Category Archives: Finance

5 good reasons why Osborne’s selling off RBS and Lloyds is wrong

Osborne as usual is taking advantage of Labour’s distraction at this time to sell off RBS and Lloyds to the private sector at a huge losses to the taxpayer, to accountability of the banks, and to the future of the British economy.   This is motivated by his ambition eclipse even the Thatcherite privatisation boom of the 1980s and to oversee the biggest ever sale of publicly owned corporate and financial assets in one year, as well as of course elevating his prospects for the coming Tory leadership race and premiership.  But what may be good for his party and for him will certainly not be good for the country.

First, it is a thoroughly bad deal for the taxpayer.   Osborne has agreed to cut the public shareholding in RBS from 79% to 73%, but at a loss to taxpayers of £1bn.   The scandal of this unnecessary sale is one main reason why it was announced in the summer recess when Parliament wasn’t sitting so that he could avoid hard questioning about its implications.   The £2.1bn of RBS shares were sold at 330p per share, far below the average of 502p per share that the helpless taxpayer was forced to purchase them.

But that is not the real reason why Osborne’s policy is downright misguided.   The banks’ overmighty arrogance, recklessness, and incompetence were the prime reason behind the worst global financial crash for a century, and there not a jot of evidence that they have accepted their responsibility, shown any remorse, or are committed to any serious reform. Indeed they have fought tooth and nail against reform, have extracted major concessions from a weak Osborne like his caving in by reducing the bank levy in response to their lobbying, have pushed back the time limit for any statutory changed to 2019, and are demanding a very early return to pre-crash business as usual.

Moreover there are 5 specific reasons why the banks should NOT be returned to the private sector.   Their deregulated lending – for overseas speculation, for deployment of artificial tax avoidance devices on an industrial scale, for exotic derivative financial constructs which were highly lucrative but were at the heart of the crash, and for for prime property sites in central London – do not benefit British industry, but only their own selfish interests for profit maximization.   Only 8% of their lending last year went towards productive investment in Britain.

There has been far too little reform to prevent another massive crash, mainly confined to increasing the capital reserve ratio and setting up ‘Chinese walls’ between the retail and investment arms of banks.   They are still ‘too big to fail’, so that the implicit taxpayer guarantee is still in place.   There is no structural reform: Britain needs smaller, regional, specialist banks that helps Britain in the same way as the German Mittelstand.   And the dark forces of the next crash – the rise of shadow banking and a re-run of the most dangerous derivatives  – are not being countered.

 

Osborne shows his true colours: in the pocket of the banks

Osborne’s sacking of Martin Wheatley, head of the Financial Conduct Authority (FCA) says it all.   His sin was that he was too tough on the banks.   The banks are the most powerful section of the Establishment which runs Britain, and Osborne is one of their chattels who does their bidding when half of the Tories’ annual income comes from the UK finance sector, so Wheatley had to go.   This is a political ousting of the worst kind.   Wheatley was a tough regulator which was needed, and is still needed, when almost every week new scandals are unearthed in the finance sector, when the banks cost the UK £70bn in bailouts and a doubling of the national debt to £1.4 trillions, and when new areas of systemic financial risk including the revival of derivatives that caused the crash in the first place and the growth of the shadow banking sector threaten another financial armageddon.
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Why should a teacher or senior nurse pay a higher tax rate than a millionaire fund manager earning 200 times more money?

The Finance Bill which starts next Monday in the House Purports to stop hedge fund and private equity fund managers from claiming artificial costs to reduce the tax they pay on their ‘carried interest’ (i.e. their personal share of the profits from the funds they manage).   The Treasury thinks this will raise over £350m a year from the few thousand hedge fund and private equity personnel.   Of course Osborne announces a crackdown on tax avoidance in every budget, but it usually turns out to be a fraction of what he claimed, like the Swiss deal which was supposed to yield £5bn, but actually raised only just over £100m.

Once again he shows himself willing to hurt, but afraid to strike.   He omits the most obvious way by which private equity fund managers currently shrink their tax bills, by arranging to pay 28% capital gains tax rather than 45% income tax on their carried interest.   If ever there was a tax fiddle, carried interest was it.   Carried interest is their remuneration for managing other people’s money, and should therefore be taxed as income tax.   Their ability to pay CGT on what is properly income also allows fund managers to avoid paying any national insurance contributions on a major portion of their income.
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The Greek ‘deal’ represents the supplanting of European democracy by neoliberal economics

Arguably the so-called deal that has been forced down the throats of the Greek people represents the worst of all worlds.   It imposes even more draconian terms than were on offer even a week or two ago, with very little conceded in terms of debt relief, but with such added conditions of austerity as will make it nigh impossible for the Greek economy to achieve the growth necessary to pay down the indebtedness which had reached 175% of GDP.   This is not a creative solution of EU solidarity which is the constant refrain of European rhetoric, but a brutal punitive assault which all but turns Greece into an EU economic protectorate, including a requirement to place the country’s most valuable publicly owned assets into a €50bn privatisation fund controlled by the EU.   This is the end of Keynesian economics in Europe and its replacement by capitulation terms reminiscent of those imposed on Germany by the Versailles Treaty after the first world war.
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Labour leadership contestants need to break out of Tory cage

What is so disappointing (so far) about the Labour leadership contest is the failure to edge the party to any significant degree away from a look-alike Tory posture.   Osborne launches the biggest cuts programme of the last century, and we are told that if we wish to be taken seriously we must be as fiscally conservative as the government.   Osborne preens himself with running the economy on a permanent surplus, and Labour, not to be outdone, endorses the idea, absurd and unworkable as it is.   The Tories taunt Labour for being on the side of shirkers against strivers – a ridiculous claim when Osborne has just impoverished millions of workers in poverty by severe cutbacks in working tax credits – but Labour, for fear of being lampooned by the Mail for being soft on ‘lifestyle’ benefit recipients, lamely echoes its support for tightening the benefit cap.   When is Labour going to stand up and assert what it really believes in?
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The Blairites are beginning to panic about Jeremy Corbyn

Having at the outset of the leadership contest been contemptuously written off as ‘unelectable’, Jeremy Corbyn seems to be surprising everyone that he is now rapidly emerging as a serious contender.   But they shouldn’t be surprised.   He represents what the majority of the Labour Party have been crying out for for years – a leader who does not think that we should all behave like mini-Tories, who is not an insider member of the enclosed Westminster bubble, and who genuinely engages with grassroots activists campaigning across the country and indeed internationally.

The Blairites don’t get it because they believe that their ideology of light-touch financial deregulation, market fundamentalism, privatisation of public services, relaxed attitude to people becoming filthy rich, keeping the unions on a very short leash, and hob-nobbing with the corporate elite is the natural order of modern politics.   But those are Tory themes and they are not shared by the vast majority of Labour members.  They are in fact the reasons why throughout the noughties the leadership became so estranged from the grassroots base of the party.   To return to these basically Tory themes now would risk not only alienating further a disconsolate party, but actually splitting it altogether.
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Osborne’s deficit fantasy will boomerang on him

Osborne said almost nothing in his budget speech about the deficit – unsurprisingly when he had said in 2010 that it would be cleared by this year when it is actually a towering £90bn – except en passant that his wiping out the deficit this time by 2020 was a foregone conclusion.   It is anything but.   He relies on the belief that growth will continue for the next few years at the rate of about 2.5%, but the economic growth rate in the latest quarter fell to just 0.4%, suggesting an annual growth rate of only 1.5%.   But even if the growth rate were to be maintained at 2.5% a year, which is highly unlikely, that still wouldn’t translate into a big deficit reduction.   The growth rate reached its peak at 2.8% in 2013-4, but the size of the deficit hardly budged at all.   Nor is that surprising.   If you continue to shrink the economy by bigger benefit cuts of £12bn, as Osborne has just done in his latest budget, you will shrink tax receipts too and hence the government’s capacity to pay down the deficit.
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It isn’t a ‘lower tax, higher wage’ economy as Osborne boasts, it’s actually a higher tax, lower wage economy

One has to give it to Osborne, he’s extremely good at branding whatever he doesn’t like with a clever, pejorative – but false – jingle.   ‘The merry-go-round on welfare’, ‘strivers versus shirkers’, ‘Labour left behind this economic mess’ , and ‘austerity’s painful decisions are the only way to cut the deficit’ immediately spring to mind.   But they’re all wrong, or at least require teasing out to show they’re more propaganda than reality.   But with the unerring aid of a prostrate Tory press and the feeble docility of a pliant Opposition, he manages to command a narrative resonant with the public consciousness which even a cursory scrutiny would show to be a raging falsehood.

Thus in his budget yesterday Osborne, faced with widespread rejection of his £12bn welfare cuts, sought to turn the tables by fitting it positively into his new framework of a ‘higher wage, lower tax, lower welfare’ society to replace the ‘low wage, high tax, high welfare’ economy  which the incessant Tory mantra of hostility over the last 5 years had turned into the enemy within.     But the budget portrayed no such thing.   It actually contained tax increases of some £47bn, roughly twice the size of all the tax cuts in aggregate.
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What Osborne won’t tell you about his budget

This is supposed to be a ‘lower welfare, lower tax’ budget.   The centrepiece is of course the £12bn welfare cuts, even if a third of that is postponed until after the 2017-8 deadline (but very close to the 2020 election).   By far the largest elements in that are the severe cuts in working tax credits and the freeze in most working age benefits until 2018.   What he wont’t tell you is that this will hit 11 million families by 2017-8.   Osborne will also announce a further reduction in the benefit cap to £23,000 and an even lower £20,000 regional cap, tripling the number already affected and hitting particularly ethnic minorities with larger families.   Withdrawing housing benefit from unemployed 18-21 year olds will hit 20,000 people, but what he won’t tell you is that housing benefit paid to private landlords has reached £9.3bn a year, amounting to 38% of the total.
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