Economic Interests

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Archive for the tag “UK”

A Recovering Britain?


The new Bank of England Governor, Mark Carney, has shown impeccable timing. He leaves Canada in the best shape of the G7 members, boasting GDP at least 5% higher since the crisis began  compared to Britain, where GDP has still yet to catch up to its previous peak.  But he also leaves the country with some long term problems that he won’t have to deal with. Canada is facing a rising debt problem as more and more consumers are borrowing money they don’t have. This is compounded by Mr Carneys low interest rates, which are needed to boost growth but are now encouraging reckless borrowing. Growth is also slowing this year, with the Canadian central bank now cutting projection for the next few years.

As this graph shows, Britain is experiencing a worryingly slow recovery compared to previous years, with GDP still somewhat below the 2008 peak.  

In contrast he arrives in the UK at a possible turning point.  After five years of a deep recession followed by a failed recovery, the statistics are now finally pointing to better times. Manufacturing and construction are growing, consumer confidence is improving and new schemes to help boost lending and property buying seem to be working. GDP is set to grow at around 1% this year if the economy stays on track and unemployment is staying low compared to the rest of Europe.

Yet there is an underlying problem in Britain’s economy that will prove hard to fix for the new Governor.

The average wage in the UK has declined by 5.5% since mid 2010 when adjusted for inflation, falling further than some of the worse off countries in the EU like Spain. This won’t surprise Britons, where the cost of living is squeezing the incomes of many households. As wages have remain restricted since the recession by companies that can either not afford the higher costs or are simply taking advantage of the desperate workforce, inflation has been increasing at between 2-4% a year. This can particularly be seen in the steep rises of energy bills, which have  more than doubled in the period from 2004 to 2011. More price rises are set to happen in the future too, with some energy companies suggesting bills will be £100 more than government projections state for 2020.

As this graph shows, Wages and inflation have diverged negatively since the recession, squeezing real incomes. Found at http://www.economicshelp.org/blog/6994/economics/uk-wage-growth/

Even the new positive growth numbers hide this problem. Instead of salary rises, people are turning to borrowing again to supplement their income. Personal debt has increased by £4 billion in the last year and is worryingly becoming a necessity for families to keep up current costs, along with benefits. If growth recorded in the first quarter at 0.3% had been based on wages, it would have fallen by more than 1% and pushed Britain into recession. A real recovery will need wage growth to create real growth. Otherwise a debt inspired recovery could see interest rates start to rise, leading to costlier interest payments on the debt held by consumers, leading to more defaults and another market crash.

A worrying trend is that of the zero hour contracts, where companies do not have to stipulate what hours an employee is working each week. Additionally, they don’t have to provide the employment benefits that full time employees receive like sick pay and maternity leave. Regulation is lighter in such work places and offers no real job protection, leaving the employees less likely to spend freely if they don’t have a consistent salary or job. This can only harm the economy’s recovery at a fragile time.

Yet there are some positives. Unemployment has stayed relatively low in the UK since the recession because of the countries flexible labour market. Instead of industry wide lay-offs, companies were able to lower salaries to keep people employed. This was healthy, as employees on low wages were better than the unemployed claiming benefits. But with the economy now trying to recover, there is no longer that fear of a market crash to hold companies back from increasing wages.

Unemployment has remained steady and relatively low compared to the rest of Europe, when unemployment is more than double in Britain’s in countries like Greece and Spain. Found at http://www.goldmadesimplenews.com/analysis/unemployment-in-the-uk-rises-to-7-8-as-real-wages-have-go-down-for-nearly-5-years-in-a-row-9951/

The problem is that while consumer have been able to borrow money freely, companies are finding it a much harder task, especially the smaller and medium sized firms that employ the majority of the population. Banks, the biggest lenders to businesses, are focusing on building up their capital for new regulations, meaning they are averse to lending money to companies that don’t have the size and market share to guarantee their loans. There is a lack of a genuine back up to the banks for smaller companies, in contrast to the bigger companies that can lend from the international markets for affordable rates. This is restricting both current companies struggling to grow and new ones trying to enter the market.

 

This affects the public, as investment improves productivity which tends to influence higher wages. Right now business investment is down by a third since the recession, productivity has declined despite more people being in work and real wages have therefore fallen. Astonishingly, the UK ranks 159th in the world for its investment to GDP ratio.

The solution is therefore to improve the market for lending to small and medium businesses. This is easier said than done. Banks are still a long way off from their pre-recession lending rates; especially with two of the biggest banks still part owned by the government. People are wary to see banks go back to that sort of lending anyway, with bankers lending recklessly and risking too much money. But a middle ground must be found to provide capital to the rest of the market. Different lenders must be found as well; in America banks share a much a lower percentage of the lending market than in the UK and Europe, one example of why America has outperformed both since the recession. One such example is peer-to-peer leaning, where the two largest providers in the USA lent over $1.7 billion in the last five years. One recent improvement has been the “Funding for Lending” scheme which gives incentives to banks to lend by offering money that can only be used to lend to businesses.

Britain is further ahead than the rest of Europe in solving this problem and is thinking outside the box to improve the economies main weakness. If lending can pick up and even better without having to rely solely on the biggest banks, then investment can pick up and wages could start to grow.

It’s not the recession but how the country recovers that will come to define Britain.

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Governor Carney


The new Bank of England Governor will be Mark Carney. 

The new Bank of England Governor was released at the start of the week, with the candidate rather surprising to most speculators. Mark Carney will leave his lead post at the Canadian Central Bank and take over at Britain’s next July. It was a surprise as he publicly and privately rejected the job, with many making Paul Tucker the favourite. Paul Tucker is the current number two and knows the inner works of the bank well, but was criticized for being too similar to the current Governor, Sir Mervyn King.  There was an urge for something different after the Bank was caught cold in the financial crisis of 2007, reacting much slower than other central banks. Mark Carney couldn’t be accused of such an act, as he was one of the first central bank leaders to cut interest rates drastically in Canada. He is indeed the best candidate available, with heavy central bank experience and importantly global knowledge (as the only non-British candidate that was considered). But what sort of direction will he lead Britain as the Central Bank gains more and powers, and was it worth the hassle?

As head of the Bank of England, Mr Carney will hold more powers than previous governors have possessed. Alongside the control of monetary policy (manipulating interest rates to control inflation) and quantitative easing (the printing of British money), Mr Carney will also supervise individual banks and have extra tools to control lending in the British economy. This is a lot of responsibility, but Mr Carney has a good track record. During his term as the head of Canada’s central bank, they proved resilient to the worst of the financial crisis (with one the shortest recessions in the rich world), while none of their banks had to receive a bailout (a rare event at the time). He also heads the FSB (Financial Stability Board), an international body that coordinates the regulation of the financial world. Alongside this he studied at Harvard and Oxford, had practical experience of the financial world by working at Goldman Sachs and is respected by most of the business people he interacts with. That would be a large difference from Sir Meryvn King, who is largely disliked in the private sector for his bank bashing and over-the-top panic calls.

Sir Mervyn King is disliked in the financial world. 

The big question marks he will face are over the commercial banks that are so vital to Britain’s economy. Sir Mervyn King has spoke out recently about debt bombs that are still waiting to explode in the banks systems, arguing they need more capital built up still to ensure their safety against the Euro crisis. While many suggest this to be a bit extreme (with a EU break-up looking less likely), British banks are still not as secure as say, American Banks, which went through vigorous stress tests to ensure they were safe. RBS and Barclays are two of the top five under-capitalised banks in Europe, while RBS is likely to face large fines in its involvement in the Libor scandal. Mr Carney is likely to ensure this changes; with a history of backing tough regulation as chairman of the FSB, while as head of the Canadian Central Bank he used his position to make public any grievances he had over the banks. Another upcoming problem is the popular demand that banks split up their investment arms away from the retail side. It’s hard to predict what direction Mr Carney will take on this, but in Canada the top six banks all have large investment arms, with Mr Carney not challenging them so far to split up their businesses. Finally there is the matter of QE, which the Bank of England has used regularly to help boost the economy. In Canada, Mr Carney has yet to print any money, instead promising to keep record low interest rates (at one point just 0.25%) over a set time, something the US Federal Bank has replicated recently. But the Canadian economy has fared a lot better than the British economy has in the last 5 years, so it hard to suggest he is against QE completely. But with the Bank of England already having spent £375 billion, it is unlikely Mr Carney will want to print more money any time soon.

This chart found at the Telegraph shows RBS had the lowest capital ratio of the British Banks. 

But was Mark Carney worth all the hassle it took to get him? Chancellor George Osborne has spent the year convincing him to take the job, even going to the extremes of offering him £624,000 a year (far more than the current incumbent, Sir Mervyn King), relocation and accommodation allowances and has cut the offered term time to 5 years from 8 years at Mr Carneys request. Such effort to get this candidate seems over the top, but then he is a well qualified candidate in a top government position, with even more powers than his predecessor. The pre-favourite Paul Tucker may feel hard done by that such expense was made to give his rival the job, but Mark Carney was a much better candidate at the end of the day.

Paul Tucker was largely pushed to the side in the chase for Mr Carney. 

George Osborne will feel glad he has managed to pull off such a coup after a poor year in which his budget was heavily criticized and he was himself booed at the Olympics. Britain now has a world class Bank of England Governor that will hopefully fix its banking sector and ensure that Britain once again becomes a leading nation in the financial world. The cherry on the top is that for the first time in the banks history, a foreigner has been appointed the top position. For a nation that is trying to naively cut immigration figures by restricting student visas, it is a great sign of the countries openness.

Altruistic Britain


Britain has recently declared that it will steadily end its £280 million a year aid package to India by 2015 and is also reviewing its current aid scheme towards Rwanda in Africa. Both have good reasons; India is currently growing faster than Britain and has its own aid and space program (which costs £750 million a year), while Rwanda has repeatedly been accused of human rights abuses and has a repressive government. When you then consider Britain has just come out of a recession and is struggling to cut its large budget deficit, it becomes hard to believe for the general public that billions of pounds are leaving the country with no tangible reward.

Paul Kagame, the controversial leader of Rwanda, after many allegations of human right abuses. 

This isn’t just India and Rwanda, Britain is one of the largest aid donors in the world in comparative terms. It donates three times more than America as a percentage of GDP and attaches far less strings than for example the IMF does for its loans to Greece. Britain’s whole aid program last year totalled around £8.5 billion and is split between direct aid to governments (bilateral aid) and funds given to international bodies like the UN and IMF (multilateral aid). Alongside India, Bangladesh and Ethiopia receive the two other largest amounts of bilateral aid, at £219 million and £324 million a year respectively. The countries aid programme is also one of the few public spending measures not to be cut, relieving it of the austerity that the NHS has had to face.

This graph from the economist shows British aid as a percentage of GDP compared to other countries in 2010. It lies only behind the Scandinavian states. 

Critics of aid suggest it does more harm than good. The money given to countries governments can tend to be “lost” on the way to those in poverty, usually lining the pockets of those in power. This is a big deterrence, as donors argue rightly they don’t want to be financing the corrupt governments that allow their people to live in such dire conditions. Another problem is that it can lead to countries become dependent on aid, shutting out private businesses and stifling real solutions to the poverty problem.  A good example of this is Afghanistan, whose economy has become overwhelmingly dependent on foreign aid, accounting for 100% of GDP last year.

Another graph from the economist shows Afghanistan’s foreign aid reaching 100% of GDP last year. 

So has British aid yet to adjust to Britain’s dwindling influence in the world? And is the cutting of India’s aid a sign of things to come?

I would suggest it shouldn’t be. While the aid given to India sounds unneeded, the country actually contains a third of the world’s poorest people (which its current tax system cannot deal with alone). With Rwanda, the country has become known for spending its aid money very efficiently (cutting the poverty rate drastically in the last decade) despite its moral ambiguity. In other countries, British aid is a welcome necessity for the very poor and gives the bonus of improving Britain’s image across the world. While the DFID (Department for International development) is restricted by law from making aid decisions based on Britain’s best interests, it aid plans do help improve trade links between Britain and other countries, a welcome boost when British exports aren’t as strong as they used to be. Plus despite all the criticism of British money flowing out of the country, development aid still only accounts for 0.56% of British GDP. On top of that, the DFID is one of the most transparent branches of British government, detailing online where each bit of their budget is spent.

Found here http://www.one.org/c/international/policybrief/4220/.  If Britain reached the current o.7% target for aid spending, then only 1.6p of every pound would go towards aid. 

Britain has become one of the most giving countries in the world despite its lower economic and military status. This should be praised, it’s one of the few government programmes that is truly altruistic and does a lot of good. Britain could cut back on its aid development schemes and become a more background figure in the world stage once again. Or it could continue to lead the way in helping poor countries bring millions out of poverty each year and become a country to be truly respected again. I know which direction I would prefer.

Cameron’s turn to shuffle the cards


The British government had its first re-shuffling since the Coalition took power in 2010 and it could very well be its last before the next election. So it is interesting to see what David Cameron the prime minister feels has gone wrong over the last couple of years and what needed changing. Obviously all is not right within the government, infighting between Liberal Democrats and Conservatives has divided the coalition while hardcore Tories have criticised David Cameron for losing the Parties values. The conservatives also trail the Labour party in the current polls and needed to freshen up the parties’ image.

So what appointments were made and what do they show about the Governments change in direction. First up is the Health Secretary, where Andrew Lansley lost his job after heavy criticism from the public over NHS reforms. In truth he wasn’t moved out for the policies implemented, but rather the handling of the reforms, as messages about what was happening were confusing and vague and his presence in front of the camera was sorely lacking, hurting the public image of the government. In his place comes in the previous culture secretary, Jeremy Hunt. This appointment backs up the previous statement that the government are looking to change the image of the NHS reforms, as Mr Hunt is well versed in both changing people’s minds and remaining very likeable at the same time. This is despite his links with the Murdoch family, an incident he has done well to shake off and move away from.

Jeremy Hunt will be expected to re-package the NHS reforms.

Next up is the removal of Justine Greening as Transport Secretary and her replacement Patrick McLoughlin. This is a clear shift in the policies involving a third runway at Heathrow, with the previous appointment in line with the Tories old stance against expanding Heathrow (more disruption for those living around the airport). In contrast, the new Transport secretary favours a shift in aviation policy as a third runway could possibly boost growth for the country and bring in new investment into London. This change in policy is confusing for the public, as is David Cameron’s continued denial of a u-turn on a third runway whilst clearly manoeuvring out obstacles in his way.

Justine Greening’s objections to a third runway result in her losing her job as Transport Secretary. 

Another key change was the removal of Ken Clarke as Justice Secretary, who was pro-European and leans to the left in nature (showing a move towards the right wing in this reshuffle). Criticised by Tory backbenchers for giving in too easily to the Liberal Democrats wishes, the new Justice Secretary is a clear change in direction. Chris Grayling is less easy to sway on policies and is keen to stand up against European human rights laws that have long conflicted with British law and angered everyday Britons, though it remains to be seen how exactly he will achieve this.

The loss of Ken Clarke shows a move away from the EU and the Liberal Democrats. 

These were the three big moves by the government, but smaller changes also show a new direction by David Cameron. Along with the Transport ministry, pro-growth liberals were moved into the environment and local government ministries to help promote new infrastructure projects that could help get the economy moving. Though one area where this wasn’t achieved was in the movement of Duncan Smith from the work and pensions secretary. He refused an offer to become leader of the Commons and will continue to fight against current Chancellor of the Exchequer George Osborne on cuts to the Benefits system, as Mr Osborne looks to make cuts of £10 billion by 2016.

Duncan smith’s refusal to leave is one obstacle David Cameron couldn’t avoid.

Along with individual changes there were broader changes in the government. The reshuffle showed the ever increasing cracks that are appearing between the Conservatives and the Liberal Democrats. David Cameron has tactically moved out allies of the Lib Dem’s (for example Ken Clarke) and has brought in more right-winged Tories to help boost the parties’ image rather than the coalitions (with two pro-reform Tories moved in alongside Vince Cable to help ensure he keeps on track with Conservative party aims). Nick Clegg disagreed with appointments like Jeremy Hunt to Health Secretary, but gave into a lot of Tory demands so that he could get David Laws into the government, even resulting in the sacking of Nick Harvey from the defence department, who was considered to be doing a good job and came as a complete surprise. The Conservatives also seem to be focusing on growth rather than the environment with plans for new roads and a third runway at Heathrow, which clearly conflicts directly with the Liberal Democrats aims as a green party. Watch this space.

Nick Harvey (above) is sacrificed to help get David Laws into Government. 

Furthermore, the reshuffle also shows a decline in the women and ethnic minorities in the cabinet. David Cameron had promised that at least a third of his cabinet would be female by 2015; now less than 20% of the cabinet is female with the number of women in the cabinet actually declining slightly. Welsh Secretary Cheryl Gillan, Environment Secretary Caroline Spelman and Conservative Chairman Baroness Warsi all left their posts in the reshuffle (with only Baroness Warsi moved to a lesser role and the other two fired completely), while Theresa Villiers promotion to Secretary of State for Northern Island coincides with her move out of the Transport department as she is known to be against a third runway at Heathrow. Men outnumber women in the cabinet 5 to 1, in stark contrast to countries such as Switzerland and France where women are represented far more evenly. Ethnic Minorities are even less represented with Baroness Warsi’s demotion to a minister (who can attend but not vote at the cabinet) a backwards step in the modernisation of the government as she was the only non-white member. It has to be said that at junior level more women and ethnic minorities are being brought into the government, but at the top level there seems a glass ceiling that neither group can break through right now. Other social issues with the reshuffle include the inclusion of Mr Grayling and Mr Paterson into the cabinet (both openly against gay marriage) and the number of southern ministers increased while the number of northern ministers was kept the same (despite the midlands being regarded as northern).

The Cabinet remains on overwhelmingly male and white.  

Overall the reshuffle shows a movement in David Cameron aims regarding the economy (infrastructure growth), the environment (sidelined) and the repackaging of current reforms (NHS). It also enhances the current problems associated with the coalition government, namely that it is too white, too male and too southern.

London’s time to shine?


 

The Olympics are upon us and the excitement is palpable as sportsmen across the country get ready to compete for their nation. Great Britain did great at the Beijing Olympics to finish with 47 medals (Finishing fourth in the table) and with countries on average winning 54% more medals when hosting the Olympics themselves, Britain could win an outstanding 72 medals (a record for the country if achieved).

But what sort of impact will staging the Olympics have on the City of London and the country itself?

In terms of the legacy it will leave behind, the London Olympics objective seems confused at best. Most countries use it to improve the hosting city or country in general, with Barcelona in 1992 a great example of how a city can use the Olympics to its advantage. Barcelona improved its infrastructure and created a new modern image of itself, which lead to the number of visitors to the city doubling in the decades since – a true legacy. London has repeated this to a degree in revamping the Lower Lee Valley into the modern Olympic park (a much better use of the space) and improving the image of a shabby part of East London. But the city is not in a similar state to the Barcelona of 1992. London is already the most visited city in Europe, is a centre of wealth in the world and has good infrastructure (discounting an overused public transport system that the Olympics is only set to make worse). So what legacy is London trying to leave behind? By the logos up all around the city it could be to promote better fitness and sport participation in an overweight nation by getting the public involved in the Olympics. But this has had little success if the case, with statistics showing no significant change in the nation or in London (though the Olympics could have a more long term effect in this respect). That leaves the reformed areas around the east end, where a new shopping centre and better transport systems have improved the area, but critics suggest the government hasn’t gone far enough in renovating the area while the target of creating jobs has yet to happen. It seems the Government is trying to both improve the rural areas of London and create a sporting atmosphere in the country, a tough combination that could leave either a great legacy or a feeling of regret at not concentrating on one or the other.

The other effect to consider is the economic impact. When the Olympic bid was won Britain was a rich, successful country that could afford such a big outlay on hosting an international tournament. Now the country is in a much weaker state, where three consecutive quarters of GDP decline have seen the economy become smaller than when the coalition government first took over. The costs of hosting the event have come under the £9.3 billion budget set, but this is only because the budget was increased drastically in 2007 from the original budget of £2.4 billion. But this sounds worse than it is, most countries go over budgets when staging the Olympics while China’s cost reached around $45 billion in 2008. On top of this the International Olympic Committee has raised a third of the budget by selling broadcasting and sponsorship rights for the London Olympics. The right to use the Olympic logo in advertising was sold to eleven big sponsors (notably Coca Cola) and brought in just over £600 million pounds over the last three years. In effect these companies (including Panasonic and MacDonald’s) are paying to advertise the Olympics, as boards and adverts that would have already been in place are now including the Olympics logo, in effect advertising the games for London at the company’s cost. Companies do this to either get good publicity or to prove themselves as the top of their markets, though this backfired for G4S who found they had completely underestimated the number of security they would need at the Olympics and consequently saw their share prices nose dive in value. Broadcasting deals meanwhile brought in £2.5 billion over the last three years and £1.6 billion in the three years before that.

But this still works out as a loss for the government in the short term, meaning the longer term impact will need to be positive for the government to make a profit out of this huge expenditure. The Prime Minister, David Cameron had suggested Britain could make £13 billion over the next four years, but many see this as a laughable estimation, with the figures not accounting for the negative effects that the Olympics will bring, such as the impact of people leaving the country to get away from all the crowds etc. This has been proven slightly with hotels claiming that the demand for rooms in London during the Olympics have been markedly weaker than expected. While the money spent on the Olympic structures might never generate a return on its investment. The Olympic stadium cost over £500 million to construct, nearly double what China paid for their “Bird’s Nest” stadium (mainly due to lower labour costs) and nearly double the original estimate of £282 million that was made back in 2004. Its future lies in the balance as a London football club, West Ham United, awaits a decision on whether it can rent the stadium to use as its home ground, with controversial issues remaining about the track field around the pitch and the sharing of the stadium with other tenants. But without tenants like West Ham United, the stadium would make little recuperation on the money spent on it, with the football club along with other tenants expected to pay around £2 million a year on rent to the stadium, which would help offset the maintenance costs of around £5 million a year. Without West Ham United, £50 million would have to be spent to alter the structure to a smaller size for use in future athletics like the world championships in 2017. Then there are other structures like the Olympic Aquatic centre, which at £269 million is very expensive for what equates to a luxury swimming pool. These Olympic structures threaten to become white elephants after the event, expensive relics that lose their usefulness in a months’ time.

Nonetheless, the Bank of England expects the economy to receive a boost in the third quarter by about 0.2% (roughly £5 billion), while another fiscal watchdog has worked out that the 8.8 million tickets sold should give a boost of 0.1% in the third quarter (roughly £2.5 billion). Then there is the boost to morale across the country; where the carrying of the torch helped bring the nation together and the opening ceremony reminded most people of the eccentricity of Britain. This is rather immeasurable, but a timely boost to a country low on confidence with a lot of issues to worry about. For the government it has become an advert to the multinationals of the world, an appeal to global businesses to come to London and spend your money in Britain. For the public it has become just another complaint against the government, joining the current angst against the NHS changes and University fee caps.

But whatever the Olympics has become for London and for Britain, it will hopefully be remembered for the moments in history it creates, rather than the costs it brings and issues it leaves behind.

No Diamond in the rough


Bob diamond, Chief Executive of Barclays has resigned amid all the controversy over the banks role in the manipulation of market rates. Barclays along with twenty other global banks (including Lloyds, RBS and HSBC) are being accused of fixing the LIBOR and EURIBOR interest rates between 2005-2009 that affected the cost of nearly every mortgage, loan and credit card in the western world. Barclays has been the first bank to admit its role and has agreed a settlement of £290 million (30% lower after settling early) which might bring an end to Barclays punishment, but not that of the actual traders that are believed to have broken the law. The Serious Fraud Office is conducting an inquiry into the traders, while the FBI is threatening to extradite any individuals involved in the affair. The allegations against the traders are that they have manipulated rates to help save their jobs or worse their bonuses, while there are accusations that during the peak of the financial crisis rates were lowered to stop the damage to the bank’s balance sheets.  Ironically, this was what the Bank of England (a big regulator of the market) actually wanted to happen, as lower LIBOR rates meant credit would have been more easily accessible in the market.

Image summing up the key figures involved with Barclay’s fine. 

So is Bob Diamond to blame? He was not found personally guilty by the FSA (Financial Services Authority) but as the figurehead of Barclays he was always going to come under pressure from such allegations. Indeed, both Lord Turner (Chairman of FSA) and the Bank of England governor Mervyn King pushed Mr Diamond into resigning and as the two biggest regulators of the city of London, Barclays would have been foolish not to listen. Even ignoring this recent fiasco however, Bob Diamond was heavily disliked by both the public and the government. He has become the encapsulation of all that is wrong with bankers today in the public eye, while the government has clashed with him before in arguments over tax and bailouts. He has always lead Barclays close to boundaries of legality and his resignation was the right choice for Barclays if they really want to change their public image.

Adair Turner - Gordon Brown & Alistair Darling Meet US Treasury Secretary Timothy Geithner

Both Lord Turner and Sir Melvyn King, plotting the fall of the banking culture?

But Barclays weren’t the only bank involved in this debacle; they were just the first bank to come clean. RBS has already sacked 10 individuals already and I would expect more banks to face even bigger fines than that of Barclays. On top of this the regulators of the markets must surely be questioned for not noticing that rates were being manipulated, as it is their job to ensure such a thing doesn’t happen once, let alone for 4 years. The law and regulation applied to the banking industry must be toughened to ensure such actions cannot be taken again, but they must not choke off the credit market and squeeze profits too much as to have a negative effect on the economy in Britain and other countries. I have always been against the criticism of bankers as the sole reason for the financial crisis, but such allegations if proven right (as they look to be) are hard to defend and show an industry that has gotten out of control. Making unnecessarily risky decisions in lending was a wrong but forgivable action, manipulating market rates to save their jobs/bonuses was immoral and illegal, and should result in severe punishment for those involved.

So it would be unfair to single out Bob Diamond as the scapegoat for all this controversy, a lot of people are to blame and overall the whole banking culture must change. But I can’t feel sorry for a man that has made numerous mistakes in his career and still be leaving with a lucrative payoff and shares worth £22.9 million, not bad for a man reportedly worth £105 million. On top of this he still accepts little blame for his actions, arguing that such activities didn’t always happen on a daily basis (a similar argument to an abusive parent arguing he didn’t hit his kids every day).

Mr Diamond’s resignation will not be the end of this calamity, but it’s been a long time coming for one of Britain’s most hated figures.

Britain: The Coalitions first two years


Have David Cameron and Nick Clegg been good leaders?

So the Coalition has been in power for two years now, that’s long enough to paint a good picture of where they are leading the country and how well they have done in charge.

One of the biggest factors in the coalition’s reign has been their reforms in education, health and the military. With education the government has set about creating “academies” which are schools that have been freed from local authority and allowed to make their own decisions on budgets, working hours and teaching styles. This has really kicked off across the country, with nearly half of all state schools being turned into these “academies”. Along with this the government is changing the exam structure in secondary schools, with the old O-level system being brought back in to replace GCSE’s. This is aimed to make exams harder after renowned criticism of exams becoming easier each year, while it also hoped to raise Britain’s poor standing in international tables for key subjects like Maths and Science. All in all, this makes sense as the current structure is flawed and corrupt (with schools manipulating the system to rise up the league tables), but those students unlucky enough to be the guinea pigs will likely achieve lower results. Finally there has been changes to higher education, with the cap on university fee’s raised to £9,000 from £3,000, to much protest from current and potential students. This is a debateable subject, with fees now very expensive considering you would have to study three years plus the costs of living, but the fact that student loans are accessible to everyone means it shouldn’t punish the currently poorer families too much (though the maintenance loans have been accused of being too low).

Protests against University tuition fee increases.

Next up are the reforms in the health sector, with a shake-up wanted for the NHS. The idea was to diversify the NHS, make doctors more accountable for budgets and open up the private market more. This has been an unmitigated disaster however; with substantial criticisms leaving the health bill a complicated mixture of compromises. This leads back to the Governments clear weakness throughout their reign, poor public relations. The government failed to make clear what exactly they wanted to change about the NHS (an already popular institution) and made it worse by not publicising such plans in the election campaign. Then there is the military, which the government has proceeded to cut down. With budgets tight, the army has been a big victim to the government’s cuts, with it being told to lowers its numbers by 60,000 people by 2015. This is to help close the £38 billion hole found in the defence budget, but critics now suggest the UK military is markedly weaker and would struggle to win conflicts such as a possible Argentinean invasion of the Falkland Islands.

Protests against the NHS reforms (you can see a pattern starting to emerge).

Even away from these big sectors there have been big reforms to the country. The government tried and failed to implement elected mayors in some major cities, with nine of the ten referendums being rejected. Then there are the big reforms to the police, which are set to integrate democracy into the Police hierarchy and allow the outsourcing of tasks like office work. Welfare is also being tackled, with benefits capped at £26,000 per household and David Cameron even pondering whether to drop the housing benefit for under 25’s. Finally there are possible changes to the Civil service being planned, to try and make individuals more responsible for their actions after criticism over the difficulty in passing through bills. So rightly or wrongly, the government cannot be accused of doing nothing, with a possible criticism instead being that they perhaps tried to do too much in such a short space of time.

Next we can look at the country’s economic performance. On the positive side of things, Britain surprisingly kept unemployment relatively low since the financial crisis, with the current figure of 8.1% (only 1% higher than the pre-crisis level) lower than its European counterparts; with Greece at 21.9%, Spain at 24.1% and even France at 10.1%. In fact, public sector jobs cuts of 424,000 over the last two years have more than been accounted for by a rise in private sector jobs by 843,000. In debt terms Britain isn’t too bad either, its public debt sounds incredibly high at just over £1 trillion, but this only accounts for 67% of their GDP. In comparison to other countries this isn’t too bad, with Germany and France having similar debt to GDP ratios, while Greece, Portugal and Italy boast debt levels over 100% of their GDP’s. In fact, all the worry over the Eurozone crisis has driven investors to Britain, with bond yields incredibly low at around 1.6% meaning Britain can borrow money very cheaply right now.

Current unemployment in Europe shows Britain in the bottom half and fairing better than its neighbors.

However, Britain is struggling deeply in other terms. Despite debt levels not being too high, the current budget deficit is 8.4% of GDP, which along with Ireland is the highest in the eurozone. This means that although Britain’s debt isn’t too high, they are adding to it much faster than any other countries in Europe. Even more disappointing is the Primary budget deficit which discounts the interest being paid on current debt. This stands at around 3% of GDP and is the highest in Europe, deafening criticism when the likes of Greece are boasting a surplus. It basically shows Britain is reliant on foreign money to survive right now, and is the main reason why the government is making such drastic cuts to the public sector. On top of this is Britain’s poor growth, with the country currently in recession, after a GDP decline of 0.4% in the final quarter of last year followed by a decline of 0.3% for the first quarter of this year. Though this isn’t a severe recession, it follows a long term trend of poor growth for the UK, with just 0.5% annual growth forecasted this year preceded by 0.7% annual growth last year. Such poor growth is not all Britain’s fault with oil prices and the Euro crisis obviously having an effect, but more must be done to implement growth within the country. At times the government is too set on cutting costs, with little ideas for boosting growth, a policy that is born to fail as low growth will only lead to less taxes and higher benefits being dished out. So in economic terms the government has done well to cut budgets without dropping the country into another deep recession, but without some sort of plan for Growth, they will be fighting a losing battle to lower the budget deficit.

The GDP forecasts of Britain show weak growth compared to Germany and France. 

Finally there are the international issues the government has had to face. International conflicts have seen Britain take a bigger role, with the intervention in Libya lead by Britain and France and the chaos in Syria seeing David Cameron condemn President Assad and argue the case for harsher sanctions and possible intervention. While the current disagreement with Argentina over the Falklands islands has been handled well, with a referendum set to end the debate and keep the islands under British control if the people reach such a conclusion (as is expected). However the debate over Scotland remains a touchy subject. Scotland is set to hold a referendum themselves over whether to stay as part of Britain and there is general worry that a decision could go against what the Coalition are hoping for. A messy split would not help the economy and debateable issues such as the North Sea oil revenues and transfer of Scottish bank debts could take a while to be sorted out. But by and large the biggest international issue remains the Euro crisis. Britain are one the few countries in the EU not to hold the euro currency and this has helped them devalue their currency, meaning the internal devaluing (public sector cuts etc) didn’t have to be as drastic. But the downside is that they are highly vulnerable to a break up without the safety net of having the EU bail them out. Britain actually doesn’t have much money tied up in Greece itself (roughly 0.4% of GDP) compared to Germany and France. But the combined money exposed to the weaker economies (Greece, Portugal, Spain, Italy and Ireland) accounts to £190 billion, which is higher than France or Germany’s exposure and is roughly 12.7% of British GDP. That’s not to take into account the money exposed to Germany and France at around £116 billion, which would be in big danger due to the domino effect expected to happen if just one economy in the eurozone fully crashes. So far Britain has gone against the trend in European discussions, opting out of the fiscal compact (such budget targets were beyond Britain right now) and largely looking out for itself (with the transfer of sovereign powers back to Britain high on the coalition’s plans). This has seen them marginalised somewhat and there is sense that if the EU is to solve this crisis they would have to become more unified. This leaves Britain with a big question to face in the near future, whether they join the new EU or leave the eurozone permanently.

Graph shows the extent to which Britain is exposed to the euro crisis. 

Overall, the Coalition government has had an eventful two years do far. Big changes to the county have had mixed effects, while the same could be said for their economic performance. Internationally they have fared well but will need to decide what direction they want to take in regards to the European Union. I would give them a 6/10, as they have fared okay in most departments, while it possibly could have been higher had they publicised their actions better. This has been the big problem with this government so far, they have dealt poorly with public opinion and are unpopular not down to their decisions as such, but rather the ways they have gone about making such decisions.

The Euro’s trapdoor: Elections


Europe is once again in disarray this year as Spain announce they will miss their budget targets, the effects of the ECB’s one trillion euro injection ware off and a year of elections see the public strike back at current governments. This last point is arguably the most important as elections around Europe have changed the balance of the EU and caused panic in the markets.

First up is France, who recently elected Francois Hollande as their new president. He is expected to cause a shake up within the EU as he calls for growth over austerity, rebels against Germany’s hold over Europe and expects to tax the French people more rather than cut spending (going against the current trend). Mr Hollande was also clearly not the candidate the rest of Europe favoured as Angela Merkel publicly backed Nicolas Sarkozy in the election and both David Cameron and Mario Monti refused to make time to meet him when he was a candidate, showing a general worry around Europe that Hollande could push the EU off course. But then his ideas aren’t that radical; he is arguing for a Growth Compact alongside the Fiscal Compact that will probably include policies already in place, he talks of austerity going too far but still agrees with reducing France’s budget deficit to 3% of GDP and while many are making a fuss over the French-German alliance breaking up, Francois Hollande’s contrasts with Angela Merkel might keep the EU more in check than the similar minded Sarkozy did. Even so, the elections show that it is clear France have chosen to change the direction that their country is heading in; from a globalised leader of the euro to a country that is looking at creating more trade barriers and reducing the power of the EU.

Hollande will have to learn to like austerity if he is to cut the French budget deficit.

Next up is Greece, where no party could gain enough votes to create a government, leaving many worried about the future of the country. The two biggest parties: the New Democracy party (Conservative) and Pasok party (Socialist) both experienced shocking results as their share of the vote fell from around 80% to lower than 30%. The Greek people instead voted for a range of anti-austerity parties, leaving no chance for a government to be elected as parties with contrasting policies refused to join in any coalition. The only hope is that a second round of elections will see the vote concentrated more on one or two parties as another scattered approach will cause many problems. But more important than the results of the next election is the message behind it, that the Greek people are heavily against the current bail-out scheme being forced onto their country. The problem is that there is no conceivable way around it, the EU will loath to re-negotiate the bail-out measures once again after writing off half of Greece’s debt at the start of the year. A real possibility now is that Greece will leave the euro, a frightening thought as the rest of the EU is still not ready for such an event despite it being the topic of discussion for over two years now.  This election has thrown a spanner in the works of Greece’s debt reduction plan and if radical parties can get into power in the next election, then Greece could refuse to pay back its debts, a move that could have far reaching effects around the Globe.

Greek election results.

The French and Greek elections have been the biggest elections in Europe so far, but both Britain and Italy have experienced damaging results in local elections. In Britain, the Conservatives lost 404 seats and the Liberal Democrats lost 330 seats, allowing Labour to gain 823 seats in total. This was a crushing result for the Coalition government and showed the public disapproval in the government’s performance, in fact if this was a parliamentary election then Labour would have won a majority government comfortably. In Italy, voters showed their disapproval by either voting for protest parties or by not voting at all (with the turnout at just 67%, compared with the French elections which had an impressive 80% turnout). One of Italy’s biggest losers was Berlusconi’s People of Freedom party, going from 37.6% to just 11.6% of the vote, as disapproval with the former prime minister has fallen onto his party. The problem with Italy is that while Mario Monti has done a respectable job at reforming the country, he is only a short term occupant, appointed as a technocrat leader by the coalition government to help sort out the nation’s economy. When he leaves next spring, Italy will face a hard job replacing someone who has united the different factions of the government superbly as a neutral.

This is not to mention the recent breakup of the Dutch government over budget cuts, with elections to be held soon to create a new coalition. While Angela Merkel’s party lost a local election in a key German state to their socialist rivals. Overall, this year follows a trend of countries chucking out their governments since the financial/euro crisis started. The UK voted in the Conservatives/Liberal Democrats in 2010 and chucked out Labour, while last year Italy voted out Berlusconi and Spain voted in Mariano Rajoy. The austerity measures currently being employed in Europe have left the public angry at the job cuts and new taxes that are popping up, but any possible new governments won’t have much choice to deviate from this plan. Any that does will be punished by the markets and perhaps shunned by the rest of Europe.

Austerity is a tough pill to swallow, but voting out the current governments will only lead to the same result at the end of the day.

Tax Avoidance in the UK


The UK is a modern country that is home to many companies, ranking 7th in the World Bank’s ease of doing business index. But a big problem facing the country and indeed other nations like the USA is that companies are dodging taxes when in the country. In 2010, Apple only paid £10 million in British taxes despite making around £6 billion in sales. A similar story was reported on Amazon, after making £8 billion in sales in the UK they have yet to pay any corporation tax. This is a common practice by the big multinationals of the world; they can escape paying a large amount of the tax as they can use foreign subsidiaries where corporation tax is much lower, like the British Virgin Islands or Ireland. In fact, Facebook chose Dublin in Ireland as the location for its international HQ, as the corporation tax was very low.

Apples cash holding vs the amount of tax it pays to the USA

The British Virgin Islands has the unusual statistic of having 457,000 active companies, a ratio of 16 companies to every citizen. A lot of these are shell companies, set up by firms to hide accounts for the main purpose of tax evasion and money laundering. This is the big problem, as firms can hide funds from the government through lots of smaller shell companies and can even use these to place bribes to officials, showing corruption is still prevalent in society. In 2011, it was reported that 25% of the FTSE 100 companies were avoiding tax through foreign tax havens, this went up to 98% using the stricter US Congress definition of tax havens. While in 2010, tax evasion cost the UK government £15 billion compared to benefits fraud, which cost just £1 billion in comparison. Switzerland, a more famous location for secret bank accounts are now being cracked down on by the likes of Germany, pushing the UK into a decision on whether to toughen its tax agreements with the country (with a clause in the current deal making it possible). This could raise an estimated £5 billion for the UK government and could be worth pushing, though secrecy laws on the income of individuals would remain intact.

This shows the British Virgin Islands has very low costs for starting businesses

George Osborne has made public his stance on tax avoidance, calling it “morally repugnant” and suggesting a concentration on this subject is in the governments mind. This could mean extra powers given to HMRC, when there is already concern on the current powers afforded for example: being able to request information on an individual from third parties (like banks) and being able to inspect business premises unannounced. The concerns are also that tax payers won’t have much protection, with the appeal system time consuming and costly. But this is a popular method of dealing with the heavy budget deficit the government needs to dig itself out of, as it will mostly be a problem for the rich and businesses – current public targets. A recent success was a blocking two tax avoidance schemes by Barclays that would have amounted to £500 million in tax revenue lost.  But the recent budget also admits defeat in trying to tax the rich, as the 50p tax rate was dropped to a 45p tax rate, showing the government wasn’t confident in its ability to beat the rich and their accountants.

Gaining to many powers?

For now the wealthy individuals and firms remain slippery in the current tax system. They can afford better accountants than the government sadly and with small countries happy to offer tax havens there will all ways be a get out clause for them. But it is important that they are made to account for themselves, otherwise money that should be flowing into the government and therefore the countries itself is being cut off. This revenue for the UK is important in keeping the country running and any loss in it can have a negative effect on the rest of us as budgets are tightened. Even more so, it sends a bad message that the rich do not have any responsibility to finance the country they live in, when they should be treated as any other member of the UK.

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