Sunday, 31 March 2013

So much for 'family values' ... Tories make families £1000 worse off this year

The sharpest set of social security cuts come into force tomorrow, 1 April. There's a comprehensive look at those changes here.

But one thing that has gone under-remarked is how hard the Tories are hitting families in the budget cuts. In year one, they abolished the sure start maternity grant which gave £500 to low income families having a baby.

They also abolished the Health in Pregnancy grant which gave £190 to pregnant women to help with living healthily during pregnancy.

Once baby is born then parents will be entitled to maternity and paternity allowance. But the annual uprating due to occur on 1 April is capped at 1%. So it increasesonly to £136.78 instead of £139.92 if it had been uprated by RPI inflation. So for a couple taking 39 weeks maternity allowance and 2 weeks paternity allowance, the government is in real terms taking away nearly £130.

Child benefit was until January this year a universal benefit - a gift from society to parents to help with the additional cost of bringing up the next generation. That ended if either parent has an income of over £50,000. But even for those who are not high earners, the government has it in for you.

For the past three years, child benefit has been frozen at £20.30 (for the first child) and £13.40 (for all subsequent children). If these had been uprated by RPI inflation for the last three years then from tomorrow the new rates would be £23.01 and £15.19.

So a family with one child will be £141 worse off this year, and a family with two children £234 worse off.

This of course is all before any calculation including the benefits cap; capped rates of jobseeker's allowance, employment and support allowance, tax credits and other benefits; extra liability for council tax; bedroom tax; reduced local housing allowance, etc

A low income family having their first child will be at least £961 worse off this year due to the benefit changes made by this government.

It's little wonder that the Child Poverty Action Group calculates that an additional 200,000 Children will be living in poverty this year, rising to an extra 1 million by 2020.

Wednesday, 13 March 2013

Why David Cameron is economically illiterate

David Cameron has managed to find folksy metaphors that have resonated. His one about the last Labour government "maxing out the nation's credit card" may be economically illiterate - implying that the state is like an individual consumer (a point demolished in this Guardian editorial) - but it certainly conveyed the claim that Labour had spent too much and that was why we're in a crisis.

"They didn't fix the roof when the sun was shining" resonated equally, even though it implies a classic Keynesian demand management strategy (that Labour should have raised taxes during the boom*) which Cameron would presumably reject ... but it did communicate a point that Labour was reckless.

However, his latest claim - from his speech on the economy last Thursday and repeated at Prime Minister's questions today - is that:
“They think that by borrowing more they would miraculously end up borrowing less ... Yes, it really is as incredible as that.”
But it's not incredible, in fact it's a common occurence for most people - and lends itself to a Cameron-style metaphor. Balls or Miliband could simply retort:
"It's like when you borrow money today to buy a house with a mortgage, so that tomorrow you spend less because you don't have any housing costs in later life"

The metaphor can actually be stretched even further:
"And why do we borrow more today? Just like the mortgage holder: to get an asset at the end of it. That's exactly like the infrastructure Labour is advocating on a million new council homes. As well as creating jobs, reducing unemployment, tackling homelessness and overcrowding, we'd also get extra income from council rents and save on the housing benefit bill. So yes, Mr Cameron we'll borrow more today so that we borrow less tomorrow."
In the FT today, Martin Wolf also assesses Cameron's economic credibility - and pulls no punches.

*instead Labour cut corporation tax from 33% to 28% during its period of office and only introduced the 50% tax rate from 1 April 2010, well after the boom had bust.

Saturday, 9 March 2013

The Economist backs Cable, but it's no lurch to the left!

Cable looks to the heavens for inspiration
In a further sign that Cameron and Osborne are losing economic credibility even among their own side ahead of the 2013 Budget, The Economist's editorial has come out in favour of Vince Cable's proposals which he outlined in the New Statesman earlier this week.

Although more clearly articulated, Cable's proposals and modest critique of Osborne's strategy are actually more right wing than what the two Eds' Labour Party is calling for. Call it 'austerity-lite-lite'. Vince has since been feted by many, including now the journal "read by more of the world's political and business leaders than any other magazine".

The Economist backs the case for extra borrowing, made by Cable:
"All in all, the present evidence does indeed – with qualifications – point to some weakness of domestic demand and a low risk of expansionary policies spilling over into significant domestically generated inflation."
As the editorial points out, "between 2009-10 and 2011-12 public-sector net investment plunged from £48.5 billion to £28 billion" a large part of the reason for the appalling construction figures.

However, like Cable, The Economist also advocates that some "expansionary policies" i.e. public investment, should be funded by cuts to pensioner benefits and that perennial punchbag, welfare. The Economist also supports Cable's call to remove the ringfence around NHS funding.

This highlights how Cable is still very much on the Orange Book wing of the Liberal Democrats. Austerity is failing, the markets are unhappy, and what Cable and The Economist reflect is the capitalist class scrabbling around for an ideologically compatible solution to the enduring slump.

The fact that the right is divided, and Cameron and Osborne increasingly isolated, is reason for joy, but Labour and the trade union movement should not be taking sides in this internecine squabble.

Instead the struggle goes on to stop austerity in its tracks - not simply find another route for it to get to the same destination.

The left should take some encouragement however that its analysis is being proved right and that the right is having to adopt some of our proposals. In the case of The Economist both for more borrowing to invest, and - surprisingly - for a Land Value Tax:
"One reason why companies sit on development land is because they do not pay taxes until the offices and warehouses are built. It would be much better to tax the land value: that would make hoarding expensive and force owners to sell to someone who can use the site. Once in use, the site value and the tax would rise—creating a virtuous circle, as the revenues pay for better infrastructure, making land more valuable."

Wednesday, 6 March 2013

Downgrade your expectations: it pays to be wary of credit ratings agencies

Prem Sikka

Evaluating the creditworthiness of countries is far from an exact science, yet the influence of credit ratings agencies is extraordinary.

Recently, the UK government’s debt rating has been downgraded by credit rating agency Moody’s from AAA to Aa1. It joins France, whose credit rating was downgraded to Aa1 in November 2012. In August 2011, Standard & Poor’s (S&P) had downgraded the US from AAA to AA+.

Credit ratings enable investors and markets to assess the risks of government securities. In the case of the UK, a downgrade could increase the government’s borrowing costs. It would also further reduce the value of the pound sterling and thus stoke inflationary pressures by increasing the cost of imports, though the weak pound may help British exporters.

But the notions of social stability, justice, and fairness are beyond the remit of credit ratings agencies. The general message from the Moody’s downgrade is that the UK government must deepen its austerity program and attack hard-won social rights on education, pensions, healthcare and unemployment.

Credit ratings can have serious impact on national and household accounts, but are also a major money-spinner. In 2012, Moody’s reported profits of $1,077 million and 2012 is expected to produce record profits as investors seek shelter from growing financial uncertainty. However, the models used by credit rating agencies continue to produce odd results, and there is an urgent need to check the economic, social and political power exercised by the rating agencies.

The UK government has provided around a trillion pounds in loan and guarantees to ailing banks. For many years, the UK-based banks engaged in organised tax avoidance, money laundering, interest rate manipulations, mis-selling of pensions, endowment mortgages, payment protection insurance and many other scandals. These scams did not persuade credit rating agencies to reduce the UK’s credit rating. Perhaps they approved of hot money rushing to London to take advantage of scams. Just as the regulators began to show signs of getting off their bended knees to giant corporations, Moody’s has downgraded the credit rating.

The very concept of risk assessment requires some openness and a relatively free flow of information, but credit rating agencies continue to give higher ratings to opaque jurisdictions. Bermuda, whose opaque structures often enable corporations and wealthy elites to avoid taxes elsewhere, is rated Aa2, while the economic powerhouse China is rated Aa3. Oil-rich Saudi Arabia is rated Aa3, the same as the Cayman Islands which is well-known for its secrecy, opaque structures and fiddle factories that facilitate tax avoidance. Iceland, bailed out by the European Union and the International Monetary Fund enjoys a credit rating of Baa3. It shares the same rating as India, which has foreign currency reserves of around $300 billion. In December 2009, Moody’s boldly stated that “investors' fears that the Greek government may be exposed to a liquidity crisis in the short term are misplaced”, but barely four months later, the Greek government was negotiating bailout deals.

Credit rating agencies have a history of poor performance. Enron, the fraud-ridden US energy giant, collapsed in December 2001. Right until its demise, it continued to attract favourable credit ratings. These enabled the company to overstate its profits and assets and understate its liabilities. Credit rating agencies said that lessons will be learnt, but the banking crash once again has shown that the emperor had no clothes. Moody’s, Standard & Poor’s, and Fitch, the world’s biggest credit rating agencies, maintained A-ratings for Lehman Brothers and US insurance giant AIG until early September 2009, just days before their collapse and bailouts.

In 2008, just prior to the banking crash, there were about twelve AAA-rated companies and about the same number of AAA-rated countries, but around 64,000 complex financial instruments received the AAA-rating. Banks sliced, diced and repackaged subprime mortgages, collateralised debt obligations and structured finance deals into what they described as “safe investments”. This illusion was supported by the AAA-ratings given by rating agencies, which subsequently turned out to be junk. The regulators were content to let the banks hold less capital for AAA securities and, as a result, banks did not have the buffer to deal with toxic debts. Investors, governments, taxpayers and markets were duped, and the whole financial system came tumbling down.

Credit rating agencies wield enormous economic, social and political power, but do not owe a “duty of care” to the stakeholders affected by their opinions. These issues have now become the subject of legal disputes. In February 2013, The US Department of Justice sued Standard and Poor’s (S&P) for issuing “inflated ratings that misrepresented the securities’ true credit risk”.

The Australian case of Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 held that credit ratings agency S&P was liable for the “misleading and deceptive” ratings issued by it because it made unfounded and irrationally optimistic assumptions in its analysis. Protracted litigation will follow as credit rating agencies try to wriggle out of any social obligations. These issues are important because credit ratings form the basis of economic experiments that can result in austerity drives, unemployment, loss of social welfare, and ruined lives.

This article first appeared at The Conversation

Tuesday, 5 March 2013

It's time to take over the banks!

Get along to an excellent meeting tonight at 7pm in Westminster to discuss the public ownership of the banks.

At TUC Congress last year, unions voted in favour of an FBU motion calling for the public ownership of the banks. At the meeting tonight, to be held in Committee Room 6 in the House of Commons, FBU general secretary Matt Wrack will discuss the campaign alongside LRC and LEAP chair John McDonnell MP.

The meeting will also hear from Michael Roberts who, alongside Mick Brooks, wrote the excellent FBU pamphlet 'It's time to take over the banks' (pdf).

The pamphlet makes the case for a publicly owned finance industry that provides a public service, giving financial support to industry and working people. Taking over the banks will enable planning, investment and the creation of millions of jobs. A publicly owned and democratically accountable banking system is essential to developing such a programme.

The meeting is open to all and free to attend, but allow 10-15 minutes to get through parliamentary security.

In a Comment is Free piece yesterday, PCS general secretary Mark Serwotka also made the public ownership of the banks one of his 10 steps to kickstart the UK economy. So far, the article has an 89% approval rating!

Monday, 4 March 2013

Pushing on a piece of string

The Funding for Lending Scheme (FLS) published its quarterly results yesterday. Announced at the 2012 Budget and established in August, the scheme aimed to boost lending by effectively subsidising it - £14 billion has so far been given to the banks.

In total £70bn is being made available to banks at reduced interest rates to lend on to small and medium-sized businesses, as well as individuals.

However, results announced yesterday for the last three months of 2012 show that bank lending fell by £2.4 billion. So despite giving cheap money to the banks, lending fell why?

The answer is simple: demand. With the average wage growing by just 1.3% in the last year - and inflation at 3.3% - people's living standards are falling, and have been for over four years now. You can supply as much cheap credit as you like, but if there's not sufficient demand then it's just pushing on a piece of string.

As I told the Morning Star:
"When people's incomes are being constrained and job insecurity remains there is no confidence to borrow money, even at marginally reduced rates.

"Likewise businesses know that consumers are spending less and are not borrowing to invest in expanding their operations,"
Consumer spending in the retail sector fell 0.6% in January from December which itself saw a 0.3% fall in sales. The January 2013 figure is also down 0.6% from January 2012. With wages lagging inflation a sustained upturn is highly unlikely to materialise.

That's why it's encouraging that members of the PCS union have voted to strike - primarily over pay - but this needs to be widespread and result in inflation-busting pay awards to boost demand.

Even some Tories are reaching the conclusion that the supply-side is not the problem. Step forward the Mayor of London's new economics adviser Dr Gerard Lyons, writing in the Telegraph today:
"The economy is suffering from a lack of demand. There needs to be more spending by the Government on both infrastructure and construction and people and firms with the ability to spend need to be given the confidence to do so"

On the business side, some have pointed to statistics showing that the number of small business loans rejected by the banks has quadrupled since the crisis - they say this is evidence of unmet demand. That may be true to a limited extent, but it ignores three salient factors:
  1. Businesses are now making more loan applications to cover (what they hope are temporary) shortfalls, rather than to invest
  2. Banks, whose reckless lending practices played a major role in causing the crisis, are now more rightly more cautious
  3. The same business plan in 2006/07 at a time of high employment and rising real wages was a lot more attractive to invest in than it is in 2012/13

I expect that lending via the scheme will pick up marginally in 2013, as from the low base borrowing at reduced interest rates will be more attractive to some businesses and to some people. However, increases in FLS lending are not likely to be enduring until something happens to increase demand.