King Hints At Rate Rises

Mervyn King, Governor of the Bank of England, has hinted in his letter to the Chancellor that there will be interest rate rises (in line with market expectations) during the course of the year.

On the assumption that the "goat's entrails" have been correctly read, then "experts" are predicting three rate rises during the year bringing rates to 1.5%.

We shall see.

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Child Benefit Shake Up

I see that George Osborne used the BBC Breakfast show to announce to a bleary eyed "Monday morningish" nation that child benefit for higher rate taxpayers would be axed "by" 2013.

Someone should remind Osborne that announcements such as this should be made to Parliament first. The Tories were always quick to criticise Labour when they indulged in this form of "government via media announcement", sadly they seem to be emulating their foe.

Credit to the interviewer, who was clearly taken by surprise, for trying to press some details out of Osborne. She quite rightly made him admit that "higher rate" includes not just those on 50%, but also those on 40%.

She then asked, in relation to "by 2013", whether this would be phased in over a period of time up to 2013. Osborne gave a rambling, evasive response which did not answer the question.

Quite clearly he intends to start cutting child benefit back (for higher rate taxpayers) now, in phases, rather than leaving it all until 2013.

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Interest Rates To Stay Low

Mervyn King, Governor of The Bank of England, has told the Treasury Select Committee that given that risks posed to the economic recovery there will be no rush to raise interest rates.

King also gave the Chancellor, George Osborne, a mild vote of support noting that the recent emergency budget had not made a "significant difference" to the chances of Britain suffering a double-dip recession.

Hardly a ringing endorsement!

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The Orifice Of Budget Responsibility

Sir Alan Budd, who is leaving as Chairman of the Office for Budget Responsibility after a mere 3 months in the role, appeared before the Treasury Select Committee (TSC) yesterday.

The TSC was keen to probe beneath the public perception that the OBR is not as "independent" as the government, and indeed OBR, would have us believe.

Sir Alan claimed that he had not come under political pressure recently, even though he released public sector jobs data early. He claimed that this was to correct a misinterpretation of figures leaked to the media, the fact that this was of benefit to David Cameron who used the data with glee was (of course) irrelevant.

Sir Alan, who has yet has no successor to replace him, has issued advice to the successor as to the future of the OBR eg:

- the need to relocate it outside the Treasury,
- allow Parliament a role in appointments to the OBR's key committee
- employ both external and Treasury staff to produce its forecasts and analysis.

He neglected to add that his future successor needs to be put on a contract longer than 3 months, allegedly the length of Sir Alan's contract (one wonders why, if that is truly the case, there is no successor lined up yet?) if he/she is to be effective.

As to whether the government and Treasury actually want a truly independent OBR, remains to be seen. Doubtless their choice of Sir Alan's successor may shed some light on that.

We await the announcement with interest!

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Cuts

The Chancellor, George Osborne, is using zero based budgeting to reset the country's battered finances.

He has ordered a purge of capital spending, and review of every single capital expenditure project, to run alongside the annual expenditure cuts demanded of every department of between 25% and 40%.

It is likely that the 40% target is being used as an exercise to "scare the chickens" into grudgingly rolling over and accepting 25% cuts.

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Shutting Stable Doors

Listen very carefully and you will hear the sound of a stable door being slammed shut by Darling and Mandelson.

Ahead of Alistair Darling's Labour conference speech outlining new rules to curb bankers' bonuses, Lord Mandelson spoke on BBC's Radio 4 programme.

He noted that Gordon Brown, as Chancellor, had introduced new legislation that "sorted out a ragbag of different regulatory processes" in financial services to make them "much leaner, meaner and more efficient".

Aside from the obvious point that the Tripartite system was hardly "leaner, meaner and more efficient", it is clear that if Darling is now having to introduce further regulations, it is clear that Brown's regulations weren't up to the job.

Mandelson will say later today that we rely too much on the financial services industry.

Fair comment, except this has been known for many years.

What exactly will he replace it with?

Later today Darling will outline plans to:

-End automatic bank bonuses year after year.
-End immediate payouts for top management.
-Defer any bonuses over time so they can be clawed back if they are not warranted by long term performance.

All very well.

However, as can be seen with the change of HQ for the CEO of HSBC, bankers will simply up sticks and leave.

The stable door may now be slammed, regrettably the horses have long since bolted!

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Who's In Charge?

Those of you who were worried about who is exactly is in charge of the UK need worry no more, Lord Mandelson has revealed that he is in charge and the person where the "buck stops".

In an interview with The Today programme he said:

"The spending period currently operating in Government stretches beyond the next election and therefore it is reasonable to review public spending at that time."

Adding that the Chancellor has already "made that judgment".

By making that statement in public, he has tied both the Chancellor's and the Prime Minister's hands.

Now all we need to know is who exactly is in charge of the Tripartite regulatory system; the Bank of England, the FSA or the Treasury?

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Government Headache

The government is learning that running a bank is not at all without its downsides.

This week the Royal Bank of Scotland, owned by the taxpayer, is expected to announce a £9.6M pay package for Stephen Hester, its CEO.

Whether Hester may, or may not, justify such a package will be an issue that will be buried in the headlines that instead will scream about the fact that the taxpayer is "footing the bill".

The sooner the government comes up with a clear plan as to how, and when, it will return its bank holdings to the private sector the sooner it will rid itself of what will become a very nasty headache for the PM and Chancellor (whoever they may be).

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Nature Abhors a Vacuum

Unsurprisingly the current political turmoil his hitting the economy. The pound slid 1% against the dollar to $1.6022, a one-week low, while the pound hit a two-week low against the euro of 1.1277 euros.

Nature abhors a vacuum, and until the political situation is brought into some semblance of control KPI's such as the exchange rate will be savaged by the markets.

On a brighter note, well done to Alistair Darling for clinging on to his job as Chancellor.

As to whether is this is a sign of his strength, or the Prime Minister's weakness, is another matter.

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Darling in Denial

Dead man walking Alistair Darling (soon to be ex Chancellor of The Exchequer) has denied the allegations in today's Daily Telegraph that he had broken House of Commons rules, by claiming second home expenses on two properties at the same time.

Yet, within hours of his denial, he announced that he would repay part of a parliamentary expenses claim on his London flat.

He claims that he is innocent, yet he repays some money. Why repay the money if he is confident that everything was above board?

He will be out of office by Friday.

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Threat To Credit Rating

Standard & Poor's have threatened the Chancellor's reputation, by saying that it was revising its outlook for Britain's "triple A" debt rating to "negative" from "stable".

Any future downgrading would cost the Treasury more in interest payments on government debt.

That being said, ratings agencies happily gave banks and their pyramid scam schemes triple A ratings in the past; why should anyone set much store by their ratings now?

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50% Tax Rate Own Goal

Unsurprisingly, the politically motivated 50% top tax rate introduced by Darling in last week's budget has proven to be an own goal.

The Treasury admitted that billions of pounds of revenue would be lost, as high earners take the high road and leave the UK.

Mike Williams, the director of personal tax at the Treasury, told the Treasury Select Committee that only 31% of the possible total income from the tax increase will be received by the Treasury.

Last week the Chancellor said that the rate change would raise £1.1BN. However, figures now show that £2.5BN will in fact be lost via perfectly legal tax avoidance schemes, or by moving abroad.

Another nail in the coffin of last week's dismal budget.

Labour Chancellors never seem to learn the lesson that the politics of envy, when applied to tax, simply backfires; as they lose more money than they gain.

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RBS Breaks a Record

Congratulations to the Royal Bank of Scotland (RBS) for posting the largest loss in British corporate history (£24.1BN in 2008). Given the appalling state of its finances, RBS is to receive a further £25BN capital injection from the overworked British taxpayer, and will place £325BN of toxic "assets" in the government insurance programme.

Clearly RBS is following the old banking maxim that if you owe a small amount, the lender has you by the balls; whereas if you owe a large amount, you have the lender by the balls.

Needless to say the dire situation which RBS has placed itself in threatens many of the jobs of its employees. However, one man who seems to be doing OK is its ex CEO Sir Fred "The Shred" Goodwin, who is currently receiving a pension of £650K per annum (despite being only 50).

Unsurprisingly Alistair Darling is a tad peeved at RBS for treating Goodwin so generously, and even more peeved at Goodwin for taking the money. In fact Darling was so peeved, that he sent Lord Myners to have a word with Goodwin about the wisdom of taking the money.

Darling is still waiting for an answer.

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Roll The Presses!

The Times reports that the Bank of England will write to the Chancellor asking permission to start printing money (quantitative easing), in order to buy up government and other securities.

The Bank, having almost exhausted its interest rate arsenal, is hoping that this will ease the credit drought.

All well and good, but this should have been done quite some time ago.

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Darling Admits To Overoptimism

Alistair Darling has admitted that his predictions last year, that there would be a recovery in the second half of this year, were in fact wrong.

In the Financial Times Darling says that the Pre-Budget Report in November may have been overoptimistic, when a recovery was forecast for the second half of this year.

No kidding!

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National Lending Scheme

Alistair Darling, exasperated by the banks' refusal to resume lending, is (according to The Times) considering a national lending scheme.

Under the scheme the government would guarantee new lending to businesses, on the condition that it is genuine new lending and not an attempt by the banks to reschedule old loans/debt.

Ironically figures from the Office for National Statistics (ONS) show an unexpected rise of 1.5% in retail sales in the UK last month. Needless to say, the veracity of the figures are being called into question.

Like it or not, unless there are further pro active measures taken by the government and Bank of England, the recession will worsen significantly. Three key measures should be taken instantaneously:

1 Cut interest rates to zero.

2 Initiate a national lending scheme.

3 Initiate a policy of quantitative easing (akin to dropping money from a helicopter), whereby the Bank of England buys debt using government bonds.

These measures will draw a firm line under the rapidly failing economy, and provide the bedrock from which to grow again.

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Careless Talk Costs Cents

Alistair Darling is learning the lessons that previous Labour Chancellors have learned, namely that careless talk costs the pound dear.

Sterling continued on its downward path today, falling to a 12 year low (88.2) against the Bank of England trade weighted index of currencies and to its lowest against the dollar ($1.7669) since April 2006.

The fall has been attributed, not unsurprisingly, to Darling's outburst over the weekend over the state of the economy.

The fact that he is now barely on speaking terms with his old "friend" Gordon Brown have given the markets little comfort, as divisions over policy and presentation between number 10 and number 11 mean that the economy will suffer.

Until Brown and Darling decide what the real story is, and what to do about it, the economy will continue to decline.

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Self Flagellation

The FT today asserts that Chancellor Darling's bizarre self flagellation over the weekend, when he stated that the UK economy is facing times as bad as any ever seen in the last 60 years, may in fact have been a tad overdone.

Quote:

"The chancellor also claimed this weekend that the economic times facing Britain were arguably the worst in 60 years. His precise meaning has been in dispute but it would certainly be nonsense to suggest the UK faces the worst downturn in six decades.

It is true that in specific areas – trust among financial institutions, in particular – the UK is in very bad shape by historical standards. But, more generally, the assertion is untrue."

I have to concur, quite why the Chancellor came out with this bizarre assertion remains to be clarified. There are a number of possibilities:

1 He knows he is about to be sacked, and wants to go out "with a bang".

2 He has given up and lost the plot.

3 He knows something about the economy that no one else, including other members of the Treasury or government, knows.

Whatever the real reason, it would be advisable for the government and Darling to get a grip; the economy, and the citizens of this country, are not best served by such public flagellation and rifts.

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Housing Market Grinds To A Halt

The Royal Institution of Chartered Surveyors (RICS) report that the housing market ground to a virtual standstill last month, as a result of the lack of mortgages.

RICS report that the average number of property sales handled by surveyors, over the past three months, fell to 14.4.

Needless to say the government's botched leak about the possibility of lifting stamp duty for a few months has added to the problems, as people have now delayed making a purchase until the situation is clarified.

Unfortunately the government will not be clarifying its position anytime soon, as the Treasury blames Number 10 for the leak and Number 10 claims it was not responsible.

Brown's government is collapsing around his ears, and is bringing the economy down with it.

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The Price of Dithering

The FT reports that Chancellor of the Exchequer, Alistair Darling, is considering a new plan to help resuscitate the housing market by allowing banks to swap new mortgage assets for government bonds.

The Treasury is formulating a plan to extend the Bank of England scheme, where high quality outstanding mortgage backed securities are exchanged for gilts to incorporate new mortgage lending.

Sir James Crosby, the former chairman of HBOS, is expected to propose the idea tomorrow when he delivers his interim report on the mortgage market.

It is a pity that it takes Labour's meltdown in the polls and the disastrous Glasgow bye election to motivate them to tackle this open sore. Had they moved with alacrity, in the final quarter of 2007 and at the beginning of 2008, the liquidity crisis could have been better contained.

Regrettably the government dithered, the result being that Deloittes are now warning that the economy is heading into recession, and may face a slump on the scale of the early 1990s.

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