25 June 2010
Paying the Piper
New Chancellor of The Exchequer George Osborne's initial budget highlighted his inexperience. Osborne seemed much more concerned, both in his budget and his subsequent comments, with scoring cheap political points than with any kind of meaningful measures to tackle the UK's economic problems.
The difficulties that remain are:
* The high level of annual deficit
* The record levels of wartime debt
* The additional capital needed by the state-owned banks
* The reluctance to write down asset prices to realistic levels
* The anaemic performance of the UK private sector
* Severely damaged economic confidence
Osborne addressed the additional capital requirement by creating a banking levy - this recognises the problem but offers a solution which implies that he's completely out of touch with the realities of the moral hazard of modern banking. In a non-zero failure world, banks will fail sometimes but a regulatory framework that prevents the build-up of systemic banking and shadow banking sector risk remains the most important priority and one which hasn't been addressed.
The annual deficit is being addressed by a series of cuts and also by increasing capital gains tax and VAT. A higher consumption tax at a time of weak economic performance is muddled thinking analogous to that which led Messrs Smoot and Hawley to introduce tariffs in the USA 80 years ago, erroneously thinking that this would improve America's balance of payments at that time.
From what we've seen the proposed cuts are more likely to impact economic growth, consumer spending and essential services while not addressing the waste and inefficiency of the bloated UK civil service - the cutback of development finance facilities to companies like Sheffield's Forgemasters is simply making short term savings at the price of longer term gains. Rather than taking the difficult structural decisions, the measures appear to be based on very short term immediate expediency at a time when what is needed is focused strategy. Even bank-benchers from the government's Liberal Democrat coalition partners, were united in their opposition to Osborne's budget.
A further slowdown may well probably have been unavoidable anyway - thanks to Osborne, it's now completely inevitable. A second banking crisis was a major concern - instead of preventing it, Osborne's answer is to build up a GBP 2 billion fund to allow him to throw more good money after bad.
Debt is likely to continue to spiral. Asset prices remain fundamentally overrated preventing further investment. The structural problems all remain - they've simply been buried for 6 months and are likely to re-appear with even greater severity.
Eamon Holmes in an interview on SkyNews asked Osborne about England's World Cup prospects and when Osborne stated a preference for selecting Joe Cole, noted that The Chancellor's footballing wisdom seemed to be sound and sharp even if his economic judgment wasn't. That’s pretty worrying right now.
I wonder how profound England football manager Fabio Capello's financial knowledge is - it can't be weaker than Osborne's - maybe a job swap is called for?