by Alex Porter, Economy Editor
‘Black Wednesday’ was the day the British Conservative party lost its overwhelming advantage over the Labour party in terms of economic credibility. John Major’s government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) on 16 September 1992 after they were unable to keep sterling above its agreed lower limit. George Soros, Quantum Fund founder, the most high profile of the currency market investors, made over US$1 billion profit by short selling sterling. The cost to the UK Treasury was later revealed in 2005 under the Freedom of Information Act to be £3.3 billion
These days in the rabbit hole of ‘too big to fail’ banks, ‘light touch regulation’, leverage, bonuses, discredited regulators and fraudulent ‘financial instruments’, UK government borrowing hit £23.3 billion in the single month of November 2010.
In 1992 George Soros’s name entered the UK pantheon of economic arch-villains. Now, City speculators know that if they gamble recklessly the UK government will bail them out at taxpayers’ expense. At the Bank of England they literally have a licence to print money, and that’s exactly what they’re doing.
Once the UK had a functioning, sentient political class and a financial sector which did the boring things we needed it to do, such as lend to small businesses. Now the UK political class is captured and utterly at the mercy of international financiers. Make no mistake, austerity is about finding savings for the next round of bail outs. If the UK government really wanted to stop its deficit ballooning it would prevent banks indulging in tax avoidance and tax them more, but the reality is that for all David Cameron preaches about the ‘Big Society’ it won’t include City finananciers.
Go east young man
Soros co-founded the Quantum Fund with American investor Jim Rogers. Rogers retired at 37, is Chairman of Rogers Holdings and an internationally revered contrarian investment guru. He has very blunt views about Western economies.
In 2009 Rogers didn’t endear himself to many UK commentators when arguing that the sensible option for young Britons considering their futures was to emigrate. When Rogers was asked what advice he would give to young Britons his answer was, “Move to China; learn Chinese.”
His reasoning was that Britain’s attempts to save the UK banking sector through subsidy and nationalisation would cause the UK to go bankrupt. Arguing then that Gordon Brown should quit, his advice was that before Brown leaves office he should abolish the Bank of England. Taking the view that in 2008 that the banks’s bondholders and shareholders should lose their ill-conceived investments, he is scathing at the idea of sovereign nations compensating private losses and using quantative easing and nationalisation to do it.
Of the Bank of England, he said: “They are the ones printing all this money … Central bankers are not gods or geniuses; why does anyone think they are?”
In December last year, while discussing the situation of Europe’s sovereign debt crises on business tv channel CNBC, Rogers pulled no punches in his indictment of the UK. “Greece is insolvent, Portugal has a liquidity problem, Spain has a liquidity problem, Belgium has been cooking the books for a long time, Italy has been cooking the books for a long time and the UK is totally insolvent.”
Having studied at Balliol College Oxford, Rogers retains an affection for the UK, however his take on Britain’s plunging global economic status is that of a cold-blooded investor. Rogers commented that he had “no idea where that floor may eventually be … we used to have North Sea oil and the City of London,” but now “you don’t have anything to sell … it’s a terrible shame.”
This weekend in an interview with Bloomberg, the legendary investor had Saudi Arabia in his crosshairs when he claimed that Saudi Arabia is lying about being able to increase its oil production. “Saudi Arabia has been lying about the reserves for decades. Saudi Arabia the last two times said they are going to increase production and they couldn’t increase production. Don’t fall for that. The reason oil is going up is the world is running out of known reserves of oil.”
With the price of oil hitting $112 per barrel and with political tensions in Libya and other parts of North Africa, uncertainty abounds in relation to oil supply. Increased oil prices drive up the cost of almost everything because it is involved in the production and delivery of most products. Inflation in the UK is already double the Bank of England’s stated target of 2%. In this respect low interest rates will make matters worse as more money means each pound is devalued and so imported products and components will rise in price.
Throwing fuel on the fire global commodity prices like wheat, up over 80% in a year, which have caused food riots and political unrest and contributed to the toppling of North African governments will soon have political consequences in the UK.
If consumer prices in the UK escalate just as the increased rate of VAT is priced into the economy, the social consequences will be severe for many. In January Shelter Scotland warned that as much as 5% of Scots, 207, 500 people, were using credit cards to meet mortgage or rent payments.
Many experts now argue that the true rate of inflation in the UK is far higher than the official figure with some estimates putting it at 8%. Any further increase in inflation will be felt on main street and so masking the real figures will no longer wash. There will be calls to increase interest rates and that will mean the kind of increase in mortgage payments which will justify Shelter Scotland ringing the alarm bells.
Simultaneously austerity cuts are due to take effect and while there may be a case for cutting the wages of the highest paid public sector workers, scything down hundreds of thousands of lower scale public servants during an economic contraction would be taking a huge risk.
Austerity cuts are not just about taking public sector wages out of the economy but forcing low paid workers to source and pay for services they previously received free from the council, while at the same time benefits payments are cut. The knock-on effect of less money in family budgets would be missed mortgage payments, less VAT and less money spent in communites including retailers.
The very real worry for economists and policy makers is that all these factors together will create a potent mix which will anger citizens and lead to serious political upheaval.
Meanwhile there’s no sign of the Treasury’s tax take increasing as in the last quarter of 2010 the British economy contracted by 0.6%. It is safe to say then that government borrowing will continue its dramatic upward trend .
If Jim Rogers is correct and the UK is “totally insolvent” then it is simply a matter of time before international investors offload the UK debt that they own. Combined public and private debt in the UK is 449% and investors will realise that their investments will most certainly be repaid in devalued sterling. When the profits are gone the investors will vanish and Britain will be fast-dialling the IMF.
The key factor in this geo-political picture which allows the UK to continue borrowing is the rising price of oil. North Sea oil is used as the guarantee that UK PLC will not go bankrupt and creditors will not lose their investment.
Weighing up the options
As Jim Rogers points out global oil supplies are now diminishing. This is creating security problems for industrial nations which depend heavily on oil supplies. Consequently being an oil producer means your influence in the world improves as importers jostle for suppliers’ favour.
Last September German broadsheet Der Spiegel reported on a study by the German military into the geo-political and economic effects of ‘peak oil’ on the world. Pointing to the increased strategic influence of oil producers Der Spiegel’s Stefan Schultz said: “For importers of oil more competition for resources will mean an increase in the number of nations competing for favour with oil-producing nations. For the latter this opens up a window of opportunity which can be used to implement political, economic or ideological aims. As this window of time will only be open for a limited period, this could result in a more aggressive assertion of national interests on the part of the oil-producing nations.”
Given the financial dire straits of the UK public finances, which have been filletted to bail out the City, the key role that North Sea oil plays in propping up the UK economy is grossly underestimated. This was acknowledged in a Telegraph article by Edmund Conway in November 2009 when he said: “… the truth is that, for the past quarter of a century, Britain has been a petro-economy.”
This brings us the subject of North Sea oil and electoral cycles. Historically, North Sea oil has a nasty habit of threatening to run out just as an election approaches. So, with a matter of weeks to go before the Holyrood election what is the state of play in the oil sector? According to the Press and Journal the oil sector is booming:
“A resurgent UK oil and gas industry is expected to deliver thousands of new supply chain jobs for the north-east during 2011. Increased capital investment amid buoyancy in the market just now could lead to up to 15,000 people being taken on across the UK this year, bosses said yesterday. Scotland accounts for about 45% of all oil and gas jobs in the UK and the Aberdeen area is home to the bulk of positions north of the border – meaning a jobs bonanza for Europe’s energy capital as confidence grows in the sector. According to industry organisation Oil and Gas UK (OGUK), spending on exploration and production in the UK Continental Shelf will soar to about £8billion this year, up from less than £5billion during 2009.
OGUK chief executive Malcolm Webb hailed the findings of the group’s latest activity survey as a sign of renewed interest in Britain’s oil and gas assets. ‘There is huge potential,’ said Mr Webb. ‘We have the capability and resources to drive economic growth for decades to come.’ “
So, is a window of opportunity opening for series oil producer Scotland? Not as things stand.
You might imagine that the Scots’ generous contributions to the UK Treasury would mean that Scottish demands for a fuel duty regulator would be deemed a reasonable and equitable aspiration. Such is the intensity of feeling on this matter the SNP today launched a website which allows people to list the costs of fuel in their own parts of Scotland. Indeed, before last year’s Westminster election the Liberal Democrats promised action on the regulator. Since forming the coalition with the Conservative party that promise was sent off to a remote, dark, overcrowded subterranean sanctuary at the edge of the map marked Here Be Dragons, which is specially designated for banished Lib Dem principles.
According to the the most recent official figures (GERS) Scotland’s national accounts show a surplus, yet despite bolstering an increasingly indebted UK Treasury Scots are also having their Parliament’s block grant cut from Westminster. The consequences of these London-driven austerity cuts are now providing a steady stream of news stories.
Glasgow University’s Principle Anton Muscateli is warning that the university, established in 1451, faces insolvency next year. Reduced finances for higher education is causing alarm and the universities are pressing to have the ability to charge students tuition fees similar to what universities in England are doing. Mr Muscateli was a member of the Calman Commission and is against Scotland having more economic levers to manage its own economy.
With Full Fiscal Autonomy (FFA) the austerity cuts would not be needed as Scotland has no structural deficit. If the Scottish parliament could keep the taxes raised in Scotland then austerity cuts would become prosperity spending.
These southward migrating subsidies also mean that a gaping hole in local government spending is left behind. The news today is that public sector Unions and Cosla are at loggerheads with the Scottish Government, which is seeking to avoid compulsory redundancies by trying to reach agreement on pay constraints and cost-cutting measures across local government.
Clearly it is time for Scotland’s university, trades union and local government sectors to fully support the popular policy of devolving all tax powers to Holyrood. It should be a matter of pragmatic representation of members, workers and students for these sectors to be backing FFA rather than fighting over the diminishing crumbs of a shrinking pie doled out by Westminster.
The reason that Scotland’s civic institutions are not properly representing these interests is simple. Their allegiance is first and foremost to political Union and not their members and employees. Some observers note that civic Scotland is stuffed full of Labour and more generally pro-Union placemen whose perks are dependent upon preserving the Union at what is now an unsustainable cost for Scottish families and businesses.
The Scotland Bill has now been outed as a monster designed to take more powers away than it grants. Furthermore new powers recommended by Calman, which the Lib Dems promised to ensure were kept in the Scotland Bill, such as air passenger duty, aggregates levy and the assignation of income tax yield from savings and distributions, have been dropped.
There is a clear cost-disincentive to any Holyrood Government using the pretend income tax powers which are proposed in the Bill. Some would argue that it would be better if Westminster kept the income tax powers and devolved corporation tax powers.
There would be a clear advantage for the Scottish parliament if corporation tax were devolved to Scotland along with the law needed to underpin it. Without going down the road of Ireland and lowering corporation tax to 10% it does make sense for Scotland to have a lower rate than England and there is plenty evidence that reducing the tax rate somewhat would mean the overall take for a Scottish Exchequer would be greater. That aside there is an international trend towards lowering corporation tax.
In Ireland there is a large exit charge if a company decides to leave, bringing stability by filtering out less serious players. A more significant benefit than attracting the corporation tax from relocating companies is the income tax and national insurance accrued from the companies’ employees’ earnings.
Bizarrely, CBI Scotland is arguing to continue having corporation tax reserved to Westminster. This, in effect, means a business organisation is arguing for a greater tax burden for its members. Another curiousity is that in Northern Ireland the CBI thinks that having a lower corporation tax through devolving the power to the devolved assembly is a wonderful idea.
One wonders what exactly CBI Scotland’s members make of all this, although as recently pointed out by Calum Cashley, CBI Scotland represents less than 100 members. Compared to leading business organisations such as the Federation of Small Businesses with around 20,000 members, CBI Scotland’s director Iain McMillan, who has been in position now for some 18 years, talks for an ever-diminishing minority of large businesses some of whom have their headquarters south of the border.
From the boardroom to the livingroom Scots are waking up to the fact that the UK is broke and if a Scottish Exchequer controlled and raised all of Scotland’s taxes Scots voters would be considerably better off instead of facing years of austerity.
Unionism is a luxury that is very clearly costing Scots a packet. It is now merely a matter of time before the sums are done and the vested interests discarded.