THERE will be plenty of banker-bashing from George Osborne when he delivers his first Mansion House speech to the City tonight. The audience of movers and shakers will barely notice; financiers are used to the abuse by now. Most of the proposals have been well trailed: a new levy on balance sheets (which could raise £1bn or more and will mean consumers pay more); a transfer of powers from the FSA to the Bank of England; and an inquiry into whether universal banks should be broken up (they shouldn’t, but any hints on the composition of the commission will give us a clue as to its findings).
Let us hope this doesn’t turn out to be a missed opportunity for the Chancellor. He needs to convey a positive, pro-growth, pro-enterprise message: he claims that Britain is once again open to business – yet his flagship proposal this evening will be yet another tax, to be followed next week by an even more damaging announcement on capital gains. The Chancellor also needs to improve his analysis and rhetoric on the budget deficit.
As a report from the Reform think-tank points out, demographic changes mean that spending on health and pensions is spiraling out of control. The Department for Work and Pensions estimates that – under current policy – the annual cost of pensions will increase by £162bn (in today’s money) by 2050. HM Treasury forecasts total state spending will rise by 4 per cent of GDP over the next five decades. That may not sound much – but given that the government is already spending much more than is sensible as a share of national income, anything extra would be disastrous. Public debt could exceed 200 per cent of GDP in a decade’s time. The Bank of International Settlements estimates that, given demographic changes, taking debt back down to 2007 levels (36 per cent of GDP) would require running a budget surplus of 3.5 per cent for 20 years. Only Japan would face a more stretching commitment.
There is no way that the welfare state, as presently structured, can continue: the middle class will no longer be able to rely on free public services for ever; European-style co-payments are inevitable. Osborne will come of age tonight; he mustn’t blow it.
MORE WOES FOR BP
IT looks increasingly likely that BP will eventually have to put its American unit into Chapter 11 bankruptcy. The firm’s beleaguered management, as well as the City, has consistently failed to appreciate the true scale of the damage it faces. Barack Obama will probably lift the (already pretty useless) liability caps faced by the firm; he will probably claim that this only applies to fresh spills, not to what has already happened, but the difference is merely academic. It sometimes seems as if the Democrats are keen to move to a nationalised, Chinese, Latin American or Russian-style system of oil production – think of Gazprom, Petrobras, the China National Petroleum Corporation or even the National Iranian Oil Company – even though it is absurd to claim that such ventures are either safer or more efficient than private, Western firms.
The next question is whether the administration will attempt to pursue BP in the British courts once they have taken possession of its American assets. The legality of it all is dodgy; but investors who think they can easily make a major killing buying supposedly dirt-cheap BP shares are playing with fire.