US Fed Report; UK Budget Targets Missed; Bailout Fallout; Market Reaction; UK Budget Discussion
RICHARD QUEST, HOST: Good evening, a little later than usual, but a warm welcome nonetheless. It's QUEST MEANS BUSINESS, and tonight, our program is all about the letter B. The three Bs. First of all, the bailout in Cyprus. Secondly, Ben Bernanke of the Fed. And the third B, the budget in Britain. It's been a day of seismic importance for the global economy, and tonight we're going to explain exactly what's happened and where it leaves us all. Join me at the super screen for a moment and I'll show you just how all these -- areas come together. Let's begin. An hour ago in Washington, we start with the Fed. The Fed has trimmed its growth forecast just a tad at the upper end. But it does also say that employment will -- unemployment will fall faster than expected. So, the Federal Reserve with its continuing bond purchases very much on the case. And then in London at the budget of the chancellor, George Osbourne, announced that targets were being missed. The growth target for this year had been cut in half, the deficit will be larger than expected, and the chancellor, the finance minister, saying it's all taking longer than anyone had hoped for. He specifically said the UK was being hit by the euro crisis. And then of course, finally, Cyprus. The finance minister is in Moscow, the cabinet's debating a new bailout plan, and everybody's wondering what on Earth is plan B. The banks will stay closed, incidentally, until next Tuesday. Now, Ben Bernanke says Cyprus isn't going to have a major impact on the US economy, but the one thing we can say at the moment is the way the tentacles of this crisis all moves around and then transmits itself over to Russia and into Asia, and then all throughout the globe. Before long, you start to understand why the -- the US -- the global economy is in such a fragile mood at the moment. This is the way the markets are trading at the moment. Stocks are gaining ground in the US. That's on the back of the Federal Reserve and not so much on the instability in Europe abating. It is the Fed that's caused that up, it's up just about half a percentage point. There was a new intra-day record set. As for the European markets, London off just a tad. That's on the back of the dreadful growth numbers for the UK, the higher deficit that we saw. And you can tell that, of course, because Paris, Zurich, and Frankfurt both were higher after the speech. So, it was a bleak budget for Britain's underweight economy. The UK finance minister, George Osbourne, cut a penny off a pint of beer. Oh, and then sliced UK's growth forecast in half. He cut the business tax rate to try and coax austerity -- or growth out of austerity in a weary nation. In his budget speech, the chancellor said the economy will grow 0.6 percent this year. Three months ago, he was expecting double that number. And his trimming debt is behind schedule. Debt as a proportion of GDP won't stop falling until 2017 to 18, two years later than planned. Corporation tax will fall to 20 percent, down from 28 percent when the coalition took power. George Osbourne said that even tough times are challenging, the UK's faring better than its eurozone neighbors.</s>GEORGE OSBOURNE, UK FINANCE MINISTER: While less than we would like, our growth this year and next year is forecast by the IMF to be higher than France and Germany. It is a reminder that all Western nations live in very challenging economic times. And the ABR then expect the recovery to pick up to 1.8 percent in 2014, 2.3 percent in 2015, 2.7 percent in 2016, and 2.8 percent in 2017. Crucially, jobs are being created.</s>QUEST: Now, put all this to the test. John Prescott is the former UK deputy prime minister. Andrew Sentance is a former UK monetary policy committee member. They are with me here in the studio. And from central London, Lord Lamont, former chancellor of the exchequer, former finance minister, joins me. I'm going to start with you, Norman Lamont. The budget -- there seems to be a consensus -- we'll come to you in a second on this point -- but there seems to be a consensus that the budget, fiscally neutral, could have been a lot worse. As somebody's who's put these budgets together, what did you make of it?</s>NORMAN LAMONT, FORMER UK FINANCE MINISTER: Well, I think he was in a very awkward position, his back was against the wall. He had very little room for maneuver. He had to announce these downgrades in forecasts, which quite honestly, I don't think surprised anyone. Anyone who knows what's happening in our main export market, historically --</s>QUEST: Right.</s>LAMONT: -- knows that that is likely to be the situation. But I thought he had one imaginative innovation, which was the help he's going to give the housing market. There's not a lot he can do about exports. Exports are the reason --</s>QUEST: All right.</s>LAMONT: -- that our growth has not met the expectation. But he can do something domestically, and the way in which he was going to use the government's balance sheet to help the housing market might actually just do something.</s>QUEST: Lord Prescott?</s>JOHN PRESCOTT, FORMER UK DEPUTY PRIME MINISTER: Well, I think you showed this is a global problem. There's a big argument in Britain, well, it was the Labour government or Tory government. It's global, and it's affecting the world. The reality is, in America, your shares you go up. In UK, they've gone down. We've lost our triple rating. And the real problem for the chancellor was that he promised four years ago that he had the solution.</s>QUEST: Oh!</s>PRESCOTT: Cut the debt and then be able to get the increase in jobs and prosperity. It just did not happen.</s>QUEST: But he has had Greece, Portugal, Ireland, and now Cyprus, all of which have taken their toll.</s>PRESCOTT: Well, of course they've taken, but a lot of other countries, such as Germany and France, that's not the same case. But in reality, what he promised was that he could cut the debt. He hasn't. It's gone up. He could growth factors. It's gone down. He hasn't got the credibility now to present the policy he's got.</s>QUEST: Norman Lamont?</s>LAMONT: Well, the one thing that has to be recognized that John Prescott is not recognizing is that it isn't austerity that has caused our deficit to go down slowly, it's the fact that these other countries, they've done better on deficit reduction not because they've had growth -- they've had far worse outcomes for their economies than we have. But they've got it down through absolutely slash and burn.</s>QUEST: All right.</s>LAMONT: We have actually pursued a more gradual approach, and that is why the domestic economy really has performed in the circumstances not too badly. The economy has broadly flat, but employment has been growing because of the favorable domestic conditions.</s>QUEST: OK. MPC -- former MPC member, you had to make the decisions or were there when the decisions were taken on interest rates and quantitative easing. Andrew Sentance.</s>ANDREW SENTANCE, FORMER UK MONETARY POLICY COMMITTEE MEMBER: Yes, well in terms of the budget, I think the situation is the chancellor was hemmed in. He has chosen not to try and claw back the extra borrowing. Actually, that means --</s>QUEST: Do you welcome --</s>SENTANCE: -- that borrowing targets are higher.</s>QUEST: But do you --</s>PRESCOTT: Hemmed in by his own policy.</s>QUEST: Do you welcome the change in remit to the monetary policy committee that they're going to have to now justify when they are trading off growth versus employment or inflation?</s>SENTANCE: I think it's good in the sense that it's making things a bit clearer and more transparent. I think the worry I have about it is it appears to perhaps dilute the focus on the inflation target, and the banks already played fairly fast and loose with the inflation targets.</s>QUEST: That's gone out the window.</s>SENTANCE: And there'll be an encouragement, I think --</s>PRESCOTT: They haven't been flat and loose in three and a Monday for their growth, have they?</s>SENTANCE: -- through this to --</s>PRESCOTT: That's another problem.</s>QUEST: What about -- Lord Lamont, do you agree that it's right that the Bank of England should have this wider remit?</s>LAMONT: Well, I really agree with what Andrew Sentance said, and I think it would be a great mistake to think that inflation was yesterday's problem. The Bank has consistently missed its inflation target, and you know high inflation or higher than target inflation is why consumer spending has been squeezed and real incomes have been squeezed --</s>QUEST: Right.</s>LAMONT: -- and real incomes have been squeezed. If we'd had lower inflation, we'd have had stronger consumer demand.</s>PRESCOTT: Yes, but other central banks have tried to measure this -- the jobs, employment, and inflation, and that's proper, and I think we get more information by these changes to make a judgment about it.</s>SENTANCE: Well, as long as the -- it depends on how it's going to operate. And the problem with the MPC remit, now, it's now an extremely long, complicated document.</s>QUEST: It's very difficult, as opposed the Fed's, which is straightforward --</s>SENTANCE: And the --</s>QUEST: Growth -- employment, and inflation.</s>SENTANCE: And the question is, how will the new governor and how will the committee interpret down the scope for quite a lot of different ways of interpreting this complicated remit.</s>QUEST: It's a busy night, if you want --</s>LAMONT: I think we forget, the reason the Bank was given independence in the first place was because it was thought and argued that there was no tradeoff between inflation and employment. And by taking other criteria into account, you're really going backwards --</s>QUEST: All right.</s>LAMONT: -- and undermining the whole case for the independence of the Bank.</s>PRESCOTT: Well, it's working for America --</s>QUEST: I want --</s>PRESCOTT: -- it's working for New Zealand. There are other central banks who get a better balance.</s>QUEST: I want to pull this together finally with the idea that whatever is happening, the UK has got many more years of austerity and slow growth ahead. Can we agree on that, Andrew Sentance?</s>SENTANCE: I think we're in what I call the new normal for growth for Western economies.</s>QUEST: That's depressing.</s>SENTANCE: Well, it's interesting that the United States is experiencing slower growth, but it's still getting unemployment down --</s>PRESCOTT: And it's still getting growth!</s>SENTANCE: -- and what that's telling us is that productivity growth is slower across a range of economies as we adjust the financial crisis and the big changes in the global economy.</s>PRESCOTT: Well, that chancellor's telling us we're not going to get any growth in the next five years, for God's sake!</s>QUEST: Isn't that the point, gentlemen? That the US is still growing by 1.5 to 2 percent --</s>PRESCOTT: Yes.</s>QUEST: -- Lord Lamont, and unemployment's coming down? Whether it's Germany -- well, actually Germany, it is Germany's unemployment has done. Whether it's any of the other major European countries, it's exactly the opposite.</s>LAMONT: No, I think that's true. America has this tremendous dynamism, this productivity and innovation. But we have many countries in Europe that are in a far, far worse position than Britain. If you take Italy or Spain, they have something like 7 and 8 percent below the peak of output in 2008.</s>PRESCOTT: But how do you explain Germany? How do you explain Germany?</s>LAMONT: Germany contracted 0.6 percent in the last quarter.</s>PRESCOTT: On what has growth?</s>QUEST: All right --</s>PRESCOTT: We have a reduction and no growth.</s>QUEST: And there we must leave it, gentlemen, for this evening. Lord Lamont, thank you. Lord Prescott, thank you. Andrew Sentance, would you still like to be on the MPC today?</s>SENTANCE: I'm happy to leave it to others for the moment.</s>QUEST: Thank you very much, indeed. A slightly more truncated discussion than we'd have hoped for, but obviously with the president and the prime minister in Israel, that takes a certain -- lead of the day. When we come back, Cyprus. We've talked about Britain, but one of the reasons everything's so grim is when you look at what's happening in Cyprus, staggering though one of the worst weeks in its economic history. Certainly one of the worst weeks of the eurozone's history. It's now looking to Russia for help. We are live in Moscow and Nicosia after the break.