GEORGE OSBORNE was a happy man yesterday, courtesy of the usually dour International Monetary Fund (IMF), which released an unusually effusive and gushing endorsement of the coalition’s macroeconomic policies.
The IMF is upbeat for 2011, predicting growth of two per cent. It makes it clear that slashing the deficit and controlling public spending is the only way forward to avoid a sovereign debt crisis. While squeezing state spending will slow growth, the IMF is confident that liberating resources for the private sector will ensure that the recovery continues strongly. More emphasis should be given to reducing public sector compensation wage premia and achieving savings in benefits through better targeting, it argues, policies that will be music to Osborne’s ears as he prepares for next week’s party conference in Birmingham.
But while the IMF is right to highlight Britain’s economic recovery and cyclical upswing, many longer-term challenges remain for Britain. Two in particular stole the limelight yesterday. First, pensions. According to a study by A.T. Kearney, the management consultancy, 95 per cent of Britons will find themselves having to downgrade their lifestyle significantly or be plunged below the poverty line in retirement.
The bottom 88 per cent of British households own only £7,000 on average in liquid assets, with many relying on downsizing their homes when they get older. The next four per cent own an average of just £71,000, with the next 2.8 per cent an average of £141,000. Only the top five per cent of households have any substantial amount of liquid assets – and even then only the truly rich have anything like enough. Someone aged 54 and earning £150,000 with £200-£500,000 in liquid wealth will only take home an annual retirement income of £20,000-£31,000.
The study demolishes the myth that “my house is my pension”. Downsizing won’t unlock enough cash for the majority of the population; most would only have £30,000 left in equity, after stamp duty and other costs. The government’s Nest scheme to auto-enrol those on lower incomes into approved pension plans will be a case of too little, too late. Charlie Bean, the Bank of England’s deputy governor, was being too short-termist when he called yesterday on consumers to save less and spend more – low savings are a much greater threat to the UK’s prosperity than a couple of years of weak consumer spending and sluggish GDP growth.
Second, the corporate exodus. Wolseley, a heating and plumbing firm with a turnover of £13.2bn, will adopt a Jersey structure and base itself in Switzerland for tax reasons. The move will save it millions of pounds and lower its tax rate substantially. The result for Britain will be an even higher deficit, fewer jobs and less investment. The government is consulting on a reform of the tax system but UK Plc has run out of patience – understandably, given the growing anti-capitalist mood music. Britain is the only country in the world which appears actively to want to chase away its multinationals.
So the IMF is largely right about the short-term – but Britain’s longer-term prospects remain dire. Osborne is understandably concerned primarily with fire-fighting right now, but he will eventually also have to address those extraordinarily difficult issues if he truly wishes to make his mark as a reforming chancellor.