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Tuesday, 26 October 2010

Left wing wrong-footed by reality

The BBC set out its anti-government stall this morning by saying that a consensus of City economists took a dim view of the state of the economy.  These let us remember were the same economists working for banks that the BBC was happy to chastise only a few days earlier because of the size of their bonus pools.  That was enough to allow Lord Mandelson to grace the airwaves saying that the Coalition had failed, blah, blah blah..

But then we hear the news that the UK economy grew at a "faster-than-expected" 0.8%.  Faster than expected by the BBC, New Statesman, Guardian and their ilk, but not by anybody who has seen the recent growth in activity by UK companies following the election.  Nothing too dramatic, and pay is still restrained but companies are building headcount and expanding hence the 3.3% (annualised) GDP growth rate.

Of course that doesn't stop the BBC wheeling out their latest economics correspondent, the Shadow Chancellor Alan Johnson, who tells us that it is not as rosy as the figures tell us, because, err, because .. he doesn't want it to be. In fact according to the Labour Party the cuts (which of course aren't cuts in reality because actual spending is going up by more than RPI) should be reduced us to stave off the fall in GDP which ... isn't happening.

Alan Johnson even wentso far as to say that the government were still taking a "reckless gamble" with the economy, although he stopped short of saying why Labour's planned 1% extra cut was not even more of a gamble, and for the more economically astute, why government spending which is actually 3% more than last year is a gamble.  Well, he wouldn't, because it isn't.and more fool Labour and the BBC for thinking it is.

Meanwhile rating agency Standard and Poor's upgraded its outlook for the UK's triple-A credit rating, which is nice.

But how did the Labour Party get it so wrong? The main reason appears to be a poor grasp of reality.  The "cuts" aren't cuts in totality, merely a scaling back of the preposterous notion that we can boost our way to prosperity by ever greater borrowing and spending. 

What is more, while some government spending may be cut back. total government spending is still increasing.  This means that GDP, which measures broad activity in nominal terms, will not actually fall (because actual spending is not falling).  Add to that the reassurance to business that the new government has a dose of sanity about it (capping benefits at a figure significantly higher than the average wage is not meanness, but a recognition that while some do little to receive their weekly cheque from the state, many others work for 40 hours and pay taxes to receive far less), and the effect is a boost to the economy after several years with a negative outlook.

But if you really want to see the bizarre narrative of the Labour Party, you need look no further than Ed Miliband's speech at the CBI, which the BBC covered in much more detail than the Chancellors' (but there you go).  The problem in Britain, says Red Ed, is that we don't put enough emphasis on industry. 

True enough. I don't disagree, having spent much of the last 25 years trying to finance UK industry and its exports.  The problem is that the last government of which Mr Miliband was a member and previously a Treasury policy wonk, had a series of policies that acted against British industry more than any other government.

Leaving aside all the red tape, compliance costs and bureacracy, let us just look at the financial measures enacted by the Labour government from 1997:
  1. effectively preventing capital intensive companies from financing their assets through sale and leaseback in the second (i.e. post-election) Finance Act 1997, 
  2. effectively banning finance leasing (which had been used to finance all of the inbound industrial investment - think Japanese - in the 1980's and 1990's), unless you happen to be a foreign shipping company taking the UK tax payer for a rise in Giovanni Prescott's Tonnage Tax abortion, 
  3. the promotion of multiple film finance schemes using tax breaks snapped up by Hollywood studios, on the basis that it would stimulate the British Film industry, when in reality film crews pack their bags and move elsewhere as soon as the film completes and the subsidies dry up, while there were no such tax breaks for investors in British industry where an investment in plant and machinery would likely result in 25 years of employment, rather than a summer of filming; and
  4. the crassest of Budget manoeuvres where a reduction in the corporation tax rate from 30% to 28% is announced, to be funded by ..... a drop in the rate of capital allowances from 25% to 20%, or in other words, since there is no net cost to the tax payer, this is a movement of cash from the capital intensive, plant and machinery buying industry and utilities to the much less asset intensive advertising agencies, investment bankers and estate agents.
As buggers' muddles go, that doesn't just take the biscuit.  It ransacks a whole tin of Huntley & Palmers' finest.

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