Azure Global : 10/04/13

Friday 4 October 2013

George Osborne's credibility gap

The chancellor claims he'll balance the books and avoid tax rises. But his record so far is of failure

The party conference season doesn't always change the political weather. This year it has. Ed Miliband's decision to stand up to the power companies in the face of market failure struck a loud chord with the public. And no, it's not anti-business to challenge such failures.

His jibe that the rising economic tide would lift only yachts, struck a raw nerve with the Tories. So they rushed out measures to help home buyers, despite real fears of a housing bubble. They announced a married couples' allowance worth less than £4 a week. They promised to freeze fuel duty. The funding of these promises, costing more than £2bn, is to be met from some unidentified source. Strange that when Labour makes promises, the Tories claim it will mean more borrowing, yet it's fine for them to make unfunded promises.

The Tories have also changed their tune on the economy. In September George Osborne claimed to have slain the dragon of downturn. Many economists have their doubts. It was also bad politics. A dead dragon poses no political threat. So this week the beast has been resurrected: it's not over, after all.

The chancellor promises another six or seven years of austerity. After that, he claims he will balance the books. This raises questions about both the credibility and the desirability of his promise. On credibility, consider the facts: in 2010 the economy was growing and we still had ourtriple-A rating – yet at the time Osborne claimed we were like Greece. More than that, he said he would balance the books by 2015.

Today, having moved considerably from his original plans, he is borrowing 68% more than he promised. He will borrow £96bn in election year alone. The deficit, far from being eradicated, is still at £120bn. Osborne's debt reduction target has been kicked into the far distance, and the effect of many of the cuts pencilled in for the next few years has yet to be felt.

So the chancellor's record is not good.

Is it really credible to deliver the scale of the cuts needed to balance the books and avoid tax rises, as Osborne now says it is? Not without economic growth it isn't – something that the prime minister seemed to concede in his speech yesterday. Is it credible to deliver a 20% real cut in the police budget, both in this parliament and the next?

There are two issues here. First, what sort of services will the public get if they are hacked back on this scale? The Tories need to tell us. Second, the Conservatives' rhetoric often implies that the public sector is bad and the private sector the only good. Yet, for example, this country's future depends on the quality of our education, not just for the few but for the many. And what price do we put on good quality health care, let alone the increasing costs of caring for a growing elderly population?

This is a debate we must have. It is essential to bring down our borrowing and debt. It's worth remembering that in 1997 Britain's debt was the second highest in the G7. A decade on, it was the second lowest. But these reductions must be delivered both credibly and in a way that does not damage the UK's economic and social fabric. The best way of doing that is to get sustainable growth. To promise a balanced budget, come what may, carries the risk of damaging cuts and unacceptable tax rises.

Although economic growth seems to be returning, it is still lagging way below what was expected by now. What we produce as a country, our GDP, is not likely to return to its pre-crisis levels until 2018. This government is not on strong ground, either in blaming the crisis on the spending it supported in opposition, or on the credibility of its performance since the election.

The Labour party will stay in the middle ground, promoting enterprise and growth and never afraid to challenge market failures. Nor should we be scared to make the case that the public and a thriving private sector need each other. We need them both.

Article Source : http://www.guardian.co.uk

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Strong UK services data 'points to fastest economic growth in 15 years'

PMI score suggests economy grew by 1.2% in the three months to September, analyst says

Britain's economy may have expanded at its fastest pace in 15 years over the past three months, analysts suggested on Thursday, after an upbeat survey of the key services sector suggested it is growing at a healthy clip.

The monthly Purchasing Managers' Index for services declined slightly, to 60.3 in September, from 60.5 in August, but the average score over the quarter suggested the fastest growth in services output since mid-1997.

Chris Williamson, chief economist of data provider Markit, which compiles the survey, said taken together with similarly strong readings for activity in the much smaller construction and manufacturing sectors, this latest survey signals even stronger growth in GDP than the 0.7% recorded between April and June.

"Historical comparisons of the PMI with official GDP data suggest that the economy grew by 1.2% in the three months to September. This was a marked gathering in the rate of expansion compared with the 0.7% increase seen in the second quarter."

GDP growth Photograph: Graphic

Michael Tinsley, of BNP Paribas, added that in the second quarter of 1997, the last time the combined PMI surveys were this strong, GDP growth was 1.2% – well above Britain's long-term average – and averaged 1% every quarter over the following year.

"It remains to be seen whether the UK can repeat anything like that feat, and we would prudently expect some cooling in the data in coming quarters. But for now there is no mistake the economy is growing jolly fast," he said.

Firms reported that incoming new business had continued to be strong, they were hiring new staff, and expectations of future activity were also positive – a marked turnaround from the start of 2013, when many economists feared that the UK may have dipped into a renewed recession.

Howard Archer, of consultancy IHS Global Insight, described the latest survey as "very good news" – though he warned that it could force the Bank of England to take earlier action on interest rates than it currently expects. Under new governor Mark Carney's policy of "forward guidance", the Bank's monetary policy committee has pledged not to raise interest rates until the unemployment rate falls at least to 7%, provided inflation does not get out of control. The committee expects that not to happen for up to three years.

But many City analysts are betting that borrowing costs will have to rise sooner, as the economic recovery gathers pace. The first estimate of GDP growth for the third quarter of 2013 will be published later this month.

Earlier on Thursday, PMI surveys for the euro area suggested that the 17-member zone continued to clamber out of recession in the third quarter.

The services index jumped to a 27-month high of 52.2 – above the 50 mark that divides expansion from contraction. German activity expanded for the fourth successive month; while the French survey suggested the country's services sector scored its first expansion in more than a year.

The eurozone economy expanded by 0.3% in the second quarter of the year, marking the end of a gruelling 18-month downturn; but several member-countries, including Spain and Italy, and bailed-out Greece and Cyprus, remain in recession.

Article Source : http://www.guardian.co.uk

Christine Lagarde tells US that debt crisis threatens world economy

IMF chief says US politicians must overcome shutdown and raise US debt ceiling before 17 October deadline

Shares in New York fell sharply on Thursday after the US Treasury warned that the budget fight between Republicans and Democrats in Washington risked plunging the world's biggest economy into its worst slump since the Great Depression.

President Barack Obama turned up the pressure on Republicans on Capitol Hill after the Treasury and the International Monetary Fund joined senior Wall Street figures in urging a deal well ahead of the deadline for raising America's debt ceiling on 17 October.

"A default would be unprecedented and has the potential to be catastrophic," the Treasury reported.

"Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

The recession of five years ago was the most severe the US has suffered and the economy has recovered only slowly from the damage caused by the financial crash. A health check of the service sector showed a marked slowdown in activity even before large parts of the federal government were shut down as a result of the failure to agree a budget deal.

Obama accused the Tea Party wing of the Republicans of being "extremists" who were "demanding a ransom for doing their jobs". The president added: "Congress has to pass a budget that funds our government with no partisan strings attached."

Heightened anxiety in the financial markets was reflected in an early 170 point fall in the Dow Jones industrial average and a rise in interest rates for one-month US Treasury bonds.

Christine Lagarde, the IMF's managing director, urged America's politicians to settle their differences before the dispute harmed the entire global economy.

Speaking ahead of the fund's annual meeting in Washington next week, Lagarde said it was "mission critical" that Democrats and Republicans raise the US debt ceiling before the 17 October deadline. Lagarde said the dispute was a fresh setback for a global economy that would take at least a decade to recover from the slump of 2008-09.

"I have said many times before that the US needs to "slow down and hurry up" – by that I mean less fiscal adjustment today and more tomorrow," Lagarde said. She added that the world's biggest economy needed to put its finances in order, but favoured back-loaded measures to raise revenues and limit entitlement spending such as medicare that did not jeopardise short-term growth.

"In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy.

"So it is 'mission-critical' that this be resolved as soon as possible."

Mario Draghi, the president of the European Central Bank, has also warned of the risks from a protracted federal shutdown.

Lagarde's speech followed an appeal by senior figures on Wall Street for a budget to be passed in Washington. The IMF managing director said America's recovery was being held back by over-hasty budget cuts. "Households are in better shape, the housing sector is looking brighter, and the private sector engine is humming again. And yet, growth this year will still be too low – below 2% – due to too much fiscal adjustment. This should ease up next year, with growth about a percentage point higher."

Lagarde said: "We at the IMF are very familiar with the ebb and flow of economic cycles, with the shift from recession to recovery. Experience tells us that this process usually takes a year or two, or a bit longer if the situation is especially severe. The transitions I am talking about today are different. They will likely play out over the rest of the decade, if not longer."

Article Source : http://www.guardian.co.uk