Economy

George Osborne will formally unveil the government’s banking reforms in a speech at Mansion House later this evening. The reforms are in line with the recommendations of Sir John Vickers’s Independent Banking Commission (ICB), as laid out by the Treasury, which published this White Paper earlier today. For those who’ve forgotten, Vickers suggested splitting retail and investment banking through a Glass-Steagall-type ‘ring-fence’ mechanism that would protect retail, SME deposits and overdrafts while commanding that the ring-fenced part of the bank is not dependent on other departments for liquidity.

It’s tempting to see comedy in the government’s 30th U-Turn, but there’s a more serious side to this. It fits a pattern: act first, think later. The lack of special advisers in government is part of the problem. Even in the Labour days, I argued for more and better political appointees to help a reforming government get its agenda through. But the problem this time was George Osborne’s chillaxing approach to being Chancellor, coupled to what seems to be a casual disregard for detail. This approach was embodied in his decision to join Cameron on White House jolly the week before delivering his shambolic Budget. It makes you wonder if his growth strategy (or what purports to be his growth strategy) has had enough thought put into it.

No government likes to u-turn, and particularly not on a Budget measure. So, tonight’s changes to the VAT regime proposed by the Budget for Cornish pasties and static caravans are embarrassing for the coalition. It is also worth noting that they have come after they have taken most of the political heat they were likely to take for the changes, including in the House of Commons where there were decent-sized rebellions on both issues. One of the lessons that I suspect that politicians, and particularly the coalition, will learn from this episode is: don’t try and deal with the anomalies in the VAT system. Voters, for obvious and understandable reasons, react particularly badly to taxes hitting products that were not taxed before.

Theresa May’s suggestion that Britain could suspend the free movement of people in the event of a Eurozone break up is a reminder of just how transformative an event the falling apart of the single currency would be. The Home Secretary is a cautious politician who picks her word carefully, so when she says that the government ‘will be doing contingency planning’ about the immigration implications of a Eurozone break-up you know it is serious. One of the things that makes this such an intriguing development is that it suggests a shift in government thinking on the severity of the crisis that could be coming.

Treasury Select Committee Chairman Andrew Tyrie recently explained he would support cutting back the size of the state even if our public finances were in balance. I doubt whether the leadership of the Conservative party agrees. Cameron and Osborne seemed settled on the Brownite consensus until the financial crisis threw them a curved ball. This, in many ways, makes the so-called ‘austerity’ programme more difficult for them to implement. Without the argument that they genuinely believe in smaller government for economic or moral reasons, the party has had to adopt the ‘we wish we weren’t doing this but we have to’ line.

Fred Michel’s testimony this morning at the Leveson Inquiry was embarrassing but not devastating. The texts between him and Jeremy Hunt are cringe-worthy but my read is that the Culture Secretary is not in a weaker position than he was this morning. More important for Hunt’s survival prospect is the appearance of his former spad Adam Smith this afternoon. The question is, did Hunt not know of the extent of contact between Smith and Michel? Everything going on at Leveson, though, is a sideshow compared to the economic news and the storm brewing on the continent. On that note, it does seem odd that Nick Clegg is suggesting that the seventy percent of German voters who would like Greece to leave the euro are irrational.