The spectre of Blair’s big mistake haunts David Cameron, who took power in less auspicious circumstances 100 days ago. Although many observers expected a Tory-Liberal administration to be hamstrung with infighting and indecision, the fragility of the government has spurred it to do more, not less; both sides are acutely aware that a coalition – no matter how strong – is more likely to fall apart than a majority government. Time is not on their side.
With this in mind, the government has been getting things done at a frenetic pace. Legislation is being rushed through the Commons at breakneck speed, using mechanisms originally designed for times of national emergency; Downing Street spinners have been instructed to make an announcement a day; laws have been repealed; and countless reviews have begun. Here City A.M. selects the events that have affected London’s financiers and businesses, and asks if more – or less – could have been done.
George Osborne’s emergency Budget, delivered in June, looms large over everything the government does. Faced with a parlous economic inheritance, Osborne has embarked on the toughest fiscal tightening in Britain’s peacetime history; most departments (excluding health and international aid) have been asked to cut spending in real terms by between 25 per cent and 40 per cent.
The City had serious concerns about Osborne when he was in opposition, but, for now at least, he has protected Britain’s triple-A rating and kept the cost of servicing the national debt low. He also managed to see off a potential rebellion by brokering a compromise on capital gains tax, which went up from 18 to 28 per cent; high enough to satisfy tax-happy Lib Dems but low enough to convince Tory rebels to keep their powder dry.
OFFICE FOR BUDGET RESPONSIBILITY
This was supposed to be Osborne’s big, bold move: an official forecaster that was independent of the Treasury, making it impossible for the chancellor to fiddle growth forecasts to fit his Budget. Advisers likened the move to Gordon Brown’s decision to hand interest rate setting powers to the Bank of England in 1997. Osborne always knew the OBR could create a rod for his own back, but he can’t have gambled on it causing so many problems so early on. Its inaugural head Sir Alan Budd has already stood down amid questions over his independence, and a replacement has yet to be found. Few can doubt the merits of an OBR, but its genesis has been nothing but trouble.
Osborne’s long-held dream of scrapping the Financial Services Authority and handing its powers to a beefed up Bank of England looked in jeopardy when the coalition was formed. Vince Cable, the Lib Dem voice on economics, was an ardent opponent. Still, Osborne got his way, albeit by convincing FSA chief Hector Sants to stay on board at the very last minute. Sants will oversee the disbandment of the FSA and then head up the new Prudential Regulation Authority (PRA), a subsidiary of the Bank. An Economic Crime Agency, promised by the Tories in opposition, seems to have hit the skids for now, however, showing the limitations of the government’s whirlwind approach. Although Osborne has won the argument on disbanding the FSA, the real test is whether the PRA is much better.
There’s been a running joke in Westminster since the coalition took the reins of power. “A review a day keeps legislation away”. Reviews and commissions have become a useful device for kicking party differences into the long grass, not least in the area of banking. In opposition, the Lib Dems said the break-up of universal banks like HSBC and Barclays would be a precondition of any coalition deal, but they’ve had to make do with an independent commission instead.
The make-up of the commission should worry the banking industry: consumer champion Claire Spottiswoode has already called for the separation of retail and investment banking, while Financial Times writer Martin Wolf argues for a similar approach in his columns. Even the bankers – ex-Barclays chief Martin Taylor and former JP Morgan banker Bill Winters – are said to be in two minds about the merits of the universal model.
Sources say Osborne and Cable are not as divided on the future of banking as reports suggest: the spectre of a British version of Glass-Steagall could yet become a reality.
TAX ANDRED TAPE
Firms feel more at home with the pro-business noises coming from the new government, but there have been few actions to match the rhetoric. On the plus side, the headline rate of corporation tax will be cut by 1p-a-year for the next four years until it hits 24p – Britain’s lowest ever rate, while the government will reform the way in which foreign profits are taxed. But the government is planning to scrap the default retirement age and is pressing ahead with Harriet Harman’s equalities agenda, both of which will cost firms dearly. Hopes for a bonfire of red tape appear to have been just that.