Party Political Animal

Posts Tagged ‘Economy’

Oh dear. It looks like George Osborne and David Cameron are drawing the wrong conclusions from the financial melt-down.

Osborn has been flagging up the need for more regulation. I’m not sure he is right. The FSA has extensive powers already. But as Northern Rock showed, the regulators failed properly to do their job – and the lightweight Treasury ministers failed to oversee them.
Nor do we need politicians and bureaucrats second guessing who banks should lend to. Demutualisation and deregulation of building societies has become a favourite target of the I-told-you-so mob.

Sure, we all miss the cosy, sepia-tinted days of having a paying in book and a high street building society, where we could drop in for a slice of Hovis and chat – in English.
When I tried recently to call the Nationwide about my account, it took six different people and eight calls over two weeks to discover they had lost my address. I had to find a branch – not easy – so I could go and prove who I was. And guess what? No-one spoke any easily identifiable language – and I wasn’t even offered a slice of Hovis.

Fine, we all know that the banks – which building societies have become – are hideously impersonal bureaucracies. But in the good old days, mortgages were horribly uncompetitive and strictly limited, forcing many less-well-off people into rentals. I’m not sure we really were better off.

No, the bigger problem has been the expansion of easy credit – something the Tories have largely ignored. 

Since 2003, the Bank of England has been set an inflation target of 2%. But which inflation rate?

From 1997 to 2003, the Bank targeted a 2.5% rise in RPIX. But from 2003 this was changed to 2% for the CPI.

The crucial difference is that the CPI excluded housing costs and council tax. One reason for the change was to standardise our measure with the Europeans. And at the time, both Gordon Brown and the Bank of England governor told us that house prices rises would ease off.

In other words, monetary policy and interest rates in effect reduced by up to half a percent just as the credit bubble was being huffed and puffed full of air.

So throughout 2006, while the CPI was broadly within the 2-3% range, the RPIX was bombing up towards 5% – a much more accurate indicator of real inflation and the credit/asset bubble.
The exclusion of housing costs from the indices didn’t matter so much in most of Europe where asset prices were more stable – though it did, of course, matter very much in Spain and Ireland, which neatly makes an important point about the disadvantages of a single currency across massively differing economies.

But I digress. Unfortunately at the time Conservative criticism of the switch was muted, with some notable exceptions including John Redwood. Indeed, Osborne remained largely silent throughout 2006 and 2007 even as an increasing number of commentators criticised the mismatch between real and targeted inflation.    

In too many ways the Conservatives have tried to march in lockstep with New Labour. If they are not careful, they will make many of the same errors if and when they reach government.
All the touchy-creepy Steve Hilton stuff is fine. God know, the tone of the Tory party needed changing. But hey, guys, you also need to start to think about what you are going to do with the power, not just how you are going to get it.

Phillip Oppenheim

A year ago, Alan Greenspan, former chairman of the Fed for nearly 20 years, was being hailed by (almost) everyone as the great architect of an era of low-inflation growth.

Meanwhile, closer to home, Gordon Brown was casting himself in much the same heroic role – his name could hardly be uttered by a breathless BBC commentator without the prefix: “the most successful Chancellor since the War”.

But then Mrs Thatcher once dubbed Nigel Lawson as her “brilliant” Chancellor and look how that ended up. Plus ca change…

Phillip Oppenheim

Here’s a fact: inequalities in income under this government have got worse, both before and after tax. To put matters more brutally: the rich have got richer under Labour – relatively, while the poor have got poorer. And after the abolition of the 10p tax bands, things will get worse.

Delve into the more arcane recesses of the HMRC website and you will find a table showing that between 1999-2007, the pre-tax share of income of the bottom 1%, 5% and 10% and 25% and 50% of earners has fallen – while the share of the top 1%, 5%, 10%, 25% and 50% all rose. The after-tax figures make little difference.

If you don’t believe me, look at the Commons answer on the subject from Treasury minister Angela Eagle for July 17th 2007. I’m glad that Angie was forced to choke out that reply, because the rise in inequality under the Tories was a rallying cry for old Trots like her.

In fact movements in inequality varied in the Tory years. Overall, though, Angie and her gang had a point. Income did become more unequal between ’79 and ‘97. The excuse – and it was a decent one – was that the Conservatives began by dismantling a penal tax regime and that economic reforms delivered massively improved prosperity across all income groups.

In fairness, this government has also delivered an overall increase in wealth – up to now, anyway. But they have little excuse for increasing inequality. So what went so wrong?

First, they promised what they could not deliver. To take one small example, Gordon Brown came to the Treasury in ’97 on an election pledge of taxing the non-doms. Non doms are, as we know, often very rich people who live in this country but pay no tax. Yet nothing happened for a decade – and we all know what happened next.

Then, in an attempt to produce a “fair society”, Brown micromanaged the tax system by introducing a new 10p tax band and tax credits.

The theory behind tax credits is good. The interaction of the tax and benefits system often disincentivises people from going to work. The Tory government struggled with the problem and didn’t really come up with answers.

Tax credits for less-well off workers and families address the problem – in theory. In practice, the tax credits system has been so complex that even the HMRC don’t seem to understand it. Over-payments suddenly reclaimed and under payments not remedied have left thousands of poorer people in a desperate state.
Five years ago Treasury minister Dawn Primarolo admitted “the system has not worked 100% right from the word go”. It still isn’t. Did someone mention joined-up government?

Overall, Brown’s obsessive tinkering with the tax system has mirrored his U-turns on capital gains tax, pensions and savings policy, all of which has been a bonanza for accountants and tax lawyers – without addressing inequality.

And now they’re supposedly concentrating on the 20p band to “simplify” the system. Yeah, right! The truth is that Brown failed to save in the fat years, so now the lean times are coming the government is skint and needs to tax the poor to raise some dosh – at just the time when the economy needs a bit of consumer spending

No wonder poor John Prescott tried to eat himself to death. “Things can only get better..” – remember the new Labour anthem of 1997? Wrong. They just got worse.

Phillip Oppenheim