Bailey’s brokenomics
Look, we’re in a bit of a jam at the moment. Would you mind awfully if I asked you to take a pay cut? Oh, and could your employer please not charge as much as he could for his product? This was, in effect, the message from poor old Andrew Bailey at the Mansion House this week. He dressed it up quite prettily (he’s had plenty of practice) but the task of getting inflation back to 2 per cent is clearly beyond him.
Instead, he’s reduced to Mouthy Monetarism, asking us all to show restraint to help him with his task. To be fair, his boss at the Treasury had little helpful to say in his speech. Having been the first Chancellor to preside over the unholy trio of the highest taxes in half a century, runaway state spending and a record Budget deficit, he has no idea what to do, either.
Those of us with a long time in finance can remember how evil inflation is, how painful it is to overcome, and how much of that pain falls on the poorest in society. Contrary to what you might think, these are not the ones facing big rises in mortgage costs. Much worse are those for whom a mortgage is not a realistic option, as anyone trying to rent will tell you. Prices are beyond reason, while landlords are fleeing the market to escape more costs and regulations.
One key difference in today’s market for domestic mortgages: when building societies provided almost all advances, they ran on deposits effectively tied to Bank Rate, so the variable interest rate they charged rose almost automatically. Today the banks dominate, and their key cost is the two-year swap rate. That, and the short-term fix which is almost standard, blunts Bank Rate as a weapon. The result is water torture rather than waterboarding.
To disguise his lack of any ideas to regenerate the UK economy, the chancellor proposes “encouraging” the big pension funds to invest in small businesses. Similar policies have been tried many times over the years, starting with Harold Wilson’s infamous “white heat of technology” speech. The best that can be said about the latest triumph of hope over experience is that the funds will only have to put up 5 per cent of their assets for Great British Innovation (or whatever). The absurd arithmetic that this move would make today’s youngsters £1,000 a year richer when they retire is pure moonshine.
That there is a serious problem here is not in doubt. Changes in the rules have pushed pension funds into bonds and out of equities, especially UK equities. The companies and their workers who put up the money are seeing their capital going to help their competitors overseas put them out of business. Nest, the government-backed default scheme for compulsory pension savings, now has £29bn under management, yet there is not a single UK company in its top 10 equity holdings in any of its funds.
There is plenty the government could do. It might start by treating business as a source of national wealth rather than as a cow to be milked whenever the public demands. Understanding that economic growth cannot be ordered up with the rations would be a start. Easing the employment rules for small businesses, raising the VAT threshold, helping rather than hindering firms’ expansion, planning reform, and actually simplifying tax rather than paying lip service, for example.
Unfortunately, such measures do not win votes for an administration desperate to survive past the next election. Any one of them would be better than asking us to settle for a real-terms pay cut (even if we know we have to) as inflation continues to roar away. Still, never mind. Mr Bailey may have failed in his attempts to control inflation, but isn’t it a comfort to see the Bank of England deciding that mothers can be of either sex?
Crocodile tears at Thames
As all the world knows, Thames Water has a new boss. Cathryn Ross was at Ofwat, the industry regulator, which makes her gamekeeper turned poacher. This week the Thames shareholders stumped up £750m in additional equity. Or did they? The total is short of the £1bn Ofwat thinks they need, it’s not in the bank, and the promises are hedged about with the sort of conditions we are becoming used to in this monopoly industry.
Disgorging the cash will depend on Thames’ shareholders being allowed to make sufficient profits to produce a nice return on their investment. In practice, this means drawing up complex conditions to bamboozle the Ofwat lawyers when the time comes for the next price rise.
The companies have form here, as elsewhere. In their successful attempt to persuade the Competition and Markets Authority to overturn Ofwat’s last price determination, they spent £26m on legal fees. According to the FT, at a recent meeting of environmentalists Ms Ross said: “It’s going to take cash to solve those problems; and every penny we get is going to come from our customers.” Rather lets the Cathryn out of the bag, you could say.
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