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Britain: a case study in low-growth economic mediocrity

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ALLISTER HEATH

BRITAIN is stuck in a rut. No wonder that investors and credit rating agencies are losing patience: the coalition doesn’t have the guts or decisiveness needed to jolt the UK out of its present mediocrity, while the opposition is busy dreaming up new taxes, thinks that a slightly looser fiscal policy would transform our prospects and has no real understanding of the extent of our fiscal crisis.

Britain’s tax receipts confirm that the economy continues to do poorly, albeit not disastrously. So far this fiscal year, receipts from Vat are up 2.2 per cent, less than the rate of inflation. Income and capital gains tax receipts are down 0.2 per cent and corporation taxes are down 8.4 per cent: while in both cases there have been tax cuts (a higher personal allowance and lower corporation tax rates) these don’t explain such shockingly bad numbers. Very limited pay rises, a drop in reported income from the highest earners and weak profits are among the answers. National insurance contributions are up a healthier 3.4 per cent, though this not anything worth shouting about.

What all of this suggests is an economy that is either stagnating or growing a little, but by no more than a few tenths of a per cent. At best, the situation looks only marginally rosier than the official GDP figures; at worst, there is no difference. Mediocrity undoubtedly rules OK.

While revenues are poor, any progress the government is making in trimming overall expenditure on wages, benefits and other current spending is being more than cancelled out by increased interest on the growing national debt. During April 2012-January 2013, central government current expenditure hit ?525.7bn, 2.7 per cent higher than in the same period of 2011-12.

Depending on which measure of inflation one uses, real current spending was therefore either up or down slightly. The real cuts are happening in capex, the one area where state spending can be useful for long-term growth (though the private sector, if it were allowed to, could take over many projects). So far this year, central government net investment was minus ?6.4bn – with depreciation overwhelming gross investment – a massive ?27.7bn lower than in the same period of the previous year. So we are still seeing the wrong kinds of cuts, stagnant growth and weak tax receipts. Unless something drastic changes soon, it is not just credit rating agencies that will be running out of patience with the government.

LOW RETURNS
One of this column’s themes is that we are now facing a world of low real returns across financial assets, with high inflation gobbling up nominal gains, and that the bond markets, after years of astonishing returns, are set for a crash. There is lots of evidence to back up this thesis in Barclays’ latest annual equity-gilt study. The conclusions are stark. Over the next five years, Barclays expects cash to provide negative inflation-adjusted returns of about -1.5 per cent per year (with compounding effects, that means a very sharp drop in value), “safe haven” government bonds -2 per cent – in other words, even worse than cash – and equities annual growth of 3-4 per cent. The authors believe that the bull market in government bonds – which peaked last year – will end in a whimper, rather than in a 1994-style crash. I suspect the authors may be too optimistic, but their case is that a shortage of “safe” assets, combined with a decision by the authorities to keep the monetary floodgates open, will do the trick. One thing is clear: savers are going to suffer.


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Citigroup reveals pay shake-up as Corbat gets $11.5m for 2012

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MICHAEL BOW

GLOBAL banking giant Citigroup yesterday introduced a new pay policy for top executives at the firm to more closely align salaries and bonuses with the bank’s performance.

The move, revealed in a regulatory filing yesterday, follows shareholder concerns over payouts which led to the departure of former boss Vikram Pandit after shareholders rejected his pay deal last year. Executive pay used to include a controversial profit-sharing plan, which has now been shelved.

“When our shareholders spoke last year about Citi’s compensation structure, we listened. We have stepped up our efforts to solicit feedback from investors to better understand their concerns,” chairman Michael O’Neill said. Citi said the new executive pay programme would use a “scorecard-based structure” to remove the discretionary nature of pay awards in the past.

In light of the tougher measures, shareholders agreed to award chief executive Michael Corbat $11.5m (?7.5m) for 2012, which included a $4.18m cash bonus and $6.27m of shares.

     
     
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Mikhail Prokhorov sells $3.6bn Polyus Gold stake

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CITY A.M. REPORTER

Russian billionaire Mikhail Prokhorov has sold his 37.78 per cent stake in Polyus Gold to two Russian buyers, in a deal worth $3.6bn (?2.3bn).

Prokhorov’s vehicle Onexim group said this morning that it had sold 18.5 per cent had been sold to Zelimkhan Mutsoyev for $1.77bn, and 19.28 per cent to Gavrill Yushvayev for $1.85bn.

The deal had been under review by the UK Takeover Panel over whether retail tycoon Mutsoyev and fruit juice magnate Yushvayev were acting in concert.

If the pair had been found to form a concert party together, or in relation to existing shareholder Suleiman Kerimov, who owns 40 per cent of Polyus, the deal would have triggered a mandatory buyout to minority shareholders.

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