January 31, 2008 | posted by Michael Baxter in UK economy | comments (0) |

Ask any dove this question; and you are sure to get the same reply. Do you like hawks? “No we are terrified of them.” But, then again, the truth is most of us are doves. Unless we are prodigious savers, or mainly live off our savings, we like to see low interest rates. And organisations such as the British Retail Consortium seem to twitter away calling out for interest rate cuts as frequently as any bird chirping at nesting time. The tabloids, with their fool’s quest to maintain the property bubble, positively squawk out their demands for interest rate cuts, every time bad news hits the headlines.

Yet, yesterday, the Government reappointed the arch hawk.

Mervyn King is the longest-serving member of the Monetary Policy Committee to date. In fact he sat on the first meeting in June 2007, and in that time he has proven himself to be a terror of the interest rate stratosphere. Swooping down from his perch to vote for interest rate hikes 30 times throughout his 129-meeting career. No other member of the present committee comes close, with the next highest number of votes for a rate hike coming in at 13. But even taking his voting for a rise as a percentage of the meetings he has sat in, of the 25 members who have sat on the committee since its inception, he is still the sixth-most enthusiastic voter for a rate hike.

Besides, the two current members who have voted for hikes more often in percentage terms, have only sat on 43 meetings between them, so their record is perhaps statistically insignificant.

Despite his sharp talons, despite the unpleasant matter of Northern Rock, despite strong hints from chancellor Alistair Darling that he wants to see the committee adopt a more dove-like pose, Mervyn King has been reappointed for another five years.

It seems likely the Government made the decision despite King’s implied criticism of them over the way Northern Rock was handled. That wouldn’t have endeared him.

You will recall that before he became chairman of the Fed, Ben Bernanke said the key to solving a credit crisis would lie in splattering money across the land from a helicopter, earning him the nickname of helicopter Ben. Well, since last summer he has certainly practised what he preached, and metaphorically chartered a fleet of helicopters, each one brimming over with handsome pictures of George Washington. The ECB’s top man, Jean Claude Trichet was no less enthusiastic, moving us to refer to him as Airbus Jean, yet throughout this saga, Mervyn King has been decidedly stuck to the ground. If you like, a hawk which keeps a low profile when money is flying around.

The pressure on King to cut rates, and pump out more money must be intense. It could be argued that if he had pumped money into the system last summer, just like his peers in Washington and Frankfurt, the Northern Rock debacle could have been avoided. But then again, Mr King is a great one for not wanting to reward excessive risk-taking by bankers. It is known as the moral hazard argument, and Mr King seems to be a fully paid-up member of the ‘fretting about moral hazard’ club.

So was it a brave move by the Government? A decision to go against its popularist instinct, and put long-term measures ahead of short-term electoral needs?

No, rather it had no choice. If King had not been re-appointed, it would have looked as if the Government was trying to blame someone else for its mistakes. As for Gordon, the man who once self-styled himself as the prudent chancellor, he would have lost all credibility as a man who puts stability first if he had not re-elected Mr King.

But, it seems that the Bank of England is governed by a man whose position now seems completely secure. He will surely feel invigorated by his re-appointment, he will surely feel he is now free to practise his hawkish art.

And while he will receive much criticism if King still lingers with higher interest rates, it does sometimes feel he stands alone amongst central bankers, as a man who wants to deal with the underlying problems that created the current credit mess: an apparently endemic tendency for bankers to rush recklessly from one crisis to the next, sure in their knowledge that if things go wrong the central banks will bail them out, and the bonuses for the men and women at the top will be secure.

In truth, Mr King is more like a knight in shining armour trying to combat the forces of darkness, than a hawk. The government may not see it this way, but in re-appointing him they have struck a blow against the insidious forces that lie behind not just this crisis, but so many of the crises we have seen over the last decade or two.

January 31, 2008 | posted by Michael Baxter in UK economy | comments (2) |

Alistair Darling would need to announce fresh tax increases worth about 8 billion in this year’s Budget to keep public sector debt below the Government’s self-imposed ceiling, and to bring about the improvement in the public finances over the next five years that the Treasury wants to see, or so says the Institute of Fiscal Affairs (IFS).

The IFS has worked out its own – green budget – and even it is only slightly right; the Government seems to be stuck between the devil and the deep blue sea.

“Over the next five years,” says the IFS “to cut borrowing and comply with its self-imposed fiscal rules, the Government is planning to increase the tax burden to a 24-year high and cut public spending to an 8-year low as a share of national income. This would involve the Government taking 48 per cent of the proceeds of growth (the extra real income generated by the economy) in tax and other revenues over the next five years, up from 45 per cent under Labour to date and 30 per cent under the previous Conservative government.

“But we fear that tax revenues will not grow as strongly as the Treasury hopes, as the impact of the credit crunch and a weak outlook for profit growth depress Corporation Tax receipts and as weaker share and property prices reduce Stamp Duty revenues.”

The IFS concludes, “We expect the Government to have to borrow more than 40 billion this year, next year and in 2009-10. We expect public sector net debt to hit the Government’s ceiling of 40 per cent of national income in 2009-10 and to rise to 41.2 per cent by 2012-13. The Government would also break its golden rule (to borrow only to pay for investment) over the new economic cycle, unless that cycle lasts at least a decade.”

But all that is counting without Northern Rock. A possible decision by the Office for National Statistics to put Northern Rock on the public sector balance sheet would probably add 100 billion or 7 per cent of national income to public sector net debt, easily breaching Gordon Brown’s ceiling of 40 per cent of national income – although the eventual impact will be much smaller once Northern Rock’s mortgage book is sold.

And that’s the problem. In the US, the government is planning to give $150bn back to the taxpayer. But in the UK, we are still paying for the last round of fiscal expansion.

The idea behind Gordon’s golden rule is that it’s okay for the government to borrow in the lean years, providing it pays back in the years of plenty. The snag is, the economy, it appears, had developed the habit of relying on government spending. We staved off recession earlier this decade, in part thanks to Gordon’s spending. But, what happens if the next big threat comes along while you are still getting over the last one?