Public Sector Pension's reform likely to trigger unrest

The Hutton Report has announced that public sector pensions will be reformed, which means that most workers in the public sector will get less and will have to work longer. The new system will involve scrapping the final salary scheme in which pension is determined by final grade and insted pensions will be determined by average pay throughout career. As for the retirement age, it will be brought into line with the national retirement age of 65 from its previous age of 60 for public sector workers. This is yet another blow for the public sector to add to the pay freeze, which with inflation predicted to be 4% will see a significant fall in real income (in fact employees in the public sector will be 4% worse off).
Taking away pension rights, freezing pay, sacking workers and putting remaining staff under pressure is a sure way to stir up wide spread union action. Civil service unions have becoming increasingly more daring in recent years, increasing strikes and its rumoured they are mobilising for mass protest. Add to the civil service unions to the battle cries of the aggrieved teaching unions, the already striking lecturers, furious students and the police federation has made its stance as very much against the Government. You have to wonder who isn't against the Government.
Walking around Preston Town Centre I was surprised to see members of the Socialist Worker Party asking for signature against cuts, I was even more surprised to see the number of signatures they had as people showed a keen interest in their march on London. The graph from Youpoll shown bellow shows the decline in popularity of the Lib Dem and Conservative party since forming Government.

The popularity of the Government is falling and Unions are mobilizing, times are going to be very tough for the Government. As long as they maintain their plan of contractive fiscal policy through cut backs whist leaving the super rich and culprit banks untouched, people are going to questions what Government they elected.

Bank of England's independence threatened

Bank of England's independence threatened

Mervin King, Governor of the Bank of England, is under pressure to resign after WikiLeaks revealed he had less faith in David Cameron.
The WikiLeaks articles contained this document from a US ambassador : "He [Mr King] opined that party leader David Cameron and shadow chancellor George Osborne have not fully grasped the pressures they will face from different groups when attempting to cut spending," Since this has emerged Mr King has been pressured to resign.
Reports state that leading Economist David Blanch Flower states: Mr kings "thirst for power and influence ... has clouded his judgment one too many times".  That he should quit because of political bias.

Mervin King should not quit for exactly that reason!
He was reported to have concerns about the Government, this is merely his opinion. While Mr King may be using his influence surely he is entitled to an opinion.
If he is forced to resign for expressing some concern about the Government it will seriously question the independence of the Bank of England. If the Bank of England is a truly independent body then the Governor, while working closely with the Government, should be allowed to judgement. If every Governor that questions the Government is removed then surely we might as well take monetary policy back to 10 down street !

Predictions for 2011

That most reliable and well-established organization known as the independent office for budget responsibility is telling us its all going to be just fine, I would care to disagree.

First lets look at what the OBR are saying:
A revised growth for this year 1.8% which is 0.6% higher than predicted. This does make some sense considering the 3^rd quarter was 0.8% growth, which is a lot higher than predicted. This figure also predicts good figures for the final quarter of this year. This is disputable, however sales figures for Black Friday were 0.2% higher than last year, which could suggest a strong final quarter to the year.
What is dubious is that it predicts 2.1% growth next year. I would question this, increased retail sales are likely to be being fueled by the VAT increase in spring, it makes sense to buy now. Also inflationary pressure (the multiplier effect) is only going to add to that. So this is only short term, next year consumption will fall and other sectors are likely to be hit. Construction is likely to take a hit from Government cuts and we are yet to see figures published from other industries. However some indicators do not look good.
The housing market has been falling dramatically; this is a good indicator of an impending recession in the UK. Also if we analyze these consumption and confidence graphs we can see that as the recovery took hold consumption and confidence went up however now it is falling again! These all point towards a double-dip. 

The OBR has altered its prediction of public sector job losses to 330,000 instead of 490,000. This however does not take into account all those on contract, the job losses may be made up elsewere, this is statistical fiddle because contracted workers are not public sector. The reason stated however was that benefit cuts have been higher and departmental cuts lower, this would of course lower the job losses but it is still likely to hurt the economy. Benefit cuts give consumers less to spend, which will cut consumption away. If anything direct benefits cuts have more of a direct impact on the economy.
The OBR is yet to truly be tested, its independence is questioned but it appears to be more optimistic than bias. They are not the only ones though:

We shall see what 2011 holds but I don’t believe it will be a good growth year!

I would predict low growth for this year 0.2-04% for the 4th quarter, but next year will see us slipping into negative growth.

UK Debt is not a problem!

Liberal-Conservative coalition is convinced that their emergency tightening of the budget is the right thing and that the economy will cope. I'm not so sure and here is why.

I’d hate to repeat my self on the topic of why the UK economy is a mess… as discussed in my article on the fallacy on the 0.8% growth figure and my analysis on the latest OBR prediction the economy is not doing as well as the present Government would suggest with its policies.
Basic theory dictates if you withdraw fiscal stimulus (low taxes and high Government spending) then you will strain the economy and perhaps knock it back into recession. In this case we have a very weak recovery with a Government about to introduce tax increases, public sector cuts and benefit withdrawal, this would point to economic suicide. But why is the Government doing this? Because the country is ‘bankrupt’ we have the ‘worst deficit in the G20’ a ‘debt time bomb’ and we have to do something about it! Here is a novel idea… how about not bothering about the debt?

101 reasons not cut Government spending (now)

1) Firstly lets look at what economists consider the main objects to target in the economy. 1: GDP growth, 2: Inflation, 3: Unemployment, 4: Balance of payments (money going in and out of the economy). To pure economists these are the main objectives to target, is Government debt one? No... Government debt or what economists call the PSNCR is the 5^th objective that is often omitted from the list. Why bother about it?

2) Ok so just because economists don’t list it, as a main objective does not mean it is important, in fact in resent years focus has been on equality and happiness also. But still number two Government debt does not have a direct effect on the Economy.
3) When a nation goes into recession something know as automatic stabilizers kick in.  These help stabilize the economy but increase Government debt short term. Automatic stabilizers consist of: lower taxes because of higher unemployment, lower wages and less profits and higher benefits to unemployed. A vast proportion of the debt is automatic stabilizers.
4) The UK Government bought out RBS and shares in other banks to stabilize them, this is not lost money! These shares were bought low and can be sold back later… that’s not debt that’s investment.  Bank bail out shares can be sold back at profit!
5) The Government is not anywhere near bankrupt! We have AAA rating that’s far from bankrupt. If we were bankrupt all our money would be worthless
6) The way the Government raises finance is by selling bonds, these are promises to pay the barer the sum of money on a date, these bonds are fixed we have a long time to pay them back. Why not wait?
7) Ahhh but you say that who will buy these shares? Well shares are bought on the bond market, so has this market been more reluctant to trade out bonds? Has it heck! People will buy our bonds. 8) But that’s not the issue, the issue is that our interest goes up because we have to attract people to buy them. True the price is increasing (which is bad) but it is by no means much by international standards and at just under 4.5% it is less than most consumers could get a loan.
9) Journalists like to compare debt to a persons debt… well consider this how much was your house worth when you bought it? How much were you earning? Now work out the value of the house against your yearly salary… that is your equivalent to government debt now. I should image its quite high? Government debt is around 70%.
10) How about me? Well a rough estimate tells me after I’ve taken my university loans and worked out my income its rough estimate of 660%. Oh no I best panic and sell my laptop… what!?
11) This is a key one: DEBT IS REDUCED WITH TIME – INFLATION ERRODS DEBT. Take out a loan for £100 now, and spend it when you come to pay it back a  year later assuming inflation is 2% your debt is worth 2% less because the person you are now paying £100 too will need £102 to buy what you bought with it last year. That’s inflation!
12) So remember that figure of 4.5% interest on Government bond repayments. its actually 2.5% if you negate inflation. That’s assuming inflation is 2%. It is actually 3%+ at the moment.
13) Compared with the past our debt is minimal:

14) compared to recent past it is minimal:

15) Debt is at a fixed point in time. If our debt is 60% of GDP in 2010 by 2030 it is likely out economy will have grown by 40% so the debt will be proportionally less of our countries income when we come to repay it.
16) If we cut spending now we will lower Government spending that will lower AD (total demand or spending) which will lower GDP17) If we cut spending now we will cause unemployment, like the 2+ million predicted from the budget.
18) If we increase unemployment we will likely increase crime.
19) If we decrease public sector budgets there may be union action20) Cuts to infrastructure will damage UK business! (damages AS)
21) Cuts to the education system will mean the next generation will have less knowledge/skills so the economy will suffer in the long run. (reduction in supply side)
22) People made unemployed in the public sector will spend less money, so those in the private will suffer! 23) People with less benefit will spend less money, so those in the private will suffer!24) The last time we were in this situation we found our self in a depression then WW3…
25) maybe we should not cut our military in just in case.26) Increasing Taxes such as VAT to 20% is recessive creating more inequality.
27) If we go into double dip the automatic stabilizers that are out of the Government control will increase making the debt worse!
28) If we continue to support GDP by spending then automatic stabilizers will fall and are falling! 29) Government deficit is already falling; even without a budget slashing Spending things will begin to get better.
30) Next time the economy is in ‘overheat’ we can reduce spending to stop a positive output gap and prevent another recession. 31) Next time we have high demand pull inflation we can deduces spending to create a positive Government account and pay back some of the debt and sole inflation problems.
32) Ireland is in economy difficulty and so it 33) USA this means we will have less exports to these countries and they are our main exports. This is bad for the economy Government needs to make up for this fall in exports.34) House prices are falling, this is a signal that the economy is becoming heading towards recession, surely this would suggest we do not have a strong enough to take the hit of cuts. 35) Equally consumer spending is falling36) Unemployment is a lagging indicator, so if we go into a double-dip which theory states we may do if we cut back now then unemployment will only get worse and say like that for a long time.
37) Those employed by the public sector have skills that are not valued by the private sector! Crowding out theory suggests the private sector will create jobs with cut backs, how can this happen. What kind of private sector business wants to employ millions of civil servants? 38) Those unemployed require training to get back into the labour market, how can they do this with increased tuition fees, less adult education etc..
39) The longer people are unemployed the more their skills depreciated, the focus should be spending to get unemployed back to work not creating more unemployed making it more competitive for people to find jobs.
40) “the number of vacancies for the three months to October 2010 was 453,000, down 27,000 over the quarter” –ons Where are the jobs for the unemployed and soon to be unemployed?41) Front line services will be cut WITH implications to their service provided.
42) Government bonds are sold to the general public, the government represents the public. we owe our selves money? – a bit of  a silly argument granted. However:
43) The UK created £200bn in Quantitative Easing, the other name for this is Asset purchasing. This means we purchased £200bn worth of bank and Government debt. The proportion we bought from the Government can be written off.
44) If we do go into a double-dip then we can’t lower interest rates to raise AD and help us back into recovery because they are at 0.5%
45) Equally if we go into double-dip it would cost more to launch a new stimulus package to bring us back to positive growth than it would be to simply wait before cutting the debt

At this point the time opportunity cost of listing another 56 would out weight listing them so I will chose to stop this list here… 

The point is why are we so concerned about this debt! Yes it is a problem but we can pay it back later when we have good strong growth, as Labour should have done during the recent boom.

Another interesting read on the subject can be found on the Hutton Economics Society website: The National Debt? Timebomb?

Nick clegg can't count.

One of my first introductions to politics was seeing Nick Clegg on TV explaining how he would fight to bring back free tuition fees.

Then came the general election, Nick Clegg promised to the voters and the student unions that he would ensure tuition fees did not go up.

"Students face tuition fees rising to £9,000" -BBC 3rd of November 2010

Since when did a promise of no increase in tuition fees become a triple in tuition fees... apparently Nick Clegg can't count! He might be one of an increasing number who struggle with math’s in the coming years thanks to the education cuts, so much for being the party of the young.

But was does £9000 tuition fees mean?

Basic macro economic principals states that the supply side of the economy made up of Land, Labour, Capital and Enterprise. Tony Blair famously said: "education, education, education" were the 3 most important things. By improving education he work force (Labour) improves and as such the economy experiences real growth. Increasing tuition fees makes no sense! It is cutting the long term in favour of the short term, in the long term to quote Maynard Keynes we really will be dead at this rate. This is contractionary supply-side policy which could result in negative economic growth... The theory that increased debt will not deter students is not valid at all! From asking around collage it really has had an impact on people considering university. It seems double standards to make a large issue out of government debt (which is not a main economic objective) then expect households not to be bothered.

To blame the universities would be folly teaching grants have been cut by 80% and budgets for research have gone down as well, universities have had to increase their fees. To strengthen the economy we should be investing in our universities not the opposite!

My opinion, it makes no economic sense. But is it fair? No! Is it progressive? NO! Is it politically wise? NO if your a lib dem.

The repercussions have already been felt by the conservative party, mainly on their HQ window panes.. although there is much more to come!

As for the Lib dems, its safe to say they have lost the key youth vote and the NUS are hot on their backs for betraying them. Even talking of hitting MPs with the book!

Could it be ulterior motives? A very cynical view would be to say the conservatives are attempted to reverse history and once again make higher education for the 'elite'.

Even those who will not have to pay the high rate for the first year (and hopefully the rest) are still feeling the pain by increased demand for 2011 places... offers are more demanding

The fallacy of 0.8%

Some predicted 0.6% GDP growth, some predicted 0.4%, what did we get: 0.8%. Fantastic news, it would appear George Osborne's faith in the economy coving the back lash from the public sector cuts was correct.
George Osborne needs around 1 million jobs to be created, with the 0.8% growth came an decrease of 0.1% of unemployment. The Economy is creating jobs! So all the predictions of double dip, all the apocalyptic judgements on the spending review are wrong, its all up from here.
NO

What Mr Osborne will not be drawing attention to is that these figures are from the 3rd quarter, thats July, August and September. This is way before the spending review get chance to sink its teeth into the economy, it is in fact its before the new Government had done anything. The Con-Dem rejoice they really should be thanking the past Government. I'd go as far as saying this 0.8% is the fall out of the stimulus package that has now been reversed.
If your looking for more practical evidence not to get your hopes up, consider this.
Office for national statistics:
-Government and other services rose 0.6 per cent
-Construction output rose 4.0 per cent in the third quarter of 2010, compared with an increase of 9.5 per cent in the previous quarter
Construction is on the slide from the previous quarter indicating a downwards trend, the cancelation of Government contracts is not yet applied to these figures (with them being out of date) and other indications such as slowing housing market appeared after these figures have been calculated.

3rd quarter of 2008

 Construction is a large chunk of GDP if it starts to decline it could multiply across the whole economy. The 0.6% growth in Government services is almost certainly going to decline with the spending cuts. Then manufacturing will decline in the 4th quarter as well as there will be less demand for manufactured goods in the public sector (e.g: Fighter Jets..) and export demand for manufacturing is shaky with Europe  on the brink of a second economic collapse.

Don't be too quick to make judgements at first glance from one figure, analysis. I'm standing by my predictions of a double-dip.

The UIC Index

There are many ways of measuring the standard of living, or economic performance. I thought i would develope may own, here it is the UIC Index:

The Historian

"A historian is a profit in reverse"

Always a favourite quote of mine and now it seems to be more relevant than ever.

Were we are now
With the spending review just around the corner questions are being raised as to what it will mean for the UK economy.The UK has a national debt of around 950 billion (that's: 950,000,000,000!!), this staggering figure is the problem now facing Chancellor George Osborne but what is he going to do about? This is the question on the mind of many, will raising tuition fees be part of repaying the debt, cancelling child befit is certainly one part of it.
The front line services such as police have already begun making cut backs and other areas of the public sector cringes in the knowledge its almost certain to see heavy job loses.
George Osborne may be cutting back to reduce the budget deficit but what will happen to the Macro economic objectives? Government spending (G) is a key part of Aggregate demand (AD), plotting a reduction in G and thus AD on a Long Run Aggregate Supply (LRAS) has the effect shown bellow:
Output falls from O to O1 and thus GDP falls.. the economy goes into recession! Surely George Osborne knows this? Well a major part of the conservatives plan on keep the economy afloat release a theory called crowed out, as explained in full by a fantastic article written by Joe RS: Joe's Article. Basically the Government expects the private sector to fill in the gap as they deplete the public sector, a valid theory. However this only possible if businesses have money to expand, something which is about to get a whole lot harder if the Monetary Policy Commity decides to raise interest rates!
Has George Osborn factored this into his theory? It certainly raises questions as to how qualified he is to run the economy, lets find out:

The Man in charge
Name: George Gideon Oliver Osborne
Age: 39
Born: Paddington UK
Degree: Modern History.
Job History:
NHS: recording deaths
Selfridge's: Tidying towels
The Conservative Party
Experience in Economics (including GCSE ):
NONE

Anyone else shiver at the sight of that résumé, Well the city of London for a start! On the positive side every single one of you now reading this probably can say: "I have more experience in economics than the man in charge of the UK economy!" So how did he get the job.. well another Quote springs to mind, this time by Benjamin Franklin exasperated by politics:
"Democracy is two wolves and one lamb voting on what to have for lunch"
Alas more fitted for the present times would be:
"Two politicians and an economist voting on what to do with the economy"
At least there is one good thing, if he studied modern history he should be able to tell us about the 1930s.

The Past
During the period of 1930s the world economy was in a state of depression, in the US this was know as the great depression lasting from 1929 to around 1939 while the UK's problems started in 1918 but were not quite as bad by the late 1939s.
Economic growth was negative, between 1918 and 1921 there was a fall of 25% in output in the UK! The Government debt was large and the government was pressured to lower the deficit, this didn't help the economy!

Many nations were pinned down by something known as the gold standard that fixed their currencies so they could not export effectively.
As a result of the economic depression extremism increased, the Nazi party rose up in Germany and to a lesser extent in the UK, the KKK became stronger in the US and in Italy and Spain far right dictatorships rose up. Eventually Adolph Hitler rose to power in Germany and consumed Europe in war.

The future? (The apocalyptic edition)
World war 1 = war on terror
The Gold standard = The Euro
Economic down turn = Credit crunch
Right extremism = Tea Party Movement, BNP etc..
Government cut back? = Spending review?
World war 3 anyone?

OK so that's the extremest prediction possible (unless we look back the fall of Rome), but there some merit in looking back at the past to judge the future, there are many similarities to then and now and Keynesian models suggest these cut backs will lead to bad times ahead. We have to learn the lessons of the past, lets hope George Osborne did in his history classes. A final quote to consider:
"History repeats itself because no one was listening the first time"

Inflation Killed My Pocket Money

Here Sonny boy take this 10p and go buy yourself a handful of sweets" ... yes Grandma i think you will find you can no long buy a humble Fredo with that!

Inflation is often a concept none economists easily over look. People will look at the public sector (for example) and ask why are they complaining about a 1% pay increase? Its an increase isn't it? No it is not, if inflation is higher than 2%. If inflation is 2% that means everything will cost 2% more than last year so their wages from last year will be able to buy less. While this is not a fall in nominal income it is a fall in real income. This means that a 1% wage rise is actually a pay cut in real terms.
(This means that the pay freezes, which means no more pay increase, in the public sector as stated in the budget is actually a cut in real terms.)
Value can also confuse some people, consumers can easily be thrown off track by inflation as the hypothetical granny was. To assume that something will cost the same as it did ten years ago is folly because firms will have raised their prices due to inflation. If your pocket money as a child (if your lucky enough to get any) never saw an increase then it means it will have fallen in value significantly over time. "Your lucky back in my day we got 50p a week" is a failure of a statement.. back in your day 50p could buy a lot more!
On a final note, if you can grasp this concept you will be able to understand that over time the value of your savings fall. If interest rates are less than inflation then in real turns saves are devaluing... using this theory we can move into Micro Economics because this is one of the main principals of Monetary policy......