By Russell Bruce
Given the fiasco over last year’s pastie budget, George Osborne, the UK Chancellor on an extended period of work placement, will be pleased with himself that he has avoided some of the furore that arose in the wake of last year’s effort.
The furore will come none the less, because £500 per head is charging down the line in spending cuts and tax rises. As I noted in last week’s article the Office of Budget Responsibility has calculated the tax take during the five-year period of the coalition government will have risen by 30%.
Now I don’t remember either the Tories or the LibDems announcing in their manifestos for the 2010 general election that they would be increasing taxes by 30%. Indeed the Tories, including George Osborne, were scathing about tax increases during the period of the previous Labour Government.
The Tories are supposed to be the tax cutting party. At the heart of their proposition to the electorate in 2010 was the implication that taxes would be cut over a five-year term as Osborne got the mess sorted out. They just failed to mention that the cut would be in the 50% rate for the wealthy.
Along with Labour the rose garden duo are demanding answers of the SNP for post independence certainty. Yet it is clear to all that Westminster austerity will run for years after 2015. Our experience is of a total lack of economic stabilisation, and austerity stretching out into the unknown.
Reports of enthusiastic celebrations in pubs up and down the country over the 1p cut on beer duty have been of a level that no amount of exaggeration is discernible.
To be fair, the £2000 entitlement to companies against the cost of national insurance contributions is welcome and will help struggling smaller businesses. It will not cut down on the paperwork as you cannot remove employee entitlement from national insurance as a consequent of this measure.
What is intriguing is that this measure will be universal. I understood universality was a nasty word these days according to all three of the opposition parties in Scotland, with Labour the most vociferous.
But the backdrop to all this is what matters. There has been a failure to get the economy moving with the result that growth estimates for this year have been halved to 0.6% from only four months ago in the autumn statement. Yet again Osborne has got his sums wrong on the size of the budget account deficit. And the increase adds to the pile of accumulated national debt.
George Osborne’s calculations and assumptions in economic forecasting for the UK are beginning to have all the credibility of a gambler on a losing streak.
You will remember how he went on about how Triple A Britain benefited from low interest rate payments on her debt and how we must manage the economy to hold on to the security of the UK’s triple A status.
With the Triple A gone, having remained longer than was really justified, this was always a hostage to fortune scenario. In reality the rate of interest on a country’s debt is a great deal more complicated
Another myth pedalled is that not being in a monetary union, like those silly Europeans in the Euro zone or an independent Scotland in a Sterling monetary union, Big Britain had the resources and the muscle to keep the interest rate on our debt low.
It is extraordinary that this latter claim has never been seriously questioned.
The UK through the Bank of England does have the ability to switch on the printing presses and churn out money that does not exist in physical terms.
This is then used to buy up debt, usually called bonds but in the UK Gilts, suggestive of the fact that hoards of gold might still be lurking in the vaults of the Bank of England. But we all know that Gordon Brown sold great chunks of it off when the price of gold was nearly a sixth of its value today.
Gordon Brown sold off 395 tons of gold at an average price of $275 an ounce raising $3.5 billion in US dollars. The price of gold is now $1608 per ounce so 395 tons of gold would be worth $20.4 billion today. That represents an asset loss of $16.9 billion.
As gold, like oil, is priced in dollars, the loss mounts when current exchange rates are taken into account. The devaluation of sterling in recent weeks means that although gold has lost 3.3% in value in US dollars over the last year, gold’s value in sterling has increased.
So much for any rose tinted, wishful thinking for economic competence should Labour return to power at Westminister. With the rose garden duo’s credibility to deal with the borrowing mess Labour left behind in shreds, UK parties have provided a gold plated case for transferring all economic and welfare powers to the Scottish Government.
With all this debt increasingly in the hands of the Bank of England, the bank then picks up the interest payable and George Osborne, desperate to find anything to plug the widening gap in the deficit, demands the bank hands the interest over. This is a bit like you going to your bank manager and saying that the interest he took on your loan should now be handed back.
Low interest rates are the result of a combination of a variety of factors not least the low bank rate in most western countries. It is true that demand for national debt in the form of interest bearing bonds is also related to a level of confidence that the bond issuer will not default.
Being part of a monetary union does come with some constraints. But the real brakes on economic flexibility come with unsustainable debt levels especially it your plans to reduce the debt have been shown to fail.
The interest paid on national debt in the Eurozone varies from country to country. The higher the debt the less others are willing to pay to hold your debt and therefore the price obtained for your bonds falls and interest paid rises against the borrowing.
So just how well is the UK doing? Based on 10 year government bonds, which is the standard comparison, the UK is paying 1.85% at the moment. This is a bit better that France paying 2.01%, but not as low as rates paid by better performing Euro countries.
The Euro rate comes in at 1.31% on European Central Bank (ECB) debt. Of individual Euro area countries, Germany does best paying 1.37%, followed by Finland 1.58%, Netherlands 1.62% and Austria at 1.68%.
In other EU countries that have not adopted the Euro, Denmark pays 1.57%, which in a global context is the eighth lowest rate. Sweden, which also retained the Krona, pays 1.79%.
So how does George Osborne’s claim stack up now? The figures speak for themselves. Just one final ignominious comparison, the UK is in a virtual tie with the Czech Republic paying 1.86%.
This shows that being within a monetary union does not mean that the rate of interest paid on individual countries national debt will be the same. Unionist commentators and economists have suggested that Scotland would face higher rates of interest as a new country.
So lets assume this might be the case. As Scotland in a monetary union with rUK would have the same bank rate and agreed levels of flexibility over national debt any variation in the early stages, if at all, would not be significant. But lets assume it is a bit higher in the opening months. By buying Scotland’s debt investors would get a marginally higher return in interest payments.
As our Net Fiscal Balance is lower at -5% than the UK’s at -7.9% and our share of the UK’s national debt would amount to a lower percentage of GDP, Scotland would look a low risk country.
A marginally higher rate of interest would attract money, pushing down the interest rate an independent Scotland would have to pay until it equalised with the UK rate.
Indeed we could soon attract investment levels for our bonds just in the same way Scotland is currently taking the lion’s share (19%) of inward investment to the UK at present. The result could be a divergence in which we move closer to the lower rates paid by Denmark or Finland.