Britain faces an… interesting challenge over its fiscal deficit and sovereign debt in 2010, not to mention the reforms awaiting the City after May’s election.
We’ve therefore already covered the UK Labour party’s election pitch for financial and fiscal reform. Now, for the sake of balance if nothing else, let’s look at their main rivals’ plans to keep Britain a AAA-rated sovereign state.
And, well, it’s rather hard to tell if the Tories most wanted to love-bomb voters or Moody’s, Fitch and S&P in the manifesto they published on Tuesday.
After all, this is one of the very first paragraphs. Can you feel the ratings agency love?:
Ensure macroeconomic stability: We will safeguard Britain’s credit rating with a credible plan to eliminate the bulk of the structural deficit over a Parliament. Our fiscal policy will seek to help keep interest rates lower for longer. The independent Bank of England will continue to target 2 per cent Consumer Price Index (CPI) inflation, and will use its new role in prudential supervision to preserve financial stability.
Ah yes, telling the independent Bank of England what to do. Most cunning. The manifesto goes on thumping the sovereign debt tub too:
Urgent action is needed if we are to avoid the higher borrowing costs that would inevitably follow from a credit rating downgrade…
…We will increase spending on health in real terms every year and honour our commitments on international aid, but our plan to get a grip on the deficit will include cuts to wasteful spending in many other departmental budgets. That will enable the independent Bank of England to keep interest rates as low as possible for as long as possible.
We’ll leave it to Fitch and friends to unscramble that odd headline mix of spending and cuts, should the Tories find themselves in Downing Street after 6 May. Still, it goes on — and on:
…we will set up an independent Office for Budget Responsibility to restore trust in the government’s ability to manage the public finances.
We will provide an emergency budget within 50 days of taking office to set out a credible plan for eliminating the bulk of the structural current budget deficit over a Parliament. The case for starting early to re-establish our economic credibility is overwhelming, and is backed by economists and business leaders.
Hmm. More detail on that Budget office, please? Correct us if we’re wrong, but we thought the Treasury is more or less omnipotent in determining the spending items within each Budget — while Parliament can only vote on overall budgetary spending.
We’re not sure what blocking-power an independent body would have here. Perhaps S&P might enlighten us? Anyway, here’s a bit of detail on what the Conservatives want to cut:
We will start by cutting a net £6 billion of wasteful departmental spending in the financial year 2010/11. In addition, we will make the following savings:
• freeze public sector pay for one year in 2011, excluding the one million lowest paid workers;
• hold a review to bring forward the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women;
• stop paying tax credits to better-off families with incomes over £50,000;
• cut government contributions to Child Trust Funds for all but the poorest third of families and families with disabled children;
• cap public sector pensions above £50,000;
• cut ministers’ pay by 5 per cent, followed by a five-year freeze; and,
• reduce the number of MPs by 10 per cent.
over the course of a Parliament, we will cut Whitehall policy, funding and regulation costs by a third, saving £2 billion a year, and save a further £1 billion a year from quango bureaucracy.
For context — Britain’s fiscal deficit is projected to amount to £178bn this year. That’s a lot of kiddie trust funds.
Do compare the Greek and Portuguese austerity plans — and do note that just announcing cuts couldn’t save either Athens or Lisbon from further downgrades. ‘Execution risk’, as we believe Moody’s likes to call it. Consequently, the pressure would be on a Tory government to perform after 6 May.
On to the Tories’ banking reform proposals specifically– these, as we said with Labour, offer an interesting comparison to the US legislation already under way. The headliner:
Create a safer banking system that serves the needs of the economy: We will reform the regulation and structure of the banking system to ensure lower levels of leverage, less dependence on unstable wholesale funding, and greater availability of credit for small and medium-sized enterprises (SMEs).
Great. Very Basel III. But, is it just us, or is there a deliberate lack of detail here too?:
We will put in place a levy on banks. We are prepared to act unilaterally if necessary, but there is emerging international agreement on this approach and the US and German governments have both announced similar plans…
A levy, eh? How much? One-off or ongoing? Anyway — the rest of it:
We will abolish Gordon Brown’s failed tripartite system of regulation and put the Bank of England in charge of prudential supervision. We will restore the bank’s historic role in monitoring the overall growth of credit and debt in the economy. In addition, we will:
• pursue international agreement to prevent retail banks from engaging in activities, such as large-scale proprietary trading, that put the stability of the system at risk;
• empower the Bank of England to crack down on risky bonus arrangements;
• increase competition in the banking industry, starting with a study of competition in the sector to inform our strategy for selling the government’s stakes in the banks; and,
• as the government comes to sell off its holdings in the banks, offer a ‘people’s bank bonus’, so that everybody in the country has the chance to buy a stake in the state-owned banks.
Hooray! That’s more dilution discounts in shares for the hard-pressed taxpayers who saved RBS et al. The markets must be utterly bemused quaking in their boots at being opened up.
Still, the Conservatives clearly have committed to the Volcker rule separating retail and prop trading. But only after international agreement (meaning America, we presume). Worth pointing out, legislators in Washington aren’t exactly enamoured of the rule right now.
Other than that, note the Bank of England’s promotion — which could mean bye-bye, FSA. And hello, Fitch.
Related links:
Anything new in the Conservative manifesto? – FT Westminster
A manifesto story of little platoons and absent arithmetic – Philip Stephens / FT
A sovereign vulnerability scorecard – FT Alphaville