George Osborne’s Comprehensive Spending Review Statement in Full

October 25th, 2010

“Mr Speaker.

Today’s the day when Britain steps back from the brink.

When we confront the bills from a decade of debt.

A day of rebuilding when we set out a four-year plan to put our public services and welfare state on a sustainable footing – for the long term.

So that they can do their job – providing for families, sickness protecting the vulnerable and underpinning a competitive economy.

It is a hard road, cialis but it leads to a better future.

We are going to bring the years of ever-rising borrowing to an end.

We are going to ensure, tadalafil like every solvent household in the country:

  • that what we buy, we can afford;
  • that the bills we incur, we have the income to meet;
  • and that we do not saddle our children with the interest on the interest on the interest of the debts we were not ourselves prepared to pay.

Tackling this budget deficit is unavoidable.

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EPC Platform piece on Public Sector Pension Liabilities influences CSR

October 25th, 2010

Much praise to EPC author Angus Hanton !

Back in April 2010, Angus argued on our Platform section   – The £1 trillion black hole – public sector pension liabilities – that the government has used too high a discount rate for unfunded public sector pension liabilities – now at 5.5% compared to 3-4% in some other countries. This means that when those UK public sector pensions become due, the unforseen liability could be as much as £1 trillion pounds.

I’ve been watching the stats on our website and this article has been viewed many, many times. Of course it’s great to see people reading your work, but it means so much more when they listen and act on it.

So following the EPC’s and Angus’s promotion of the article and the issue, we were pleasantly surprised to note in George Osborne’s speech last week the following words;

. . .we will carry out, as the interim report suggests, a full public consultation now on the appropriate discount rate used to set contributions to these pensions“.

Long-term strategy depends on reweighting the balance of cost and value

October 20th, 2010

“We have all but lost the capacity to think strategically . . . we have simply fallen out of the habit, and have lost the culture of strategy making.”

So says, according to Philip Johnston of the Daily Telegraph,  a report of our Parliament’s Public Administration Select Committee –  not yet up on their website, please let me know when it is – and it’s hard to disagree.

For me the answer is quite stark – government has placed far too much emphasis on cost rather than value. Only if this is rebalanced with long-term incentives, will we ever develop large, long lifespan strategic assets. And as Johnston rightly points out, nowhere is this more true than post the Comprehensive Spending Review,  in energy or defence.

What is the value of aircraft carriers’ conventional deterrence, low and high intensity warfare air support and disaster relief capabilities over 40 years that these mobile airbases can bring to anywhere in the world?

Equally, what is the value of a Severn Tidal Barrage’s 100% predictable power output with zero fuel costs throughout its 120 year lifetime?

In both cases, their long-term value relative to their initial cost, is inordinately high. Would that we as a nation could recognise that and countless other examples too.

The unwelcome consequences of a US-forced Chinese Yuan revaluation

October 12th, 2010

Over the summer, I really savoured reading Tom Bower’s book, OIL – Money, Politics, and Power in the 21st Century which – covering 1990-2009 – has become the unofficial sequel to Daniel Yergin’s The Prize: The Epic Quest for Oil, Money, and Power – covering the 1850s to 1990.

So if you’ll forgive the pun, I’d like to crudely summarize some of the best points from Bower’s book thus;

  1. There’s actually plenty of oil – it’s just in the wrong place, too many restrictions on its extraction, limited finance and bottlenecks in refineries
  2. The immensely diverse oil industry – downstream, upstream, traders, engineers, accountants, politicians, economists, refinery workers etc. all work in silos and don’t interact, less still understand each other
  3. So no one apart from the occasional brilliant or lucky trader has any lasting insight on the price of oil which has a massive impact on the investment horizon
  4. As for the IOCs (Independent Oil Companies)
  5. BP under Lord Browne was very go-ahead trying to boost reserves and sloppy on safety and outsourcing engineering (this before Deepwater Horizon)
  6. Shell prospered but was often beset by Anglo-Dutch internal squabbles and having rings run round it by  Oligarchs, Greenpeace etc.
  7. Exxon is a stultifyingly dull bureaucracy, obssessed with safety, has absolute faith in itself and is usually right
  8. As for the NOCs (National Oil Companies)
  9. They may have the oil, but they don’t have the technology or the finances and tend to overstate their reserves
  10. And they constantly strive to renegotiate settled deals with scant regard to reputation or the balance sheets of their partners
  11. Oil producers are ultimately far more dependent on consumers than the opposite
  12. It’s all about achieving an elusive balance between governments, regulators, markets and nature

For all that, compared to preceeding years, oil prices have now gone through a year of relatively high stability, largely in the $65-$80 range which makes me think it won’t last.

So I keep wondering about this piece in the Wall Street Journal a few days ago, The Trade and Tax Doomsday Clocks. Whilst being critical of the Currency Reform for Fair Trade Act which would mandate the US Department of Commerce to take a foreign country’s currency interventions into account in determining whether its trading practices are unfair (crazy in my view – see my earlier post) it makes a fascinating point about the impact such a policy would have on the price of oil;

…an unintended consequence is that it will make China an even more voracious competitor for oil. That’s because oil is priced in dollars, so a revaluation would make it cheaper in yuan terms. Remember, during the period from 2005 to 2008 when the yuan was revalued under similar political pressures from the U.S., the price of oil rose, not coincidentally, to $147 per barrel from $60. That could happen again—and it would be another inflationary tax on U.S. consumers.

I looked at this chart (CNY:USD 5 years)  and this seems to be true. The roughly 16% gain in the Yuan over the last 5 years against the dollar is quite well correlated to the jump in oil prices that we had over that period. So maybe we now have a clearer idea with recent history in mind of what can cause oil prices to go up again?

The bottom line is that the USA has had all the benefits of having the global currency – cheap credit, low transaction costs and enormous diplomatic leverage for too long to now turn round and demand China revalues their own which will cost the Chinese and the USA dearly if not managed gradually. And should such a dispute kick off, all sorts of unintended consequences like higher oil prices will hurt the rest of us. I really hope America’s politicians pull back from the brink on this one. Because as I wrote back in Spring 2007 for World Finance magazine, The nightmare of a Chinese economic collapse, the consequences could be very ugly.

Date of Comprehensive Spending Review – 20th October 2010

October 3rd, 2010

Put it in your diaries now !

Last week I was at a policy wonks’ dinner and a very senior economist made the salient point that the 20th October 2010, will be the most significant date in the UK’s economic calendar for many years to come. He argued that it will set the tone for all debate on public spending and the size of the state for well beyond the life of the coalition and it’s hard to disagree.

Few then will envy the Chancellor, George Osborne his job when he presents the CSR to Parliament.

A range of opinion polls suggests it’s going to be very difficult to sell the CSR to the public who are used to an ever-expanding state. And not least because voters seem unaware for all the ongoing media coverage of “cuts”, as John Redwood MP has pointed out many, many times to an unlistening world, expenditure is still rising and forecast to keep doing so, from £600 bn in FY 2009/1 to £693 bn in FY 2014/15.