The OECD is wrong, at least for now

Last week the OECD predicted that the UK economy would record a 0.1% decline in GDP for Q1.  This would mean that the economy had fallen into the dreaded "double dip" recession,  since GDP fell by 0.3% (originally estimated at 0.2%) in Q4/2011.  The OECD also opined that the UK would experience more sluggish growth in the medium term than most of its peers.

That medium-term outlook may well turn out to be true.  There is no sign that the government is ready to slacken the pace of fiscal tightening, and ultra-loose monetary policy seems to be doing little more than allowing the economy to stay afloat.  That's nothing to be sniffed at, of course.  Although unemployment in the UK has been rising in recent months, it has stayed a long way below the dire levels that some experts predicted when the financial crisis hit.  Even now it stands far short of the appalling rates evident elsewhere in Europe: Spain, for example, where overall joblessness is now 24%, and the rate for young people is massively higher than that.

On a more positive note, however, it's very likely that the OECD's forecast of a fall in GDP for Q1 will turn out to be wrong.  A number of commentators have noted that the surge in fuel sales last week, amid strike-driven fears of a supply shortage, will have boosted consumer spending for the entire quarter.  Some experts have gone so far as to suggest that the government actually provoked the fuel panic in order to achieve exactly that outcome, in order to make sure the OECD's forecast was wrong.  This seems very far-fetched, if only because it implies a level of cunning far beyond anything the government has displayed in recent times.

Other, more concrete indicators also point to positive growth for Q1.  The Markit/CIPS purchasing managers' index for March showed its strongest reading for 10 months, at 52.1 (where any reading above 50 implies expansion of the sector).  Separately,  a joint study by the CBI and the accountancy firm PwC showed that the financial services sector expanded in Q1 for the eighth straight quarter. Add in the fact that retail sales started the quarter on a strong note (even though there was a setback in February), and it's hard to see why the OECD is so pessimistic about overall GDP (official data for which will be released on April 25).

After Q1, things may get tougher for a while.  Bank of England Gov. King has already predicted that GDP may fall slightly in Q2, because of the extra public holiday to mark the Queen's diamond jubilee.  By the same logic, Q3 might also be tough, given that much of London will be off limits to all sane people for a month or so while the Olympics are in town.  And, of course, there's still the threat of a fuel drivers' strike. Panic buying of petrol may have boosted consumer spending last week, but if the pumps really did run dry, even for a short while, the impact on the economy would be very severe.              

Fuel shortages? Maybe. Fool shortages? No chance!

The UK Government has pulled off the remarkable trick of triggering panic buying of fuel, even though supplies are completely normal. UNITE, the union that represents a majority of tanker drivers, has been given a strike mandate by its members.  However, it has to give 7 days notice of any strike, and conciliation talks are set for this coming Monday in the hope of reaching a settlement.

No matter! The Government, from David Cameron on down, has offered a bewildering array of "advice", some of it actually illegal. Cameron says there's no need to panic buy, but maybe you should top up the tank if you happen to be passing a petrol station. One Cabinet Minister says fill up when you see your gas gauge reading half full.  Another says keep your tank two-thirds full. Worst of all, Francis Maude, the minister notionally in charge of emergency preparedness, suggests buying jerry cans and keeping a stash of fuel in your garage or home.  It was quickly pointed out that this is not only dangerous, but also illegal.  Not quickly enough, sad to say:  today we hear of a woman with burns over 40% of her body, caused by decanting petrol from one container to another in her kitchen. One hopes Mr Maude's conscience is troubling him.

This possible strike has been brewing for a very long time, and the government has regularly bragged that it has contingency plans in place. It would appear, based on the events of this week,  that the main "plan" is to pre-empt chaos that might be caused by a strike, by triggering chaos well ahead of time.

And in the last couple of hours, the government has announced its master-stroke. In response to requests from the industry, tanker drivers will be allowed to work 11 hours per day, rather than the usual limit of 9, in order to replenish supplies that have been drained by panic buying. So, having created the panic in the first place, the government is now going to allow the drivers to earn lots of nice juicy overtime pay to fix the problem. Should at least mean that they have plenty of money in the bank if they eventually do go on strike.  

A dangerous presumption

There are few more divisive issues in the UK than planning and development. Reverence for the countryside remains way out of proportion to either its economic importance or the number of people who actively live there. Proposals to allow even a smidgen of concrete to intrude on the so-called "green belts" around major cities provoke uncontained fury among local residents.

So it's no surprise at all that the Government's latest changes to planning regulations, announced on Tuesday, have polarised opinion.  The existing national planning rules had apparently swollen to more than a thousand pages, but this has been slashed back to a mere fifty.  There is now to be a "presumption in favour of sustainable development".  This of course delights the developers, who regularly complain of being strangled by red tape, but terrifies conservation groups and rural interests, who warn darkly that England's green and pleasant land is about to be bulldozed and paved.

In looking at these issues, it's always worth remembering the old joke about the difference between a developer and a conservationist. Remember how that goes?  A developer wants to build a cottage in the country; a conservationist has already got one.  Many of the people now trying to protect their pristine rural environment would have screamed blue murder if someone had tried to bar the door to them when they first tried to move there.

Even so, it's not clear that we need any sort of "presumption" in favour of development, sustainable or otherwise.  Sure, there are high-profile examples, such as the planned HS2 rail line, where well-heeled local residents may stand a good chance of sabotaging the plans, but at a more local level, where most people  actually live, developers already seem to get away with pretty much whatever they want.  For instance, take a look at this project,  King Harry Park, in my own esteemed home town of St Albans.  Sounds great, no? "Green, rural environment"...."boulevards and walkways".  No mention there that it was a lot more green, rural and walkable before the developers pitched up, since it was a large playing field. What's more,  the developers initially proposed that a section of the development would be sold only buyers over the age of 55,  but now they are now lobbying for that restriction to be lifted, and no doubt they will be successful.  

It's a story that's repeated regularly all across England.  Developers rarely take "no" for an answer, whereas local residents eventually tire or run out of money, and give up the fight.  Close to home again, our local council has been fighting for years, at enormous expense to taxpayers, to fight off developers wanting to build a freight depot in the area. The application has been turned down over and over at all levels of the system, but still seems likely to get the go-ahead in the end.   The potential damage to the local area is incalculable and the site is green belt, but there's to be a railway spur, so no doubt that will make it "sustainable" in the eyes of the Government.

The Government's spin on the planning changes is that they will promote economic growth, or rather "recovery" as it's now called. Nobody in their right mind could oppose that -- could they?? -- even if it does look like yet another in the surprisingly long list of ideologically-inspired policies (the top rate tax cut, NHS reform, welfare cuts) that this Government is starting to spring on us.            

Shopping folly

A few years ago, when the blog and I were young, I wrote about attempts to ban stores from giving out plastic bags to their customers, supposedly on environmental grounds.  As I said at the time, many people (including me) re-use these bags as kitchen bin liners. If stores were banned from giving them out, I'd have to buy bin liners instead.  So who would gain from a ban on free bags?  Most obviously, the supermarkets -- instead of giving bags away, at some cost to themselves, they'd be selling them at a profit. The losers? Consumers, naturally. And the environmental impact? Probably almost neutral.

Alas, the issue hasn't gone away. In England, supermarkets have tried hard to reduce "throwaway" bag use by promoting reusable bags, which you pay for once but which are then replaced free for all eternity.  Supposedly this hasn't worked, and the number of free bags handed out is still about 300 per household per year.    This will come as a surprise to anyone who has watched a very high proportion of the customers  turning up at the local store with huge stashes of reusable bags, but you can't argue with official statistics, right?  In Europe, by the way, the number is even higher -- closer to 500 a year -- which will be no surprise to anyone whose been handed a tiny, flimsy sacchetta at a checkout in Italy.

In Wales they've gone a step further, charging 5 pence for every throwaway bag you take. This has apparently reduced bag usage, though probably at some cost in terms of smashed eggs in the car park, as shoppers attempt to carry armfuls of groceries back to their vehicles. The policy in Wales is very stringent, to an almost perverse degree. In Cardiff just before Christmas,  I bought a very expensive designer perfume as a gift for my wife, but had to pay an additional 5 pence for the bag (which matched the box and had the designer's name on it) to carry it in. The bag was made of paper, but the policy still applied.

Anyway, it looks as though the EU is about to force all member countries to introduce laws banning free bags. The EU claims that the bags are mostly used just for a few minutes but take "100 to 1000 years" to decompose in landfill. Leaving aside the fact that "100 to 1000 years" makes economic forecasts look downright precise, I have a question here: how do they know that? There isn't a plastic bag on the face of the earth that's anywhere close to 100 years old, so how can anyone claim to know that the damned things will take a millennium to decompose?

And one more thing. How much of the rubbish going to landfill do you think these little bags, which seem to worry the bureaucrats and Eurocrats so much, actually account for?  The answer: ONE percent. There must be some more productive way for these people to spend their time.          

Get used to it, Granny!

Probably to the dismay of the Government, the media's quick takeaway from yesterday's UK budget is that pensioners are to be hit hard in order to pay for the planned reduction of the top rate of income tax from 50% to 45%.  The tabloid press are referring to a "Granny tax", when what the Chancellor is in fact proposing is to freeze one of the many benefits available only to pensioners.

Boy, are there are a lot of those benefits,  and most of them are not means-tested.  Free bus travel (and Tube travel for those in London).  Free prescription medicines.  Free TV licenses for the over-75s. Lower rates of local property tax. The "winter fuel rebate", a no-questions-asked cash payment much loved by pensioners spending their winters in Cyprus and Tenerife.  And a break on income tax: the tax-free exemption for pensioners, that is, the amount of income they can earn before paying any tax, is higher than for regular taxpayers.

It's this last one that the Government is tinkering with. It will be frozen at its current level for existing pensioners, until it comes into line with the exemption for other taxpayers, which is being gradually increased year-by-year. Those due to retire in coming years (including your humble blogger) will no longer receive a higher exemption.

These small changes will bring in a tidy sum for the Government:  well over £3 billion in the next 3-4 years.  However, the cash impact on existing pensioners is precisely nil (and in any case they are about to receive a significantly higher state pension), while for future pensioners, the only impact is that they will pay a bit more tax than they had been expecting.  Half of all pensioners pay no income tax at all.  Calling this a "granny tax" is the purest scaremongering.

Which is not to say that it's not a brave and risky step for the government to take. Older folk have the annoying habit of turning out to vote in elections, and may turn their wrath on the Tories at the next available opportunity unless the Government makes a strong case for the change.  Objectively, that shouldn't be difficult.  Older people are the fastest-growing cohort in UK society, thanks to the post-WW2 baby boom and rising life expectancy. They are also the only age group that has not become collectively poorer since the financial crisis.  They own a disproportionate share of the nation's wealth, mainly in the form of housing.

To finance its programmes, any government has to follow the Willie Sutton maxim and go "where the money is".  In the UK as inmost Western societies, that means the prosperous baby boomers.  For many years the elderly were able to plead for special treatment on the basis that "we fought to keep this country free", but there are fewer and fewer folk around who can claim that any more. While it would be unconscionable to implement tax changes that harmed poorer pensioners,  there's no good reason why richer ones shouldn't  pay their fair share.  But good luck getting that message across, Mr Osborne.          

The (toll) road to Hell

As hard as David Cameron tries to shed the Conservatives' image as "the nasty party", he can never quite shake off some of the Tories' atavistic instincts. One that has resurfaced with a vengeance over the past year is the deeply-held belief that the private sector can do anything cheaper and better than the public sector.

How remarkable it is that this belief has survived the catastrophe of the botched railway privatisation and the money pit of the "private finance initiative" (PFI).   Yet for the past year the government has been pushing plans to increase private sector involvement in the National Health Service, over the objections of just about every health care professional in the land, and in recent weeks there have been reports that some local authorities are looking to outsource certain policing functions to private security companies.

Today David Cameron has opened up another front by calling for private companies and private capital to play a leading role in modernising the UK's ageing infrastructure, especially the road network.  The Chancellor, George Osborne, has already expressed the view that pension fund cash could usefully be deployed into a national infrastructure fund, and has also been assiduously courting sovereign wealth funds, especially from Asia.

Existing highways could be leased to such investors on a long-term basis, with improvements and maintenance paid for out of existing road taxes; or private capital could be used to develop entirely new roads. Cameron is anxious to reassure everyone that he is not talking about imposing tolls on existing roads (though the words "just yet" hang almost visibly in the air); however, new roads or added capacity on existing roads would be fair game for charges.

This blog is not normally in sympathy with the self-interested whining of road users, but some of the numbers are pretty stark. Motoring-related taxes amount to over £40 billion a year, but the highways budget is only about £9 billion.  Moreover, the share of UK motor fuel prices accounted for by taxes is the highest in Europe, and there are few signs that the government is willing to forego further fuel tax increases that are already in the pipeline.

There have been suggestions in the past that modern technology would make it possible to replace fuel taxation with a road pricing scheme,  so that (for example) drivers could be charged more for using the busiest roads in rush hour. There's not much sign that Cameron's announcement is a step in that direction: instead, the motoring lobbies are probably right to see it as a scheme to get people to cough up even more for something they already pay for.

Let's remind ourselves of a couple of things here. First, all of the roadbuilding in the UK is already carried out by private firms; there's no cheaper or more expert supplier out there just waiting for a chance to get involved. Second, the government can borrow more cheaply than the private sector, so there is no prospect of reducing financial costs by involving private money, a point that you'd think had been proven many times over in innumerable PFI fiascos.  (There might be a saving if there were some sovereign wealth fund out there prepared to put its own money into a project and take on the equity risk, but I'd be willing to bet next week's petrol money that there isn't).  No, it all looks like another fire sale of national assets to secure a short-term financial gain: selling the furniture to buy gin. If you care to read more, take a look at this righteously angry piece from The Guardian's website, or this rather excellent analysis.              

The illusory magic of equities

There must be a financial advisor out there somewhere who doesn't buy into the proposition that "equities will always outperform bonds in the long term", but if there is, I've never met him or her.  As I've mentioned here before, I like to ask new financial advisors when the US equity market returned to the levels it had attained just before the Great Crash of 1929.  I haven't yet met one who knows the answer, which is 1952. Twenty-three years! How many people can honestly say their investment horizon is that long?

The Economist has just published a very interesting piece on equity returns that suggests the painfully slow post-Great Crash recovery is by no means a one-off event.  It describes the unshakable faith of the investment community in equities as a "shibboleth", by which it seems to mean a belief that nobody dares to challenge, but which in fact means (more appropriately, I'd say),  a long-standing belief now regarded as outmoded or no longer important.  (Definition from Wikipedia).

The Economist points out, as one example, that Japanese equities have never returned to the all-time peaks seen in 1989.  (That's almost to understate the case; the Nikkei average is well below even 50% of its 1989 peak).  In the US, from 1999 to the present day the return on equities has been 7.6 percentage points per year below the return on government bonds.

Remember "Dow 36000"?  That was the title of a book published back in the late 1990s, when the DJIA first traded above 12000, a level not a million miles from where it sits today.   One of the only two people to bother reviewing the book on Amazon described it as "a lot of padding around one big idea, and the idea's wrong", and hoped that not too many people would lose money by following the book's advice. You'd certainly have been better off following the advice of the reviewer, alas anonymous,  rather than that of the authors.  If you are interested in acquiring it as a historical artefact, or as a firestarter, there's a seller on Amazon anxious to send it to you in exchange for 30 pence.

The Economist ends its story with a stark message: "Equities are not a miracle asset that will turn measly contributions into a generous pension. Those who want to retire in comfort should save more".   Good advice, but almost certain to be ignored, especially in the UK, where most people still cling to the equally outmoded belief that property is the best pension plan.