大象传媒

Little margin for error

• Robert Peston
• 12 Mar 08, 03:10 PM

So here are a few of the messages from Alistair Darling's first budget.

1) Don't be a four-wheel driving, cigarette-smoking, non-domiciled, boozer. Life is becoming much more expensive for you. Perhaps it's time to move to Switzerland, where at least you're allowed to smoke in public places and they don't look too closely at what's inside your bank account.

2) If you run a power company, you're being pressurised to cut prices for those with lowest incomes. You can't relocate your business abroad. And if you fail to comply, you can expect the government to name and shame you, or even use statutory powers to reduce the tariffs on pre-pay metres.

3) Most of us will notice tax rises, especially after 2009. But most of them are expenditure taxes and therefore avoidable.

4) The Treasury is sailing closer to the wind, in respect of the health of the public finances, than it has been for many years. It is projecting a 拢5.8bn fall in tax revenues in 2008/9 compared with what it had been expecting last October. But it has chosen to allow public borrowing to rise rather than make good that shortfall with immediate tax increases.

That makes sense, at a time when the confidence of businesses and consumers is fragile. Tax increases that bite straight away could have seriously damaged the economy.

But there are many economists who believe that the Treasury's central growth forecast of 1.75% to 2.25% for this year is far too optimistic. If they're right, the public finances may end up in worse shape than the Treasury expects. And with the public finances projected only just to meet the fiscal rules, there's little margin for error.

For Alistair Darling, as for the rest of us, 2008-9 looks like being a hair-raising time, economically speaking.

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Shift away from biofuels

• Robert Peston
• 12 Mar 08, 01:32 PM

The Treasury is raising 拢550m in 2010-11 鈥� which is not trivial 鈥� by removing the biofuels duty differential.

That sounds like a fairly major policy shift away from promoting biofuels.

On the changes to Vehicle Excise Duty, to extract more from owners of gas-guzzlers, that is forecast to raise 拢465m in 2009-10 and 拢735m in 2010-11.

So that鈥檚 a pretty big incentive to buy a green car.

And as for those increases in alcohol duties, boozers will be 拢400m worse off next year, 拢505m the following year and 拢625m poorer in 2010-11.

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Power companies hit

• Robert Peston
• 12 Mar 08, 01:15 PM

Bad news for energy companies and - presumably - good news for those on lowest incomes.

The chancellor wants the power businesses in the current year to treble to 拢150m what they spend on 鈥渟ocial tariffs鈥�. That would mean they would charge less for gas and electricity to those who have least.

There was no detail on precisely how he鈥檒l extract these subsidies from them.

And many of them will grumble.

And there鈥檚 a whammy for power generators.

From 2012, they鈥檒l have to bid for their permits to pollute under the emissions trading scheme (they were given them in the first phase of this scheme).

The reason that the power generators, as opposed to other companies, will be hit first with a cost that could be significant is that they are not in competition with overseas companies, but only with each other.

So they would not be put at a competitive disadvantage by this de facto tax.

But when they are hit with this new cost, they will presumably simply pass it on to us.

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Confident chancellor

• Robert Peston
• 12 Mar 08, 12:55 PM

Alistair Darling is confident that the UK will avoid recession. He expects UK economic growth to slow down this year by a third to between 1.75% and 2.25% 鈥� but that would be faster than most of our major economic competitors, and is likely be massively better than the US, which may already be in recession.

But he acknowledges that this is no time to take money out of the economy through tax increases that bite with immediate effect. The main impact of tax increases will be after 2009.

So in 2008-9, he forecasts a relatively sharp increase in public borrowing to 拢43bn.

That won鈥檛 be seen by many as disastrously high, but still more than would be ideal at a time when the economic outlook is highly uncertain.

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Credit crunch budget

• Robert Peston
• 12 Mar 08, 12:29 PM

This is the credit crunch budget.

We are all feeling the impact of the accumulating losses of banks and financial institutions from their unwise lending of the past few years 鈥� and their growing reluctance to lend as much to us as they were doing or as cheaply as they had been doing.

And if we feel poorer and more constrained in our spending, so too does the Chancellor, Alistair Darling.

His receipts from taxation come under pressure.

Yesterday I described how revenues from stamp duty and capital gains tax suffer as a result of the credit crunch-induced softening in the housing market and the stock market.

But there is even likely to be a VAT squeeze.

Why? Well, the rise in energy prices means we鈥檒l spend more on fuel 鈥� which incurs a low VAT rate 鈥� and rather less on those items that are taxed at the full VAT rate.

What鈥檚 more, in a slow down, we tend to spend relatively more on shop-bought, no-VAT food, in preference to eating out in VATable restaurants.

So the chancellor will receive less in tax revenues than he hoped only last October.

But although he鈥檒l put up taxes to make good those losses and prevent a severe deterioration in the public finances, it would be very dangerous for those tax-increases to bite in the coming financial year 鈥� when the confidence of businesses and consumers is likely to remain fragile.

I therefore expect the Treasury to let public borrowing to take the strain of lower revenues next year.

So the first big question for me will be: how much will public sector borrowing rise next year from the forecast made last October of 拢36bn?

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The Fed buys the market

• Robert Peston
• 12 Mar 08, 09:20 AM

The global financial economy looks increasingly like an over-pumped old tyre, on to which the central banks are desperately trying to apply patches.

But just when they鈥檝e mended one puncture, there鈥檚 that unmistakable hissing sound again.

The latest crisis, as I mentioned on Friday, is the collapse of investors鈥� confidence in regular US residential mortgages.

With delinquency rates rising and the severity of the US slowdown impossible to predict with confidence, no-one wants exposure to Mr and Mrs Average of AnyTown, America.

Except, that is, for the , the US central bank.

It did this remarkable thing yesterday by announcing that it would swap $200bn of US Treasuries 鈥� supposedly the best credit in the world 鈥� for mortgage debt.

This offer is only available to primary dealers, the securities firms with which it deals directly.

But these are America鈥檚 major banks, so in theory it delivers succour to an important part of the system.

There are two possible ways in which the mortgages-for-Treasuries exchange should help.

It would provide direct succour to any bank suffering a funding crisis from its own holdings of illiquid mortgage assets.

And it could 鈥� but I stress this is hypothetical 鈥� restore a bit of confidence to banks so that they lend to other institutions, such as hedge funds or structured finance vehicles, that are on the brink of insolvency as a result of their own exposure to mortgages.

It鈥檚 a bit of clever financial engineering by the Fed, in that 鈥� unlike many of its other money-market initiatives of the past few months 鈥� it does represent net additional credit for the financial system.

But it鈥檚 high-stakes stuff.

It shows that the Fed believes that capitalism has entered one of its more dysfunctional phases, when foolish lenders have to be protected from the consequences of their own folly.

We鈥檙e in the mess we鈥檙e in because financial institutions en masse lent far too much to the wrong people and businesses over the preceding few years.

But, the Fed feels, they can鈥檛 be allowed to suffer the full consequences of their stupidity, for fear of the damage wreaked on the US economy in particular and the global economy by extension.

In other words, the Fed is now wholly committed to a full-scale rescue of the financial system.

Its latest initiative may not work, but that鈥檚 not the point.

What is relevant is that it has signalled that it will do whatever it takes to minimise the pain for banks, insurers, hedge funds and so on.

It鈥檚 coming pretty close to making a commitment to buy up all and any financial market that runs into difficulties, almost to nationalising capitalism.

And that鈥檚 why stock markets rose across the world, because of the intent signalled by the Fed rather than because of confidence that it will succeed with this latest gambit.

That said, the next possible crisis in this wave of crises may be particularly intractable.

For the past few weeks, strains have been worsening in the market for credit default swaps 鈥� that multi-trillion dollar market in debt insurance.

The price of that insurance has been going through the roof.

There is some cost to the companies whose debt is insured, but they are almost an irrelevance in this market.

The real significance of credit default swaps is that they are instruments for speculating on the fortunes of companies by hedge funds, banks and other financial institutions.

They represent one of the most disturbing manifestations of the debt bubble, in that trading in them has been massive and opaque.

If they were to become impossible to trade or value, the damage to many financial institutions would be immense.

And in those circumstances, it鈥檚 really difficult to see quite what the Fed could do.

Would it begin to take credit default swaps as collateral for high quality US government debt?

That really would be to swap exchange ordure for gold.

But let鈥檚 keep our fingers crossed and hope that it never comes to that 鈥� and that the Fed鈥檚 evasive action sees us through this crisis in reasonable shape.

Would that mean we had got off scot-free?

No.

When the Fed bails out the system in the way it has done, it sends a powerful signal to the players that they are too big and important to fail.

That gives them all the confidence they鈥檒l need to make new and even more stupid lending mistakes when the economy returns to its next benign phase.

So at some point, the US authorities will presumably have to ask themselves searching questions about the nature of the capitalism they hold dear.

Do they really feel comfortable with a market system in which modest folly is punished but an outbreak of grand delusion is excused?

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