A ‘Titanic’ gesture from Mervyn King’s Bank of England

The British coalition’s majority partner throws crumbs of public spending to appease the social revolt against austerity. But, while companies count their losses, the question is: what else can they do at the HM Treasury to revive the island’s economic activity?

LONDON | At Oxford University, apart from learning how to get drunk and how to get elected for government, the chancellor George Orborne –who shared club of youthful excesses and college desks with the current prime minister David Cameron and London Mayor Boris Johnson– seems also to have had his speech polished as to say it loud and clear if necessary. When the CBI this week asked him to soften the corporation tax, Mr Osborne told them:

“Of course the business community would like us to go even further and I would like to go even further if I had the money. I believe in lower taxes, I would like to have permanently lower taxes, I think permanently lower taxes do boost growth. But you can't fund, when you have got a huge budget deficit, a permanently lower tax rate because you end up having to put the tax up next year as the international money markets swirl around you and say 'Hold on, how is Britain going to pay its debts?'” [Source.]

Those whose nerves are already swirling are the Britons’ themselves. Among them, the president of the CBI and former Financial Times editor Richard Lambert, who felt his duty to alert the public just as the Conservative Party celebrated its annual conference in Manchester. Lambert said that

the economy is clearly growing more slowly than when Osborne made his plans 15 months ago. Osborne has to include some flexibility and some wriggle room.” A not quite subtle hint.

The language used by Lambert, however, sounds moderate when contrasted against the latest industry developments: Pfizer has announced the closure of its research laboratories in Kent (southern England); aerospace transportation and railways firm Bombardier will fire “hundreds” of skilled workers; and BAE Systems, the military and defence quasi-flag company will cut its workforce by 3,000 jobs. The pain is now felt even among large supermarket chains, the so far untouchable in the middle of this plague of the credit followed by a dramatic decrease in consumption, with an imperial Tesco presenting the worst results (January to August 2011) in two decades while its growth prospects have collapsed by 40%. Over other terrains, the same lament is being heard, with Dixons’ sales shrunken a whole

10%. Desolation echoes everywhere.

CAN I HAVE MORE QE, PLEASE, SIR?

So the Bank of England, with its governor Mervyn King at the front of the ship, has launched a second helping of Quantitative Easing (QE): £75bn of fresh electronic pound sterling injected into the veins of the country's economic system. Although, what is really the British central bank’s magic money for? Basically, it was spent in UK sovereign debt, £198,300 million in gilts of the £200,000 million created in previous editions of QE –a bond shopping that is supposed to make yields thinner and let the coalition government borrow from the markets at affordable cost. Yet, at home the reception has been cold.

It feels like like launching the Titanic,” says Ros Altman, director general of over-50s lobby group Saga, surely concerned about the overall impact on savings. “The last round of QE was supposed to stimulate UK growth and fight deflation, but instead it boosted prices, bank bonuses and borrowers' balance sheets. It actually created asset bubbles and inflation, not sustainable growth.”

Jeremy Warner, economic commentator in The Daily Telegraph, spelled no kind words for King or Osborne, either:

“I worry about it. I worry both that it will be ineffective in terms of stimulating investment and growth, I worry that it is going to be very difficult for the Bank of England to unwind these now vast holdings of government debt, I worry that we are now perilously close to outright monetisation of the deficit (a policy approach which all economic history shows ends in abject disaster).”

Even the commitment to issue a new class of bonds, specifically for small and medium-sized company, has not drawn any smiles. The Treasury would finance the new debt market, but all those involved know they will wait months, years perhaps, before the project starts rendering profits –or trouble.

The other measures are equally slow, or fall short of their goal. The reduction of corporation tax by 3% will only be official by 2015, the budget for improving telecommunications and mobile networks merely weighs £150mn, and the largest amount that the coalition has committed is a £750mn package so councils can re-introduce garbage collection on a weekly basis.

Joanne Segars, executive director at the British Association of Pension Funds NAPF, summarises the situation: “A strong and growing economy is essential for the long-term sustainability of UK pensions. Quantitative Easing is a price worth paying, but only if it is successful.”

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About the Author

Victor Jimenez
London contributor at thecorner.eu, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.