ECB still throwing stones

Imagine this crisis as a plane bombing the global village (which here is represented by an actual village). It approached the US first (I guess their house overlooks the town from the side from which the bomber approached, but that isn't important), and they threw everything they could at the situation, starting with dramatic cuts in interest rates (from 4.75% in September 2007 to 0-0.25% in December 2008, where it has remained ever since). It is not zero precisely due to technical difficulties with maintaining rates at that value (what they set is a target rate). They have since bailed out the banks (TARP, TALF and various other programs) culminating (or perhaps not) with the stress tests that most of the leading banks passed, according to reports today. They also had a massive stimulus bill in their budget, acting as a boost the economy. This, in my metaphor, amounts to firing every available anti-aircraft weaponry at the plane.

In Britain, we were slower to acknowledge the threat. In July 2007 rates were raised to 5.75% and only started dropping in December 2007, finally reaching 0.5% in March 2009. We lead the way on "saving the world........'s banks" and also had a "stimulative" budget, running a whopping 12% deficit for two years. This amounts to using all available anti-aircraft weaponry, except starting with lower stocks. Consider also that Gordon Brown did much of the shouting about the peril we were all in.

In Europe, they are still throwing stones. The ECB started cutting rates in October 2008 from 4.25% and are STILL cutting, and in a position to cut rates. Today they went from 1.25% to 1%. Given that European economies are suffering every bit as much as British and American ones, it beggars belief that the ECB hasn't done more, sooner. Euro-zone governments have been less forthcoming in their stimulus packages too, although in Ireland's case it is because potential lenders won't give them any money. They must be assuming that the Americans, Brits or possibly the Japanese, Chinese or others will shoot this plane down for them. Put simply, they aren't doing their bit to help defend us all from a decade of penury.

Why 50%?

New Labour specifically promised not to raise the top rate of income tax in this parliament. The November announcement (of a 45% rate on earners of more then £150k) circumvented this by kicking in only in 2011, which must be after a general election. Now, however they have both increased and brought forward this rate rise (to 50% from April 2010). Why?

Reasons in favour:
1. Revenue. Increasing tax raises revenue (ignoring largely discredited Laffer theories about discouraging or scaring away high earners). However, even the Treasury only expects this tax to raise £2.4bn (compare to the budget DEFICIT of £175bn this year and next).
2. Symbol. There is a widespread feeling that the rich caused this crisis, and that whilst they may have lost more financially (stocks, housing and offshore banking having collapsed), they aren't the ones living hand-to-mouth as a result, and so it is very satisfying for the public to see the rich stung (especially since the personal allowance and base rate have both been made more generous for most people over the past couple of years). See "poorly targeted" in reasons against.
3. Angry mob. Related to symbol, this is a very effective way of drawing a little ire out of people's belief that politicians are representing the rich, and that everything possible must be done to punish both groups for this crisis.
4. Diversion. The deficit numbers are spectacular and so something must be done to draw attention away from the £350bn net public borrowing over the next 24 months. The Tories, to their credit, although entirely self-interestedly are focusing more on the deficit. It is my view that an 8-12% deficit was necessary this year and next, although I also feel that it should quickly return to surplus.
5. Putting the Tories on the spot. Not now, that is, but when they take over. How easy will it be for a Labour Shadow Chancellor to exclaim and fulminate about the Tories helping the few, the élite, at the expense of the many, whenever the next Chancellor tries to remove this tax (and try they will).

Reasons against:
1. Symbol. To those of means, this is a sign that Britain intends to tax them heavily for the forseeable future. Whislt taxes are rising everywhere, they are not equal everywhere, and this will encourage some rich people to shop around for a better country in which to live. They might even be heartily welcomed by countries desperate for their money.
2. Poorly targeted. Most of those who caused this crisis are no longer earning as much as they used to. Those still earning £150k work in countless fields, most of which have little to do with banking and many of which will be the same industries helping Britain (or any other economy) out of the recession.
3. Broken promise. Whilst Labour have (to me) a perfect force majeur defense for this charge, the Tories will use it to declaim any Labour election pledge.
4. It was proposed by the Lib Dems ages ago. Surely someone has pointed this out, but the Lib Dems had this in their manifesto for 2005, so surely the government is only acknowledging the superiority of the 3rd party.

Having said all of that, it was STILL the right thing to do. The symbol of hitting the rich (whilst not hitting them 85-98% as in the 70s) will help the party a lot, especially since it affects so few people (how likely are YOU to be earning £150k in the next 3 years?)

Budget 2009

Budget day and there are some key headlines:

1. Top rate of income tax to be 50%
2. £2000 incentive to scrap 10 year old cars
3. Borrowing to hit £175bn
4. Return of the fuel escalator
5. Changes to ISAs and pensions
6. Lots of other changes

I'll address each in turn below:

50% income tax - In 1988, Nigel Lawson (now Lord Lawson) cut the top rate of income tax to 40%. New Labour have always mentioned in campaigns that they wouldn't increase the top rate of tax. Last November, however, Alistair Darling announced a new top rate of tax for people earning over £150k per annum. This was to be 45% and to take effect in April 2011. It is this tax that has risen, and been brought forward. Now it will be 50% from April 2010. Several other adjustments, to minimise deductions for high earners mean that anyone earning in 6 figures will lose (however this is not many people).

Scrapping incentive - This is not a £2000 subsidy, as implied. Nor should it be confused with the £5000 incentive to buy green cars from 2011, that was announced last week. The government will only put up £1000, with the rest coming from the automobile industry, and will only apply to new cars. So not as generous as it sounded.

Borrowing - The largest peacetime deficit ever, even as a percentage of GDP. In fact only the Second World War sent the budget deficit higher. What is more, 2010/11 will be almost as bad as 2009/10. Over the 5 years whose deficits were announced a whopping £703bn. Which is more than a few. Realistically, the interest on that debt (given yields of 4% over the long term) amounts to £28bn per year forever, unless of course surpluses are run for the forseeable future (recent events have shown that period to be nil, but I speak figuratively). I still think this is the right thing to do, although I'd plan for lesser deficits in 2012-15 than Darling does. Having said that, it won't realistically be Labour in charge by then, so it is someone else's decsion to make.

Fuel escalator - 2p per litre come September, then 1p per litre ABOVE INFLATION every April for the next 5 years, subject to "keeping an eye on fuel prices". Empty promise of green policy, in other words.

ISAs - currently the allowance is £7,200, of which only £3,600 can go into a cash ISA (cash ISAs are lower-risk and lower-reward, except when things go like they have recently). These limits will be increased to £10,200 and £5,100 from next year (unless you are aged over 50, in which case they increase come October - if you turn 50 this winter, your allowance increases on your birthday). This will encourage saving, at a time when people were increasing their savings anyway. At some point I may explain in detail my view on taxing savings interest, but in principle I oppose it, so welcome this increased allowance.

Pensions - For the so-called super-rich, pension credits have been cut. If you earn over £100k you will face a higher marginal tax rate, until your average pension credit drops to 20%, where it remains (rather than the 40% it used to be, and remains for incomes in the £40-100k range).

Other - ask the Beeb. It has a personal budget calculator. Apparently I'll be slightly better off, although that comes mostly from increases in the allowances in line with inflation.


Market response: FTSE up 1%, pound down 1.1% against the dollar and 1.7% against the Euro. That implies that "the markets" believe Darling is doing the right thing, but that those debts must be paid for somehow (hence the drop in the £s value). Most importantly those changes are no greater in scale than usual daily changes, so the Budget was in line with expectations.


Final note: This blog will now focus on Economics. All new F1 related posts can be found on my new blog, the power of 15000 horses.

Irish cancel Christmas

The Irish budget was annoucned yesterday, and as usual for Irish budgets, it got little coverage in the British news. Compared, say, to a UK budget. This is entirely reasonable.

It is generally very contractionary, which makes sense only if Ireland believes itself to be near bankruptcy. One feature I found less than friendly was in the social welfare expenditure section. A €171m saving is being made by:

Removal of provision for a Christmas bonus payment in 2009.

Which, to me, amounts to cancelling Christmas.