Guy Ropes

So the Chancellor stuck to Plan A, eliminating the deficit by 2015, coming as little surprise to us anoraks. With fiscal policy having been set for the course of Parliament during last year’s CSR and emergency budget, there wasn’t a whole lot of room for manoeuvre in this year’s budget. From the start, his speech was going to be far from the 4hrs 45mins speech Gladstone gave to the house in 1853. But it presented our hard-pressed Chancellor with the opportunity to engage in a media relations exercise by announcing a series of positive measures that would dominate headlines the next day.
What caught the headlines?
Most newspapers went with the cut of 1p in fuel duty, a deferral of 1p plus inflation duty rise scheduled for April and a promise that fuel taxes would not rise so long as the price of oil did not fall below $75 a barrel. Although a surprise and welcome relief to motorists, it pales in comparison to the rise in NI contributions and cuts in departmental and local council grants set to kick in next month and newly announced measures to link direct tax rates to the lower Consumer Price Index.
The cut in corporation tax from 28% to 23%, set to be the lowest in the G7, over the course of the parliament was a positive pro-business headline. Arguably because the bank levy had been adjusted upwards to neutralise any such tax cut for the banks and the decision to bring down the 50% tax rate had been put on the back burner. A cool calculation designed to head off criticism of the Tories as a party of the rich.
The impending return of WPP was a coup for the coalition; the marketing giant has reportedly been enticed back from Ireland with the prospect of a lower 5.75% tax on overseas earnings. Although rumours are circulating within communications consultancy circles that the move was a cynical ploy to secure a key communications contract with the government.
It would be unfair to brand the entire budget as an exercise in PR, it does contain a seemingly impressive list of pro-growth measures that have been developed in consultation with key business groups and think tanks. Aside from the corporation tax and reform of foreign earnings taxation, the budget centred on a number of targeted measures to nurture the growth of SMEs, some of which were flagged up in the previous blog entry. The most prominent are:

- A three-year memorandum exempting businesses employing fewer than 10 staff from new domestic regulation.
- The creation of 21 Enterprise Zones in potentially high-growth areas which offer high-speed broadband, up to 100% discount on rates (capped at £275k over 5 yrs) and relaxed planning rules.
- Expansion in the Enterprise Investment Scheme, increasing the qualifying threshold to companies with 250 employees and assets of up to £15m. To entice venture capital, the level of investment permitted under the EIS has been raised from £2m to £10m with a rise in tax relief from 20% to 30%.
- A rise in R&D tax credits for small businesses to 200% from April and 225% next year.
Is this a budget for growth?
Previous budgets have been presented amidst much fanfare and hubristic claims so this month’s one will be in good company. Putting aside the questionability as to how far governments of advanced economies can influence growth trajectories over the long run, in the short run the proof will be in the pudding; at this stage it would be premature to make such claims on the budget’s efficacy.
For much will depend upon the demand side too; if the private sector has little faith in the economy then businesses will hoard cash, pay down debt or pay out dividends from the proceeds of the tax cuts and lower regulatory compliance costs instead. As has been the case over the past couple of years. So it will really be a matter of hoping consumer confidence picks up now.
JR

As the 2011 budget draws ever closer, the country waits with bated breath to see what Osborne has to offer at the dispatch box during these gloomy times.

Although media attention is on the goodies Osborne may offer come next Wednesday, he will in all likelihood stick firmly to October’s Comprehensive Spending Review and refrain from lavishing us with too many handouts so expect these to be few and far between. A fuel duty stabiliser? Perhaps, but more probable is a delay in the 1p (plus inflation) duty rise for April pencilled in by the previous Labour government.

At the heart of the budget will be a growth strategy with a particular emphasis on measures designed to support SMEs. If the Tories’ spring conference is anything to go by we should expect it to be the “most pro-growth Budget this country has seen for a generation”. The rhetoric of Cameron’s speech, which unsurprisingly sparked a furore in Whitehall, points to small businesses (not the export sector this time) as the supposed driver of Britain’s economic recovery and bureaucrats as the ever malign influence which “concoct those ridiculous rules and regulations that make life impossible for small firms”.

It shouldn’t come as a surprise though. The coalition took a good kicking from Labour last October, having failed to come up with a white paper on growth, it wasn’t helped earlier this year when Richard Lambert, the outgoing CBI Director-General, strongly criticised the government for its lack of a growth strategy. The narrative of a Tory-led government bent on ideological and reckless cutting has started to take hold among the public and for the first time opinion polls show diminishing faith in the coalition’s economic policies. Former economic advisor and FT commentator Ed Balls, who took over the shadow chancellorship from Alan Johnson in January, has proved to be a formidable opponent having done well to project this image over the past couple of months.

If the coalition partners are going to get through this parliament united and stand a chance of reaping the electoral dividends of their stewardship, they will need to paint a rosy picture of a dynamic economy that sits neatly besides their deficit reduction agenda. And with revised ONS figures showing a 0.6% contraction in the economy during the fourth quarter of 2010 and spending cuts now starting to bite, it is particularly important that the coalition weaves a “good news narrative”.

With little to play with, we can pretty much rule out any substantial injection of funds but rather a tinkering with existing regulations and the tax system. So here are some of the more likely measures…

Firstly, Osborne may act on the interim report from the Office of Tax Simplification published on the 10th March. Having been taken to the task of reviewing small business taxation, thought to be particularly byzantine and time consuming to navigate, the OTS has come up with a number of ambitious recommendations. One of which is to reform National Insurance Contributions, merging it with Income Tax so as to create one transparent tax. It is not a new idea but a radical one which has managed to elude many previous governments. Although a herculean task, it shouldn’t be written off just yet, it would certainly be a badge of honour that Osborne could pin on his lapel. If there is one lesson to be drawn from the first 10 months of coalition rule it this - the government has a radical streak. Most political commentators could never have foreseen the upheaval in welfare provision and the NHS initiated by Messrs Smith and Lansley respectively.

Another such possibility is that small firms may become subject to less stringent employment laws as part of the coalition’s deregulation drive. Leaked sections of the budget outline how small firms with less than 10 employees will be able to bypass employment legislation and directly negotiate maternity and paternity deals with its staff. However it may be too optimistic to expect that the leaked proposals will make it to the final draft in its entirety as the Lib Dems have been showing signs of discomfort. A distinct possibility is that an exemption may be granted to small firms to the new employment laws which are due to come into force next month. This will see fathers using up to six months worth of maternity leave left unused by the mother who chooses to return to work early. Afterall the Federation of Small Businesses has been pretty vocal about the changes, believing them to be onerous which discourage small firms from taking on more staff.

It seems very likely that the budget will also herald the return of enterprise zones, a scheme which takes it precedence from that of the Thatcher era in which businesses were offered simplified planning rules and discounted business rates amongst other concessions to operate in impoverished regions. The aim is simple, to foster the growth of small businesses and encourage firms to flock to the region, and so turn the fortunes of areas with historically high unemployment rates around.

Lastly, the coalition may choose to beef up the existing Enterprise Investment Scheme. The scheme in its current form offers individual tax breaks to those investing up to £500,000 in businesses that have assets totalling a maximum of £7 million and a workforce of no more than 50. The coalition could raise the 500k cap and/or permit investment in companies with more assets and a larger workforce. Such a measure could be funded by a reduction in tax breaks for Venture Capital Trusts which have proved increasingly unpopular over recent years.

Expect Wednesday to be a field day for the opposition, not only will Labour pick at the measures to portray the budget as a cynical exercise in PR but also to point to the budget’s growth forecasts which in all probability will have been revised downwards. Given that the recent OECD forecast revised the UK’s growth down to 1.5% for 2011-12 and 2% for 2012-13, it seems untenable for the government to stick to the previous ONS forecast of 1.9% and 2.6%.

Next Wednesday will prove a testing moment for the coalition as it attempts to push its growth agenda; after last October’s fiasco the government will have to be seen to be taking the initiative this time round.
JP

So the dreaded Comprehensive Spending Review has finally been unveiled; £81 billion worth of cuts, including 46 billion from central departments and a further 7 billion from welfare designed to close the structural deficit by the end of the parliament. That amounts to the greatest cut in public expenditure in living memory but who are the winners and who are the losers? That’s the million pound question. As economists pour over the detail to give a thumbs up (or down), one thing is aclear; a generational chasm has opened up.

Sure, commentators and journalists have been right to point to other such fissures; north vs. south, private vs. public sector workers, England vs. the devolved regions etc etc, the generational chasm, however, is more revealing of the current political landscape and for future policy development.

Last year, David Willett published The Pinch, a pretty insightful, if controversial, account of how the baby boomer generation have concentrated wealth and dominated national culture at the expense of the next generation. It couldn’t have been a better timed account of how this “selfish giant”, as the author less diplomatically describes the BBs, is forfeiting the future of the younger generation. Significant in number and with a greater propensity to vote, the BBs are increasingly being courted by politicians, having wised up to the fact that if they want to win elections they must court the BBs with sweeteners.

The CSR appears to have been just such an exercise in inter-generational redistribution. If the axe must fall, best to let it fall on those less likely to inflict heavy losses on the coalition partners come the next election, the apathetic youth.

The most obvious measure designed to placate the BBs in the review has been the uprating of the state pension by a triple guarantee of earnings, prices or 2.5 per cent, whichever is highest. Not since the 80s, when Thatcher removed the link to RPI, have pensions been so generous in real terms. The NHS, as promised, will experience real-term annual increases of 0.4 per cent with an injection of £2 billion for social care. This, justifiably or not, protects the enormous investment made in healthcare by the previous New Labour government. Given that the elderly are heavily dependent upon the NHS, it seems a particularly adroit political move. Just as important, if less ostensible, has been what was not been announced; there is no planned cull of pensioner perks such as free bus passes, TV licences, winter fuel payments, free eye tests, prescriptions and cold weather payments to name but a few. Yes, the retirement age will rise to 66 from 2020 for both sexes, but it is a relatively small increment that still falls short of the Tory manifesto promise to increase the pension age sooner.

The burden of fiscal retrenchment must then fall on the rest of the population, whether it is working families, commuters or public sector employees.

Today’s youth are being particularly short-changed. The coalition has agreed to scrap the Educational Maintenance Allowance (EMA), a move that will see many 16-18 year olds lose out on up to £30 a week. Although the schools budget is to grow by 0.1 in real terms over the parliament, this is likely to translate into a real-term cut in funding per student given the projected growth in demand for school places. Sure Start, an early years programme, will also experience similar real-term cuts. The review, more controversially, cuts funding for universities and paves the way for an increase in tuition fees, potentially without limit. To ask students to take on significantly more debt at a time of high youth unemployment is a tall order but a decision more-or-less forced onto the table.

If there is one message to take home from the CSR it’s that we are not all in this together!
JP

Many friends and colleagues have been asking me about The Times newspaper’s decision to introduce a paywall for it’s content. “Is it going to work?” they ask.

The truth is it has to. Whether other newspapers will follow suit is another matter, but I imagine the editors of The Guardian (which has one of best-read news website in the World), Telegraph and others know that they will inevitably one day have to follow suit.

Various opinion polls have been conducted suggesting that The Times will (or already has) lose masses of readers. They will “suffer” too because Times stories will be removed from Google. My old boss Rupert Murdoch is far from concerned - he has referred to Google as “stealing” his content.

“The aggregators and plagiarists will soon have to pay a price for the co-opting of our content,” Murdoch has said. “But if we do not take advantage of the current movement toward paid content, it will be the content creators … who will pay the ultimate price and the content kleptomaniacs who triumph.”

Murdoch’s logic is that The Times doesn’t have to have all that many subscribers to make money from the offer of £2 a week, or £104 a year.

According to paidcontent.co.uk, that would make The Times newspapers £3.6m per month or £43.29m a year. That’s nearly a tenth of the publisher’s income last year.

That goes quite some way to stemming the losses the newspaper makes, currently nearly £88m a year.

This, of course, depends on whether those who say they are prepared to pay actually do. On those figures, it could make the site more successful than FT.com, which has about 126,000 subscribers.

Media experts expect that the paywall should sign up 50-100,000 straight away, which is money in the bank nevertheless.

The Times site looks sharp, particularly on the new iPad, and the paper has done well with its serialisation of Lord Mandelson’s memoirs.

However the key will be whether subscribers stay. On the one hand, people are often less than diligent in cancelling their direct debits; on the other, the site isn’t offering THAT much more online than in the paper itself. It’s not like the FT or Wall Street Journal, which are offering “news you can use” live financial information. A lot of potential subscribers in the PR and media industry I know are still hovering over their mouses.

One theory is that the paywall will hurt the comentariat at The Times, led by Danny Finkelstein. Political bloggers are the harbingers of doom, claiming that Times writers are no longer part of the “national conversation” now they are behind a paywall. They also say it goes against the culture of “open linking”, a real problem for a
paper which relies on influence over cash.

Another issue is whether it is worth the Sunday Times having it’s own new site at all. Unlike it’s daily stablemate it actually does make money. And my view is that in a world of declining newspaper sales, Sunday reads are actually much more viable as businesses.

Meanwhile another Murdoch bête noire, the BBC, has revamped it’s website - potentially taking readers who might otherwise pay for The Times’s content.

So it remains to be seen what will happen. The paradox is that while The Times may be prepared to lose readers to make money, their potential advertisers may well baulk. In truth for paywall to take off, the whole national newspaper industry - and news websites generally - have to jump together.
They may have no choice to preserve quality journalism - and simply to survive.

The big question that comes after the formation of the “Liberal Conservative” government is whether it can be sustained for longer than a year or two. Certainly few commentators give it much chance of lasting the full five-year term of a new fixed-term parliament of five years.

In the media it has been portrayed as a “love in” between Cameron and Clegg at best; and a comedy double act like Morcambe and Wise at worst. At least no one resorted to Del Boy and Rodney.

It certainly did look like there was genuine chemistry between Dave and Nick at their joint press conference in the sunshine of the No10 garden. But we must bear in mind that, love in aside, the divorce rates in the UK are some of the highest in Europe. Apparently we are also in the vanguard of the “two-year slouch” in this country, where romance dies only to be replaced by lazy behaviour where one or the other no longer makes the effort.

So watch out for when Nick gets fed up with Dave leaving the toilet seat up.

But being an optimist, I believe that this historic alliance will last for a number of reasons.

Firstly, the way it came about in the first place. It was bred out of necessity. And necessity is the master of invention. No one party had an overall majority, and yet it was clear that the public no longer wanted a Labour government (and I doubt they would have changed their minds much if an emergency Miliband had been parachuted in at the last minute).

Secondly, Cameron really believes it, or put it more accurately, Cameron now has something in which he can believe as a genuine and original principle. It always looked like the past four years as opposition leader that he was copying the Blair 1997 “war book” in the run-up to the election. Keep policy pledges to a minimum, ideology kept at bay, keep the coffee roasting and just don’t mess up. But the way he so easily sashayed into a “full and comprehensive” partnership with the Lib Dems suggests that he had given the possibility quite some forethought.

Thirdly, the Lib Dems have become relevant again for the first time in generations. They have power. Sensible Lib Dem heads are in the Treasury (David Laws) and Department for Business and Industry (Vince Cable). They have bought into this project just as much as Cameron and they need to deliver in order to justify the whole enterprise and not look like trivial power seekers in the history books.

Fourthly, the coalition massively strengthens Cameron and his “project”. He needed worry about a few stray right-wingers from the Cornerstone group. He has taken the Conservative party firmly into the centre ground of British politics which was so successfully dominated by Labour under Blair. It is difficult to see where Labour can go to make itself distinctive other than leftwards in these circumstances.

Lastly, Cameron has given (and the Lib Dems have accepted) some of the most difficult jobs in government - that of working out the details of the cuts and managing the business community. If the slouch sets in, he can always blame them - just as everyone is now blaming Labour for cooking the books to hide the depth of the deficit

Ok, so my (and others’) long term prediction that Cameron would get a small majority didn’t come true. But the British people were decisive in a sense, nevertheless - they don’t prefer any of the main three parties.
As I said when I reviewed the papers on BBC late last night, the outlines of a deal between the Tories and Lib Dems is coming together. But it seems clear as day, right from when Cameron gave his speech on Friday, there is no way that Clegg will get a referendum on electoral reform. Nor does he seem to expect it.
Cameron is prepared to offer policy sweeteners to the Lib Dems, probably on tax breaks for the lower paid, schools reform and some green issues. If I was a Lib Dem, I would feel this was more than disappointing. And cabinet seats for Clegg - home secretary even? That could actually be a genius move for Cameron, as poor Nick would have to deal with all the difficult stuff like immigration. Everyone knows that job is a poison chalice.
And of course Gordon is finished; but let’s face it, until the others get their act together, it would irresponsible for him to leave the country without someone being in charge.
But even if Alan Johnson, Jack Straw or one of the Milibands steps into the breach, wouldn’t a Lib-Lab pact now look like an awful stitched together affair - and one which the electorate might well punish by firmly rejecting electoral reform once and for all.
Whatever happens over the next few days, it looks highly likely we’ll be going to the polls again this year!
DC

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