UK > History > 2010 > Economy (I)

UK budget deficit

reached record £23bn in November

• City expected November budget deficit of less than £17.4bn
• Analysts warn trend points to a deficit of £155bn for the year

Larry Elliott
Economics editor
Guardian.co.uk
Tuesday 21 December 2010
18.20 GMT
This article was published on guardian.co.uk at 18.20 GMT on Tuesday 21 December 2010.
A version appeared on p21 of the Main section section of the Guardian on Wednesday 22 December 2010.
It was last modified at 00.01 GMT on Wednesday 22 December 2010.

George Osborne received a blow as it emerged that state borrowing soared to the highest on record for a single month despite the government's austerity measures to rein in the deficit.

News that higher spending on defence, the NHS and contribution to the European Union had left Britain in the red by £23.3bn stunned the City, which had been expecting the early fruits from the chancellor's spending restraint to cut the deficit from the £17.4bn recorded in November 2009.

Sterling dipped to its lowest level against the US dollar in three months following the release of the official data amid fears that the coalition would struggle to meet its targets for reducing a deficit that rose sharply during the longest and deepest recession Britain has suffered since the interwar period.

Figures from the Office for National Statistics showed that despite robust economic growth in the second and third quarters of 2010, public borrowing has shown virtually no improvement on last year. In the first eight months of the 2010-11 financial year, net borrowing stood at £104.4bn, compared with £105.1bn in the same period of 2009-10.

Analysts said the public finances tended to be volatile from month to month, and that it was possible that the highest monthly deficit since modern records began in 1993 was a freak. They added, however, that if the trend seen so far continued, the deficit was likely to total £155bn by the end of the financial year, £7bn higher than predicted by the government's fiscal watchdog, the Office for Budget Responsibility.

Today's borrowing figures were the third disappointing piece of news in the past week for the government, following the surprise increase in inflation and the rise in unemployment to more than 2.5m.

The City and academic economists believe growth in the final three months of 2010 is unlikely to match the 0.8% seen in the third quarter, and that activity will weaken further in early 2010.

Osborne believes that the poor state of the public finances vindicates his decision to announce the biggest four-year fiscal squeeze since the second world war. "November's borrowing figures show why the government has had to take decisive action to take Britain out of the financial danger zone," a Treasury spokesman said.

David Kern, Chief Economist at the British Chambers of Commerce (BCC), said: "These figures are much worse than expected and show a significant increase in the deficit compared with the same month a year ago. Britain's fiscal position is very serious and it is essential for the government to implement its tough strategy aimed at stabilising our public finances.

"British business supports these measures and wants to see the government continuing to focus on spending cuts rather than tax rises. But, in order for this policy to be successful the austerity measures must be supplemented by a credible growth strategy so that businesses can drive a lasting recovery."

Michael Derks, chief strategist at FxPro, said: "More than anything, these figures reinforce just how important fiscal consolidation is, and reiterates how hard the process can be. The much-vaunted spending restraint that formed such a critical part of the Chancellor's fiscal austerity has not started, based on these latest figures. The pound may give the chancellor a couple more months' leeway on the spending side, but thereafter it will want to see hard evidence that restraint is actually working."

A breakdown of the ONS figures showed that spending in the first eight months of the year was 6.8% up on the same period of 2009-10, compared to the 6% growth projected by the Treasury. "Some departments may have to trim their spending in the months ahead to stay within planned levels," said Stephen Lewis of Monument Securities. "There is a risk, as a result, public services will suffer, in a way that could erode popular support for the coalition's policies. In such circumstances, it could become more difficult for the coalition to hold together. These uncertainties are likely to be reflected increasingly in risk premiums in sterling asset markets."

UK budget deficit reached record £23bn in November, G, 21.12.2010, http://www.guardian.co.uk/business/2010/dec/21/budget-deficit-november-2010

David Cameron

holds historic meeting

with union leaders

First meeting of its kind
with a Tory-led government
for a quarter of a century

Hélène Mulholland and Matthew Taylor
Guardian.co.uk
Monday 20 December 2010
15.11 GMT
This article was published on guardian.co.uk at 15.11 GMT on Monday 20 December 2010.
It was last modified at 16.24 GMT on Monday 20 December 2010.
It was first published at 11.08 GMT on Monday 20 December 2010.

Union leaders told David Cameron that the government's spending cuts spelt a "bleak" future for the country when they met the prime minister at Downing Street today.

The trade union chiefs issued the hard-hitting message after requesting an audience with Cameron in what is believed to be the first meeting of its kind with a Tory-led government for a quarter of a century.

Today's session – described by sources as "good-natured" – took place over tea and mince pies with both sides seeking to quell mounting tensions over the government's austerity drive.

A Downing Street spokesman said the event hosted by Cameron today was "part of the dialogue we want to have with the trade unions".

Union leaders used uncompromising language, warning Cameron that the spending cuts due to kick in next April would be both "socially divisive" and "economically dangerous" After the meeting, Brendan Barber, the TUC general secretary, who has already held talks with Cameron since the general election, said: "The UK is currently in the grips of a bleak midwinter. Today we warned the prime minister that next year promises to be even bleaker for millions of families and their communities as the spending cuts bite hard and hit jobs and services.

"We made clear to the prime minister our strong view that the spending cuts would both be socially divisive and economically dangerous. We urged him to do more to raise money from the banks as a sector that had done the most to take us into the current crisis and which had received enormous help from government."

Barber added that there were also "useful discussions" on green growth and jobs, manufacturing and equality, and welcomed Cameron's intention to "continue this dialogue" with unions on issues such as public sector pensions.

Not all were convinced ongoing talks will prove useful, however, with one union source pointing out that the prime minister stressed that the vexed decision to switch indexation for pensions from RPI to the usually lower CPI was not up for negotiation.

One of several union leaders unable to attend because of poor weather conditions was Len McCluskey, the recently elected general secretary designate of Unite, who ratcheted up the pressure regarding mass industrial action in an article in today's Guardian.

McCluskey said that union leaders plan to stage a special meeting in January to discuss a "broad strike movement" to stop what he describes as the coalition's "explicitly ideological" programme of cuts.

The leftwinger said that unions had to prepare for battle. "It is our responsibility not just to our members but to the wider society that we defend our welfare state and our industrial future against this unprecedented assault," he wrote. He praised Ed Miliband, the Labour leader, for drawing a line under the party's Blairite past, but called for a clearer alternative to the coalition's "austerity frenzy".

Downing Street said in response to McCluskey's call that the prime minister "obviously" doesn't want to see co-ordinated strike action, but also insisted there were "no plans" to raise the threshold on union ballots to make it harder for unions to strike, as some predict.

The spokesman said: "We actually want to engage in a constructive dialogue with the unions and today's meeting is part of that. We obviously have a different view and it is important that we make our case to them."

Miliband's office was more robust as it distanced itself from McCluskey's "overblown rhetoric" on the spectre of mass action.

A spokesperson for the Labour leader said: "Ed warned about using overblown rhetoric about strikes in his conference speech and this is a case in point. The language and tone of Len McCluskey's comments are wrong and unhelpful and Ed Miliband will be making that clear when he meets him in the near future."

Though the TUC general secretary, Brendan Barber, has met Cameron since the Conservatives took office with the Liberal Democrats in May, union sources say the official meeting with a large delegation of senior union figures is the first of its kind by a Tory prime minister and the leaders of the union movement in 25 years.

The last official meeting was at the end of the miners' strike in 1985 when the then-TUC general secretary Norman Willis met Margaret Thatcher.

In his seven years in Downing Street, John Major never officially met the TUC, although he did meet individual union leaders privately.

Talks with unions to date have only taken place with lower ranking ministers since the coalition was formed in May.

A previous attempt at dialogue with senior government figures fell foul earlier this year when some unions remonstrated over the TUC's decision to invite Cameron to address its annual conference in September. Cameron declined the offer, citing expected paternity leave for the birth of his fourth child.

Vince Cable, the Liberal Democrat business secretary, accepted his invitation to address the conference in Manchester, only to have this subsequently rescinded amid union anger at the emergency June budget and speculation about deep cuts ahead of the comprehensive spending review the following month.

    David Cameron holds historic meeting with union leaders, G, 20.12.2010, http://www.guardian.co.uk/politics/2010/dec/20/david-cameron-meeting-union-leaders

Ireland bailout fails to calm nervy markets

• FTSE 100 down 2%; Dow loses 1%
• Euro slides to two-month low against US dollar
• Cost of insuring Spanish and Portuguese debt hits record high

Monday 29 November 2010
19.35 GMT
Guardian.co.uk
Jill Treanor and Julia Kollewe
This article was published on guardian.co.uk at 19.35 GMT on Monday 29 November 2010.
A version appeared on p28 of the Main section section of the Guardian on Tuesday 30 November 2010.
It was last modified at 01.30 GMT on Tuesday 30 November 2010. It was first published at 10.40 GMT on Monday 29 November 2010.


Stocks fell on both sides of the Atlantic, the euro tumbled, and the cost of borrowing for Ireland, Spain and Portugal jumped today, as details of the republic's €85bn (£72bn) bailout failed to quell anxiety that the crisis in the eurozone was deepening.

Amid speculation that the European authorities may be left with little option but to embark on large-scale quantitative easing to try to bolster sentiment, Ireland's borrowing costs shot as high as 9.6% as the terms of its bailout by the International Monetary Fund and European Union were digested by investors.

"The bottom line is that the financial markets are unimpressed, and that's the most generous description," Neil MacKinnon, global macro strategist at VTB Capital told Associated Press. "The crisis rumbles on."

Only two shares in the FTSE 100, Barclays and HSBC, ended the day in positive territory as the blue-chip index closed below 5600 for the first time since 1 October, down 2% at 5550.

The Dow Jones industrial average fell 39.51 points to 11,052.49, and the euro slid to a new two-month low against the dollar of $1.3065 amid concerns about the long-term future of the decade-old single currency.

The cost of borrowing for the peripheral eurozone countries stayed stubbornly high, with Portugual above 7% and Spain above 5%, as speculation focused on the next indebted country which might need financial help. Italy endured its biggest one day rise in borrowing costs for a decade.

The cost of insuring Portuguese debt against default rose to a record high after Nouriel Roubini, economics professor and chairman of Roubini Global Economics, urged Lisbon to take international assistance. "Like it or not, Portugal is reaching the critical point," Roubini told the Portuguese newspaper Diário Económico. "Perhaps it could be a good idea to ask for a bailout in a preventative manner."

Ireland's bailout failed to dent fears of contagion across the eurozone despite rallying cries by France's economy minister Christine Lagarde and Germany's finance minister Wolfgang Schäuble, who both insisted Portugal would not need help. Andrew Lim, head of financials research at Matrix investment bank, said: "The Irish bailout doesn't solve the euro problem … We are looking at Portugal, then Spain next."

The fragility in the markets led to speculation that the European Central Bank will delay attempts to begin withdrawing funds for banks at its meeting on Thursday, even though the €35bn earmarked for Ireland's banks was intended to wean them off the ECB's life support.

Analysts said although the Ireland bailout had been accompanied by plans for new ways to rescue troubled eurozone countries after 2013, when the current emergency schemes run out, investors had been left confused. It was still not clear in what circumstances bondholders would be expected to share the losses of countries that were allowed to reschedule their debt after 2013 – in effect defaulting.

"Given the lack of clarity about what constitutes the appearance of insolvency, and what type of restructuring might occur in such a case, markets are likely to remain wary of holding government debt issued by other troubled eurozone countries like Portugal and Spain," said Ben May, European economist at Capital Economics.

"With huge political frictions still clearly in place within the region, fears of a future break-up of the region look set to remain, placing further downward pressure on the euro."

The bailout for Ireland is intended to ensure that neither the country nor its banks will default on their debt. The decision by the authorities to ensure that the possibility of default was reduced was initially welcomed. Gary Jenkins, head of fixed income research at Evolution Securities, said: "This is not the time to inject panic into the banking sector."

Greece, the first eurozone country to be bailed out, was today given until 2021 to repay its €110bn loan from the IMF and EU, rather than 2015.

Greece's finance minister George Papaconstantinou said: "We have a grace period of four years and a repayment period of seven years.

"The decision is very important, it opens the way to return to markets earlier than expected."

    Ireland bailout fails to calm nervy markets, G, 29.12.2010, http://www.guardian.co.uk/business/2010/nov/29/ireland-bailout-fails-to-excite-markets

Government services to be online-only

People without internet access – especially older people – could suffer in coalition cost-cutting

Saturday 20 November 2010
21.00 GMT
Guardian.co.uk
Anushka Asthana and Tracy McVeigh
This article was published on guardian.co.uk at 21.00 GMT on Saturday 20 November 2010.
A version appeared on p26 of the Main section section of the Observer on Sunday 21 November 2010.

Britons will be forced to apply online for government services such as student loans, driving licences, passports and benefits under cost-cutting plans to be unveiled this week.

Officials say getting rid of all paper applications could save billions of pounds. They insist that vulnerable groups will be able to fill in forms digitally at their local post offices.

The plans are likely to infuriate millions of people. Around 27% of households still have no internet connection at home and six million people aged over 65 have never used the web.

Lord Oakeshott, a Liberal Democrat Treasury spokesman, said: "We must cut costs and boost post offices as much as we possibly can, but many millions of people – not just pensioners – are not online and never will be. They must never be made to feel the state treats them as second-class citizens."

Oakeshott argued that the ageing population meant that an increasing number would also find it difficult to get to post offices.

Cabinet Office officials say the full savings will only be felt if everything is moved online. Leaving even a small percentage of print registrations would be "prohibitively expensive", they say. The first service to go online-only will be student loans, followed by applications to schools, such as school meals; personal applications, such as driving licences; and benefits such as job-seekers' allowance. The changes would be phased in over a number of years.

Francis Maude, minister for the Cabinet Office, who will unveil the plans this week in response to a report by Martha Lane Fox, the government's digital adviser, said: "We want the UK to be at the forefront of the digital age, and that is why putting all services online has to be the aspiration. Online services are better for consumers and better for government, making services available in a convenient 24/7 format and reducing the costs of transactions.

"However, we will always provide support for those who need it, which is why assisted digital services are an integral part of our strategy."

Most concerned about the moves will be older people, who often depend on government benefits but are the least likely to be online. Michelle Mitchell, the charity director of Age UK, said: "While we welcome the government's ambition for a digital revolution, this should not come at the cost of the millions of people, many older, who are not online."

George Thomson, general secretary of the National Federation of SubPostmasters, said he was glad the government wanted post offices to be the place that people without internet connections would go to access government services. But he added it could also be a threat to Britain's 12,000 post offices.

"I do have a problem with everything going online," said Thomson. He argued that a lot much of the work of post offices was dealing face to face with people about their Post Office card accounts, green giros and taxing their cars, for example. "Those are important transactions, and the philosophy of everything going online means that despite the new products there could be a lower volume of work overall.

"Most post offices are also shops and they depend on the footfall that comes in. If 3,000 people come in during a week, they also buy their newspapers, bread and milk there. My fear is that, if you lose the volume, then the business model that sustains that disappears."

    Government services to be online-only, G, 20.11.2010, http://www.guardian.co.uk/society/2010/nov/20/government-services-online-only

Student fees protest: 'This is just the beginning'

• Tory HQ attacked as demonstration spirals out of control
• 35 arrested and 14 injured in violent clashes at Millbank
• Police admit being caught out by scale of student action

Wednesday 10 November 2010
21.38 GMT
Guardian.co.uk
Jeevan Vasagar, Paul Lewis and Nicholas Watt
This article was published on guardian.co.uk at 21.38 GMT on Wednesday 10 November 2010.
A version appeared on p1 of the Main section section of the Guardian on Thursday 11 November 2010.
It was last modified at 23.15 GMT on Wednesday 10 November 2010.

Tens of thousands of students took to the streets of London today in a demonstration that spiralled out of control when a fringe group of protesters hurled missiles at police and occupied the building housing Conservative party headquarters.

Tonight both ministers and protesters acknowledged that the demonstration – by far the largest and most dramatic yet in response to the government's austerity measures – was "just the beginning" of public anger over cuts. Police, meanwhile, were criticised for failing to anticipate the scale of the disorder.

An estimated 52,000 people, according to the National Union of Students, marched through central London to display their anger over government plans to increase tuition fees while cutting state funding for university teaching. A wing of the protest turned violent as around 200 people stormed 30 Millbank, the central London building that is home to Tory HQ, where police wielding batons clashed with a crowd hurling placard sticks, eggs and some bottles. Demonstrators shattered windows and waved anarchist flags from the roof of the building, while masked activists traded punches with police to chants of "Tory scum".

Police conceded that they had failed to anticipate the level of violence from protesters who trashed the lobby of the Millbank building. Missiles including a fire extinguisher were thrown from the roof and clashes saw 14 people – a mix of officers and protesters – taken to hospital and 35 arrests. Sir Paul Stephenson, Met police commissioner, said the force should have anticipated the level ofviolence better. He said: "It's not acceptable. It's an embarrassment for London and for us."

While Tory headquarters suffered the brunt of the violence, Liberal Democrat headquarters in nearby Cowley Street were not targeted. "This is not what we pay the Met commissioner to do," one senior Conservative told the Guardian. "It looks like they put heavy security around Lib Dem HQ but completely forgot about our party HQ."

Lady Warsi, the Tory party chair, was in her office when protesters broke in. She initially had no police protection as the protesters made their way up the fire stairs to the roof. Police who eventually made it to Tory HQ decided not to evacuate staff from the building but to concentrate on removing the demonstrators.

The NUS president, Aaron Porter, condemned the actions of "a minority of idiots" but hailed the turnout as the biggest student demonstration in generations. The largely good-natured protest was organised by the NUS and the lecturers' union the UCU, who have attacked coalition plans to raise tuition fees as high as £9,000 while making 40% cuts to university teaching budgets. The higher fees will be introduced for undergraduates starting in 2012, if the proposals are sanctioned by the Commons in a vote due before Christmas. The NUS president told protesters: "We're in the fight of our lives. We face an unprecedented attack on our future before it has even begun. They're proposing barbaric cuts that would brutalise our colleges and universities."

Inside parliament the deputy prime minister, Nick Clegg – the focus of much anger among protesters for his now abandoned pledge to scrap all tuition fees – came under sustained attack, facing 10 questions on tuition fees during his stand-in performance during prime minister's questions. He said there was consensus across the parties about the need to reform the system.

Labour's deputy leader, Harriet Harman, said the rise in fees was not part of the effort to tackle the deficit but about Clegg "going along with Tory plans to shove the cost of higher education on to students and their families". She said: "We all know what it's like: you are at freshers' week, you meet up with a dodgy bloke and you do things that you regret. Isn't it true he has been led astray by the Tories, isn't that the truth of it?"

Meanwhile one student won an unexpected concession from the coalition yesterday. In answer to a question from a Chinese student during his trip to China, David Cameron said: "Raising tuition fees will do two things. It will make sure our universities are well funded and we won't go on increasing so fast the fees for overseas students … We have done the difficult thing. We have put up contributions for British students. Yes, foreign students will still pay a significant amount of money, but we should now be able to keep that growth under control."

Additional reporting by Rachel Williams and Matthew Taylor

    Student fees protest: 'This is just the beginning', G, 11.11.2010, http://www.guardian.co.uk/education/2010/nov/10/student-fees-protest-conservative-hq

Unemployed claimants to face loss of benefits for refusing work

Severe welfare shakeup will introduce claimant contract with up to three years' benefits penalty for refusing a job

The Guardian
Thursday 11 November 2010
Patrick Wintour in Seoul and Randeep Ramesh
This article appeared on p1 of the Main section section of the Guardian on Thursday 11 November 2010.
It was published on guardian.co.uk at 00.05 GMT on Thursday 11 November 2010.
It was last modified at 00.27 GMT on Thursday 11 November 2010.

A tougher-than-expected squeeze on the unemployed is to be announced today as the jobless face the threat of losing all benefits for as long as three years if they refuse community work or the offer of a job, or fail to apply for a job if advised to do so.

In the most severe welfare sanctions ever imposed by a British government, unemployed people will lose benefits for three months if they fail to take up one of the options for the first time, six months if they refuse an offer twice, and three years if they refuse an offer three times.

Downing Street sources said the new "claimant contract" will come into force as soon as legislation is passed, and may not wait for the introduction of a streamlined universal credit system in 2013-14.

Iain Duncan Smith, the work and pensions secretary, will tell MPs that he is introducing the biggest shakeup of the welfare system since the Beveridge reforms ushered in the welfare state after the second world war. He will say that a new universal credit system will make 2.5 million of the poorest people better off and reduce the number of workless households by 300,000.

The welfare white paper is deemed so groundbreaking that David Cameron chose to laud the measures as he landed at the G20 summit in South Korea.

He said: "The message is clear. If you can work then a life on benefits will no longer be an option. If people are asked to do community work they will be expected to turn up. If people are asked to apply for a job by an adviser they will be expected to put themselves forward. If people can work and they are offered work, they will be expected to take it. This is the deal. Break the deal and they will lose their unemployment benefit. Break it three times and they will lose it for three years."

The regime will apply to all 1.6 million jobseeker's allowance claimants, irrespective of how long they have been unemployed. JSA is worth only £64.45 a week for over-25s, and No 10 said it expected the sanction to be enforced, once warranted, as a matter of course.

Job advisers should not use discretion to let people stay on benefit, Downing Street said, arguing that too many advisers do not make use of the sanctions available to them.

The new workfare regime is certain to be criticised for expecting the jobless to take work at a time when unemployment is forecast to rise. The move could potentially leave thousands of people receiving no benefits other than some money to cover their housing costs.

Many charities and local government leaders will be wary of offering work to unemployed people, especially if they have been in effect forced to take the work or lose benefit. The community jobs set aside for the jobless include clearing up litter and doing charity work.

Cameron argues that the new regime is necessary to prevent a dependency culture. He believes a new universal credit system bringing together tax credits and a range of benefits simplifies the system so much that it will ensure work will always pay in comparison with staying unemployed. Ministers say that, with 5 million people on out-of-work benefits and almost 2 million people growing up in workless households, they have to embark on "root and branch reform".

The new universal credit, costed at £2bn for this parliament, is designed to remove the financial disincentives to work, ensuring that someone keeps a minimum 35p in every extra pound earned. Cameron said: "It simply has to pay to work. You cannot have a situation where if someone gets out of bed and goes and does a hard day's work they end up worse off. That is not fair and sends entirely the wrong message."

Duncan Smith will cast his reforms as a "once-in-a-generation" attempt to get the jobless back to work. But the man credited by Duncan Smith as his greatest influence on poverty reduction criticised the changes . Bob Holman, an academic and community worker from Glasgow who has worked for Duncan Smith's thinktank, the Centre for Social Justice, accused the work and pensions secretary of forcing people into "degrading" jobs.

Asked his opinion about Duncan Smith and his plans for welfare reform, Holman said: "Well, my view has taken a bit of a dent. When Iain came to Easterhouse in 2002, one of the things he expressed admiration for were unemployed people who were working or giving their time as volunteers to our project … now he seems to have turned that on its head.

"He seems to be regarding them with disrespect and saying you're not really a part of society. We're going to force you to do these, what are really degrading jobs, which won't equip them for anything, but in a way are punishing them for not working and in a climate in which jobs are hard to get."

    Unemployed claimants to face loss of benefits for refusing work, G, 11.11.2010, http://www.guardian.co.uk/politics/2010/nov/11/welfare-unemployment-benefits-tougher-rules

Unemployed told: do four weeks of unpaid work or lose your benefits

• Crackdown on £190bn-a-year welfare bill
• Payments could be suspended for three months

Sunday 7 November 2010
The Observer
Toby Helm and Anushka Asthana
This article appeared on p1 of the Main section section of the Observer on Sunday 7 November 2010.
It was published on guardian.co.uk at 00.08 GMT on Sunday 7 November 2010.

The unemployed will be ordered to do periods of compulsory full-time work in the community or be stripped of their benefits under controversial American-style plans to slash the number of people without jobs.

The proposals, in a white paper on welfare reform to be unveiled this week, are part of a radical government agenda aimed at cutting the £190bn-a-year welfare bill and breaking what the coalition now calls the "habit of worklessness".

The measures will be announced to parliament by the work and pensions secretary, Iain Duncan Smith, as part of what he will describe as a new "contract" with the 1.4 million people on jobseekers' allowance. The government's side of the bargain will be the promise of a new "universal credit", to replace all existing benefits, that will ensure it always pays to work rather than stay on welfare.

In return, where advisers believe a jobseeker would benefit from experiencing the "habits and routines" of working life, an unemployed person will be told to take up "mandatory work activity" of at least 30 hours a week for a four-week period. If they refuse or fail to complete the programme their jobseeker's allowance payments, currently £50.95 a week for those under 25 and £64.30 for those over 25, could be stopped for at least three months.

The Department for Work and Pensions plans to contract private providers to organise the placements with charities, voluntary organisations and companies. An insider close to the discussions said: "We know there are still some jobseekers who need an extra push to get them into the mindset of being in the working environment and an opportunity to experience that environment.

"This is all about getting them back into a working routine which, in turn, makes them a much more appealing prospect for an employer looking to fill a vacancy, and more confident when they enter the workplace. The goal is to break into the habit of worklessness."

Sanctions – including removal of benefit – currently exist if people refuse to go on training courses or fail to turn up to job interviews, but they are rarely used.

The plans stop short of systems used in the US since the 1990s under which benefits can be "time limited", meaning all payments end after a defined period. But they draw heavily on American attempts to change public attitudes to welfare and to change the perception that welfare is an option for life.

Last night the shadow work and pensions secretary, Douglas Alexander, suggested government policy on job creation was reducing people's chances of finding work: "The Tories have just abolished the future jobs fund, which offered real work and real hope to young people. If you examine the spending review then changes such as cuts to working tax credit are actually removing incentives to get people into work. What they don't seem to get about their welfare agenda is that without work it won't work."

Anne Begg, Labour MP and chair of the Commons select committee for work and pensions, said that many unemployed people already had a work record and carrying out work experience would give them less time to search for a job. "The problem is finding a job," she added. "One of the reasons the last government moved away from work placements and towards things such as the Future Jobs Fund was that it actually acted as a hindrance to them looking for work."

The Observer has also learned that ministers have abolished the Social Exclusion Taskforce, which was based in the Cabinet Office and co-ordinated activity across departments to drive out marginalisation in society. Documents show that the unit has become a part of "Big Society, Policy and Analysis".

Jon Trickett, a shadow minister focusing on social exclusion, reacted angrily, saying that ministers should "hang their heads in shame". Whitehall sources insisted the work would carry on, but more of it would take place in the Department for Work and Pensions.

Naomi Eisenstadt, who was director of the taskforce until last year and is now an academic at Oxford University, said the shift was worrying. "I don't think it is significant in terms of the name – call it a banana – who cares? What does worry me is why they are not using the civil servants who were doing the work on deep disadvantage in the Cabinet Office and exploiting their expertise," she said.

Eisenstadt added that it would be a concern if the government believed the "big society" could take the place of government intervention. "If you speak to any minister I am sure they would agree that civil society is one part of the solution, but not the whole solution," she said.

The proposals come as the government prepares to unveil policy plans across a number of departments. Tomorrow, the Ministry of Justice will reveal that thousands of criminals with serious mental illnesses or drug addictions will no longer be sent to prison but will instead be offered "voluntary" treatment in hospital. Documents will show that offenders will be free to walk away from NHS units because officials believe it would be pointless to create duplicate prisons in the community. "While treatment is voluntary, offenders in these programmes will be expected to engage, be motivated to change and to comply with the tough requirements of their community order," they will say.

Kenneth Clarke, the justice secretary, said: "Serious criminals who pose a threat to the public will always be kept locked up, but in every prison there are also people who ought to be receiving treatment for mental illness rather than housed with other criminals. The public would be better protected if they could receive that treatment in a more suitable setting."

    Unemployed told: do four weeks of unpaid work or lose your benefits, O, 7.11.2010, http://www.guardian.co.uk/politics/2010/nov/07/unemployed-unpaid-work-lose-benefits

UK economy grew by 0.8% in last quarter

• Growth was double City forecasts
• S&P upgrades UK outlook
• Chancellor says S&P move is 'vote of confidence'
• Construction sector surges 4%
• Further quantitative easing now in doubt

Tuesday 26 October 2010
12.20 BST
Guardian.co.uk
Graeme Wearden
This article was published on guardian.co.uk at 12.20 BST on Tuesday 26 October 2010.
It was last modified at 13.04 BST on Tuesday 26 October 2010.

Fears that Britain is sliding towards a double-dip recession receded today, after the UK economy grew by 0.8% in the past three months.

UK GDP grew twice as strongly as the City had expected between July and September, with most analysts expecting growth of just 0.4%. However, the 0.8% rise was still slower than the surprisingly robust growth of 1.2% recorded in the previous quarter.

The government also received a boost from ratings agency Standard & Poor's, which raised its outlook for the UK to "stable" today, having studied the details of last week's spending review.

George Osborne said that S&P's move was a "vote of confidence" in the government's economic policies.

"The country's credit rating, which had been put at risk by the previous government, has been secured," the chancellor said. Osborne also said that a "steady recovery" was now under way.

Much of the increase in GDP was due to the construction industry, which grew by 4% during the quarter. The services and industrial sectors both expanded by 0.6%, the Office for National Statistics said.

Shadow chancellor Alan Johnson argued that the UK economy was still feeling the benefit of the stimulus measures taken by the last government.

"The risk going forward is that the government has a plan to cut one million jobs, but no plan to support the private sector in replacing them," Johnson said.

Economists agreed that the GDP data indicated that the UK was in better shape than feared. However, growth is still expected to slow in the coming months.

James Knightley of ING said: "The government will no doubt take this as a sign that the private sector can fill the gap created by public sector cuts, but with consumer confidence, hiring intentions surveys and housing activity data all softening, we remain cautious."

George Buckley of Deutsche Bank said that the UK Treasury would be heartened by the GDP data.

"The UK government will be pleased with a more robust economy and will feel more comfortable having embarked on its tighter fiscal source," Buckley predicted.

A stable outlook

Standard & Poor's had previously held a "negative" outlook on the UK, but is now more optimistic.

"We believe that the completion of the government's spending review, announced on 20 October, reduces uncertainties about its political resolve to tackle the challenges resulting from the structural deterioration in public finances between 2007 and 2009," S&P credit analyst Trevor Cullinan said.

S&P believes that the UK deficit will fall to 3% of GDP by 2014, down from an earlier prediction of 4%. However, the ratings agency forecasts that Britain's economic growth will average only 2% over the next five years, slightly less than the official forecast of 2.4%.

The pound rose against other major currencies, with sterling gaining more than one cent against the dollar to $1.589 by midday.

The boom in construction work in recent months has been attributed to work delayed by the bad weather at the start of the year.

Britain has now enjoyed its strongest six-month period of growth since the first half of 2000. The UK economy has grown by 2.8% over the past year, after the deepest recession in decades.

Today's data also suggests that the Bank of England is now less likely to launch fresh efforts to stimulate the economy, at least in the near term.

Howard Archer, chief European and UK economist at IHS Global Insight, said: "The resilience of GDP growth in the third quarter appears to put any revival of quantitative easing by the Bank of England on the back burner for now at least. However, it remains a serious possibility should growth slow markedly over the coming months."

    UK economy grew by 0.8% in last quarter, G, 26.10.2010, http://www.guardian.co.uk/business/2010/oct/26/uk-economy-grew-in-third-quarter

Spending review means challenge to caring for elderly and vulnerable

300,000 more elderly will need care in next four years – and so will 70,000 more people of working age

Wednesday 20 October 2010
The Guardian
David Brindle
This article appeared on p6 of the Main section section of the Guardian on Wednesday 20 October 2010.
It was published on guardian.co.uk at 06.00 BST on Wednesday 20 October 2010.
It was last modified at 09.45 BST on Wednesday 20 October 2010.

James Cooper embodies the often remarkable progress made in recent years in the care of disabled people. A quadriplegic with cerebral palsy, partial sight and no verbal communication, he has nevertheless moved out of his family's home into his own bungalow where he lives independently with round-the-clock help from a team of support workers.

"The best thing for me is that they really put themselves out to make sure he is happy, that he is doing things and that he has a really good life," said the 27-year-old's mother, Tina Cooper, who has been liberated from the responsibilities of full-time, intensive caring.

Care packages like James Cooper's are not cheap. The near-£100,000 annual cost of his support, which is bought with a personal budget, is met jointly by the NHS and social services authorities for his home district of Droitwich, Hereford and Worcester, together with a contribution of much of his disability benefits and some £400 a week, recently reduced, from the government's Independent Living Fund.

Today's review casts a long shadow over the future of elaborate support of this type: the ILF has already stopped issuing new grants and its future is under review. But the review equally calls into question the ability of councils to deliver simpler and relatively inexpensive interventions – a grab rail in a bathroom, for instance – that can make the difference between an elderly person continuing to live independently or falling and ending up in a care home.

The £14.4bn allocated by government for adult social care spending by English councils is right in the firing line for cuts. As local authorities' single biggest controllable budget, now most education spending is devolved to schools, it is bound to take a significant hit.

Ministers have briefed that there should be no need for big cuts in services, and hint of an "extra" £1bn a year by 2015, but the demographic challenge is such that even that – were it true – would amount to a real-terms reduction. According to the Association of Directors of Adult Social Services (Adass), the ageing population and growing numbers of people with learning disabilities mean that spending needs a 4% boost annually, over and above inflation, just to keep pace with demand.

For elderly people, the figures are well rehearsed: a doubling of the number of over-85s by 2026, with 300,000 more needing care over the next four years alone. Less well known is the sharp rise in the number of younger people with care needs: thanks largely to the increasing longevity of learning-disabled adults, 70,000 more people of working age will need care by 2014.

"A reduction of 25% in our budgets over three years [the rule-of-thumb for unprotected spending areas] would come at a time when we know we are likely to see 370,000 more people needing care and support – an effective growth in demand of some 4% a year, creating a potential challenge of up to 40% for many councils," said Richard Jones, Adass president.

"We know further efficiencies can be made and we have a track record, along with local government, of delivering 3% efficiency savings annually. But at best this gets us close to a sixth of the way towards what we might have to find."

What will councils do to make savings? The two most obvious levers to pull would raise the threshold for eligibility for services and raise the charges levied on those able to contribute to the cost. But the scope for each is limited.

Three in four councils already limit service eligibility to elderly and disabled people deemed in "substantial" or "critical" need. Factors indicative of the former include "an inability to carry out the majority of personal care or domestic routines"; factors indicative of the latter include that "life is, or will be, threatened". It is generally assumed that almost all councils will move to one or other of these thresholds.

On the level of charges, average means-tested rates for home care are already of the order of £8-£10 an hour. Some councils are contemplating increases of as much as 50% in the hourly rate and/or the maximum weekly payment. But the hard truth is that a 40% cut in funding would be almost £6bn: at present, social care charges of all kinds bring in a total £2.2bn.

Welfare charities acknowledge that local authorities are in a bind. "We recognise that councils are between a rock and a hard place," said Stephen Burke, chief executive of Counsel and Care, which specialises in information and advice for elderly people and their carers. "But cutting access to care and supporting fewer older people will only cost more in the long run. Older people will be left to struggle on their own and more will end up being admitted to expensive and often inappropriate hospital and residential care."

This will be the key. With up to 40% of elderly people in hospital beds placed there unnecessarily, and as many as 70% staying too long, there is a huge incentive for the NHS to use its supposedly protected funds to help out social care in its hour of need.

Sir David Nicholson, NHS chief executive, has been clear that this must happen. And there are signs that ministers get the message too. Earlier this month, health secretary Andrew Lansley committed £70m from savings in central Department of Health budgets to an immediate boost to "re-ablement" support for people in the six weeks after leaving hospital. About 35,000 people are expected to benefit before next April.

Next month, a focus on joint working with the NHS is expected to form a main plank of a new "vision" for adult social care to be unveiled by Lansley and Paul Burstow, the Liberal Democrat care services minister.

Further on the horizon is the commission on care funding, appointed by the coalition and due to report next summer. Led by economist Andrew Dilnot, the commission is charged with producing a workable settlement of the vexed issue of how social care costs, not least care home fees now typically in excess of £500 a week, should be reapportioned between the state and the citizen.

Ministers have pledged to legislate on a new settlement before the next general election. But cynics, reviewing the bloody record of past attempts to broker a new deal and noting that legislation would likely come in the runup to that election, are not betting heavily on the probability.

The blunt reality is that people in need of social care will in future get less state help. Individuals will have to do more for themselves and, very much in the spirit of David Cameron's "big society", also for others.

    Spending review means challenge to caring for elderly and vulnerable, G, 20.10.2010, http://www.guardian.co.uk/politics/2010/oct/20/spending-review-cuts-elderly-vulnerable

Spending review 2010: George Osborne announces extra £7bn of welfare cuts

Chancellor unveils biggest UK spending cuts in decades, telling MPs 'today is the day that Britain steps back from the brink'

Wednesday 20 October 2010
15.47 BST
Guardian.co.uk
Hélène Mulholland and Nicholas Watt
This article was published on guardian.co.uk at 15.47 BST on Wednesday 20 October 2010.
It was last modified at 16.20 BST on Wednesday 20 October 2010.

George Osborne today announced an extra £7bn of welfare cuts, allowing him to turn the tables on Labour by claiming reductions in Whitehall departments would be lower than those planned by the previous government.

Osborne told MPs that "today is the day that Britain steps back from the brink", as he outlined the long-awaited comprehensive spending review, which he said would achieve a balanced budget and falling national debt by 2014-15 while putting public services and the welfare system "on a sustainable, long-term footing".

The chancellor outlined a series of complex new welfare reforms to make the extra savings, as he claimed that the coalition was confronting a "decade of debt".

To gasps from the Labour benches, the chancellor announced "tough but fair" reforms that will lead to extra changes for housing benefit and on the rules for the mobility and care arrangements for disability living allowance.

Alan Johnson, the shadow chancellor, attacked "the deepest cuts to public spending in living memory", which he warned could end up "stifling" the economic recovery.

Osborne also announced that there would be an annual £2.5bn saving from withdrawing child benefit from higher rate taxpayers – more than the £1bn identified when the chancellor announced the change at the Tory conference earlier this month.

The extra raid on welfare gave the chancellor a highly political flourish at the end of his spending announcement. Osborne said that extra cuts to welfare meant that departmental budgets would be cut by 19% over the next four years.

This is one percentage point lower than the 20% cut implied in Labour's plans to halve the fiscal deficit over four years.

To loud cheers from Tory MPs, who rose to wave their order papers, the chancellor said: "The average savings in departmental budgets will be lower than the previous government implied in its March budget.

"Instead of cuts of 20% there will be cuts of 19% over four years. So I thank them for their input and look forward to their support."

The announcement by the chancellor, reminiscent of the political flourishes by Gordon Brown when he attempted to embarrass the Tories, was designed to undermine Labour's central charge: that the coalition's plans to eliminate the structural deficit by 2015 are irresponsibly fast and will jeopardise the fragile recovery.


Political

In a highly political speech lasting just over an hour, the chancellor said the £83bn public spending cuts over the next four years in the government's most severe financial retrenchment in decades were based on reform, fairness and growth.

He announced that the schools budget would rise in real terms and the introduction of the £2.5bn pupil premium to target resources at disadvantaged pupils.

The NHS budget will, as expected, rise above the rate of inflation from £104bn this year to £114bn by the end of the four-year spending period, and universal benefits for pensioners including free eye tests, prescription charges, bus passes, TV licences for the over-75s and winter fuel payments will be maintained.

But there will be cuts. Police budgets will be cut by 16% over four years, councils will face cuts of 7.1% a year, and the Home Office and the Ministry of Justice will see their budgets cut by 6% a year.

Osborne also announced that the state pension age for both men and women would rise to 66 by 2020. This is four years earlier than planned for women, prompting critics to accuse the chancellor of making them unfairly shoulder the bulk of the £5bn-a-year savings the move will achieve.

Osborne said the money would be used "to provide a more generous basic state pension as we manage demographic pressures".

The chancellor blamed the previous government for leaving the coalition with the "worst economic inheritance in modern history", which he said had brought Britain a level of debt that "threatened every job and public service in the country".

"But we have put the national interest first," he said, "made the tough choices ... and we will make sure that the financial catastrophe that happened under the previous government never ever happens again."

Osborne confirmed that the government anticipates almost half a million job losses in the public sector by 2015 as a result of the measures to tighten the reins on public spending.


Pensions

In a move set to provoke a standoff with public sector unions, he said the government would also consult on increasing public sector workers' contributions to their pensions, with the aim of saving £1.8bn per year in the cost of public service pensions by 2014-15.

He defended the decision to axe child benefit for high earners and scotched speculation that it would be scrapped for all children over 16.

He announced changes to the social housing system: for existing social tenants, rent levels will remain unchanged, but new tenants will be offered intermediate rents at around 80% of the market rent. The age at which people are allowed to claim housing benefit for a flat, rather than only a room in a shared house, will rise from 25 to 35, "so that housing benefit rules reflect the housing expectations of people of a similar age not on benefits", said Osborne.

A £4.4bn package of capital funding will enable the government to build up to 150,000 new affordable homes over the next four years.

Other announcements include the protection of the science budget and transport projects. Osborne insisted that those with the "broadest shoulders should bear the greatest burden" and said the Queen had agreed to lead the nation in stepping "back from the brink" after agreeing to spending cuts that will help confront a "decade of debt".

The royal household's spending will fall by 14% in 2012-13 while grants to the household will be frozen in cash terms.

Despite his promise to protect public services, Osborne's decision to make town halls find 7.1% of savings for each of the next four years is expected to hit those most in need of local provision.

Councils will be given greater flexibility to manage council tax together with direct control over council tax benefit, within an overall budget that will be reduced by 10% from April 2013, he said.

In recognition of pressures on social services, grant funding for social care will be increased by an additional £1bn by the fourth year of the spending review, and a further £1bn for social care to be provided through the NHS to support joint working with councils "so that elderly people do not continue to fall through the crack between two systems".

He also announced an increase in the child element of tax credits over the next two years.

An increase in the child element of the child tax credit by a further £30 in 2011-12 and £50 in 2012-13 above inflation will ensure low income families with children would be protected from the "adverse effect from these essential savings", he said.


Deficit

Osborne told MPs that Britain had the largest structural budget deficit in Europe at £109bn, he said, with £43bn in debt interest paid back each year.

Capital spending will be £51bn next year, then £49bn, then £46bn and £47bn in 2014-15 – about £2bn a year higher than set out in the budget.

Total public expenditure, which includes debt interest payments, will be £702bn next year, then £713bn, £724bn and £740bn, bringing real terms public spending to the same level as 2008.

Debt interest payments will be lower by £1bn in 2012, £1.8bn in 2013 and £3bn in 2014, a total of £5bn lower over the course of the spending review period.

Osborne told MPs that a "strong Britain starts here". He said: "This coalition government faced the worst economic inheritance in modern history.

"The debts we were left threatened every job and public service in the country. But we have put the national interest first, made the tough choices, protected health and schools and investment in growth.

"We have reformed welfare and cut waste and made sure that we are all in this together. And taken our country back from the brink of bankruptcy."


Johnson

In response to Osborne, Alan Johnson acknowledged the "deficit has to be paid down" but said the announcements would affect "people's futures, people's jobs, people's pensions, people's services, their prospects for the future".

For some on the government benches the cuts were an "ideological objective," he claimed. "Today's reckless gamble with people's livelihoods runs the risk of stifling the fragile recovery."

He accused the government of being "deficit deceivers" who "peddled a whole series of myths to the British public" about the nation's finances.

"The most incredible myth of all is that the global economic crisis since the Great Depression is the fault of the previous government," he said.

Johnson said that when the crisis hit Britain's debt was the second lowest of any G7 country, that debt interest levels were 15% lower than when Labour came to office and the interest rates on UK debt had been falling since the beginning of the year.

At the time of the last CSR in 2007 Osborne had argued "we were spending too little", Johnson said

Osborne's statement followed a heated exchange at prime minister's questions between David Cameron and Ed Miliband over the coalition government's austerity drive.

Miliband accused Cameron of taking "the biggest gamble in a generation" with growth, jobs and livelihoods.

Cameron conceded that the outlook for the world economy was "choppy and difficult" but accused the Labour leader of being "thoroughly irresponsible".

    Spending review 2010: George Osborne announces extra £7bn of welfare cuts, G, 20.10.2010, http://www.guardian.co.uk/politics/2010/oct/20/spending-review-2010-osborne-cuts

UK economy shows fastest growth in nearly a decade

The Office for National Statistics' second estimate for growth showed GDP rose a quarterly 1.2% between April and June,

up from its initial estimate of 1.1% released a month ago

Friday 27 August 2010
14.59 BST
Guardian.co.uk
Julia Kollewe
This article was published on guardian.co.uk at 14.59 BST on Friday 27 August 2010.
It was last modified at 15.00 BST on Friday 27 August 2010.

The British economy grew at the fastest pace in nearly a decade in the second quarter, higher than initially estimated, thanks to a pick-up in the construction industry and strong household spending.

The Office for National Statistics' second estimate for the second quarter showed GDP rose 1.2% between April and June, the fastest growth since the first quarter of 2001. The figure was unexpectedly revised higher from the initial estimate of 1.1% released a month ago and compared with 0.3% growth in the first three months of the year.

Construction output proved stronger than first thought, soaring by 8.5%, the highest rate since 1982. Consumer spending rose by 0.7%, the strongest quarterly rise since early 2008 and compared with a 0.1% drop in the first quarter. Government spending advanced by 0.3%.

The figures also showed that a large contribution to growth, of 1%, came from companies rebuilding stock levels depleted by the recession. Stock levels were up £1bn, the first positive outturn since the autumn of 2008.

Britain's service industries expanded by 0.7% in the quarter, with business services and finance bouncing back with 1.5% growth, while manufacturing powered 1.6% ahead.

Retail sales have held up surprisingly well, according to the Confederation of British Industry's August survey published on Thursday, suggesting that the momentum continued into the early part of the third quarter.

The GDP figures show that the recovery gathered steam and will allay fears of a double dip recession, but economists are still concerned that grow could slow again due to looming government spending cuts.

A Treasury spokesman said: "While the government is cautiously optimistic about the path for the economy, the job is not yet done. The priority remains to implement the budget policies which support economic rebalancing and help ensure the sustained growth that the Office for Budget Responsibility forecast this year and next."

Economists noted that investment posted a 2.4% drop in the second quarter, including a 1.6% drop in business investment, and trade made no contribution to economic growth.

"Government spending is going to move into negative territory while net trade could suffer if global growth concerns, following softer US and Asian data, materialise," said James Knightley at ING. "This places a heavy burden of growth on investment. Consequently, we continue to believe GDP growth will average around 1.5-2% over the next three years or so."

Samuel Tombs at Capital Economics echoed those concerns, saying: "The recovery is built on very fragile foundations. Household and government spending did both post solid rises, but both sectors are very unlikely to maintain such growth rates as the fiscal squeeze kicks in over the coming quarters. With increasing evidence that the global recovery is faltering, the external sector still looks unlikely to push the economy strongly forward over the next year or two."

Second-quarter GDP figures were also released today in the US, but in stark contrast to the UK figures, US GDP growth was revised down to an annual rate of 1.6% from 2.4%. A recent flow of gloomy data has stirred fears of a double dip in the world's largest economy, although jobless claims figures released on Thursday showed a surprise drop.

    UK economy shows fastest growth in nearly a decade, G, 27.8.2010, http://www.guardian.co.uk/business/2010/aug/27/uk-economy-fastest-growth-in-nine-years

UK recession even deeper than first thought

Six successive quarters of negative economic growth from spring 2008 until autumn 2009
were the toughest for the economy since the Great Depression of the 1930s

Monday 12 July 2010 17.12 BST
Guardian.co.uk
Larry Elliott, economics editor
This article was published on guardian.co.uk at 17.12 BST on Monday 12 July 2010.
It was last modified at 17.12 BST on Monday 12 July 2010.

The deepest recession in Britain's post-war history was even more severe than previously feared, the government said today.


Fresh information collected by the Office for National Statistics showed that the peak to trough decline in output was 6.4% of gross domestic product rather than the original 6.2% estimate.


The new figures confirmed that the six successive quarters of negative growth from spring 2008 until autumn 2009 were the toughest for the economy since the Great Depression of the 1930s, harsher even than the slump of the early 1980s.


Growth resumed in the final three months of 2009 as the UK economy responded to the emergency cuts in interest rates, the cheaper pound and higher government spending. The ONS made no changes to its estimate of a 0.4% expansion in the fourth quarter of last year or its 0.3% growth estimate for the first quarter of 2010, but said the role of government spending in the first three months of this year in underpinning the economy had been more significant than first thought.


Consumer spending fell slightly in the first three months of 2010, with individuals running down their savings in order to finance purchases.


Despite the pick up in activity at the end of last year, output was 0.2% lower at the end of the first quarter of 2010 than it had been a year earlier.


Jeremy Cook, chief economist at World First, said: "Although the headline figure remained unchanged at 0.3%, government spending was revised up from 1.1% to 1.5% signifying that the recovery is still very reliant on state spending and that consumers are not stepping up to the plate quite yet."


Howard Archer, chief economist at IHS Global Insight, said: "The picture remains one of only gradual recovery so far following a record six quarters of deep overall recession through to the third quarter of 2009. The main message coming from the revised data was that the recession was even deeper than previously reported."

    UK recession even deeper than first thought, G, 12.7.2010, http://www.guardian.co.uk/business/2010/jul/12/uk-recession-deeper-than-first-thought

Budget 2010: VAT to rise to 20% as Osborne seeks to balance books by 2015

• VAT to rise by 2.5 percentage points
• Public sector pay frozen for two years
• Child benefit frozen for three years
• Income tax personal allowance to rise by £1,000
• State pension relinked to earnings from April

Larry Elliott and Hélène Mulholland
Guardian.co.uk
Tuesday 22 June 2010
17.31 BST
 

Higher taxes, swingeing spending cuts and deep savings in welfare were announced by George Osborne today in a £40bn austerity package, designed to fast-track the elimination of Britain's record peacetime budget deficit.

In what he dubbed the "unavoidable budget", the chancellor said he would protect the poorest from the impact of a coming new year rise in VAT to 20%, a two-year freeze on public sector pay, a three-year freeze on child benefit, and cuts of more than 25% in spending by some Whitehall departments.

Osborne said a £1,000 increase in the income tax personal allowance to £7,475 a year, restoring the link between the state pension and earnings, and a £2bn increase in child tax credits would help those on the lowest incomes and ensure that the well-off were hardest hit by the toughest package of measures since the early 1980s.

"This emergency budget deals decisively with our country's record debt," Osborne said, as he revealed plans to raise an additional £32bn from spending cuts – including an £11bn trimming of the welfare bill – and £8bn in tax increases.

"It pays for the past. And it plans for the future. It supports a strong, enterprise-led recovery. It rewards work. And it protects the vulnerable in our society. Yes it is tough – but it is also fair."

The chancellor admitted that the impact of the budget squeeze would lead to lower growth and higher unemployment in the short term, but said the need to avoid a Greek-style sovereign debt crisis left him with no alternative. Dismissing criticism that the budget risked derailing recovery, Osborne said the UK economy would grow by 1.2% this year and 2.3% in 2011.

Full details of departmental spending cuts will be announced in the October spending review, but Osborne said welfare reforms would include less generous housing benefit and stricter rules for disability benefits.

Banks and building societies will have to pay a new £2bn levy following their pivotal role in causing the financial crisis that led to the longest and deepest recession since in Britain since the second world war. But the levy was smaller than the City had feared and there was also some relief that the chancellor raised capital gains tax from 18% to 28% on high earners rather than to the 40% or 50% that had been expected.

The VAT rise, due to come into force next January, will generate more than £13bn a year by the end of this parliament. Zero-rated items – including food and children's clothes – will remain exempt from VAT over the course of this parliament.

Although health and international aid would be ringfenced, Osborne said that reductions to other government departments totalling £17bn by 2014-15 equated to 25% cuts over the next four years.

Osborne says that from next year he will increase benefits, with the exception of pension and pension credits, in line with the lower CPI index of inflation, instead of the RPI index. This will save more than £6bn by the end of the parliament, he said. Pensioners will get a new "triple lock guarantee" of an annual increase in line with earnings, prices, or a 2.5% increase, whichever is the greatest.

The chancellor told MPs: "It is a balanced package that will send the signal that Britain is open for business."

Osborne prefaced his announcements by telling MPs that unless the government took concrete measures to tackle debt, the consequences would be "higher interest rates, more business failures, sharper rises in unemployment and a potentially catastrophic loss of confidence and the end of the recovery".

He acknowledged that growth would initially be slower as a result of the budget, but would pick up towards the end of the parliament.

Osborne signalled that the government's "formal mandate" was to bring the structural current deficit into balance in the final year of the five-year forecast period, which is 2015-16.

A fixed target for debt will also be created, which in this parliament is to ensure debt falls as a share of GDP by 2015-16.

But the chancellor told MPs that the new Office for Budget Responsibility has suggested that the government's "cautious approach" meant it could achieve its aim a year earlier.

Osborne said the budget's twin aims were to deal with the deficit and provide a platform for longer term recovery.

He said the measures aimed to protect children and pensioners and ensure that the richest bore the largest share of the burden. "Sadly, with this unavoidable budget we've had to increase taxes," Osborne explained. "We've had to pay the bills of past irresponsibility. We've had to relearn the virtue of financial prudence. But in doing so we have ensured that the burden is fairly shared.

"Today we have paid the debts of a failed past and laid the foundations for a more prosperous future. The richest paying the most and the vulnerable protected: that is our approach."

He confirmed widely trailed plans to raise personal allowances for basic rate taxpayers by £1,000 to £7,475 from next April, taking 880,000 of the lowest paid out of income tax altogether and saving 23 million lower rate taxpayers up to £170 a year. He said the coalition aspired to increase this to £10,000 in the long term.

Osborne said to cheers that the state pension would be linked to earnings, not inflation, from next April.

And, in a nod to families on low incomes, Osborne said the child element in the tax credit system would rise by £150 above inflation at a cost of £2bn. He said this would mean that there would be no increase in child poverty. He said that tax credits had to be targeted on "those who need the help most", meaning that payments to families earning more than £40,000 would be reduced from next year.

Those claiming the Disability Living Allowance (DLA) will face a new medical assessment from 2013. Osborne said the cost of the DLA had quadrupled in real terms to more than £11bn since its introduction 18 years ago, making it one of the largest items of government spending.

Osborne cushioned the public sector pay freeze with a commitment that 1.7 million public servants who earn less than £21,000 – just over a quarter of the total – will receive a pay rise of £250 in each of the next two years.

He confirmed that the operational allowance for soldiers serving in Afghanistan would double to £4,800.

In an announcement that appeared to heed concerns from Conservative backbenchers, Osborne said capital gains tax (CGT) would remain at 18% for low and middle-income savers, but from midnight taxpayers on higher rates will pay 28% – which falls short of the coalition's pledge to increase rates to a level similar or close to top income tax rates.

The 10% CGT rate for entrepreneurs which currently applies to the first £2m of qualifying gains will be extended to the first £5m.

Osborne said that while everyone was being expected to contribute, the government would make sure that everyone would share in the rewards "when we succeed".

Osborne added that the banking sector would be expected to make a greater contribution, with a banking levy introduced from next January. Once in place, he expected this to generate more than £2bn a year. Smaller banks with liabilities below a certain level will be exempt from the levy. France and Germany had signed up to a similar measure, he said.

Osborne said the government was exploring the costs of a financial activities tax on profits and remuneration, with international partners. He also offered a "deal" to local authorities, saying "if you can keep your cost increases low, then we will help you to freeze council tax for one year". He said this would save the average family £35 a year. Citing the "dire need for reform" of housing benefit, Osborne outlined a package of measures that he said would reduce the bill by £1.8bn a year by the end of the parliament. They include a cap of £280 a week for a one-bedroom property and £400 a week for four or more bedrooms.

Osborne said there would be no new increases in duties on alcohol, tobacco or fuel after the "substantial increases" announced in Labour's March budget. The additional 10% levy on cider proposed in Alistair Darling's final budget in March is being scrapped.

Labour and the trade unions rounded on the austerity measures outlined in today's budget.

Harriet Harman, the acting Labour leader, told MPs that the budget would throw people out of work, hold back economic growth, and harm vital public services.

Harman said: "Deficits must be reduced but we must not risk undermining the fragile recovery. This is a budget based on rewritten history and false excuses. They say there is no alternative. But the truth is this is what they want. "This budget isn't driven by economics. It's driven by ideology – their commitment to a smaller state. This austerity budget is their choice and right now it's exactly the wrong choice."

She added that the "reckless Tory budget" would not have been possible without the Liberal Democrats.

"The Lib Dems denounced early cuts – now they are backing them. They denounced VAT increases – now they're voting for them. How could they support everything they fought against? How could they let down everyone who voted for them? How could they let the Tories so exploit them?"

Brendan Barber, the general secretary of the TUC, described the budget as "economically dangerous and socially divisive.

"The one thing we can now say is that we are very definitely not all in this together," said Barber, referring to a Tory soundbite. "Those on middle and low incomes have done worse than expected, and the rich have been let off much of what they feared. We will all suffer from an economy that is now likely to be sluggish at best and with a double-dip recession at worst."

    Budget 2010: VAT to rise to 20% as Osborne seeks to balance books by 2015• VAT to rise by 2.5 percentage points, G, 22.6.2010, http://www.guardian.co.uk/uk/2010/jun/22/budget-2010-vat-rise-osborne

How the credit crunch changed everything

Personal finance: We've cut back on the credit cards but we're still not saving

The credit crunch sent our spending into reverse but one in four Britons still has no savings

Saturday 22 May 2010
The Guardian
Patrick Collinson
This article appeared on p3 of the Money section of the Guardian on Saturday 22 May 2010.
It was published on guardian.co.uk at 00.01 BST on Saturday 22 May 2010.

We paid less into our already-threadbare pensions, and despite talk of the new thrift, we're saving little. But we have cut back on credit cards

During 2007, carefree British shoppers were adding £1bn every month to the amount owed on their credit cards and personal loans. The credit crunch sent this into reverse and by October last year we were collectively paying off our debts by £400m a month.

The conversion to thriftiness was, though, short-lived, with the latest Bank of England figures revealing that we're back to splashing out on plastic, albeit not at boom-time levels.

The savings ratio – the proportion of after-tax income households set aside – sank to 1.5% two years ago when the boom was still in full swing. It has risen to 7%, but is still below France and Germany.

We put £28bn into 11.3m cash Isas last year, £3bn up on the year before. But on average, a Brit has the grand total of just £2,205 in the bank (according to ING Direct), and one in four have nothing. Only the top 5% of the population has significant savings.

We have stopped using our houses as cash machines. During 2007 we were taking out around £12-£13bn every quarter in "mortgage equity withdrawal", some of it going into building extensions, but much of it frittered away on cars and holidays.

Two years on, economists have come up with a new term – equity injection – to describe the fact that we're actually paying down our mortgages, to the tune of around £5-£6bn every quarter. Much of it is coming from the lucky borrowers who took out tracker mortgages, and have seen their monthly payments plummet, in some cases from around £900 to £170 a month. More recently the pace of repayment activity has slowed, but is still almost miraculous compared to 2007.

Big pay rises and (for a while at least) big bonuses disappeared. The average British worker earned 4.6% extra in the tax year April 2007-08, but the rate of increase fell back to 2% the following year.

Perhaps one of the most remarkable features of the credit crunch was that on average, public sector workers began to earn significantly more than their counterparts in the private sector. Figures published by the Office for National Statistics (ONS) show that average annual earnings of public sector workers rose to £22,405 in 2009 – compared with £20,988 paid to the average private sector worker.

Most people know they're not saving enough for their retirement, yet during the recession, we further cut back our payments into pensions. In 2007-08 individuals put £6.3bn into personal pensions, but figures released this week show that this plummeted to £5.3bn in 2008-09 – although employers paid in more. It was the first fall for 20 years, apart from a small dip in 2001.

We also stopped putting money into the stock market. In mid 2007, small investors were ploughing around £1bn a month into investment funds. By September 2008, as Lehman was crashing, the inflow turned into a net outflow of £500m. But since then unit trusts and investment trusts have enjoyed a strong comeback, as savers try to find something better than the low interest rates on offer at the banks. Net fund sales are currently running at around £5-£6bn a quarter.

But perhaps the biggest change to our personal finances was that we stopped buying houses. In 2007 we £362bn to buy houses. By 2009 it fell to £143bn, and despite much talk of a property market pick up, the first quarter of 2010 saw £29.5bn of mortgages advanced, compared to £84bn in the first quarter of 2007.

    Personal finance: We've cut back on the credit cards but we're still not saving, G, 22.5.2010, http://www.guardian.co.uk/money/2010/may/22/credit-cards-saving

As Britain Votes, Economic Clouds Hover

May 5, 2010
The New York Times
By JOHN F. BURNS and LANDON THOMAS Jr.

LONDON — Even with rioters on the streets of Athens and the 16 countries using the euro threatened with mounting turmoil, the economy remained the most frequently — and least candidly — discussed topic here as the three main parties entered the last hours of a monthlong general election campaign.

Much of the wrangling centered on arguments about which party was hiding most from the voters on the true state of the economy and its plans for dealing with it. With government deficits in Britain second in Europe only to those of Greece, some analysts even suggested that this might be a good election to lose.

But one conclusion seemed clear: Whoever wins will be forced to make deep and unpopular cuts, a task made all the more difficult if the closely contested election produces, as many commentators have forecast, a hung Parliament or a fragile coalition arrangement that might delay important economic decisions.

“This is a ticking time bomb,” said Ruth Lea, an economic adviser at the Arbuthnot Banking Group who worked at the Treasury in London in 1976 when Britain, in its worst financial crisis since World War II, was forced to go to the International Monetary Fund for assistance. “If the next government does not come to grips with this, the I.M.F. will have to come in. I remember, it was very, very humiliating.”

If victory on Thursday could be a poisoned chalice, there has been little in the last-minute campaigning by the three main contenders for 10 Downing Street — Prime Minister Gordon Brown for Labour, the Conservative opposition leader David Cameron and the Liberal Democrats’ leader, Nick Clegg — to suggest it. On the contrary, veteran political reporters said they could not recall a campaign since at least 1992 that involved such a frantic dash to the finish line, above all by the man who is heavily favored to win the largest bloc in the 650-seat House of Commons, Mr. Cameron.

He campaigned through the night on Tuesday, racing from one encounter with night-shift workers to another.

Mr. Cameron, at least, is no stranger to financial crises. At 43, and like many of those likely to serve in a Conservative cabinet, he has limited experience in government. But he was an aide in the Treasury on what became known as “Black Wednesday” in 1992, when the pound sterling was withdrawn from the European Exchange Rate Mechanism at cost of more than $6 billion to British taxpayers.

While Mr. Cameron seems most likely to emerge from Thursday’s vote as prime minister, it is far from a done deal. Polls in recent days have shown the Conservatives pulling out a narrow lead of about 5 percentage points. The polls have shown Labour and the Liberal Democrats vying for second place, with their ratings one side or another of about 30 percent of the vote.

All three party leaders have centered their campaigns on vague pledges to cut government spending, which has caused deficits on a scale not seen since World War II, when Britain fought Germany and Japan largely on borrowed money.

The comparisons with Greece begin with the current year’s deficit, which at 11.5 percent of gross domestic product is not far off the 13.6 percent figure for Greece and considerably larger than the figures for Spain and Portugal, which some economists fear may be the next European countries bidding for international bailouts.

The immediate political liability for this lies with Mr. Brown and the Labour Party, which engaged in a spree of epic proportions after taking power in 1997, spending at a rate that has outstripped inflation by 41 percent. The current budget of about $1.1 trillion includes more than $150 billion on the state-run National Health Service, triple the amount when Labour came to power.

One in every four pounds the government spends is borrowed, a pattern that economists say will require the next government to make cuts on a scale not experienced since the Great Depression, as well as painful tax increases.

When these issues have been discussed at all in the campaign, it has usually been in the context of which of the parties could get away with being most evasive in setting out deficit-reduction plans that economists say fall far short of the cuts that will be needed.

One man who knows more than most about the scale of the problem is Mervyn King, governor of the Bank of England, Britain’s central bank. David Hale, a Chicago-based economist, said last week that Mr. King had told him that “whoever wins will be out of power for a whole generation because of how tough the fiscal austerity will have to be.” Mr. Hale, speaking on Australian television, met in off-the-record sessions with Lord King in London in March, according to a bank spokesmen, who did not deny the accuracy of the American’s account.

Still, few people here think that the austerity measures needed to right the country’s finances could lead to Greece-style chaos. One important measure, according to financial experts, is that interest rates on British treasury bonds have remained low at around 4 percent even as interest rates on Greek debt have at times soared well into double digits, reflecting market confidence that Britain’s leaders will find responsible ways of reducing the debt.

Yet, the measures that will be needed are likely to require deep cuts in the public services on which the vast majority of Britain’s 62 million people depend, as well as in the state-employed work force of more than six million. .

On the campaign trail, Mr. Brown has focused his fire on the Conservatives, saying their plans for sharp cuts immediately after the election would endanger the economic recovery in Britain.

But others say that delaying or restraining the cuts poses a greater risk. Kenneth Clarke, a former chancellor of the Exchequer and one of the few veterans of previous Conservative governments on Mr. Cameron’s team, has said that any postponement in attacking the deficit could lead to a run on the pound and to Britain having to go cap-in-hand to the I.M.F., as a Labour government did in 1976.

But even Mr. Cameron has had to trim his sails. Among other things, he has fenced himself in by promising to continue to increase the politically sensitive National Health Service budget, and to protect Britain’s “most vulnerable” people from cuts in social spending.

The Conservatives could emerge from the election short of a majority and dependent on the Liberal Democrats’ support to govern. That could lead to an impasse, because Mr. Clegg favors huge defense cuts that the Conservatives are likely to reject, and he agrees with Labour on delaying the deepest cuts until the economic recovery is secure.

British commentators have said that one option for the Conservatives would be to take office with a minority government and go to Parliament within a matter of weeks, saying that their new access to details of the public finances had convinced them that much deeper cuts were required than even they realized. The prospect then would be for a second election in the autumn, in which voters would be asked for a mandate supporting the Conservative cuts.

    As Britain Votes, Economic Clouds Hover, NYT, 5.5.2010, http://www.nytimes.com/2010/05/06/world/europe/06britain.html

Government borrowing highest since 1940s

But the public coffers are not in quite the disastrous state that many economists and even the Treasury had been expecting a few months ago

Katie Allen
Guardian.co.uk
Thursday 22 April 2010
11.37 BST
This article was published on guardian.co.uk at 11.37 BST on Thursday 22 April 2010.
It was last modified at 11.37 BST on Thursday 22 April 2010.

The parlous state of Britain's public finances was confirmed this morning with official data showing the worst year since records began in the 1940s.

The Office for National Statistics (ONS) said that, excluding the cost of interventions to support the financial sector, public sector net borrowing (PSNB) – the gap between the exchequer's tax take and its spending – stood at £163.4bn for the financial year just ended. This was below the government's latest forecast of £166.5bn.

It was the worst since records began in 1946/7 and compounds other economic blows to Labour's election campaign this week after news that the number of people out of work is at its highest for 15 years while inflation remains way above target.

While Britain recorded its worst full-year gap for decades the public coffers are not in quite the disastrous state that many economists and even the Treasury had been expecting a few months ago. The chancellor had previously pencilled in £178bn before cutting that to £166.5bn in his March budget.

"It provides the government with some modestly good news, although [PSNB of] £163.4bn is hardly something to gloat about," said Howard Archer, economist at IHS Global Insight.

The public finances are now widely expected by economists to improve over coming months as a recovering economy brings in stronger tax receipts.

Indeed, the PSNB for March alone was slightly better than economists had forecast at £23.498bn. March typically shows a big deficit as public spending spikes for the year-end but this year it was the biggest for that month since records began in 1993. Economists had forecast a slightly worse £24bn, according to a Reuters poll.

The other measure of the public finances, the public sector net cash requirement (PSNCR), came in at £25.752bn in March. That was better than £28.359bn a year earlier and also a much lower level of borrowing than the £32bn economists had forecast.

Separate data published by the ONS showed retail sales rose again in March but not as quickly as expected. Sales were up 0.4% on the month compared with a forecast for a 0.6% rise. On a year earlier, sales volumes rose 2.2% compared with forecasts for 2.4%.

The retail sales data could herald a stronger finish to a week packed with politically charged economic data. The ONS publishes its first estimate of GDP growth for the first quarter on Friday morning.

Analysing the retail sales data, James Knightley at ING Financial Markets said: "This is all consistent with a healthy GDP growth figure of around 0.4% quarter-on-quarter for the first three months of 2010. However, with consumer confidence starting to fall again, wages continuing to fall in real terms and taxes set to go up further we see the potential for weaker retail sales numbers as we move through the year."

    Government borrowing highest since 1940s, G, 22.4.2010, http://www.guardian.co.uk/business/2010/apr/22/government-borrowing-now-highest-since-1940s

Budget 2010: the key points

At a glance: the main measures announced by Alistair Darling in his 2010 Budget

Mark Tran
Guardian.co.uk
Wednesday 24 March 2010
14.45 GMT
This article was published on guardian.co.uk at 14.45 GMT on Wednesday 24 March 2010.
It was last modified at 15.05 GMT on Wednesday 24 March 2010.

Economy

• The impact of the economic crisis has meant the UK economy has shrunk by about 6% over the recession

• Growth forecast for 2011 revised down to between 3% and 3.5%. Predicted growth of 1-1.25% in 2010 in line with forecasts

• Borrowing will be £11bn lower this year, at £167bn. It should be £163bn next year, £131bn in 2011-12 and £110bn in 2013-14. It will reach £74bn in 2014-15, £8bn lower than forecast in December

• The reduction in the deficit will go from 11.8% of GDP to 5.2%, more than halved over four years

Taxes

• Tax on bank bonuses raised £2bn in 2009-10, twice as much as forecast

• More systematic tax on banks is needed. It should be internationally co-ordinated

• Doubling of stamp duty allowance, from £125,000 to £250,000, funded by 5% stamp duty for properties worth more than £1m

• Inheritance tax threshold frozen for next four years

• Tax information agreements with Dominica, Grenada and Belize

• Business rates cut for one year from October, so 345,000 businesses will pay no rates at all

• No further announcements on VAT, national insurance and income tax

Jobs

• For older workers, an extension of tax credits

• Length of time over-65s have to work to receive work credits is reduced

• For next two years, no one under 24 will need to be unemployed for longer than six months before being offered work or training

• Total of 15,000 civil servants relocated, including 1,000 Ministry of Justice posts moved out of London

Drinks, cigarettes and fuel

• Duty on cider will increase by 10% above inflation from Sunday. Duty on beer, wine and spirits will increase as planned from midnight Sunday

• Tobacco duty will rise immediately by 1% above inflation this year, then 2%

• Increase in fuel duty to be staged. Fuel duty to rise by a penny in April followed by a further 1p rise in October and the remainder in January

Businesses

• RBS and Lloyds will provide £94bn in new business loans, nearly half to small and medium-sized businesses (SMEs), over next year

• A new credit adjudicator will fast-track complaints from smaller firms who say they have been unfairly denied credit

• Faster licensing process for new banks to boost competition

• Increase of 15% in the number of central government contracts going to SMEs

• A new national investment corporation, UK Finance For Growth, will streamline and improve government help to

SMEs

• New growth capital fund to provide capital for fast growing firms

• Investment allowance for small firms doubled to £100,000

Jobs

• A £2.5bn one-off growth package paid for by switching spending in some areas, with the extra proceeds from the tax on bank bonuses, announced last year

• Number of civil servants in London to be reduced by a third, with 15,000 posts relocated outside the capital within five years

• Public-pay settlements will be held at a maximum of 1% for the two years from 2011

Education

• A £35m university enterprise capital fund to support university innovation and spin-off companies

• A £270m fund to create 20,000 university places in subjects such as science, maths, engineering

Banking and savings

• Everyone to have a basic bank account, bringing an extra million people into the banking system over next five years

• From next month the annual Isa limit to rise from £7,200 to £10,200, and Isa limits to increase annually

Defence

• Over £4bn next year for operations in Afghanistan

Infrastructure and environment

• £100m set aside for repairs to local roads, £285m for improvements to motorways

• A £2bn green investment bank, using £1bn of public cash matched with private funds

• £60m to develop ports hosting manufacturers of offshore wind turbines

Tax credits and allowances

• Parents of one- and two-year-old children to get an increase of £4 a week in child tax credit from 2012

• The pensioners' higher winter fuel payment of £250 and £400 for the over-80s, guaranteed for another year

Savings

• From October next year, the most expensive properties will be excluded from the housing benefit calculation in each area, which will, added to anti-fraud measures, save £250m a year

• Departments will publish details about how to achieve £11bn of new savings.

    Budget 2010: the key points, G, 24.3.2010, http://www.guardian.co.uk/uk/2010/mar/24/budget-2010-key-points

News Analysis

Britain Grapples With Debt of Greek Proportions

March 3, 2010
The New York Times
By LANDON THOMAS Jr.

LONDON — As Greece’s debt troubles batter the euro, Britain has done its utmost to stay above the fray.

Until now, that is. Suddenly, investors are asking if Britain may soon face its own sovereign debt crisis if the government fails to slash its growing budget deficits quickly enough to escape the contagious fears of financial markets.

The pound fell to $1.4954 on Tuesday, its lowest level against the dollar in nearly 10 months. The yield on 10-year government bonds, known as gilts, slid as investors fretted that Parliament would be too fragmented after a crucial election in May to whip Britain’s messy finances back into shape.

The slide in the pound followed a sharper decline on Monday after polls released over the weekend indicated that the opposition Conservatives had lost their clear lead in the election race.

Without a strong political majority to tackle Britain’s lumbering fiscal problems, investors could start to make it greatly more expensive for the government to raise funds, setting the stage for a potential double-dip recession, if not worse.

“If you really want a fiscal problem, look at the U.K.,” said Mark Schofield, a fixed-income strategist at Citigroup. “In Europe, the average deficit is about 6 percent of G.D.P. and in the U.K. it’s 12 percent. It is only just beginning.”

Since the Labour government’s intense fiscal intervention in 2008 and 2009, yields on British government debt have soared to among the highest in Europe. And on a broader scale, which includes the borrowing of households and companies, the overall level of debt in Britain is the second-largest in the world, after Japan’s, at 380 percent of the country’s gross domestic product, according to a recent report by the consulting company McKinsey.

In recent weeks, the focus has been on debt scofflaws in Europe like Greece, Portugal and Spain, countries where borrowing costs have shot up in line with their growing deficits as investors demanded higher rates to compensate them for the added risk of lending the governments money.

But the recent plunge in the value of the pound below $1.50 and the gradual move upward of Britain’s benchmark 10-year borrowing rate on gilts to above 4 percent suggest that investors are now getting ready to reassess the country’s fiscal condition.

Britain is not in the 16-nation euro zone and, unlike Greece and other struggling countries that use the currency, it retains control over its monetary policy. As a result, it has benefited so far from a huge bond-buying program undertaken by the Bank of England — proportionally, the largest in the world — that has kept mortgage rates and gilt yields at unusually low levels.

That means the government and its citizens have been able to continue to borrow at interest rates that do not reflect their true financial situation.

Indeed, the increase in private and government debt here contrasts sharply with the deleveraging that has been going on in the United States.

British household debt is now 170 percent of overall annual income, compared with 130 percent in the United States. In an echo of the United States’ rush into subprime mortgages with low teaser rates, millions of homeowners in Britain have piled into variable-rate mortgages that are linked to the rock-bottom base rate.

As for the British government, it has been able to finance a budget deficit of 12.5 percent of G.D.P. — equal to Greece’s — at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year.

“It’s not just ‘basket cases’ like Greece that can be considered candidates for sovereign crises,” said Simon White of Variant Perception, a research house in London that caters to hedge funds and wealthy individuals. “Gilts and sterling will continue to come under pressure as scrutiny of the U.K. fiscal situation intensifies.”

Adding to this concern is the precarious condition of the British consumer. As interest rates have hit new lows, the popularity of variable-rate loans has grown. At the end of December, 40 percent of new mortgages were tracking the government’s base rate.

Despite comments from Mervyn King, the governor of the Bank of England, that he might restart his quantitative easing program in light of current economic weakness, the view among investors is growing that interest rates here will rise further, along with higher inflation and Britain’s increased risk profile.

In a speech this year, Andrew Haldane, the executive director of financial stability at the Bank of England, warned about how vulnerable Britain was to a rate increase, pointing out that an increase of one percentage point would cause debt service costs relative to income to double, to 13 percent.

“This is a ticking time bomb,” said Nick Hopkinson of Property Portfolio Rescue, a company that assists overleveraged homeowners. “There are over 400,000 people who are in arrears with their mortgage rates the cheapest they have ever been. When rates increase, a lot of people will be tipped over the edge.”

As a result, those counting on the British consumer to take up the slack from any scaling back of government borrowing could be in for a shock. Consider Sheridan King, a sales manager who is struggling to pay off his £32,000 ($47,075) in nonmortgage debt. Far from thinking about going shopping, his first priority is keeping clear of his creditors.

And even though his variable mortgage of about £100,000 carries a very low rate, interest costs are already chewing up a substantial portion of his pay, and he is deeply worried about the future.

“If rates go up, it will be a very dangerous situation for me,” Mr. King said. “It might lead me to consider bankruptcy.”

For the time being, at least, the British government faces no such threat.

Despite its borrowing and spending excesses, Britain still maintains a triple-A credit rating and much of its debt is long term. But with 29 percent of British bonds held by foreigners, Britain, like Greece, remains highly vulnerable to the vicissitudes of outside investors.

Since early this year, foreign holdings of British bonds have fallen from 35 percent, a trend that has tracked the pound’s decline and contributed to the increase in the yield on its 10-year gilts.

As to which political party he thinks is best placed to handle these challenges, Mr. King takes a skeptical view. “We are just struggling to get by with all this debt,” he said. “It’s time the government got its house in order.”

    Britain Grapples With Debt of Greek Proportions, NYT, 3.3.2010, http://www.nytimes.com/2010/03/03/business/global/03pound.html

Unequal Britain: richest 10% are now 100 times better off than the poorest

• 1980s income gap still not plugged, say analysts
• Brown says equality panel report a 'sobering' read
• Datablog: get the numbers behind this story

Wednesday 27 January 2010
08.54 GMT
Guardian.co.uk
Amelia Gentleman and Hélène Mulholland
This article was published on guardian.co.uk at 08.54 GMT on Wednesday 27 January 2010.
It was last modified at 08.57 GMT on Wednesday 27 January 2010.
 

A detailed and startling analysis of how unequal Britain has become offers a snapshot of an increasingly divided nation where the richest 10% of the population are more than 100 times as wealthy as the poorest 10% of society.

Gordon Brown described the paper, published today, as "sobering", saying: "The report illustrates starkly that despite a levelling-off of inequality in the last decade we still have much further to go."

The report, An Anatomy of Economic Inequality in the UK, scrutinises the degree to which the country has become more unequal over the past 30 years. Much of it will make uncomfortable reading for the Labour government, although the paper indicates that considerable responsibility lies with the Tories, who presided over the dramatic divisions of the 1980s and early 1990s.

Researchers analyse inequality according to a number of measures; one indicates that by 2007-8 Britain had reached the highest level of income inequality since soon after the second world war.

The new findings show that the household wealth of the top 10% of the population stands at £853,000 and more – over 100 times higher than the wealth of the poorest 10%, which is £8,800 or below (a sum including cars and other possessions).

When the highest-paid workers, such as bankers and chief executives, are put into the equation, the division in wealth is even more stark, with individuals in the top 1% of the population each possessing total household wealth of £2.6m or more.

Commissioned by Harriet Harman, minister for women and equality, the National Equality Panel has been working on the 460-page document for 16 months, led by Prof John Hills, of the London School of Economics.

The report is more ambitious in scope than any other state-of-the-nation wealth assessment project ever undertaken.

It concludes that the government has failed to plug the gulf that existed between the poorest and richest in society in the 1980s. "Over the most recent decade, earnings inequality has narrowed a little and income inequality has stabilised on some measures, but the large inequality growth of the 1980s has not been reversed," it states.

Hills said: "These are very challenging issues for any government because the problems are so deep-seated."

"But we hope that by doing this work, policy makers have now got information they never had before, to try and get at the roots of some of those problems."

Harman said the issues raised meant the government needs to "sustain and step up" action introduced by government over the past 13 years, such as children's centres and tax credits. "It takes generations to make things more equal," she told Radio 4's Today programme.

Social mobility was "essential" for the economy, she said. "..The government should take action to ensure everyone has a fair chance."

The panel found "systematic differences in equality panel economic ­outcomes" remained between social groups, and said many would find the "sheer scale of inequalities" in outcomes "shocking".

Inequality in earnings and income is high in Britain compared with other industrialised countries, the report states.

A central theme of the report is the profound, lifelong negative impact that being born poor, and into a disadvantaged social class, has on a child. These inequalities accumulate over the life cycle, the report concludes. Social class has a big impact on children's school readiness at the age of three, but continues to drag children back through school and beyond.

"The evidence we have looked at shows the long arm of people's origins in shaping their life chances, stretching through life stages, literally from cradle to grave. Differences in wealth in particular are associated with opportunities such as the ability to buy houses in the catchment areas of the best schools or to afford private education, with advantages for children that continue through and beyond education. At the other end of life, wealth levels are associated with stark differences in life expectancy after 50," the report states.

It echoes other recent research suggesting that social mobility has stagnated, and concludes that "people's occupational and economic destinations in early adulthood depend to an important degree on their origins". Achieving the "equality of opportunity" that all political parties aspire to is very hard when there are such wide differences between the resources that people have to help them fulfil their diverse potentials, the panel notes.

Researchers analysed the total wealth accrued by households over a lifetime. The top 10%, led by higher professionals, had amassed wealth of £2.2m, including property and pension assets, by the time they drew close to retirement (aged 55-64), while the bottom 10% of households, led by routine manual workers, had amassed less than £8,000.

Harman acknowledged in the report that the "persistent inequality of social class" was a large factor in perpetuating disadvantage, adding that the government would begin to address this with the new legal duty placed on public bodies to address socio-economic inequality, included in the equality bill.

The report follows research published by Save the Children which revealed that 13% of the UK's children were now living in severe poverty, and that efforts to reduce child poverty had been stalling even before the recession began in 2008.

The Hills report also found that: • Divisions between social groups are no longer as significant as the inequalities between individuals from the same social group; inequality growth of the last 40 years is mostly attributable to gaps within groups rather than between them.

• White British pupils with GCSE results around or below the national median are less likely to go on to higher education than those from minority ethnic groups. Pakistani, Black African and Black Caribbean boys have results at the age of 16 well below the median in England.

• Compared with a white British Christian man with similar qualifications, age and occupation, Pakistani and Bangladeshi Muslim men and Black African Christian men have an income that is 13-21% lower. Nearly half of Bangladeshi and Pakistani households are in poverty.

• Girls have better educational outcomes than boys at school and are more likely to enter higher education and achieve good degrees, but women's median hourly pay is 21% less than men's.

The significance of where you live is another theme. The panel says the government is a "very long way" from fulfilling its vision, set out in 2001, that "within 10 to 20 years no one should be seriously disadvantaged by where they live". The paper notes "profound and startling differences" between areas. Median hourly wages in the most deprived 10th of areas are 40% lower than in the least deprived.

    Unequal Britain: richest 10% are now 100 times better off than the poorest, G, 27.1.2010, http://www.guardian.co.uk/society/2010/jan/27/unequal-britain-report

UK scrapes out of recession but growth figure disappoints City

Ashley Seager
Guardian.co.uk
Tuesday 26 January 2010
10.42 GMT
This article was published on guardian.co.uk at 10.42 GMT on Tuesday 26 January 2010.
It was last modified at 17.51 GMT on Tuesday 26 January 2010.

Britain's economy finally clawed its way out of its deepest recession since the 1930s in the fourth quarter of 2009, but it only managed to expand by a much weaker-than-expected 0.1%.

The keenly awaited figure compared with the average City forecast of 0.4% expansion. It brings to an end six consecutive quarters of contraction, which saw the economy shrink by about 6%, or 10% compared with where it would now have been had the slump not occurred.

But news of any growth will come as a relief to a Labour government facing an election within months.

A Treasury spokesman insisted chancellor Alistair Darling's predictions of a return to growth by the turn of the year had been vindicated by the figures. "What this estimate makes clear is that the government is right to be confident but cautious about the prospects for the economy and that it is right that we keep supporting the economy."

Shadow chancellor George Osborne said: "After this great recession, any signs of growth are welcome. But these very weak growth figures show that Gordon Brown's government left us badly prepared for the recession and badly prepared for the recovery.

"We urgently need a new model of economic growth that includes a credible deficit reduction plan that keeps mortgage rates low, creates jobs and doesn't choke off recovery."

Financial markets were unhappy with the figure. Sterling dropped against the dollar and euro, to €1.14 and $1.61 respectively on disappointment that the growth figure remained so weak. Gilt futures shot up, pushing yields lower as dealers reassessed their view of the underlying strength of the economy.

Liberal Democrat Treasury spokesman Vince Cable said: "The markets will be surprised that growth has been markedly slower than expected. Far from the quick recovery the chancellor has been praying for, the economy is only just staggering back into growth.

TUC general secretary Brendan Barber agreed, adding: "These figures show just how fragile the economy is. With the threat of a double-dip recession looming large, it would be madness to cut public spending now.

"No sectors of the economy are fully recovered and areas such as construction are still really struggling."

Jonathan Loynes, economist at Capital Economics, said the figures were a "major blow" to hopes that the UK economy had emerged decisively from recession in the fourth quarter.

Few economists, though, expect the recovery to be very strong, as the economy remains weighed down by a still fragile banking sector and high consumer and government debt levels.

David Frost, director general of the British Chambers of Commerce, said: "This is good news, but clearly growth is anaemic, and it certainly means that the economy is far from being out of the woods."

Some analysts think the economy has only returned to growth at all because of the extraordinary support from the Bank of England in the form of ultra-low interest rates and £200bn of "quantitative easing", as well as the government allowing the budget deficit to expand hugely.

If that support is removed too early, some argue, the economy could struggle to grow strongly. Most analysts are only expecting the economy to grow by around 1% this year, compared with its long-run annual average of 2.5%.

The Office for National Statistics revealed that the weak growth extended across the economy with industry and the dominant services sector only growing by 0.1% each in the October to December period compared to the previous three months.

"Today's fourth-quarter GDP numbers have confirmed that the UK has finally exited recession – but barely," said James Knightley, economist at ING financial markets.

"The recent retail sales numbers have disappointed, as has consumer confidence, while consumer fundamentals remain very poor. Indeed, household indebtedness remains at very high levels and household incomes are under downward pressure from a weak labour market and higher taxes."

Separate figures released by the British Bankers' Association showed another net repayment of consumer debt in December, especially of overdrafts and personal loans.

"This was clearly the consequence of many consumers' desire to reduce their debt, low demand for credit and a lack of availability of unsecured credit from banks. It is yet another example of consumers looking to improve their financial situations in the still challenging and worrying economic environment," said Howard Archer, chief economist at IHS Global Insight.

    UK scrapes out of recession but growth figure disappoints City, G, 26.1.2010, http://www.guardian.co.uk/business/2010/jan/26/uk-recession-over