2010: The death of the Tiger?

Cardiff Business News

AS Ireland laments the death of its Celtic Tiger the Chinese are preparing to see out the year of tiger to ring in the new year of the rabbit. It seems 2010 has brought the death of the tiger, making it an endangered species in the West.

Tiger
The death of the Celtic Tiger in 2010

This year finance ministers in the Eurozone have struggled to keep inflation low, ensure banks are furnished with credit and balance the demands of taxpayers against investors. With all the talk of cuts and austerity, what has got us in this mess, and what does 2011 hold for Western Economies?

European Bailouts
The Eurozone has had a rocky time. In May the IMF and the European Union announced a support package for Greece to the tune of 120bn euro. In November the same pair had to come to the rescue in Ireland with an 85bn euro package, despite the country’s initial denial that it needed any help. Fears of contagion in the Eurozone have not yet been quashed as some investors anticipate bailout deals for the Iberian peninsula.

European Day Of Action: Protests In Dublin - September 29th.
The Irish banks will get around 11bn euro from the European Financial Stability Mechanism (EFSM)

Austerity
For much of the developed western world it has been a year of austerity with spending cuts, tax hikes, bank bailouts, quantitative easing and emergency summits. The UK’s coalition government announced its comprehensive spending review in October, passing the buck (certainly not literally) to regional governments. Next year VAT, a consumption tax, will rise to 20% while spending cuts in the public sector will mean around 330,000 public sector workers will lose their jobs.

Go East
“Go East young man” has been the motto of the middle class with increasing numbers of investors and students looking for better job prospects and growth in Asia. Meanwhile the Euro crisis has prompted a move by the Chinese government to pour capital into the west by buying European bonds to ensure European financial stability.

The Welsh View
As for Wales – The Ryder Cup may have brought much international attention in 2010, but in terms of the economy, Wales has received very little good news of late. The office for national statistics released data last month revealing Wales as the poorest nation in the UK. And with an workforce heavily reliant on the public sector, a drive in the private sector may be hampered by poor technological infrastructure.

Reasons to be cheerful
While there has been much doom and gloom in the past year there are still some reasons to be positive for 2011. Wales is set to cash in on London 2012 as it will host 14 football matches and be used as a training base before the games by some international teams. It has never been easier to start a business, with a boom in online start-ups and the Cardiff Bay development has brought life to the Welsh capital. One indicator we will all be watching with anticipation is GDP, as the CBI has predicted 2% growth for the UK economy in 2011.

In Europe it is yet to be seen whether the ECB issues e-bonds or will increase the EFSM to stabilise markets.

Let’s just hope there is not a double dip recession, turning the year of the tiger to the year of the Bear.

Osborne’s Tough Medicine

Cardiff Business News

Public sector workers, business leaders and members of the public had been waiting with bated breath for the Chancellor of the Exchequer, Mr George Osborne, to pronounce a series of spending cuts across the public sector today.

And at 12:30pm, an unflinching Mr Osborne presented the Comprehensive Spending Review (CSR) to the house of Commons, announcing his tough medicine to treat Britain’s chronic budget deficit.

The Chancellor said: “It is time to draw the country back from the brink of bankruptcy.”

But before laying out the specifics of where his axe would fall, Mr Osborne attempted to justify the cuts.

In a nutshell, the budget deficit – the amount of money the UK government is falling short of its annual expenditure forcing it to borrow to make up the difference – currently stands at £109bn. This is the highest of any European country, and today the Chancellor called upon the name of the IMF to back up his assessment of the UK economy.

But  Mr Osborne revealed a worrying statistic that the government currently spends £44bn a year on paying interest on net government debt (the total amount of money the British government owes to the private sector and other purchasers of UK gilts), calculated in October 2010 at £952.8bn.

Currently government debt is 64.6% of GDP. The HM treasury has published some slides to illustrate the acuteness of the debt problem. (See slide 3)

Following years of perusing a policy of Keynesian economics (spending ones way out of a recession), championed by Gordon Brown, the government has now decided to tackle the deficit with spending cuts in a move towards fiscal consolidation.

The government’s pot for capital spending, which deals with annual spending budgets, will be reduced from £51 in 2011 to £47bn by 2014.

These cuts will see  local government shrink by 27%, the environment by 29% and 23% from the Home Office. The Department of Media, Culture and Sport is to be reduced by 24% while the Ministry of Justice will see their budgets cut by 6% a year.

Apart from capital spending welfare will be cut by £7bn, while the state pension age will rise to 66 by 2020, saving up to £5bn by brining the date of implementation forward by six years. But even before today’s review, around £28bn of cuts were announced in the emergency budget in June.

The most alarming figure is that 490,000 jobs will go over the next four years, although Mr Osbourne argued this will be implemented gradually through natural turnover, that is, not replacing retired employees in the workplace.

In total, Mr Osborne’s tough medicine is to cut £81bn over the next four years.

But in reaction to the CSR, there are fears that the cuts are too deep, and rather than curing a disease of debt, efficiency savings will actually increase unemployment while cuts in certain areas could put national security at risk.

Shadow Home Secretary, Ed Balls said:

“They go way beyond what can be achieved through efficiency savings and better procurement. Cuts to the funding of border controls and counter-terrorism policing risk weakening our defences against threats to our national security. The Home Secretary has abjectly failed to fight the corner of the police in these Spending Review negotiations.”

And in Wales, where I will be investigating the effects of the cuts in the next few weeks, BBC Wales correspondent Nick Severini said:

“It’s often said that Wales has a public sector culture. Not only does it employ 27% of the workforce, but the spending power of those workers and contracts with the public sector are essential for so many companies in the private sector. These range from large construction firms, which rely on contracts for half of their work, to small firms like the appropriately named Kutz N Kurlz hair salon in Brynmawr in the south Wales valleys, where a third of all the customers are directly employed by the public sector. That’s why organisations like the Federation of Small Businesses in Wales are deeply concerned about the threat of a double dip recession.”

So although many of these figures from today’s review may seem removed from the present, many people in Cardiff will be affected by the cuts. This blog seeks to trace the effects of the CSR on the public sector and will look at how the private sector reacts to create new jobs, as policy makers hope it will. And there is no doubt that protests will follow; the first large protest has already been organised for 12pm this Saturday.