Week 6 Treasury – the department with the power

1. Week 6 Treasury – the department with the power The Chancellor of the Exchequer – the real Deputy Prime Minister Joy Johnson

2. Levers of Power • Control of spending • Fiscal policy • Budget process • Comprehensive Spending Review • Independent Central Bank – Bank of England • Monetary Policy Committee • Office of Budget Responsibility • Office of Fair Trade • Privatisations • Private Finance Initiatives (PFI) – fund investment for infrastructure projects • Initially introduced by John Major • Embraced by New Labour as PPPs (Public Private Partnerships to fund schools hospitals etc – scandals now on how much they cost in the long term)

3. Issues • Cutting the deficit (number one priority for the coalition government as stated in the coalition agreement) • Growth – flat lining (?) • Public spending cuts • Reform of the Banks – tensions with Chancellor and Secretary Of State for BIS • Unemployment • Inflation • Interest rates – tensions within the MPC over policy

4. Key texts • Morrison – Public Affairs • Politics – Jones et al • Coalition Agreement • 22 Days in May – Laws • If time various books on the financial crash; inc. Larry Elliott the Gods that Failed; Vince Cable, The Storm: The World Economic Crisis and What it Means & Gordon Brown, Beyond the Crash, the first crisis of globalisation

5. The real Deputy Prime Minister

6. Chancellor – George Osborne & his Chief Secretary Danny Alexander

7. Chancellor and his team • Chancellor of the Exchequer after the PM most senior member of the cabinet • Chief Secretary to the Treasury: Liberal Democrat Danny Alexander (member of cabinet, in charge of public spending, conducts bilateral meetings). During coalition negotiations leadership wanted to be tied into the cuts (David Laws) • Financial Secretary to the Treasury: Mark Hoban • Economic Secretary to the Treasury: Justine Greening

8. Chancellor of the Exchequer • No 11 Downing Street • Dorney Wood • Treasury – Whitehall • Responsibilities : overseeing government’s public spending commitments by managing fiscal policy; managing the national debt; promoting economic growth; controlling domestic inflation and unemployment • Treasury select committee shadows the department

9. Controlling the economy • Fiscal policy and Taxation • John Maynard Keynes • 2 types of taxation – direct up front from individuals and businesses and indirect i.e. VAT • Income tax – progressive ability to pay • Regressive tax i.e. Indirect taxes • Corporation tax paid by companies on profits • Capital Gains Tax (CGT) paid by the owners of financial assets such as property • Inheritance Tax – death duties

10. Managing the economy • Highlight of the Chancellor and the government’s year the Budget and the accompany Finance Act • Gordon Brown introduced a pre-budget statement • Comprehensive Spending Review (CSR) the one last November fixed spending budgets for each Government department up to 2014-15.

11. Budget Process • Finance Bill speaker designates it a ‘money Bill’ • Budget is fast tracked through Parliament • Speech regarded as first reading • 2nd reading must be heard within 30 days • Scrutiny at committee stage • 3rd reading steamed through on same day as report stage then Royal Assent • Lords can’t interfere • Budget speech designed to forecast short to medium term movements in the economy 1-3 years • Announces new taxes, tax breaks, and or benefits to finance investment • Other measures of help to low paid, the elderly etc likely to be in short supply in the age of austerity • Leader of the Opposition responds (difficult Parliamentary occasion as there are likely to be surprises) • Debate on the floor of the Commons

12. Business Innovation and Skills (BIS) • Vince Cable Secretary of State for Business, Innovation and Skills and President of the Board of Trade • Responsible for business and banking and regulation (lost out on Rupert Murdoch and News Corporation bid for BSkyB) tension with Chancellor over banks (banking reform important issue) • David Willetts Minister of State for Universities and Science (attends Cabinet) • BIS select committee shadows department

13. Economic terms • Fiscal Policy – taxation and economic policy of a government • Post war – mixed economy • Thatcher years – privatisation – monetary policy (economist Milton Friedman) • New Labour adopted neo-liberal economics • Fiscal rectitude – cutting public expenditure and reducing the amount of government borrowing

14. Economic terms - globalisation • Neo-liberalism theoretically makes trade between nations easier. • Freer movement of goods, resources and enterprises • Light touch or no touch regulation, tariffs, restrictions on capital flow and investment • The free market naturally balances

15. Economic terms cont • The national deficit – the annual difference between government spending and its receipts (mainly taxation) – government has to borrow to make up the difference • The national debt the accumulation of these annual deficits and the borrowing incurred to make up the difference • Lehman Brothers (September 2008) collapse triggered meltdown in the financial system

16. Economic terms cont • Banks too big to fail • Bailed out by the government – nationalised 2 big banks • http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3187946/Financial-crisis-Banks-nationalised-by-Government.html#

18. One view of the financial crash • http://www.guardian.co.uk/business/video/2008/sep/17/larry.elliott.hbos

20. Economic terms cont • Gross domestic product (GDP) – total output of goods and services • Gross National Product (GNP) GDP + with net property incomes from abroad • Group of Seven finance ministers and central bank governors of the leading Western economies • Group of Eight • Group of Twenty following banking crisis

21. Group of 8 grow to group of 20

22. Davos – talking shop of the most powerful players in global economy

23. Independence to the Central Bank • New Labour gave independence to the Bank of England in the first few weeks following their landslide first victory (1997) • Established Monetary Policy Committee chaired Governor of the Bank (currently Mervyn King chair). Responsibility to set interest rates. Takes the decision out of the political arena • Created new regulation system Financial Services Association (FSA)( (widely accused now to have failed when it came to the global banking crisis)

25. Bank of England independence • interest rates set by Bank’s governor and the monetary policy committee – tensions within

28. Economic terms cont • Inflation – rise in price levels which reduces purchasing power • Inflation used to be past scourge • “No more ‘boom and bust’” - hubristic boast of Gordon Brown then Chancellor of the Exchequer • Low interest rates to help stimulate economy • Now inflation going up • Governor of the Bank of England has to write letter to the PM saying why target of 2% has been overshot • Fear of stagflation – combination of high price inflation, high unemployment and low economic growth

29. Office of Budget Responsibility • The Office for Budget Responsibility (OBR) was formed in May 2010 to make an independent assessment of the public finances and the economy for each Budget and Pre-Budget Report. • Shaky start chaired on interim basis, by Sir Alan Budd. • New chairman Robert Chote (formerly director of Institute of Fiscal Studie (IFS respected independent think tank)

31. Other Bodies & terms • Office of Fair Trading (OFT • Confederation of Business Interests (CBI) • Institute of Directors (IoD) • Trade Union Congress (TUC) • Privatisation – selling government assets • Part Privatisation – hybrid • Nationalisation – government owned • Utilities – essential services i.e. Water, gas, electricity • Regulatory bodies i.e. Ofgas, Ofcom, Ofwat

32. Stock Exchange • Shares in plcs traded on global stock market – one of the biggest London Stock Exchange • Limited Liability companies • Private Limited companies • Public Limited companies (plcs) – floated and listed on the LSE • Hostile takeovers (see Morrison for examples)

33. seminars • Outline role of the Treasury and the mechanics of the Budget • Outline and explain important and relevant economic terms associated with public finance and economics • Identify Government regulatory controls • Role of the Bank of England and Monetary Policy Committee – familiarise yourself with the new regulatory body. • Identify current issues

34. Next week Disengagement with the Political system