I spoke on a panel at the British Chambers of Commerce conference yesterday. Mark Littlewood of the IEA, Jeremy Warner of the Telegraph and Polly Toynbee had much to say, but we all agreed that George Osborne was backing himself into a corner.
Start with his plan for balancing the budget. I wrote about why he cannot achieve this last year, however much he might wish to do so. Martin Wolf questions why he might wish to do so in the FT today:
George Osborne wants to burnish his image as an iron chancellor of the exchequer. He has already committed to achieving a fiscal surplus by 2019-20. He now suggests that further tightening of fiscal policy may be needed in response to the “storm clouds” he identified when in Shanghai last week. Mr Osborne may be preparing for bad news in his Budget on March 16. The question is whether his plan makes sense. The answer is no.
The whole panel agreed. This promise was an act of folly on George's behalf.
What did the panel agree on? That there is a need for infrastructure investment, although there was s sharp divide on who was to pay for it. But is that likely? Not according to Lorenzo Bini Smaghi, a former ECB board member, also writing in the FT, who says:
The fact that monetary policy is the only game in town is problematic. But if the central banks stopped playing their part, the sound of silence could suddenly become deafening.
He was not only referring to the UK of course, but the condemnation of Osborne's lack of a meaningful fiscal policy is implicit in the deal.
As it is also implicit in Baroness Ros Altman's condemnation of his pension proposals, for which she will have responsibility if they are passed. The FT note that in her case:
Baroness Altmann, a former consumer campaigner, has come out against the idea, which would take pension income out of the tax net.
I have, I admit, little time for Altman but at least she has rumbled what Osborne is all about here, which is short term money grabbing. And, as the FT also note that on this issue a:
Giveaway to rich voters may be the only way to placate party critics
I forecast this, yesterday: it would be a gift to Labour.
More important is that in all this there is a theme. It is as if George Osborne, now unconstrained by LibDem presence in the Treasury, is creating his own policy Ponzi scheme as part of his own, flagrant, blatant and almost certainly forlorn hope to be leader of the Conservative Party. You could add the Brexit referendum into this, for he was, no doubt a party to the agreement to offer this to placate the Tory right. And all of the offers amount to the creation of a looming crisis for Osborne from which is now seems as if there is no escape.
Whatever happens the Brexit vote sidelines him; his desperate international please for support on an issue he could have avoided making him look the small man he is.
His failure on borrowing for a second time will be more damning.
And his money grubbing efforts because he persists with austerity and will not deliver the fiscal policy that the IMF and OECD demand and deliver the investment the UK needs and which is its only route out of its current mess will eventually alienate too many, whether it be pension savers on that reform, small business on forthcoming quarterly tax returns or the population at large as he buys off protest with tax cuts for the better off.
George's policy Ponzi is set to crash.
It won't be pretty for us when it does.
But it will be obvious.
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Lets put it this way: If I were a large share holder in one of the major supermarket chains I’d want Osbourne’s head on a plate for not only taking income out of the economy but also reducing my turnover and helping the likes of Aldi and Co to take my sales and destroy my business plan.
The way he keeps spreading fear and panic about the economy would also be impacting my business.
Sooner or later even the most rabid pro-Tory businesses affected by Osbournes’ ‘policies’ will have to concede that HE is the problem and that he needs to be removed.
Prime minister in waiting? You’ve got to be joking.
The only arrangements that can be called “pension schemes” are defined benefit schemes. All other pension schemes were effectively abolished by the Coalition.
If you do not have to buy an annuity then pension pots are simply tax beneficial savings schemes, they need to be renamed and placed on the same footing as other savings schemes.
I have strong sympathy with that
Many high earners will not
We should include in the Ponzi scheme the extension of the ‘Help to Buy Scheme’ which is another ‘help to bubble/help to banking moral hazard scheme’ as the only game in town to jazz up GDP.
‘Help to Buy’ now offers 40% subsidised mortgage deposits in the London area, I’ve heard – the lunacy is beyond belief.
Agreed
Keith, disagree with your point slightly I have a 5% employee contribution DC scheme, 8% employer contribution + tax relief (20%). So that it is quite a big increase on my original contribution.
It’s not perfect, but without it I doubt I’d be anywhere close to a reasonable retirement saving. I find the biggest issue is that colleagues under say about 35 don’t utilise it or understand that it is worthwhile.
I agree fully with the principle that the tax system should be used to incentivise the purchase of pension annuities; but I do not think that it should be used to purchase lamborghinis.
Once you remove the compulsion to apply the cumulative funding to the purchase of a pension the arrangement is then no different to a savings scheme; and indeed it may be treated as such by local authorities when looking to fund care for the elderly and infirm.
Now that Osborne has such an interest in China and Mao’s little Red Book, perhaps he should take note of this analysis of the Western financial crisis by an American professor at the 2015 World Congress of Marxism in Beijing.
http://michael-hudson.com/2015/10/the-paradox-of-financialized-industrialization/
His analysis is clear:
‘About 80 percent of bank credit is lent to buyers of real estate, inflating a mortgage bubble. Instead of taxing away the land’s rising rental and site value that John Stuart Mill described as what landlords make “in their sleep,” today’s economies leave rental income “free” to be pledged to banks. The result is that banks now play the role that landlords did in Marx’s day: obtaining for themselves the land’s rising rental value. This reverses the central thrust of classical political economy by keeping such rent away from government, along with natural resource and monopoly rents.’
The utter failure of the Left has meant that the public have been deprived of knowledge of this scandal.
Hudson’s conclusion apropos China:
‘Yet having watched China grow while their economies have remained stagnant since 2008 (except for the One Percent), their hope is that socialist China’s market can save their financialized economies driven too deeply into debt to recover on their own.’
I have to say I do not agree Simon
I think everyone is aware land is over priced and mortgages are burdensome
What most are not cl;ear about is that this issue can be addressed
BUT remember many – a large number and the majority of the middle class – have no desire at all to change it
The left heard that long ago
Like all bubbles, the housing bubble is driven by a combination of apparent self-interest and easily available/low-cost finance to speculate with. The problem is that the “apparent self-interest” is completely flawed, as in all forms of gambling the majority of gamblers will eventually lose out and the game is just to try and hope to be in the minority that win.
By continuing to fuel the bubble on the basis of “middle class desire”, both the left and the right are just going to make the eventual bursting of the bubble more painful on most property owners.
The mistake is the inability or unwillingness to separate the natural desire for home ownership, from the unnatural desire of private banks to drive excessive speculation, demand and therefore price increase. The fact that most banks own the major estate agency chains show how in-bred the process has become, so that they control and profit from the whole process.
Somehow this link between private finance and home ownership has to be dismantled, preferably before the bubble bursts so there can be a controlled re-adjustment between property prices and wages.
“BUT remember many — a large number and the majority of the middle class — have no desire at all to change it
You are absolutely right there, Richard –they will hang onto their unearned increment like grim death.
This probably means it will simply continue until it can’t -another great victory for bourgeois small mindedness.
“Somehow this link between private finance and home ownership has to be dismantled, preferably before the bubble bursts so there can be a controlled re-adjustment between property prices and wages. ”
Keith-Carol Wilcox has co-authored a paper on how LVT can be introduced at at incremental rates so as to avoid disruption see: http://www.labourland.org/papers-and-articles/
At present we are a hostage to middle class shadenfreude (my corner’s alright **** yours) -if THEY can#t join up the dots then it will be a case of a massive crash/socially disruptive inequality/gated communities and a surplus population
I’m more concerned about turning off the fuel (debt money) that is really driving the fire (price increases) in the housing market, than I am about increasing the amount of water (taxes) to pour on the out of control situation.
I can believe that LVT would help return some normality to property prices, but not while the debt money fuel continues to feed the fire.
In my view there needs to be a new financial model for housing, based on need and ability to pay, completely removing private finance and the market from one of life’s obvious essentials.
I have no problem with the wealthy using their own or others private venture capital to purchase non-essential mansions. But a basic house for a working family should not be the source of gross exploitation by the private financial system in my view.
Remove all of life’s essentials from the private financial market based system, and leave the speculators to put their capital into other (more productive) things. That way a lot of rentier-ism will be forced out of existence.
I think that goes too far
I will be publishing on this on Monday
I look forward to it Richard.
This Aussie documentary will be of interest to those favouring Land Value Tax. It seems the Aussie dream has now hit the reality of the land and financial rentiers.
https://www.youtube.com/watch?v=pH6YHoZzzoE
Keith-as carol points out in her paper, it will take a decade or two for LVT to return things to a ‘sane’ level (rent/mortgages no more than 25% of disposable income).
The middle class will not be prepared to take a hit that will devalue their property as we’ve had 35 years of this housing free for all and a crash would be the equivalent of a societal breakdown and the middle classes won’t have any schadenfreude to operate as a serotonin re -uptake inhibitor.
I’m sympathetic to your views on housing Keith -seems like Richard’s not too keen on the total euthanasia of the rentier in this area ! (smiley emoticon!)
“I think everyone is aware land is over priced and mortgages are burdensome ”
But you will be surprised at how many do not understand the causality -many have been conned into thinking it is ‘just the market’ good ole supply and demand. I have to say again: The Left has utterly and shame-facedly failed to convey the reality of the mechanisms behind this. Labour could have explained these phenomena with clarity and simplicity-they didn’t and still aren’t.
As always George Osborne, as an intellectually lazy politician, has failed to make the effort to understand how a sovereign currency really works to optimise the UK economy. He has no conception of two key mechanisms:-
– once all the additions and retractions of money are accounted for at a macro level in the UK economy only a sovereign government can create net money interest free
– money is essentially “relational information” that enables us to contract with each other for goods and services. Reduce the amount in circulation through government balancing its budget or running a surplus on its books and the economy shrinks unless there is an export surplus to offset
Of course, there are other considerations involved in running an economy, countering unfair trading including currency manipulation, maintaining a stable currency by creating demand for your currency through export sales in order to pay for imports (unless your country is the world’s principal reserve currency, and containing abnormal inflation.