Sunday, April 04, 2010
City allows Osborne to make a monkey of the voters
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


Something strange has been happening in recent days. The Tories, through George Osborne, made an announcement that to me represented an unmistakeable softening of the party's fiscal stance.

By announcing that a Tory government would shelve most of Labour's planned April 2011 National Insurance (NI) hike, paid for by efficiency savings, the shadow chancellor made a remarkable lurch.

Yet, and this was the strange thing, the markets did not bat an eyelid. The gilt market, for UK government bonds, sailed serenely on. Sterling did not even wobble.

Compared with the reams of analysis that followed Alistair Darling's budget a few days earlier, I spotted barely a City note on this announcement from a man who in a few weeks could be chancellor.

Business bodies, which a few days earlier had lambasted Darling for failing to set out a credible plan for cutting the budget deficit, queued up to praise the Tory plan.

Twenty-three leading businessmen, including Sir Stuart Rose of Marks & Spencer, Justin King of Sainsbury, Sir Christopher Gent of Glaxo Smith Kline and Sir Anthony Bamford of JCB, wrote to The Daily Telegraph to back the NI cut, and the pledge to cut government waste. More followed the next day.

Let us be clear. Had the chancellor announced in his budget that he was forgoing 5.6 billion of the planned revenue boost from raising NI in April 2011, making up the lost receipts with additional and unspecified efficiency savings, he would have been pilloried.

So how did Osborne get away with it? There are three possibilities. The first is that the markets, and boardrooms, are so desperate to see a Tory government that they have suspended critical judgment. But, while there were declared Conservative supporters on the list of business signatories, I would not accuse them or the markets of letting this unduly influence them.

The second, which gets closer on the business response, is that if politicians give people what they want, they can expect support. In America they call it pork-barrel politics. As Adam Smith told us, when businesses get together it is usually for self-interest, not the national interest.

Business did not want the NI increase, which will hit profits directly, though they chose to emphasise the "tax on jobs" aspect. Business people also believe that if they could get their hands on Whitehall budgets they would save tens of billions in the first week, let alone the first year.

I understand that. Many have made their names through successful cost control and efficiency savings. Though like-for-like comparisons are notoriously difficult, it is undoubtedly the case that productivity has increased much faster in the private sector than the public sector.

When business people have tried to transfer their cost-cutting skills to government, however, the record has been mixed. Lord Rayner, one of Rose's predecessors at M&S, was called in by both Edward Heath and Margaret Thatcher to save money. Sir Peter Gershon, named by the Tories as their efficiency adviser last week, was used in this capacity by Gordon Brown.

In the case of Rayner, according to Colin Talbot of Manchester University, Britain's foremost expert on public-sector efficiency, only half the claimed savings were achieved. For Gershon, the National Audit Office said only a quarter of claimed savings were genuine. Talbot said that when politicians of all parties claim that efficiency savings will protect frontline services, voters should regard this as "flannel". Even worse is when those savings are supposedly being used to fund a tax cut.

Nobody liked the increase in NI in most respects a rise in Vat would have been better (though I do not know if last week's retailing signatories would have agreed) but the fact was that the rise in NI was a solid, deficit-reducing policy that Labour had announced.

The Tories say their commitment to cutting spending by an extra 6 billion in the first year is non-negotiable, whether or not it is done through reducing waste. They say this is consistent with the "unwavering commitment to fiscal responsibility" Osborne claimed at the Tory conference in October. Is it? A real cut of more than 5% in non-ring-fenced spending in 2010-11 will be hard to achieve, with or without cutting waste. Relying on it to meet an election promise is hardly fiscally responsible. If the cut is achieved, the Institute for Fiscal Studies says it will hit the economy when the recovery is most fragile.

The third possibility, as far as last week's non-reaction from the markets was concerned, is that we have now entered the world of lies, half-truths, dodgy statistics and even dodgier claims known as a British election campaign. Discount, in other words, everything you will hear from politicians between now and May 6.

So last week's chancellors' debate was just a case of three wise monkeys, seeing, hearing and speaking no evil. It is hard for Darling to attack the Tories' "incredible" announcement when Mervyn King, the Bank of England governor, says the government lacks a credible plan to cut the deficit.

The prime minister has been pulled up twice for misusing statistics, and now the Tories have put up 20*ft by 10*ft posters to do the same. They have a smiling Brown saying he doubled the national debt since 1997 but it also doubled under both Thatcher and John Major. They say the gap between rich and poor has grown it has, but not as fast as under the Tories. They claim he created record youth unemployment but it was higher in the early 1990s.

Labour has less money to spend on advertising, but it is just as bad. Darling claimed in evidence to the Commons Treasury committee last week incredibly that efficiency savings in the NHS would total 15 billion to 20 billion a year by 2014-15.

The Tories have pulled a fast one on NI and have probably got away with it. There will be more like this, from all parties, over the next few weeks. I'll keep you posted.

PS: The competition answers to win a copy of The Age of Instability (reviewed today in Culture) were as follows.

1. One described derivatives as weapons of financial mass destruction, the other as a "very useful vehicle" that increased stability. Who were they? Warren Buffett and Alan Greenspan.

2. What is a "ninja" mortgage? For people with no income, no job and no assets.

3. Which business leader said after Northern Rock that Britain was acquiring the reputation of a banana republic? Richard Lambert, director-general of the CBI.

4. Where was Alistair Darling when he warned that economic conditions were the worst in 60 years? The Isle of Lewis.

5. What was the nickname of Dick Fuld, boss of Lehman Brothers? The gorilla.

Either readers are very well-informed, or Google helped out, but most entries were correct. The art was in the excellent tie-breakers who was to blame for the credit crunch? Bankers and regulators featured heavily, as did the media and politicians (Bill Clinton for scrapping Glass-Steagall; Gordon Brown for claiming to have abolished boom and bust). Alan Greenspan featured most.

Some blamed the Chinese and even the Germans for never spending enough. Starbucks (for perpetuating the idea that froth could be highly profitable) was one of best oblique suggestions.

The choice of winners came down to pulling the best tie-breakers out of a hat. First was Tom Freeman of London, who blamed himself and his appetite for credit. Second was the King's School, Canterbury, for dozens of entries, all correct but with a huge range of tiebreakers. I'm due to visit so will hand over the book in person. Bad luck to everybody else.

From The Sunday Times, April 4 2010