Right-Wing Push For Austerity Based On Excel Spreadsheet Error

Do you remember the justifications given for the austerity we are all now facing?

George Osborne said in February, 2010 said:

So while private sector debt was the cause of this crisis, public sector debt is likely to be the cause of the next one. As Ken Rogoff himself puts it, “there’s no question that the most significant vulnerability as we emerge from recession is the soaring government debt. It’s very likely that will trigger the next crisis as governments have been stretched so wide.”

The latest research suggests that once debt reaches more than about 90% of GDP the risks of a large negative impact on long term growth become highly significant. If off-balance sheet liabilities such as public sector pensions are included we are already well beyond that. And even on official internationally comparable measures of debt, we are forecast to break through 90% of GDP in just two years time…

To entrench economic stability for the long term, we need fundamental reform of our fiscal policy framework….As I have made clear, our aim will be to eliminate the bulk of the structural current budget deficit over a Parliament.

The key phrase above, is one used by right wing politicians all over the world as justification for their austerity and its:

"The latest research suggests that once debt reaches more than about 90% of GDP the risks of a large negative impact on long term growth become highly significant."

And that research was carried out by economists Carmen Reinhart and Kenneth Rogoff. But there's a problem they got it wrong.

The New Yorker Blog has an excellent summary of where they went wrong.

"To sum up, there may well be a threshold at which high levels of public debt tend to be associated with very bad growth outcomes and financial crises, but it isn’t ninety per cent of G.D.P., or even a hundred per cent. Maybe it’s a hundred and twenty per cent, although that figure isn’t a firm one, either".

And Chris Hayes explains further in this following video:

Austerity isn't working?

The narrative we are expected to swallow by the Conservative led Coalition Government and those on the right, is that the UK had a massive structural deficit and that it was all the fault of the previous Labour administration, especially the then Prime Minister Gordon Brown for 'maxing out the countries credit card'. Therefore we were told that there was only one way to our salvation and that was strict austerity - things were so bad, we had to have an emergency budget. For example we were told that last government left the biggest debt in the developed world.

In order to sell the strict austerity package to you and me, we had to be convinced that it was really really bad, and that there is only one way to salvation -  that the reason for cuts in our working conditions, be that working hours or wages or health and safety or job security; or cuts to welfare - is to ensure all our future prosperities, we are all in this together remember, rather than a ideological driven neoliberal approach. See: The Guardian: The march of the neoliberals.

However, the deficit myth is simply wrong, but don't take my word for it, read what Conservative economist Ramesh Patel has to say:

Finally! Exposed! The Deficit Myth! So, David Cameron When Are You Going to Apologise? Exposed! 

Osbornomics Via Childish Proverbs, Idioms, Soundbites, Tricks and Utter Bollocks!

Not that the previous Labour Government should escape blame totally, in the context that during his tenure as Prime Minister Gordon Brown had increased public spending by too much, based on overoptimistic forecasts of the economy. Although he cant be really blamed for not foreseeing the collapse of the world economy in 2008.

In the words of the IMF "[In 2008] [t]he financial meltdown originating in the U.S. mortgage markets reverberated around the world, and led to the deep retrenchment of the world financial markets and the largest global recession in living memory."

And then put simply; because I am in essence a simple man, the money dried up, confidence was lost, nobody trusted what the other said and economy stalled. This required a massive bailout by central banks and governments to stop the world economy falling into a deep depression.

I think it's important to remember that the financial meltdown occurred primarily because we had over leveraged private debt. And not as we are led to believe due to massive public debts....as Ramesh Patel says "Labour in 1997 inherited a debt of 42% of GDP. By the start of the global banking crises 2008 the debt had fallen to 35% - a near 22% reduction[..]. Surprisingly, a debt of 42% was not seen as a major problem and yet at 35% the sky was falling down?"

In 2008 world confidence had collapsed, the world economy had in effect stalled -  it needed a kick-start to get going. But with private debt over leveraged and banks not lending to one another, it was down to governments to provide the stimulus to kick-start the world economy. And I'm not just talking about the bailout of the banks, but direct support to businesses to keep workers on during the difficult period etc...

In the UK we had a conventional Keynesian approach to a recession, increased public spending and tax cuts as a means of kick starting the economy. And as such I suppose you could say it was working,.for by the end of 2009 growth had returned, albeit small at 0.4%.

To paraphrase, the Keynesian Model is - you cut the structural deficit during the boom years, and you spend your way out of a recession. However, you cant carry on increasing public spending (in real terms) over the long term, because that could lead to the economy overheating resulting in inflationary pressures reducing the competitiveness of the private sector resulting in a lower GDP and lower tax take.

I think what is often forgotten is that had Labour won in 2010 they also had plans to cut public spending and lower taxes, but that they proposed to do it over a longer period than that proposed by the Conservatives. I recall reading somewhere that the difference between the two parties was around £5 billion, which in the context of GDP of over a trillion is a small drop in the ocean.

In essence I think, we had two approaches a Keynesian approach by Labour and a neoliberal approach by the Conservatives. Neoliberals believing in small government, low taxes and self regulating markets; and that how a person spends their well earned money should be left to the individual.

And in the 'emergency budget' of George Osborne, the Chancellor, the Conservative led coalition Government set in motion strict austerity measures, with an aim of restoring confidence, retaining the UK's AAA rating and eliminating the structural deficit by the 2015/2016 financial year.

Now and again put simply - a central premise of this approach is that by cutting public spending and red tape you make more money available to the private sector who then find it easier to invest which results in a growing economy. And there is evidence from history that shows that in certain circumstances this fiscal contraction approach does indeed result in growth in the economy driven by the private sector.

However, there is a growing consensus amongst economist; I think, that this is not one of those circumstances. Professor Robert J. Shiller gives a much more knowledgeable explanation in his post: Does Austerity Promote Economic Growth?

And it's evidential that Plan A isn't working as explained by Guardian Economics Blog.

'The only plan on the table' had at it's heart a need to inspire confidence in the private sector; especially from overseas investors, that the UK was a safe bet for which to do business with, that the plan was credible not only in the short term but also the long term, and that investment for the long term was also safe in the UK.

Now ask yourself this question - do you think the recent announcement by David Cameron that there is to be an IN/OUT referendum on EU membership in 5 years time, for which he would say YES to staying in the EU only if he gets some powers back, although we ain't sure which powers he's referring to, is it more likely  or less likely that overseas investors will see the UK as a safe bet?

If you want to see how bad the recession of 2008 was compared to others I refer you to the Guardian - Recessions compared: how does Britain's GDP compare to every recession since 1930?.

Not unsurprisingly following such a recession there is a period of low growth, as  you ain't going to recover over night. And growth is key, if you are going to reduce your structural deficit in the long term, you have to accept that initially your structural deficit will grow, by the very simple fact of growth being lower than inflation. (the Bank of England inflation target being 2%)

What you hope to avoid is falling back into recession, because then you will have lower GDP and lower tax receipts and rather than investing in infrastructure for growth, your paying the price for a failed economic policy.

We know there is plenty of private monies available, the Bank of England alone has dumbed £357 billion into the economy, and that large multinational are sitting on trillions, but there seems a reluctance to invest. We know this because lending to SMEs contracted in the three months to November, statistics from the Bank of England show - see Bdaily.

And if the private sector isn't investing, and public confidence is still low as well as disposable income, and export markets are weak and the service sector is still de-leveraging - where will growth come from?

What we need this time is not "austerity" but "investment in growth-boosting infrastructure measures." - not my words but those of Mayor Boris Johnson. 

The state we are in, and of the economy.

Puzzled why David Cameron was keen to engage us in a big discussion about welfare benefits? - even though he said no changes would happen now, but may be included in the Conservative manifesto for the next general election, most likely (unless the Coalition falls apart) in 2015. Surely you would think they'd be working hard on a plan to generate growth, that we need, to drive the economy out of recession.

Or why George Osbourne rushed out on TuesdaIsy to announce a delay in the introduction of the proposed 3p rise in fuel tax.

Let's think, me thinks....a suggestion did it have anything to do with the dire state of the economy by any chance?

The Office for National Statitics today published details of the state of public sector finance for the month of May, 2012:

The main statistics show, that in May 2012, for measures excluding financial interventions:

• the public sector current budget was in deficit by £16.9 billion; this is a £2.7 billion higher deficit than in May 2011, when there was a deficit of £14.2 billion
• public sector net borrowing was £17.9 billion; this is £2.7 billion higher net borrowing than in May 2011, when net borrowing was £15.2 billion
• public sector net debt at the end of May 2012 was £1013.4 billion (65.0 per cent of GDP). This compares with £921.3 billion (61.3 per cent of GDP) at the end of May 2011
• The central government net cash requirement was £13.3 billion, a £2.5 billion higher net cash requirement than in May 2011, when there was a net cash requirement of £10.7 billion.

A report by Reuters - 'Public borrowing rises in May as income tax falls' by Fiona Shaikh and Matt Falloon says -  Tuesday's figures cast doubt over the government's ability to meet its deficit target of 92 billion pounds in the 2012/13 fiscal year - a total which includes the asset-transfer effect.

Even Mervyn King the Bank Governor can only see dark clouds on the horizon, "We are in the middle of a deep crisis, with enormous challenges to put our own banking system right and challenges for the rest of the world that they are struggling with," King told parliament's Treasury Committee. See Reuters - 'Gloomy BoE sees outlook darken'.

And finally for an alternative narrative on David Cameron recent attendance of the G20 summit read  'Cameron G20 missteps point to wider UK problems' an article by Peter Apps, Political Risk Correspondent of Reuters.

In a damaging rebuff to the Prime Minister former Clinton official Kupchan said to   Reuters -"London's relevance on the world stage seems to have declined since he became prime minister. Part of that might be inevitable given the circumstances ... but Cameron's statecraft is also leading to self-isolation."

'Pasty Tax' - Vat on freshly prepared food when sold hot or warmish..

In last week budget the Chancellor, George Osborne announced a consultation on a change to VAT rules on freshly prepared food, dubbed the 'pasty tax'. But what exactly is being proposed?

Sadly, this was rather lost by the media with an obsession as to whether David Cameron or George Osborne had eaten any pasties, furthermore it was reported by some newspapers that hot takeaway food would now be subject to VAT.

However, as the law currently stands, standard rate of VAT already applies to food ‘specifically sold for consumption whilst still hot’ (see HMRC Notice 709/1 Catering and take-away food.)

But what if you sell the product cold and provide a microwave for the customer to heat the food themselves? The tax-man has already covered that possibility:

"If you sell food to be taken away for consumption elsewhere, but you make a microwave oven available for your customers to heat up the food, either before or after the till point, you are making a supply of hot food which must be standard-rated. This is the case whether or not you make a charge for the use of the oven."

No, what the Chancellor will be consulting on is a change to the following provision in relation to freshly prepared products:

"If you sell freshly cooked products for consumption while they are still hot they are standard-rated..... Some of these products are, however, not sold with such an intention They may only be hot/warm as they are in the process of cooling down. Examples include pies, pasties, sausage rolls and similar savoury products, cooked chickens or joints of meat, bread products and croissants. The liability will depend, therefore, on how you prepare and sell them."

And if they are sold "warm simply because they happen to be freshly baked, are in the process of cooling down and are not intended to be eaten while hot; or cold or chilled at the time of purchase" then the VAT can be zero rated.

From October it is being proposed that even freshly cooked products if sold hot (warmer than the ambient temperature outside) will have a standard rate of VAT.

Whilst you think about what is actually different between the supply of foods that are cold, be they consumed immediately or not being zero rated, and similar 'warm food' (even if cooling down) which may in the future have a standard rate of VAT, let me talk about the European Union.

The European Union has over the years been legislating with the aim of harmonising VAT across member states. There are currently two VAT rates member states can apply a standard rate (minimum 15%) and a reduced rate (minimum 5%). The UK has a derogation allowing a zero rate of VAT on certain goods.

What is allowed at the reduced rate is specified in Sixth Council Directive 77/388/EEC of 17 May 1977 as subsequently amended. You will recall I've talked about this directive before in my post about Wales Air Ambulance and VAT.

Which brings us on to Mr Manfred Bog of Germany.

"Mr Bog sold drinks and food prepared for consumption (in particular, sausages and chips) from three identical mobile snack bars at weekly markets. The mobile snack bars were equipped with a sales counter with a glass splashguard, below and around which ran a ‘board’ made from a material sold under the name ‘resopal’ which could be used for the consumption of food on the spot. To the sides of the vehicle, above the drawbar, there was a folding ‘tongue’, which was in the form of a table at the same height and from the same material as the ‘board’ running round the vehicle. The area where customers could consume the food was protected from the rain by a folding roof."

In his tax declaration for 1994 Mr Bog declared the turnover from the sale of drinks as subject to the standard rate of VAT, while the turnover from the sale of food was declared as subject to the reduced rate. The German tax-man disagreed and said that the sale of hot food for immediate consumption should be subject to the standard rate of VAT.

Cutting the story short, in the end the Bundesfinanzhof (German High Court) decided to stay the proceedings and to refer the following questions to the European Court of Justice for a preliminary ruling:

1. Is the sale of food or meals prepared for immediate consumption a supply of goods within the meaning of Article 5 of [the Sixth Directive]?
2. Does the answer to Question 1 depend on whether additional service elements are supplied (provision of facilities for consumption)?
3. If Question 1 is answered in the affirmative: is the term ‘foodstuffs’ in category 1 of Annex H to [the Sixth Directive] to be interpreted as covering only foodstuffs to ‘take away’ as typically sold in grocers’ shops, or does it also cover food or meals which have been prepared for immediate consumption by boiling, grilling, roasting, baking or other means?’

You can read preliminary rulings on the European Court of Justice website.

The European Court of Justice(Third Chamber) preliminary ruling was:

1. Articles 5 and 6 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 92/111/EEC of 14 December 1992, must be interpreted as meaning that:

– the supply of food or meals freshly prepared for immediate consumption from snack stalls or mobile snack bars or in cinema foyers is a supply of goods within the meaning of Article 5 if a qualitative examination of the entire transaction shows that the elements of supply of services preceding and accompanying the supply of the food are not predominant;

– except in cases in which a party catering service does no more than deliver standard meals without any additional elements of supply of services, or in which other special circumstances show that the supply of the food represents the predominant element of a transaction, the activities of a party catering service are supplies of services within the meaning of Article 6.


2. In cases of the supply of goods, the term ‘foodstuffs’ in category 1 of Annex H to the Sixth Directive 77/388, as amended by Directive 92/111, must be interpreted as also covering food and meals which have been prepared for immediate consumption by boiling, grilling, roasting, baking or other means.

Not unsurprisingly the UK Government says this case and others, does not apply to the UK, and it may only be resolved following a lengthy court case.

The VAT Blog in their post HMRC don't believe the WURST will happen here in the UK gives a good summary of HMRC position as detailed in Revenue & Customs Brief 19/11

UK growth nearly stalled

The UK economy barely grew in the final quarter of 2011, according to the National Institute of Economic and Social Research.

The institute estimates that the economy expanded by 0.1 percent in the three months to December, compared with growth of 0.3 percent in the three months to the end of November. According to the institute this implies the economy expanded by 1 per cent in 2011, half the rate of growth experienced in 2010 (2.1 per cent,).

The press release says The National Institute interprets the term “recession” to mean a period when output is falling or receding, while “depression” is a period when output is depressed below its previous peak. Thus, unless output turns down again, the recession is over, while the period of depression is likely to continue for some time.

Reuters reports that whilst George Osborne said there were "signs" the economy was turning a corner and there were reasons to be optimistic in a year when Britain will host the Olympic Games in London...

...Britain is teetering on the edge of recession as global growth slows, government spending cuts bite, and all-important consumers struggle with high inflation, tax hikes and slow wage rises.

You may recall at the beginning of December The Daily Telegraph reported The Office for Budget Responsibility (OBR) said that a bout of severe weather before the end of year could skew economic activity in such a way that Britain does not experience two quarters of negative growth....

Prof Nickell, a member of the OBR...said....“If you have a huge bout of heavy snow before Christmas that will probably rule out a double-dip recession because GDP will fall in the fourth quarter and bounce back in the first quarter",...but...he warned that disruption in the New Year would mean that the statistical masking of the slowdown could not take place. “It’s got to snow in the fourth quarter.”

Let's hope therefore we don't get a huge bout of heavy snow this month or in the following two months.

RBS to be nationalised?

It hard to know what to make of the news these days, one thing for certain its about to get much worse, as the world seems to be heading towards recession.

This morning Moody's Investors Service downgraded the senior debt and deposit ratings of 12 UK financial institutions and confirmed the ratings of one institution.

The Chancellor, Mr Osborne said [to the BBC] he was confident that British banks were well-capitalised. "They are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment."

However in his blog, Robert Peston, BBC Business editor says:

If the minimum stressed capital ratio were set at 8%, Royal Bank of Scotland, Barclays and Lloyds would all be forced to raise new capital.

Among the British banks Royal Bank of Scotland is most vulnerable to being forced to raise new capital, because under July's health checks its stressed capital ratio emerged relatively low at 6.3% (compared with 7.3% for Barclays, 7.7% for Lloyds and 8.5% for HSBC).

So if the new minimum capital bar were set at 7% (and we have no idea where it will ultimately be set) RBS would seem to need to raise a few billions of additional capital.....

.....I would therefore expect the chancellor to argue pretty strongly to his eurozone counterparts that RBS has quite enough capital for now.

And if he were to lose this battle, he might well be better off launching a takeover bid to acquire all of RBS - to nationalise it fully - than recapitalising the bank through an exercise of the existing rescue mechanism.

Vat rise bad news for small businesses.

In August 2009, George Osborne, the then shadow chancellor, appearing on the BBC Radio 4 Today program said "There have been absolutely no internal discussions, there are no secret plans for an increase in the VAT rate,"

Although it wasn’t a surprise to most, that when in power that is exactly what they did, by raising VAT to 20% in January, 2011.

A poll by Premierline Direct in January, revealed that a majority of small and medium sized businesses were concerned about the impact of the VAT rise. The poll showed that, overall, 90 per cent of those running small businesses are worried about the effects of the rise.

The Conservative Party, like to portray themselves as the party of the shopkeeper and defender of small businesses. For instance in the Welsh Conservative manifesto they promise to reduce the tax burden of small business, by abolishing the need for many to pay business rates.

A report in todays Sunday Times; headlined "Vat rise is crushing small businesses", by their economics correspondent, Roberts Watts says “Collapse by small business have risen 20% so far this year, in part because of the coalition’s increase in VAT, insolvency experts have said”.

“A tougher stance by the taxman has also contributed to the rise in failures, which is expected to gather pace as the year progresses”.

As the Conservatives point out, SME’s are vital to the economy, and growth in this sector brought about by an ‘entrepreneurial boom’ was seen as essential if the gamble made by George Osborne, the Chancellor; that the jobs lost in the public sector would be replaced by new jobs in the private sector, was to pay dividends.

Some would point out that Labour also increased the rate of VAT to 17.5% when previously in power.

However, what no political party can deny is that in times of austerity, if you cut taxes in one part of the economy you will need to rise taxes elsewhere.

And for the Conservatives to claim that they are the only political party that would help small business doesn’t quite ring true anymore.