (Education)
Education secretary’s major reform of the examination system for school-leavers scheduled for introduction in September 2015
3) Davey takes on Osborne over wind farms (The Independent) (Environment)
Lib Dem Secretary of State launches green initiative, while Chancellor pushes on fossil fuels
4) UK’s economic recovery has begun, says Sir John Major (The Independent) (Economy)
Speaking on the 20th anniversary of Black Wednesday, which marked Britain’s dramatic exit from the exchange rate mechanism, Sir John said the UK’s economic recovery was under way, despite gloom surrounding the eurozone crisis.
5) We must reform our justice system (Telegraph) (Judiciary and Civil Liberties)
Grayling, the new Justice Secretary, needs to modernise the system to diminish delay, increase efficiency, and make sure that the process is not intimidating for witnesses
6) Lib Dem president: Labour? Why not Labour? We can work with either party (Telegraph) (Parties)
7) Stop going on about ‘predistribution’, Ed, and talk like everybody else (The Independent) (Economy)
Labour tongues are wagging about Ed Miliband’s latest big idea, but what does it all mean?
8) In defence, as in finance, the truth is clear – our future lies in Europe (The Guardian) (Economy and EU)
The Eurosceptics are just like the Tea Party, living in their own parallel universe and making up the facts to fit their story; Will Hutton looks at possible BAE merger
9) Don’t turn off the future (New Statesman – not really a newspaper) (Environment)
The green economy in Britain is thriving – so why are politicians so reluctant to talk about it? Some nice facts.
10) Why the Tory right’s “growth plan” won’t work (New Statesman – not really a newspaper) (Economy)
Nice little overview assessing cutting taxes, labour market deregulation and planning regulation
Pick of the papers, Sunday 9th September
1. The prime minister’s masterclass in how not to conduct a reshuffle (Observer) (PM&Cabinet)
David Cameron failed most of the 10 tests on whether recasting a government has any serious point, says Andrew Rawnsley
2. Whitehall dares to whisper: we’re out of recession (Mail on Sunday) (Economy)
A look at some key economic policies that are soon to emerge
3. Owen Paterson has a fight on his hands (Telegraph) (Environment kind of but mainly Europe)
The ‘unknown Cabinet minister’ is uniquely qualified to lead Defra, says Christopher Booker looking at the Common Fisheries Policy and EU law
4. Draghi ‘rescue’ might deepen pain for recission-hit south (Observer) (Europe)
The ECB chief has been extraordinarily bold, but he has no lever to pull that will help bridge the rift between the ‘core’ northern economies and their neighbours
5. Cameron in battle to regain trust of women (Independent) (Parliament)
Following his unfulfilled pledge to have women occupy 1/3 of the cabinet , the Independent look at his reputation now with women voters
6. John Gummer warns: don’t dump green agenda (Observer) (Environment)
Incoming climate chief says growth impossible without renewable energy after chancellor supports new ‘dash for gas’
7. Britain must champion the wealth creators, says Tories (Telegraph) (Economy)
Britain should “salute” wealthy people who create jobs for others rather than looking for new ways to tax them, leading Conservative minister Michael Fallon has said, as he calls for an end to the ‘politics of envy in this country’.
8. ECB rescue plan boosts euro and makes markets purr (Independent) (Europe)
9. We need proper planning, not jerry-built economics (Guardian) (Economy)
The coalition’s decision to relax the planning laws is bad economics
10. Tories’ dash for gas risks climate target (Independent) (Environment)
Go green, vote blue, said David Cameron, but even his environment adviser thinks difficult decisions are being put off
The reshuffle and its policy implications
Pre-reshuffle Cameron promised to ‘cut through the dither’ that he said was holding Britain back. Following May, Osborne and now Hunt all being booed at the Paralympics, the cutting of ditherers is debatable however the policy implications are clear. A nice overview of the changes and cabinet as it stands can be found here from the BBC.
Ultimately this has been a shift to the right. Picking of some key changes we can see this.
Chris Grayling replacing Ken Clarke as Justice Secretary is a great example of this – implications for the approach towards the European Courts of Justice are clear. On human rights, Clarke was adamant that any reform would have to respect the European convention, whereas Grayling has previously said he would like to ‘tear up’ the human rights act that codifies that convention. On prisons, Clarke aimed to curb the prison population, during Graylings tenure as shadow home secretary in 2009, he proposed yet another prison-building programme.
Ken Clarke is by no means out of the picture though, as minister without portfolio he undertakes a title previously owned by Mandelson and will undoubtedly make his voice heard especially on economic issues as he has ensured that he will sit on the key cabinet sub-committee on the economy and on the national security council.
The chancellor was keen to move Duncan Smith because he is fighting a public battle to resist Osborne’s plans for a further £10bn in welfare cuts by 2016. Duncan Smith’s success raises the prospect of a renewal of his alliance with Nick Clegg, who provided vital support over the funding of his welfare reforms. The deputy prime minister told the Guardian last week that he would only accept some of the extra welfare cuts in return for a wealth tax.
The appointment of Owen Paterson as environment secretary is surely a sign of the ‘greenest government ever’ being a thing of the past. Sceptical on renewable energy, pro-aviation, pro-hunting and steeped in anti-environment myths his appointment is arguably a ‘declaration of war on the environment’.
Here’s a clip from the Guardian that explores more themes from the re-shuffle.