The implications of the Autumn Statement (AS) in terms of both meeting the fiscal mandate and securing economic growth have been well documented. Below, I outline three unrelated but interesting observations, the implications of which have been less publicised.
1. The Bank levy
Early on Tuesday morning, before the AS was published, the BBC’s Robert Peston reported that the Government would increase the bank levy from 0.078% to 0.088%. The tax is paid on all bank borrowing, except the first £20 billion, ordinary deposits and borrowing secured on Government debt. When the tax was introduced in the Emergency Budget of 2010 it was forecast to raise £2.5 billion by 2013/14, declining slightly thereafter due to behavioural effects.
Peston reports that the Treasury have found overseas banks borrow less in the UK than originally thought – either by shifting their liabilities overseas, or simply because the Treasury misunderstood the structure of the banking sector. The rub is that the banking levy has been raising less than expected, and now the Treasury have raised the rate to plug the hole and raise the £2.5 billion it was intended to do.
Research by Fleishmann-Hillard (F-H) makes an interesting observation, however. The extra revenue now expected to be raised from the levy appears in the Autumn Statement as a positive addition to revenue – which is odd given that the overall revenue now thought to be collected is much the same as what was originally intended. Given the Chancellor has made clear that he is committed to simply raising the £2.5-2.6 billion, the fact that the changes appears as a positive credit to the public finances suggests that at some point in the past the original forecasts must have been revised down.
As F-H state, this makes it likely that in the future the rate might have to continue to be adjusted to meet the revenue target – which puts banks in a difficult position when they are trying to reinforce their balance sheets with tier one secure assets which are outside the scope of the levy. As they do this, other parts of the balance sheet will shrink, meaning the rate will likely rise again to meet the revenue target.
This is a problem because an increase in the tax rate will hit the big British banks much harder than overseas rival, as the levy applies to all their borrowings, on a worldwide basis. Whilst RBS and Lloyds have little choice but to face up to it, the consequence could well be us saying adieu to HSBC and Standard Chartered.
2. Inflation: CPI vs. RPI
As has been widely noted in the media today, the Coalition appears to have pulled off a bit of a stealth tax with its decision to uprate certain payments by CPI rather than RPI. By 2016, the OBR’s forecasts suggest that RPI will be 1.8 percentage points above the CPI measure. This is significant. As Emma Simon points out today, rail fares and student loan repayments are linked to RPI, whereas most benefits and public sector pensions are now linked to CPI.
How such a large discrepancy between the forecasts of the two comes about though is a bit of a mystery. The gap between the two is forecast to be 0.7 percentage points in 2011, but rises to 1.8 percentage points in 2016. The RPI rate increases from 2014 onwards, whereas the CPI rate is forecast to remain at the MPC’s 2 per cent target.
Though the OBR have recently published a report suggesting that the gap between RPI and CPI will be wider in future, the fact that CPI is forecast to be totally stable whilst RPI climbs is highly unlikely.
Of course, the CPI forecast assumes the MPC is going to meet its inflation target – but can we deduce that the rising RPI suggests the MPC is less likely to hit this target in reality? Or is the divergence indicative of high growth of house prices being forecast? I suspect that this will have to be explained pretty soon.
3. Regionalising public sector pay?
One of the most meaningful long-term announcements on Tuesday was the decision to review pay bargaining to make it more responsive to local labour markets. This is an extremely welcome move. The discussion on the Today programme explained why national bargaining can exacerbate regional inequalities, in a similar way to that of weaker countries in a currency union being disadvantaged by not being able to devalue.
High unemployment and low growth in a particular area should lead to a lower wage rate, making it more attractive for private sector companies to create jobs. But in many of the less prosperous regions of the UK, the public sector crowds out the private sector because national pay bargaining ensures the public sector wage is much higher than the private sector – meaning the most skilled in the regional workforce are attracted to the public sector, with fewer available for private enterprise. This is particularly damaging if it leads to fewer private sector organisations establishing themselves in the area.
Alison Wolf has explained how a pay bargaining revolution in Sweden has had profound effects, with individual contracts replacing centralised bargaining. Salaries have not collapsed, as predicted by those opposing the change, and actually union membership has increased – which could be a particularly beneficial spin off for the unions here, particularly given that the Government has committed to abolishing taxpayer funding of union officials.