David Prosser's Outlook: Blanchflower's iceberg alert is spot on, but MPC won't change course

The tax saving that dare not speak its name; Lies, damned lies and government statistics
Click to follow
The Independent Online

David Blanchflower paints a vivid picture of what's been going on in recent meetings of the Bank of England's Monetary Policy Committee. His colleagues have been asleep at the wheel of the good ship Economy and he's failed to rouse them, despite ever louder warnings of a recession-shaped iceberg looming large.

The Bank publishes the minutes of MPC meetings, so we've known for a while that Mr Blanchflower favours interest-rate cuts more strongly than his inflation-minded colleagues. What is clear from the interview he gave Reuters yesterday is that he has become utterly frustrated at his inability to persuade the rest of the MPC to come round to his point of view.

To be fair to Mr Blanchflower, he is not the boy who cried wolf. The UK economy has slowed much more dramatically than most people were expecting even as recently as at the beginning of the year. Indeed, the latest Inflation Report from the Bank of England shows its forecasts from last year for growth were wildly optimistic. The anxieties that have led Mr Blanchflower to vote for a rate cut in each of the past 10 months look to have been well founded.

This, however, is the first time Mr Blanchflower has spelt out the practical reality of his fears to the rest of us, and it does not make pretty reading: unemployment above 2 million by Christmas, house prices falling by a third, and a move into official recession by the end of the fourth quarter.

It is difficult to disagree with much of this prognosis. The tougher question is whether the MPC feels able to cut rates even despite these fears. The best hope is that inflation will peak in the autumn, but even then it will be well into 2009 before the headline CPI rate comes back within the target range for which the Bank of England has a statutory responsibility to shoot.

In that context, rate cuts before November still look unlikely. Mr Blanchflower's MPC colleagues may have been taken by surprise by the sudden reverses that have rocked the economy, but they were well aware of the scale of the problem by the time they met for August's rate-setting meeting. And the minutes suggest that Mr Blanchflower has still not had much luck getting through to his colleagues.

Norman Lamont famously said the recession of the early Nineties was a price worth paying to get on top of inflation. And this was also the message of the Mansion House speech given by Mervyn King, the Bank's Governor, back in June. Living standards would "stagnate" for a period, he warned us all, as the MPC's battle to get on top of inflation prevented aggressive interest-rate cuts.

There is a debate to be had about how serious a threat inflation really is – Mr Blanchflower, for example, expects it to "plummet like a rock" in the medium term. But what should worry people hoping the MPC will heed Mr Blanchflower's warnings is that it seems his colleagues do not dispute his vision of doom. Mr King and others do not think he is wrong to be so downbeat; they have simply made up their minds that there is no choice but to go down this path.

The tax saving that dare not speak its name

Things you never hear a chief executive say: "We're switching our tax base out of the UK because it will save us a shed-load of cash", or "We'll be domiciled in Dublin before you can say 'where's my tax return?'." No, you get something else entirely from the boards of companies such as Charter and Henderson – which both announced yesterday that they were moving their tax base to Ireland, via Jersey, following a path already trodden by Shire and UBM this year. They tell you all about the increasingly international nature of their businesses and the changing geographic base of their sales.

A bit more honesty would make a welcome change. Having trotted out the usual guff about globalisation yesterday, both Charter and Henderson conceded that the real reason they're off to Ireland is they'll save a few bob and spend less time battling British red tape. Indeed, in the case of Henderson, which, unlike Charter, provided some numbers, it's more than a few bob. The shift will cost it £4.5m – some accountant is going to have a decent lunch or two – but Henderson reckons it will make much more than that back in the long term.

So much for the Government's attempts to buy itself some time with the talking-shop set up earlier this year by the Chancellor. Alistair Darling hoped the mere existence of the group, which includes senior figures from business and the public sector, would persuade companies considering relocating overseas that he was serious about listening to their concerns. Henderson and Charter clearly haven't bought it.

Nor was it ever likely that Mr Darling would be able to convince every single company to stay in the UK. For him, the really unpalatable message from the steady trickle of businesses shifting to Ireland is that the corporate world has lost patience with Labour. In truth, the UK's corporate tax regime has not suddenly become less competitive over the past 12 months; but as the Government's relationship with business has soured, so more chief executives have dwelt on the negative aspects of the system here and the benefits available elsewhere.

Still, there is a crumb of comfort for the Chancellor in this diagnosis. It is that chasing after disillusioned business leaders like a jilted lover will do him no good – so he might as well not bother. Freed from the effort of constantly trying to appease a powerful special-interest group, Mr Darling might find tax policy decisions easier to make.

Moreover, it's worth pointing out that despite the dire predictions of the CBI when companies first began threatening to quit the UK, the trickle of departees has not turned into even a stream, let alone a full-blown flood.

If the corporate tax system in this country really was as punitive as the CBI has sometimes claimed, more companies would have left by now. After all, Charter and Henderson are hardly the only businesses becoming increasingly international these days. Mr Darling should treat threats of a mass exodus with a pinch of salt.

Lies, damned lies and government statistics

Can official statistics be trusted? Britain's retailers will argue that the latest CBI figures prove their point when they say not. It's pretty difficult to square the business group's warning yesterday that the retail sector has just been through its worst month in 25 years with recent Office of National Statistics claims that sales were up by 3.8 per cent in July.

The British Retail Consortium ridiculed those ONS figures. And it's hardly the first time that the ONS retail sales numbers have seemed markedly out-of-step with reality on the ground – its portrait of a buoyant market in May was also dismissed by the BRC.

There is a pattern emerging here. Last week, HM Revenue & Customs postponed publication of housing figures because officials did not believe their own findings. The Ministry of Justice has also this month been forced to postpone the publication of government statistics on repossessions following computer glitches.

In the case of retail sales, there are reasons why the CBI numbers wouldn't exactly match those produced by the ONS. They cover a slightly different time period and the methodology used to compile the two sets of statistics also varies. Still, the discrepancy between the pictures painted is too large to ignore.

This is about the worst time imaginable for serious doubts to be raised about the credibility of government statistics. Walking the tightrope between recession and inflation is a tough enough job for the Monetary Policy Committee. But if the committee can't trust the data on which decisions must be based, each member has effectively been blindfolded. Don't be surprised if they all fall off.