How Gordon Brown made the recession worse

THANKS GORDON – HOW GORDON BROWN MADE THE RECESSION WORSE

‘This Chancellor is leading the rest of the world in taking us out of recession.’

(Gordon Brown, Hansard, 3 June 2009, Col 268)

Instead, the UK is the last G20 country to leave the recession. The reason is clear – Gordon Brown’s misjudgements have made the recession worse.

• Thanks to Gordon Brown, the UK entered the downturn with one of the largest deficits in the developed world.

• The Labour Government is borrowing nearly £6,000 every second – undermining global confidence in the UK economy.

• The temporary VAT reduction failed – it undermined confidence, increased in the national debt and created unnecessary administrative costs for business.

• Over half of all the businesses that have gone bust in this recession have been pushed into insolvency by the Labour government.

• Gordon Brown’s failure to set out a credible plan for cutting the deficit has eroded confidence in the economy, undermined the recovery and put the UK’s credit rating at risk.

• Labour’s key recession business schemes have failed • New red tape introduced by Labour during the recession will cost £13 billion per year.

• Manufacturing output is at the lowest level for nearly twenty years, and exports have fallen more than in any other recession on record And now his ‘do nothing’ approach threatens the recovery

How Gordon Brown made the recession worse

1

Thanks to Gordon, the UK is the last G20 country to leave the recession • The UK is the last G20 economy to leave the recession. All the other G20 nations, including the US, France, Germany and Japan have now resumed growth.

• The UK was one of the first countries to enter recession, and the last G20 country out. The UK entered recession in Q2 2008, one of the earliest of all G20 countries.

• Some countries emerged nine months ago. Many other countries even emerged in Q2 2009 (Reuters, 27 October 2009): France; Germany; Japan; Singapore; Hong Kong; Taiwan; New Zealand; Israel ; Brazil; Sweden • The pound has fallen significantly against other major currencies. Since entering recession in Q2 2008, the pound has fallen 17 per cent against the dollar. At the start of April 2008, £100 was worth $197 – now it is only worth $163. Similarly, the pound has fallen 9 per cent against the Euro, and 25 per cent against the Yen.

Thanks to Gordon, the UK was poorly prepared, and debt has soared • The UK entered the downturn with one of the largest deficits. The UK had the second largest structural deficit in the G7 in 2007 (IMF, World Economic Outlook database), and the sixth out of the twenty six members of the OECD (OECD Economic Outlook 86).

• The UK faces the largest budget deficit in the OECD and G20. According to the OECD, in 2009 the UK has the largest budget deficit as a proportion of GDP in the group in 2010 at 13.3 per cent. (OECD, Economic Outlook 86). According to the IMF, the UK has the largest deficit in the G20, at 11 per cent of GDP in 2009 (IMF, Global Economic Policies and Prospects) • The national debt is predicted to double again to £1.5 trillion in the five years from 2008-9 to 2014-15.

Public Sector Net Debt is predicted to more than double from £609.1 billion in 2008-09 to £1473 billion in 2014-15 (PBR 2009, Table B13) • This is the highest level of debt as a proportion of GDP since the war. The Government is predicted to borrow £178 billion in 2009-10, or more than 12 per cent of GDP – the worst since the war (PBR 2009). In 2013-14, the national debt as a proportion of GDP will reach 76 per cent – the highest since the war (leaked Treasury documents) • Debt interest in the UK will cost each taxpayer £2,000. Table 12 of the leaked Treasury documents, published in September 2009 by the Conservatives, reveals that in 2013-14, the cost of debt interest will be £63.7 billion. This works out at £2,144 for every taxpayer, equivalent to £41 per week. The increase in debt interest over the next four years means taxpayers will pay an additional £1,228, this works out an additional £24 per week to pay for Labour’s debt crisis.

• Labour has already more than doubled the national debt, borrowing more than every other government put together. In May 1997, public sector net debt was £351 billion. At the end of November 2009, net debt was £844.5 billion. (ONS, Public Sector Finances, November 2009) • The Government is borrowing nearly £6,000 every second. In December 2009, the Government borrowed £15.7 billion (ONS, ‘Public sector finances’, December 2009). This works out at: i. £506 million per day ii. £21 million per hour iii.£350,000 per minute iv.£5,900 per second • The UK sends more than £15 billion overseas in interest payments every year. According to Cazenove Capital Management: ‘some 36 per cent of gilts (excluding those held by government) are currently held by overseas investors. We calculate that in 2009/10, the income paid on these will be equivalent to ¾ per cent of GDP. If the per centage of overseas holdings remains the same, interest payments thereon will increase to an amount equivalent to over 1 per cent of GDP within the next three years… In effect, the UK will be paying away 1 per cent of its annual income to overseas holders of gilts.’ (Cazenove Capital Management note, 17 September 2009)

How Gordon Brown made the recession worse

2

• Gordon Brown is spending more on debt interest than almost anything else. Government spending on debt interest will reach £63 billion in 2013-14 according to Table 12 of the leaked Treasury figures. This is more than double the planned spending on schools next year. Spending on the debt interest next year is £42.9 billion (Budget 2009, Table C9) - this is more than almost any other single item of government, including: – Schools. The Dedicated Schools Grant in 2010-11 will be £31.9 billion (DCSF Annual Report 2008) – Transport. The transport budget in 2010-11 will be £14 billion (Budget 2009) – Police and prisons. The combined budget of the Home Office and the Department of Justice in 2010-11 will be £20.5 billion (Budget 2009) • Soaring Credit Default Swaps illustrate the scale of the financial crisis. CDS prices serve as a good litmus test of the market confidence in our financial system. The picture is stark: –

The cost of insuring the 10Y bonds of our leading financial institutions has soared to record highs – Lloyds Banking Group'sCDS price is now 17 times higher than at the beginning of H2 2007 (14bp to 248bp); at its height, this reached a price 25 times higher (13 Mar 09) – Likewise, RBS's CDS price is 12 times higher now than July 2007 (11bp to 143bp), with a height of 24 times higher (29 Sept 08)

–

Comparing this to benchmark FTSE firms shows just how bad things have become in the financial sector – Cost of insuring BP and Tesco has only risen 5 times July 07 levels during this period – Before the crisis, it was marginally cheaper to insure against Lloyds' debt default than it was on Tesco's; it is now 3 times more expensive – It is also now five times more expensive to insure Lloyd’s debt than it is to insure BP debt

• Gordon Brown says we should ‘do nothing’ – In his press conference on 25 January 2010, Gordon Brown said that we should ‘do nothing’ to bring down the deficit

Thanks to Gordon, thousands of businesses have been forced into insolvency Under Labour, the Government has initiated over 3,500 winding up orders against businesses since the recession began – putting thousands of people out of work and undermining the economic recovery.

According to the Insolvency Service, in 2008-09 12,966 winding-up petitions were presented to court and just under 6,000 were granted. For 3,500 of the 6,000 companies that were liquidated, the Crown instigated liquidation proceedings. In other words, 60% of all business liquidations were initiated by the Government.

These liquidation proceedings may relate to outstanding taxes, or other monies owed to the government.

More companies have gone bust in the current downturn than in any previous recession.

There were 26,978 corporate insolvencies between Quarter 2 2008 and Quarter 3 2009. This is higher than in any other recession since records began in 1960 (ONS, Time Series IHYQ and Insolvency Service, Company liquidations in England and Wales 1960 to present).

Source: ONS, Time Series IHYQ and Insolvency Service, Company liquidations in England and Wales 1960 to present How Gordon Brown made the recession worse

3

•

Almost 17,500 more companies went bust in Labour’s recession than in the 1980s recession.

•

Almost 3,000 more companies went bust in Labour’s recession than in the 1990s recession.

•

Darling’s cover-up attempt in the Pre-Budget Report. ‘In the recession of the early 90s proportionally twice as many businesses went under’ (Alistair Darling, Pre-Budget Report Speech 2009, 9 December 2009).

Thanks to Gordon, youth unemployment has risen to record levels In the Budget 2009 Alistair Darling announced the ‘Young Person’s Guarantee’ which guarantees a job or training place to 18 to 24 year olds approaching 12 months claiming Jobseeker’s Allowance. He also announced a new Future Jobs Fund worth £1 billion to create up to 150,000 jobs, the majority of which would be targeted at the long term youth unemployed (HM Treasury, Red Book 2009).

1. Labour's Young Person’s Guarantee has not even started yet. Labour's flagship programme to tackle youth unemployment, the Young Person's Guarantee is only due to start this week, despite being announced nine months ago in the budget and youth unemployment already hitting record highs during this recession. The Young Person's Guarantee does not become fully operational until April 2010, over two years after the recession began and unemployment began to rise. (http://www.dwp.gov.uk/docs/ctf-provider-guidance.pdf) 2. The Young Person’s Guarantee is not a ‘jobs’ guarantee. Labour like to refer to the Young Person’s Guarantee as a ‘job guarantee’ (Daily Telegraph, 2 September 2009, (http://www.telegraph.co.uk/news/ newstopics/politics/6124759/Gordon-Brown-to-give-job-guarantee-to-all-18-24-year-olds.html). However not all young people unemployed for ten months or more will be offered a job, many will have to take up training or volunteering placements instead. The benefit of this for Labour is that young people will be moved off the claimant count unemployment statistics even though many of them won’t have found a job. By requiring all young people to take up a full time activity when they reach 10 months on benefits, Labour will prevent these young people being classed as long term unemployed. When their placement through the Young Person’s Guarantee ends if they haven’t found a job they can make a new claim for benefits which will show them to have only been unemployed for a matter of days.

3. Jobs are not guaranteed. Young people can be turned down for a Future Jobs Fund job. The bidding guidance for the future jobs fund states "Note that not everyone who is technically eligible for a job will be referred by Jobcentre Plus – as some may not be suitable for that job. And of those referred, we would not expect employers to always recruit every single candidate. So you may want to assume that only a proportion of the possible number of people eligible would be offered a Jobs Fund job." http://campaigns.dwp.gov.uk/campaigns/futurejobsfund/faq.asp#monitoring 4. Guarantee only to last a year. Funding for the Young Person's Guarantee only runs until March 2011, after which young people will receive no additional support to find work. This is despite official forecasts in the prebudget report predicting that unemployment will not peak until 2011 and remain high until 2014.

Thanks to Gordon, the temporary VAT cut made the recession worse • Retail sales fell after the cut. The CBI’s retail survey, which covered the first ten days of the VAT cut, showed the worst downturn in retail activity since records began.

• Cutting VAT has been criticised by other countries. The French Finance Minister has said: ‘As far as we're concerned...we're not certain that when prices go down, a VAT reduction is that effective’ (BBC, WATO, 26 November 2008). The Chief Economist of the IMF, Oliver Blanchard, has said: ‘Temporarily cutting VAT, a measure that was adopted in Great Britain, does not seem to me to be a good idea... 2 per cent less is not perceived by consumers as a real incentive to spend’ (The Daily Telegraph, 24 December 2008).

• Cutting VAT has been criticised by retailers. Simon Wolfson, Chief Executive of Next, said that the VAT cut had ‘no effect whatsoever’ (The Daily Telegraph, 7 January 2009). Sir Stuart Rose, Chairman of Marks & Spencer, said that it had ‘not made a material difference to our sales’ (BBC News, 7 January 2009).

How Gordon Brown made the recession worse

4

Retailers slammed Labour’s handling of the cut • Bad timing. Labour planned the VAT change back to 17.5 per cent on 1 January 2010. Their own consultation said: ‘Many of the respondents expressed dissatisfaction with the timing of the change in the VAT rate, given that 1 January falls within the busiest trading period of the year for many retailers’. (ibid., emphasis added).

• No notice of the change given last year. ‘Most of the respondents said that they had problems complying with the 14 day period, and that this was not helped by the short notice of the change in the rate’ (ibid.).

• Price changes cost retailers £90 million last year. According to the British Retail Consortium, the two weeks’ notice retailers had last year to change their price labels to reflect the VAT change cost them £90 million in lost revenue (BBC News, 9 December 2009).

Labour admits it got it wrong • Even more retailers had trouble this January. ‘Many retailers had difficulty meeting the 14 day deadline when the standard rate of VAT was reduced to 15% on 1 December 2008, and even more expect to have difficulty in complying with the change on 1 January 2010 when the standard rate of VAT will revert to 17.5%’ (ibid.).

Timing of VAT rise slammed by business • Slammed by Britain’s leading retailers. Sir Philip Green, the owner of BhS and Arcadia, Justin King, the Chief Executive of Sainsbury’s, Sir Stuart Rose, the Chairman of Marks & Spencer, and Lord Harris of Peckham, the founder of Carpetright, described the VAT rise on 1 January as an ‘administrative nightmare’ (The Daily Telegraph, 24 July 2009.

–

Sir Stuart Rose. ‘We all want to be able to focus on delivering a fantastic Christmas and New Year for our customers, not on administration. This will be an unwelcome distraction’ (ibid.).

–

Justin King. ‘We have been clear that this is a very bad day to do it. In fact there is probably not a worse day of the year from a retailer’s point of view. The Government seem to totally underestimate the work and cost involved’ (ibid.).

–

Sir Philip Green. He called it an ‘administrative nightmare’ for retailers and for the thousands of shoppers ‘that bring back a mountain of gifts after Christmas asking for a refund. At what rate do you give the refund? It will just add to the confusion’.

• Slammed by small shops. The Association of Convenience Stores said the ‘Chancellor lets down small shops’ and that ‘the date of the increase does not give retailers adequate time to implement the changes over the holiday period, and piles a major bureaucratic burden on retailers in what is the busiest time of the year’ (Association of Convenience Stores, Press Release, 9 December 2009).

• Change will cost small shops £8 million or £240 each. The Association of Convenience Stores estimates that the VAT change cost its 33,500 members a total of £8 million or £239 each (ibid.).

Thanks to Gordon, Labour introduced £13 billion in red tape during the recession • New red tape brought during the recession will cost £13 billion per year. Figures released by the Department of Business, Innovation and Skills (BIS) show that the annual cost of the Government’s regulations in 2008-9 is £13.07 billion (BIS, The Total Benefit/Cost Ratio of New Regulations 2008-2009, 21 October 2009).

How Gordon Brown made the recession worse

5

Thanks to Gordon, Labour’s business anti-recession schemes failed • Labour’s ‘Real Help For Business Now’ stimulus for business, launched in January 2009 and run by the Department of Business, Innovations and Skills, has failed to deliver. The following graph shows that of the £18.7 billion of money promises, only £2.4 billion – or 13 per cent was actually delivered:

Sources: see full breakdown of each scheme below • Real Help Now? The Government’s ‘Real Help for Business Now’ series of schemes was launched on 14 January 2009, but no money was given out from any of them during during 2009 Quarter 1 (Hansard, 3 April 2009 Col. 1433WA). The highest number of corporate insolvencies during the current recession – 5,110 – occurred in 2009 Quarter 1 (Insolvency Service, Company liquidations in England and Wales 1960 to present).

1. BIS Working Capital Scheme.

This scheme is meant to guarantee credit lines to ordinary-risk businesses with a turnover of up to £500 million a year. The Government will provide banks with guarantees covering 50 per cent of the risk on existing and new working capital portfolios worth up to £20 billion.

Announced: 14 January 2009 (BIS, Press Release, 14 January 2009).

Planned date: 2 March 2009 initially, and then ‘in March’.

Pledge: £10 billion in guarantees.

Brown’s headline-grabbing promise: ‘This is real help for business now. It is real help for businesses that are looking for working capital’ (Gordon Brown, Hansard, 14 January 2009 Col. 206).

Status at the end of the recession: Delayed for months, and then agreements were only signed with three banks (RBS, Natwest and Lloyds) for £2 billion – not the original £20 billion as planned. This means only one tenth of the scheme’s original allocation has been used. (Hansard, 16 September 2009, Col. 2289WA) Labour’s admission of failure: On 16 September 2009, Business Minister Rosie Winterton stated that: ‘£2 billion of guarantees have been provided to banks under the Working Capital scheme to free up regulatory capital for new lending to UK companies’ (Hansard, 16 September 2009, Col. 2289WA).

Industry criticism: • Director General of the CBI, Richard Lambert, said, ‘The scale of the problem goes well beyond what the government has announced today.’ (CBI Press Release, 14 November 2008) • Digby Jones, former trade minister, and former Director-General of the CBI, said: ‘It’s not enough money. £20 billion is fine but really this is a £40 or £50 billion issue,’ (BBC News, 14 November 2008) How Gordon Brown made the recession worse

6

• Martin Weale, National Institute of Economic and Social Research said: ‘It's been clear for months that something like this is needed. I'm not sure it is on an adequate scale. My guess is that it won't be enough. After a few months it will look like another of the government's half measures.’ (BBC News Online, 14 November 2008) • Jon Moulton, managing partner of private equity firm Alchemy Partners, said: ‘Twenty billion pounds is not a very large number in the context of the problem. I would be a lot happier if the scheme was a lot larger’ (BBC News Online, 14 November 2008) • Michael Saunders, Chief Economist at Citibank: ‘The Government is announcing today its plan to guarantee about £20bn of debts for small firms. However, it must be noted that corporate debts total £1568bn, and against that £20bn is relatively insignificant. These measures look more like the "a new policy every day" pattern of recent months rather than measures large enough to resolve the economic and financial crisis.’ (Industrial Country Overview, 14 January 2009) • John Wright, FSB, said: ‘We are pleased to finally see the introduction of this fund which mirrors the Small Business Survival scheme that we urged the Government to introduce before the Pre-Budget Report in November.

It is sad to see that since we proposed our package in October, small business closures have risen to around 85 a day, meaning over 6,000 have closed while waiting for this fund.’ (Press Release, 14 November 2008) 2. BIS Capital for Enterprise Fund.

A £75 million Capital for Enterprise Fund (£50 million from Government augmented by £25 million from the banks) to invest in small businesses which need equity. The fund is run by professional fund managers. It is open to UK SMEs who are economically viable in the long term.

Announced: 14 January 2009 (BIS, Press Release, 14 January 2009).

Pledge: £50 million in equity injections from the government.

Brown’s headline-grabbing promise: The Capital for Enterprise Fund ‘is real help for high-technology firms that want their debt replaced by equity’ (Gordon Brown, Hansard, 14 January 2009, Col. 206).

Status at the end of the recession: Only five businesses accepted money (£6.15 million) from the Fund up to the end of 2009 Quarter 3 – the end of the recession. Based on these figures, a potential 61 firms could have received an average £1.23 million each if the scheme had been operating fully throughout the recession after it was announced.

Picking winners and due diligence failure. The Government has been attacked for choosing tech firms it thinks will do well. One of the firms has been embroiled in a pension row.

• The first of the firms to receive investment – the KeTech Group – has been accused of pension irregularities.

KeTech owes a significant amount of tax and has a ‘backlog’ of creditors. One of its subsidiaries, Key Radio Systems, failed to pass on pension contributions taken from the salaries of its staff. Key Radio, which was making losses, was placed into administration by KeTech on July 31 and its workforce made redundant without notice. The Government’s fund managers said that the closure of the subsidiary was a condition of the deal.

They admitted that they did not carry out due diligence on Key Radio (The Daily Telegraph, 1 September 2009).

• Lord Mandelson admits that his ‘industrial activism’ policy amounts to picking winners: – ‘It’s backing some winners but inevitably not all. Most will not need our help but those that do need our help, we should’ (ibid.).

3. BIS Trade Credit Insurance Scheme.

The scheme allows suppliers which have seen the trade credit reduced to buy taxpayer-guaranteed ‘top-ups’ or double the amount they can gain from the private sector, up to £2 million.

Announced: 22 April 2009; updated 9 June 2009 and then again 20 August 2009 (HM Treasury, Budget 2009, BIS, Press Release, 9 June 2009 and The Financial Times, 20 August 2009).

Pledge: £5 billion in insurance.

Brown’s headline-grabbing promise: ‘there will be real help with credit insurance’ (Gordon Brown, Hansard, 14 January 2009, Col. 206).

How Gordon Brown made the recession worse

7

Status at the end of recession: On 13 October 2009, the Government said 64 firms had received £10.4 million.

Based on these figures, a potential 30,769 firms could have received an average £162,500 each if the scheme had been operating fully throughout the recession after it was announced. (Hansard, 13 October 2009, Col. 829WA) As a result of this very poor take-up, the Government has altered the terms of the scheme twice (Financial Times, 20 August 2009 and BIS, Press Release, 9 June 2009).

Labour’s admission of failure. The scheme has been so poor, the Government has said it will not be extended (Financial Times, 25 November 2009).

Industry criticism. In a survey of 100 companies across the industry, the Construction Products Association found only one company that had taken advantage of the scheme over the last three months and even they had found the Scheme ‘very expensive with very limited cover’(Construction Products Association, Press Release, 26 July 2009).

Phil McCabe, a spokesman for the Forum of Private Business, said: ‘So far the government's trade credit scheme has clearly been a flop.’ (The Sunday Times, 30 August 2009).

4. BIS Enterprise Finance Guarantee Scheme.

This scheme is meant to guarantee lending to small firms with a turnover of up to £25 million. The Government will provide £1.3 billion of guarantees of 75 per cent of the loan, with banks covering the remaining 25 per cent.

Announced: 14 January 2009 (BIS, Press Release, 14 January 2009).

Pledge: Up to £1.3 billion in loan guarantees to small and medium sized businesses.

Status at the end of the recession: On 13 October 2009, the Government said 4,132 loans were drawn down with a total value of £405 million. Based on these figures, a potential 13,263 firms could have received an average £98,015 each if the scheme had been operating fully throughout the recession after it was announced. (Hansard, 13 October 2009, Col. 833WA) The only reason that this scheme has been reasonably successful, after a very slow start, is that it is a pale imitation of our £50 billion National Loan Guarantee Scheme which we first proposed months before the Government announced their scheme in January (Financial Times, 25 November 2009).

5. BIS Automotive Assistance Programme.

The programme involves two forms of help for car manufacturers. One involves guarantees to unlock loans of up to £1.3 billion European Investment Bank (EIB) guarantees for investment in lower carbon initiatives. The other involves Loans or loan guarantees to support of up to £1 billion of lending for lower carbon initiatives for non-EIB backed projects.

Announced: 27 January 2009 (BIS website, Support Measures for the Automotive Industry).

Pledge: £2.3 billion in guarantees Mandelson’s headline-grabbing promise: ‘Providing real help’ to the car industry (BBC News, 27 January 2009). On the Department’s website, the scheme is described as ‘Open for Business’ (BIS website, Automotive Assistance Programme).

Status at the end of the recession: No loans have been made under the scheme. A loan was offered to one car firm – nine months after the scheme’s launch. £10 million was offered to Tata, but the company rejected the funding because it could get a better deal elsewhere (The Sunday Times, 29 November 2009). Based on this figure, a potential 230 automotive firms could have received an average £10 million each if the scheme had been operating fully throughout the recession after it was announced.

How Gordon Brown made the recession worse

8

6. CLG Mortgage Rescue Scheme.

This is targeted at households on incomes of less than ÂŁ60,000 a year who would be entitled to be re-housed under homelessness legislation. Households will be able to apply to their local authority for two options: they will either be able to sell a share of their home to a housing association, enabling their monthly mortgage payments to be significantly reduced, or they can sell the entire home to a housing association and remain in the property as tenants paying a subsidised rent.

Pledge: ÂŁ200 million Announced: 24 November 2008 Status at the end of the recession: Operating from 16 January 2009, but has only helped 92 families. When it was announced, it was said it would help 6,000 (BBC News, 16 January 2009).

How Gordon Brown made the recession worse

9

Promoted by Alan Mabbutt on behalf of the Conservative Party, both at 30 Millbank, London SW1P 4DP.