Economic Resurgence and Roadblocks

I don't think anyone in the Conservative Party is in any doubt that if we're going to win in 2015 the main reason for this will be the economy. We've got to make sure the economy is healthy or well on the way to being so by 2015 or we have no chance of victory. Since my last economic post the picture has got a lot rosier but what are the big roadblocks to a stronger economy.

UK economic pigs on the increase.

The good news is that we are predicted to grow more than anyone thought this year. The OCED, who said that we would grow at most by 0.8% this year, has massively increased their prediction to the UK growing by 1.5%. Indeed it gets better when you look at the annualised rate of growth which is 6% meaning we're growing faster than France, Germany and America (pretty good going). Of course we shouldn't be too optimistic because these are predictions we must wait for the results until we starting patting each other on the back and celebrating an end to a depression. 

The UK in real terms is out preforming Germany and probably will continue to in the future.

This growth is also pretty sustainable, built on the increases from all sectors of the economy. Factory production is seeing a boom that could only be compared to one that took place 20 years ago. Car production is soaring as well (which Top Gear has tooted a lot). The Service Sector is really getting some pace now on the back of increased high street sales (despite threats from the interweb and out of town shopping). Construction figures are the best they have ever been for 6 years. And most importantly Lego has seen a 17% rise in sales. All sectors of the economy are growing, which, apart from last month, has only happened in 1991.

Lego is on the increase.

The best news however is twofold. Unemployment is down and will continue to fall. Expect an increase in the 1.3 million jobs that that have been created in this country since 2010, a good record for the Conservatives in government. The growth in the economy also means tax revenues are up for the government which is good for deficit reduction because the shortfall of tax has led to the deficit falling less than expected by the Chancellor in 2010. Perhaps we will pay off more of the deficit than expected?

All areas of the economy are growing creating more jobs in ares like the car industry.

But this actually leads onto the start of the bad news because the days when cheap government lending is over. The small window we had to pay back or debt with the least cost has virtually closed because yesterday the cost for the UK government to borrow reached over 3%. This is an international rather than a purely UK problem and is an inevitable shift where bankers and other countries realise that governments are not very good at paying back loans. So now each Pound in debt is a bigger weight on the future of the UK. 

Interest Rates are likely to be at an all time low for a very long time.

Also we may see a problem caused by the Bank of England keeping the rates of interest at 0.5% for 3 years (despite some caveats). This move is good for stability as businesses have a pretty clear picture of what to expect of the future, but it's not as brilliant a move for lending as people may think. Although we have started to create more wealth with economic growth, we have a capital problem still in the UK. Cutting taxes would aid this partially but we really need to be encouraging people to save so their money can be leant out, this can be done by raising interest rates. Although a low interest rate will make people want to borrow more it is impossible to do so when there is very little money. If I was Governor I'd start thinking about raising interest rates sometime in mid to late 2014. 

Inflation is something to watch out in case there is a big increase.

Inflation may become a big problem too because the government is going to start trying to get rid of as much as this debt as possible by decreasing the value of money. It has already done this quite a lot with almost 25% of the deficit that paid off by printing more money. With more quantitative easing possibly on the way, the government increasing energy bills and interest rates remaining at a standstill inflation is likely to increase. Bad for business and for people's buying power. Inflation is not something that any government wants to increase and especially before an election which Labour will fight on the cost of living.

Cue Union Flag piggy bank surrounded by money.

So there we are, lots of good news about growth, profit, jobs and deficit reduction but things to watch out for in the next coming years and possibly some mistakes made by the Bank of England and the Government.

Also, what do you think to the new look of the Blog? If you like it then good, if you don't well you'll just have to put up with the blue, red and white combined with a new logo.

Spend, Spend, Spend

Today was, as you should know, the spending review for 2015/2016. Theoretically this doesn't really need to happen mostly because it is timetabling cuts during the next Parliament, but this is a very politically savy move by the Chancellor to show a plan of action to the Great British public and put Labour on the spot. 59% of the public believe cuts are necessary (up 3 % since the Coalition came to power) but more importantly only 27% of the public think austerity is wrong (down 7% since the Coalition came in). This puts Labour in a tight spot because they can longer credibly say to the public that they will increase spending. The thing the Government is bending the truth a bit on making cuts.

Osborne is being shown up by the Labour Party of the past. I would point out though that the Labour Party at this moment would come no where near to what Healey cut in his time. 

In real terms government expenditure, despite the cuts, is projected to be slightly higher in 2015 than it was in 2011. The broad cut message apart from in 2010 is that in real terms we have stayed very much the same and even went up slightly this year compared to last. But how can this be? It is true that we are cutting lots off government departments, some like Communities and Local Government is going to have over 1/3rd taken off their budget.

We are making real cuts to budgets but overall government spending is going up this year.

So what has gone wrong? Well put simply we haven't seen the growth expected by George Osborne in 2010 and thus tax revenues have been down. Thus to keep our economy going Jeffrey Gideon the Chancellor has decided we need to stimulate the economy to make sure we don't lose the tiny percentage of growth we have at the moment. Because our economy, like somebody dependant on drugs, is so addicted to state spending if we were to start to fix it there would be serious downers experienced, which are politically unpalatable according to the Chancellor.

However the growth problem and lack of revenue can be fixed by lowering tax. At a lower level more people are willing to pay and the economy grows creating even more revenue. In the medium term this will get things going again although we would have to cut a lot more at this moment. Overall however, when comparing it over the 20 or more years it will take if noting changes, we wouldn't have to cut so much because debts and deficits are being paid off more by tax income and less by cuts. Short sharp shock treatment that produces confidence by giving people more money in their pocket.

When we cut the 50p tax rate to 45p the government brought in much more revenue than we did when it was higher. 

The thing is, the public actually think we are cutting way more than is actually going on. 39% of people, a lot higher if we discount the 18% who have no idea about this in the polling data, think we are cutting too far and too fast implying that the Government is cutting spending by several percentage points each year at least. Essentially we are taking a big political hit for no real gain. The debt, which is actually the main issue is increasing too much, there is too little growth and government is still the biggest part of the economy. The deficit is borrowing for borrowings sake an important but nonetheless a side symptom of our problem. What the Government has done so far is good, but it could do better.

There is however one piece of good news. The last budget had some very tactical tax cuts. There is a new feeling of slight optimism. It will not be as great as giving people more money to spend but somehow words such as aspiration and growth mentioned very often have inspired enough confidence to possibly start some sort of private sector led growth in the country. 

The words 'aspiration nation' may just save the UK economy.

Waste and Cuts

Today the figures for the cost of PM Direct, where Dave speaks to members of the public, was announced at £50,000. This does seem a tad too much for a glorified Town Hall meeting but I think we need should have a scale of the amount of cuts that are needed and pick the fights on what really needs to go.

Dave Direct.

The budget deficit stands this year at £108 billion and the national debt is £1.18 trillion. So let's cut PM Direct and have no public questions at all. That would save us the £50,000 and bring our deficit down to £107,999,950,000. This is obviously a truly massive saving.

It's clear we've got to do better than that. PM direct is similar to that of local government, listening to people directly and so on. So let's abolish it we'd save £27.1 billion. that's a fair size of money but barely a quarter of the budget deficit.

Let's try and get rid of that deficit. I'd then abolish the Northern Irish, Scottish and Welsh assemblies. They are a bit like local government and together make a saving of £48.2 billion. The deficit would stand at £32.7 billion.

Councils also are closely affiliated with the police. So let's get rid of them and any justice system we have in this country. We'd then save £31 billion. Almost got rid of the budget deficit then.

So let's cut international aid, that's £12.7 billion, most Tories want this to have a cut if not to go completely. That will get rid of our deficit. Hurrah, although I wouldn't in a real life scenario want an end to government departments, I would like the government to make net cuts.

But let's see how far we get the debt down by cutting. Dave said that he wanted some of the international aid budget to be spent on military expenditure so let's get rid of all forms of the MOD and military expenditure. A whopping £40 billion will be saved. But that doesn't make much of a difference to the debt either. Let's get rid of education too, that's almost £100 billion. The state at this point is now just a glorified wheelchair.

Our national debt will then stand at £1,040,000,000,000. Still loads. So let's get right to the bone. What about cutting all welfare and the NHS, tough times and all that. This comes to the massive total of  £357 billion. £683 billion pounds is left.

The State has very little to do now, so what's the point of it. Let's abolish it completely. If we can get round the logistical problem of privatising tax collectors and the like. We can save a total of £720 billion. There is now no spending, only income to pay the debt.

If we did that we'd still have to pay £468 billion. That's how big our problem is. If we abolished all spending for 1 year we'd still not pay off our debt.

If we abolish the state we would still be left with a huge amount of debt.

Obviously I'm not here to tell you we should abolish the state. That's just silly. But we need to be looking around for big areas where we can cut. £50,000 is nothing. I am a great believer in look after the pennies and the pounds will look after themselves. But clearly this will not work in the mess we are in. We need to really get a hold of the economic problems. 

The Budgie

It's budget day, and now the dust is beginning to settle let me tell you what I thought about it. George Osborne has done an alright job but don't let it cover up the underlying message is that Britain is not in great shape.

First the Good Stuff. The TPA must be pleased as they can now change their hashtag to #mashedbeertax with the alcohol escalator now axed. Sin taxes never bring in any money so just let people drink what they want. Good news for York University as their Hagueathon (an attempt to drink 14 pints like William Hague) is now 55p cheaper*. Also petrol is not going to be put up. Horray!! It is 15p cheaper to fill up under this government than it would be if Labour were still power. There is a continued Capital Gains Tax holiday. There are quite a few things to like.

Also there is this:

 

But now the overall picture of the British economy. Well borrowing is going to go UP again this year, oh dear. By 2017/2018 this country's debt will stand at 85% of GDP!!!!!!! Also growth is predicted to be just 0.6% this year, not very good either. Makes you wonder whether Mervyn King is right when he says 'there is underlying growth in the economy'. There are also no net cuts again. This is the worst bit as we are cutting £2.5 billion from department budgets to spend on programmes that are not needed. This is so stupid it's unbelievable, all wasted on projects like HS2 that make no money. What a loss.

So overall. We have No Net Cuts. No huge tax cuts. But we do have some good things on the side which may make a difference. Mind you the average family is still £700 better off than under Labour.

Also wait till next week. By then Labour may have picked out a sex tax or something.

*I would like to point out this is NUCA's idea first with the campus 14.

Good Morning Cyprus

Cypriots today received the best wakeup call ever today. The Eurozone has put a one off levy on all savings of 6.75% for any one with less than €100,000 and for anything exceeding that 9.9%. What a great day for the people of Cyprus.

Cyprus is broke, the country has a debt of €15,000,000,000, 74% of GDP. Cyprus has received a loan from the ECB as a bail out and a team of finance ministers with the President, who was elected recently 'to deal with the countries debt', are carrying out a levy on all savings on Tuesday to help pay off the debt. The Euro Team and Cypriot Government have judged that the banking crisis is over so it is safe for this to happen.

If we disregard the whole taxation and surprise thing about this levy, which is bad enough (I hope you have been filled with disgust from the start), there is one big problem. Firstly Cypriot banks are really not that safe this month the two largest on the island posted a €4.5 Billion loss, almost 25% of GDP in the country. Banking has never been in a worse shape, the officials have great timing.

Now it is even worse as everyone is withdrawing money. People are fighting through queues to avoid this 'robbery'. There would have been a run on the Banks if it were not for many of them closing their doors to stop the money from leaving. People can now only use ATMs and those few banks that remain open. And do you think people will use Cypriot banks again? Unlikely. Anyone with €100,000 will definitely be looking for a foreign bank in the future. Who's to say this won't happen again? So now Cyprus has a capital crisis. It's all going down over there.

And guess who these Banks have lent to massively, our good old friends the Greeks. So it's going to go wrong for them even more now. What is more Greece, and any other indebted country, should watch out. This great policy may come to your shores too.

And now for the icing on the cake. Cyprus is about to raise its corporation tax, clearly the best way to get businesses to grow. Who runs this country, the Labour Party? Oh no wait it's the Eurozone and they're just as bad. This is just a prime example of what's wrong with European economics. But I'm not surprised, half of all left wing politicians are ex-Euro Communists.

‘Man Up’

The pressure is now on in the Tory Party. The parliamentary party, who are more loyal to David Cameron than the rest of party, have made sure the heat is now on George Osborne to produce a budget that could not have been written by Ed Balls.

Tories of all places are calling for tax cuts and to cut the debt and deficit. Last year, as well as this year, the debt will rise. This year the deficit will do so too. George Osborne has not achieved what he set out to do. There is also only 0.2% growth to boot. Alistair Darling had a better record with about 1% of growth at the end of his time. This is directly effecting the Conservatives performance for 2015 with many UKIP voters basing their swap on economic issues (see http://thingselliottsays.blogspot.co.uk/2013/03/eastleigh.html)

Priti Patel has said "that our economy is struggling. Growth is sluggish, rising living costs mean families have to tighten their belts … the truth is that the taxes and regulation are a large part of the problem."

Even Kwasi Kwarteng, who chairs the free enterprise select committee, has said "We are still borrowing £120bn. We are not in a fit state to be spending money in this way … We have got to address this, and if we don't, what will happen is that we will have another government which will probably not address it and we will end up being a basket case."

"I'm quite happy to say that publicly. This is a big, big problem, and unless we can actually man up and deal with it, I think we've got big problems ahead of us."

People who have spoken out include Ben Gummer, Theresa Coffey and David Rutley, people who do not usually speak in such a disapproving tone. They are piling on Conservative pressure to have a more Conservative economic policy.

David Cameron recently said that "there would be no shift to the right" under his government. Tory MPs aren't asking for this. They are asking for a shift from Brownite economics to that of a liberal government. The problem for George Osborne is that he is too, small c, conservative. He refuses to change from the path left by the last government, indeed those that advised Mr Darling still advise him. The pressure is on to ‘man up and deal with it’ if not Mr Osborne may find that he’s out of a job (if it becomes so bad the PM will throw him off first). 

Where is the growth?

GDP figures came out recently showing -0.3% economic growth. Overall 2012 saw just 0.1% growth in the economy.  Why is this so considering the government says it is tackling the debt and deficit coupled with tax cuts? Obviously partially responsible is the amount of uncertainty in Europe at the moment. This is not just directly because of debt crises in Greece, Spain etc but because the exchange rates for the Euro are fluctuating, ironic for a currency that was specifically designed to be stable. But it’s no good just pointing over the Channel because other countries are growing.

So what’s up with the UK? Well Mr Osborne is bending the truth quite a bit when he says what I have laid out above. There are/will be some tax cuts, notably the decreasing amount for corporation tax, enterprise zones, dropping the 50p tax rate and the personal rate for income tax rising to £9,000. But where are the incentives for local government to decrease their business rates (particularly important due to the government wanting an emphasis on small business growth)? Why is VAT, capital gains tax and overall the tax level for the highest earners, who have the most capital to spend, up? The debt is going up, not down. The lack of cutting by the government means they are spending more on stimulus than Gordon Brown leading to the deficit falling slower than first predicted in 2010. No wonder there isn't any growth the Treasury hasn't got a clue what it is doing. Is it trying Keynesian stimulus methods that will in the short term create economic growth but accumulate more debt making the problem worse in the future or is the focus on market liberation by cutting spending and lowering tax?

There is also another element of a lack of capital in the UK with any left being spent on depreciation and not investment creating growth. The UK banks have to keep a high proportion of their capital stored in case of another crisis, helped out by quantitative easing. The low interest rate too means there is a lack of savings. Government stimulus as replacement for this capital shortfall is not appropriate, not only because it’s piling on the debt mountain, but because government is clueless to what is sound investment i.e. HS2 and wind turbines. We need to examine firstly lowering the amount of money the banks keep in case of a crisis and then, possibly sooner rather than later, raise interest rates so people can create capital through savings. It’s going to have to happen sometime.

So how can we get growth? Well firstly Government needs to decide to cut taxes and actually reduce government expenditure instead of trying half-heartedly to stimulate short term growth by Keynesian spending. After this is set in place we must then examine the lack of capital in the UK by reducing bank emergency funds and beginning to raise interest rates, because despite this making borrowing for investment less attractive there is little capital to borrow from anyway with fewer savings.

Advice to No.11

For a man who is trying to cut the debt Mr Osborne isn’t very good at it. Today it was announced that borrowing went up by £15.4 billion pounds in December which isn’t very good really, to put it bluntly. Our national debt is now £1.1 Trillion. Osborne is doing far better than Balls, Darling, Cable would have ever done as chancellor. But I think he isn’t taking cutting that seriously and seems to be relying on weak growth to bring down the deficit rather than sorting out the problem.

Now you could argue that the debt isn’t that big a deal, if we continue to cut the deficit with a stronger economy or small cuts then our country will be alright. I don’t believe this. Even if this model was economically sound, which it’s not, it would be totally destroyed when Labour comes back into power. Sadly they will do some time in the future, as they will borrow more and more till bankruptcy.

So where would I cut alternately. Well I’d leave the EU so that’s a big chunk, foreign aid would virtually all go, HS2 would be gone, I’d privatise many services like bin collection and that’s just to start. We seriously need to examine the amount the welfare takes up. I’d also switch the NHS to focus dramatically to prevention, which is much cheaper and more effective than cure. The government has committed itself to a rise in the NHS budget this parliament and it has carried it out. But my own personal view is that such a policy may be unsustainable and should be re-examined in 2015. Benefits wise there should be a reduction virtually everywhere with a lower benefits cap to minimum wage level.

We seriously need to decide what government does otherwise we’ll never escape from the austerity.