2010 A Year of Economics: the Bank of England

To deal with the effects of a negative output gap the twin pedals of fiscal and monetary policy were pressed to throttle speed.

Interest rates remained at an all-time low at 0.5% to encourage borrowing.  Quantitative easing injected £200bn into the econonmy, with effects on inflation yet to be fully seen.  Currently, inflation according to the CPI index lies at 3.1%.

Inflation levels hit the headlines as it exceeded 3%, forcing Mervyn King to write a letter to the Chancellor explaining the situation.

There were even question marks raised about the credibility of the Bank of England.  Although dismissed by the Bank of England, many asked whether the bank had virtually abanoned its 2pc target.  There were also accusations that Mervyn King had become "too political" by endorsing the coalition's spending cut plans. 

2010 A Year of Economics: Sovereign Debt Crisis

The infamously so called 'PIGS' (Portugal, Ireland, Greece, Spain) of Europe threatened the stability of the continent. They had built up unsustainable budget deficits.

In May, Greece were rescued with a $110bn package. In November, Ireland were given a $85bn emergency loan. Both countries embarked on deep austerity cuts, sparking fierce riots on the streets of Athens.

The Eurozone was called into question as it limited the powers of its members to control their debts. They were unable to devalue their currency which would have mitigated their woes.

2010 A Year of Economics: Deficit and Debt

As we approach the end of 2010, I will be blogging on the top economic stories that have dominated our lives this year.

Deficits and debts throughout Europe and the US threatened the sustainability of public finances. The UK, notoriously, had the highest levels of debt within the G20. David Cameron coined the phrase, 'the age of austerity', marking the start of unprecedented cuts in government expenditure. Amongst many cuts in spending, the reform of the welfare system created the biggest headlines - child benefit was removed for many parents.

As we begin 2011, taxation will also increase as VAT rises to 20% and transport costs increase, causing more misery for motorists.

Yes to government aid for non-democratic states

Burma, North Korea, Zimbabwe - should governments support the principle of giving aid to these countries, run by non-democratic regimes? Yes.

The argument for not giving aid often goes like this: by giving government aid, we grant an undeserved patina of legitimacy for the oppressive regime. We have a duty as a Western democratic government to exert political pressure on unjust governments. Pressures and condemnations from the international arena can unsettle regimes: we saw in this in South Africa under the apartheid and arguably, in Burma (who held their first, albeit rigged, elections since 1990 this month.) However, by giving aid we are effectively condoning their actions. In order to help their citizens in the long-term (for greater freedoms) we must make the sacrifice now.

This short-term pain, long-term gain argument does not stand. It lies on the assumption that democracy is somehow the only good form of government - all other systems are wrong. This is a typical elitist Western view. Other good forms of government do exist. Pakistan under Musharaff was undeniably more stable than it is now. Under military rule, their citizens were safer. Now, although democratic, they are plagued by insurgency. Authoritarian Communist rule in China has been good for its people - their economy is booming and the middle class are rising. Therefore, it is wrong to assume that a non-democratic state automatically equates to a system that is bad for its people.

Besides, even if we accept perhaps democracy is the ideal form of government, logic still dictates that we should give aid to non-democratic governments. There are three grounds for this.
First, by not giving aid we are only penalising the people we claim to support, not their oppressors. The citizens are the ones who will suffer as a result of our inaction. Surely we have a moral duty to meet their humanitarian needs as opposed to making a counter-productive political statement of condemnation. I say counter-productive for a reason: not giving aid only serves to strengthen the position of the dictator. As he has a monopoly over all forms of media, he will be able to turn his population against the West - the "foreign oppressors who do not help."
Second, giving aid will actually help the shift to democracy - which is the presumably, the aim of those who oppose giving aid to non-democratic governments in the first place. Aid helps to develop the country in terms of infrastructure. The population become richer and more educated. As a result, the people can no longer be ignored as they put more effective pressure on their governments. This has happened in China. As the middle class have risen, the Chinese government have increasingly become more liberal (although not perfect) towards its people. This is in stark contrast to places like North Korea, where the population can be easily oppressed because most are just peasant and hence - powerless. Thus, there is a link between giving long-term aid and the population developing. When the country develops, greater freedoms become inevitable.

Governments across the world must continue to give aid to non-democratic governments - it is the moral and practical way.

The Great Irony

The despot that is Sadaam Hussein was toppled in 2003. A new Iraq was born: based on the principles of freedom and democracy - something it had been denied in the past.

But this week Iraq stumbled. Along with five other nations (Russia, Khazakhstan, Cuba and Morocco), Iraq too declined their invitation to the Nobel Peace Prize ceremony in December. China has asked nations to boycott this year's ceremony in Oslo because it has been awarded to a pro-democracy dissident, Liu Xiaobo, who is imprisoned in China. Presumably, Iraq followed this course of action so as not to harm trade relations with China.

By doing so, Iraq has betrayed its own values and succumbed to pressure from the Chinese.

Expansion of the UN Security Council?

The UN Security Council is often the subject of intense criticism - from accusations of unfair representation to ineffectiveness to slowness. Expansion of the UN Security will exacerbate this problem, not solve it.

The problem with the current UN Security Council stems from its structural problems - the power to veto. By expanding this to include more permanent members, it means more vetoes and more inaction. Therefore, we do not solve problems on the efficiency front.

Neither do we make it more representative. Presumably, nations like India, Brazil and Japan will be the first to be added the council. This manifests two problems. Firstly, nations will undoubtedly represent their own self-interests as opposed to their continent. Secondly, it will increase agitation and tensions on those countries who are not given permanent seats. Pakistan will be furious about India representing Asia on the council and the same can be said for Mexico and Argentina about Brazil. Thus, far from improving representation, we are harming it.

Besides, even if expansion were to improve representation, that does not enhance the security council. The purpose of the council is to maintain world peace. The reason why USA, China, Russia, UK and France hold permanent seats is because they possess unparalleled military might. If the UN had intervened in Georgia, Russia would have undoubtedly sparked a bitter war. But, the fact that they could veto the UN's involvement meant that the war happened in the boardroom - not the battlefield.

The veto is a necessary evil. Expansion of the UN security council would be, on the other hand, an unecessary evil; it will not become more representative nor efficient.

Despotism in Burma

After the Second World War, Burma was widely seen as the brightest economic prospect in South-East Asia. In 2010, we have an impoverished nation plagued by the actions of a brutal army. In 1990, multi-party elections were held largely as a result of popular pressure. The National League for Democracy (of which Ms Suu Kyi lead) won a landslide victory. Yet the result was annulled, Ms Suu Kyi placed under house arrest and no elections have been held since - that is, until last Sunday.

What has gone wrong? The international community, despite what it may think, are utterly powerless. The US have imposed sanctions on Burma since 1997. This is ineffective considering Burma are controlled by despots who could not care less for their people.

These sanctions have not only been futile but actually counter-productive. Firstly, when all information is heavily censored by the state, they have undoubtedly been able to foster an 'anti-foreign' feeling in the country against the 'foreign oppressors' who impose sanctions on its people. Secondly, sanctions hurt the very people they are meant to help; the poor, impoverished citizens. Thus, sanctions are nothing more than a form of tokenism.

Instead,the most we can do is exert international pressure through the mass media. Although this is not claimed to solve our problems, it can be effective. Iran did not stone to death Ms Astiani for adultery because of the incredible amounts of negative press coverage around the world. Clearly, these brutal governments do care about international opinion. This is the way forward.

Currency Wars

The G20 meet today in Seoul - at the top of the agenda will be no doubt about global imbalances. A multilateral approach is need to prevent countries retreating into competitive devaluations.

As a result, the USA has a huge current account deficit while others, like oil exporters and China have large surpluses. There will be pressure on China to revalue its currency. This would make China's exports more expensive in the market and Chinese consumers would import more goods and services. This will support growth in the USA and Europe.

However, we must achieve this end, not by threatening China, but through agreement. Punitive protectionist measures against China will only force them to retaliate.

Stalemate in Zimbabwe

Nearly two years ago, the MDC party undeniably won the general election yet was forced into a power-sharing government with Zanu-PF.

As if that is not outrageous enough, Mugabe has refused to keep his side of the pact signed with Morgan Tsvangirai in 2008. Human rights and the rule of law are being systematically violated - including the invasion of white-owned farms. For the next election, which could be as early as next June or as late as 2013, Zanu-PF leaders have made it clear that they will not make the same mistake as in 2008. Namely, they will use violent intimidation as early as possible before an election.

The Southern African Development Community (SADC), especially South Africa's Jacob Zuma, need to be more forceful. This will have much more impact on Zimbabwe than condemnations from the Western world. The SADC and AU (African Union) need to send in peacekeeping forces a full sixth months before the election.

The EU also have a role. As Zuma has called for, the EU should lift its sanctions against Mugabe and his comrades (which ban them visiting the EU) in return for peaceful election monitored by international observers.

A politicisation of British justice

When the then Israel Foreign Minister, Tzipi Livini, accepted to speak in London last December, the British magistrates issued an arrest warrant against her for war crimes. She duly cancelled her trip. A similar situation has occurred with Israel's Deputy Prime Minister last month.

This is the result of pressure groups applying to the British courts whenever an high-level Israeli official wants to visit the UK. In theory, they have every right to do so. A legal principle known as universal jurisdiction, allows courts to try suspects in cases of crimes against humanity, even if they are a foreign national who committed the alleged crime in a foreign country. This principle does have its merit: it allows courts to try those who would not otherwise be tried - because the concerned country have a shoddy legal system. This is why Radovan Karadzic, accused of the genocide at Srebrenica and Charles Taylor, the former tyrant of Liberia is on trial at the Hague.

However, the situation with Israel is a mere politicisation of justice by pressure groups. It is, to say the least, unhelpful to our diplomatic relations. Israel have all but suspended high-level contacts with Britain. By preventing official coming to the UK, we are in no way advancing the cause of creating a two-state territorial settlement.

Why we are not heading for a double dip recession...

The economy is recovering faster than expected - up 0.8% rather than the lowly 0.4% predicted by City analysts. The encouraging part is that this is largely driven by the private sector. Construction, which did not fare well in the recession, expanded by 4%.

The cuts in government spending will, cetribus paribus, lead to a double-dip recession. However, this is not the case - other factors in the economy are improving.

The pound has depreciated by approximately a quarter in two years. A weaker pound gives the UK a competitive advantage when exporting. This continued depreciation will give the confidence to firms to invest.

Coporation tax is being reduced from 28% to 24% over a four year period. This will reduce the amount firms lose from profit and hence, provide a greater incentive for firms to expand.

Further, interest rates are at an all time low - the base rate is 0.5%. This reduces the incentive to save and more importantly, makes it more economically possible for firms to finance their investments. It reduces the opportunity cost of investment as returns do not have to be as high to make a profit - less is paid on interest.

Thus, we can see, that other components of aggregate demand - namely, private investment and net exports will make up for the decrease in government expenditure. A double-dip recession is not inevitable.

Zoning in Nigeria

First, we must congratulate Nigeria. In 1999, after year of military rule, it returned to a democracy. It has had three civilian presidents in a row - and not thrown out by the army.

However, the democracy was set up on the notion of "zoning": a rota where candidates for many public positions are alternated between the Muslim north and the Christian south. This includes the presidency.

Although this sytem was intended to quell Christian fears that they were being shut out politically, it is nevertheless flawed. Candidates, are chosen more on their place of birth than their competency. Nigeria could do with a fully meritocratically chosen president - life expectancy lies at a meagre 49 years and most oil revenues end up in the wrong hands.

Equally important is that zoning accentuates the rift between north and south. In the long term, it does not unite Nigeria - it merely emphasises the difference. This is not the way forward. Policy debates are more likely to be seen through the prism of region and religion.

The way forward: quantitative easing

The economy is growing faster than expected - 0.8% in the third quarter, from July to September.

Paul Krugman, the Nobel winning economist, argued in the New York Times last week that "premature fiscal austerity will lead to a renewed economic slump." However,this does not seem to be the case: tightening fiscal policy has improved confidence in the economy. The credit agency, Standard & Poor, announced that Britain's AAA status is now "stable." Spending cuts will be a cataylst for a virtuous circle: improved confidence leading to a boost in private consumption and investment. On the other hand, high levels of public spending will only serve to crowd out the private sector.

But as fiscal policy tightens, there needs to be another path to stimulate output. This is where monetary policy comes in. The MPC should expand the money supply through quantitative easing. This will reduce the cost of money. Yes, short term interest rates are already near zero, but long term rates on bonds and mortgages need to be lower. This is the way forward.

Guide to the Comprehensive Spending Review 2010

Why is there a Spending Review?

The Comprehensive Spending Review, lead by Sir Phillip Green, will examine public expenditure from the last three years to try to identify potential savings.

This review essentially aims to reshape and resize the state sector in the economy – but at the same time, maintaining fairness and encouraging economic growth. Even before the recession, the structural budget deficit of the UK was in a dire state. This was exacerbated by the financial crisis – hitting a record £155bn deficit in the 2009-10 financial year. The problem stems from untenable difference between government tax receipts and public expenditure. As more people became unemployed during the recession, revenue from taxes decreased. At the same time, the government had to increase their levels of spending on for example, bailouts and welfare benefits.

Thus, this review has been undertaken to tackle this problem – by cutting government spending.

What has Mr Osbourne announced today?

George Osborne mapped out £81bn of spending cuts over the next four years to reduce the budget deficit. The average cut in departmental budgets is 19%.

The headline saving - £18bn in total from unprecedented cuts in welfare spending. Incapacity benefits are to be reformed – they will become means-tested.

Among the biggest hit was the department of Eric Pickles, the Communities Secretary, whose budget was cut by 68%. However, responsibility for deciding how to make the cuts is being transferred to local councils.

Thousands of prisoners will be released under plans to cut the jail population by 3,000 over the next four years. For example, plans to build a 1,500 inmate jail in Essex have been postponed indefinitely. The Ministry of Justice’s budget is to be cut by 23%, from £8.9bn to £7.3bn.

Health budgets will rise by 0.1% in real terms but plans to expand free prescription entitlements and one-to-one nursing care for cancer patients have been scrapped.

Schools funding has also been partly protected – the rise, after inflation is factored out, amounts to 0.1%. This includes an increase in money intended for children from poor families for free school meals. However, capital spending will be cut by 60%.

The retirement age will move up to 66 by 2020 – millions of workers will have to wait longer to receive their state pension. Nevertheless, pensioners’ winter fuel payments were protected, as were free bus passes and TV licences.

The annual budget for home energy efficiency improvements will fall from £345 millions this year to £100 million in 2012-13. The policing budget is to be cut by a fifth and banks now face a permanent tax levy.

Just too draconian

In July, clashes between the Romas and the police triggered the French government to crackdown on illegal settlements with "Romas as priority" and then to deport them.

There are two problems with this. First, it is an unjustifiable generalisation - the government are stereotyping a whole ethnic group and placing them under one branch. This is a populist, xenophobic measure. If the British government were to round up lawbreakers "with blacks as a priority," there would be a mass uproar. This is exactly what the French government are doing.

Second, it is the wrong way to address the problem. Yes, perhaps, many Romas are involved in crime, prostitution and trafficking - but this is a matter of law and order, not deportation. If they are breaking the law, then just like anyone else in society, the police must deal with it. The approach of the French government is too extreme. Enforcing the law through the police force is a proportionate response that will achieve the same end - making French society a safer place.

Regardless, it is the duty of the French government to look after its fellow EU citizens. Romas in the Bronx in New York are doing so well unlike their European counterparts, who fare the worst on every social index. This is because the American government have helped to educate, and not just shun, the Romas. Education is the long-term, sustainable solution if we are to solve Europe's biggest social problem - and France have a duty to help fulfil that aim.

Instead, Sarkozy has chosen the easy, immoral route that forsakes their moral duty and is too draconian.

Heading out of the lion's den

Eric Daniels, the chief executive of Lloyds Banking Group, will retire next year. This is also the case with John Varley of Barclays and Stephen Green of HSBC. Sir Fred Goodwin stepped down from RBS in 2008 when the government were forced to save the bank from collapse. With the exception of Peter Sands, chief executive of Standard Chartered, this marks the final departure of bosses who steered the banks through the financial crisis.

Standard Chartered were shielded from the severity of the crisis due to its larger exposure to developing markets.

The coming months could also prove to a be a turning point for HSBC and with that, a blow to Britain. In March, their chief executive, Michael Geoghegan relcoated to Hong Kong. Now as Stephen Green steps down as chairman to take up a position as Trade Minister, their next chairman could be based in Hong Kong.

This is symptomatic of a greater trend of banks moving east to capitalise on the growth in China and the rest of Asia. HSBC, Barclays and Standard Chartered have warned that this move will be acclerated if regulations become too stringent.

They have a point. We run the risk of pushing these banks away, hence lowering our international competitiveness in the long term, if we continue on this path. At the Liberal Democrat conference today, Vince Cable will announce further plans to levy 50% on banker's bonuses again. We must be very careful - satisfy the need to protect our economy but not be too rash in doing so.

To cut or not to cut...

The Lib-Con coalition have been very clear from the outset: the budget deficit will be reduced drastically by the end of this parliament. This is in contrast to Labour who planned to cut the deficit by half over the next four years. Between the two parties, there is a clear divergence on how to deal with our fiscal policy.

This conflict reverberates through the entire British economy. On the one hand, we have the ardent Keynesians, who argue that government spending must not yet be curbed. On the other hand, there are those like George Osbourne, who vehemently feel that reduction must be at a much faster rate. Perhaps this is true; sustained spending could trigger inflation in the long-run. Further, interest rates will rocket as investors lose confidence in our government.

However, I see more merit in keeping our foot on the pedal. There are pertinent lessons to be learnt from the demise of Japan. In the 1990s, they tightened their fiscal belt before private demand could sustain itself. This is the case with Britain. Household debt levels in the UK are worringly high - reduced public spending and tax increases do not bode well for the British economy.

Perhaps this issue is so capturing because of the conflict of ideas it presents. Both sides wield strong economical arguments.

Nevertheless, the budget deficit question is not as clear as it may seem. There is nobody who disagrees that the deficit must be cut. Our structural budget deficit is unforgivable and an EU commission estimates that our deficit lies at 12% of our GDP. It is the rate of cutting that is so hotly contested.

The case for austerity

From speed cameras to schools to the film industry - every corner of public spending must be examined for possible cuts.

It was the proper role of government, in the financial crisis 2007-09, to cut interest rates and increase spending. This was right to meet the shortfall in private demand. Although this meant running up a large budget deficit, as the government spent more on welfare than they recieved from tax receipts, it can be seen as a necessary evil. The most ardent of Keynesian thinkers still maintain that spending is needed until the recovery is assured.

But we must put things in perspective. The European Commission estimates that the UK has budget deficit of 12% of the GDP - the highest of any EU member. Long-term interest rates have not shot up because of the serious stance the Lib-Con coalition have displayed on deficit reduction. Increased public spending was the right path in the recession, but now the path is clear.

A patchy dispensation of justice

The US government have managed to set up a $20-billion BP compensation fund for the oil spill in the Gulf of Mexico. And rightly so.

However, this highlights a blaring double standard. The Bhopal disaster killed 3,500 people in the direct aftermath, and 15,000 in the following years; many children born disabled; and toxic waste continues to contaminate drinking water. Yet the Indian government and Union Carbide agreed at a settlement for a meagre $470 million.

Yes, the BP oil spill is outrageous but it is pale in comparison to the Bhopal gas leak. Senior managers at the time of the gas leak in Bhopal were sentenced to two-year prison sentences and a fine. This scandalous dispensation of justice has been said to be treated like "a minor traffic accident."

The Indian govermnent have pledged to pursue a clean-up of the toxic waste by Dow Chemical (the company who bought up the assets of Union Carbide but have refused to take responsibility for its liabilities.) This is a welcomed decision - better late than never.

Capping the problem

Immigration issues were very prominent in the last general election - often seen as the elephant in the room that many politicians tip-toed around.

However, in the coalition agreement the need for a non-EU immigration cap was set out. The aim is to reduce the numbers coming in from hundreds of thousands to tens of thousands, back to levels seen in the 1990s.

Cameron claims that a cap will finally put a cap on the heated issue of immigration in the public domain (excuse the pun!) The thinking is, the public will be appeased by action and thus, it will no longer pose a problem.

The number of bogus colleges with bogus students would also be curbed. Hence, a cap will reduce the number of people coming to the UK to work in the black economy.

However legitimate the plans may be, perhaps these comments are untimely. On a visit to India to strengthen economic ties, Cameron talks about a cap that would potentially prevent Indian doctors, nurses and engineers seeking employment in the UK. India's commerce minister, Anand Sharma has even gone as far as claiming it could have an adverse effect on trade relations.

The key to all our woes...

...in David Cameron's eyes, it's certainly our foreign trade policy. And rightly so. By demonstrating Britain is "open for business", we can attract healthy foreign inward investment.

His reasoning is very logical: in times of austerity, when government spending is curbed on every level to tackle the structural budget deficit, we need trade. Companies all over the world need to buy British goods. Private companies must be the engine of growth as the public sector is squeezed, if we are not to see jobs lost.

Accordingly, Cameron has made it clear that diplomats, regardless of their juniority, must promote UK business abroad by trying to win orders for UK firms.

In the last week, the Prime Minister has been on a "jobs mission" - from the USA to Turkey to India. This is the right strategy.

Freshfields

I have always thought that I wanted to go into the law profession in the future. So, to find out a bit a more about the field, I decided what better way than getting first hand experience; for the last three days I have been on work experience at Freshfields.

Being able to mingle with the people at the firm, from trainees to associates to partners, my time at Freshfields provided an ample opportunity for me to gain exposure to working life.

I worked in the Employment, Pensions and Benefits (EPB) Department shadowing an associate. I was able to learn so much more than I could by researching on the internet! First off, I read through and discussed an Employment Appeal Tribunal document . All three days I sat in on the department's training sessions - on cross border deals, treasury shares and pensions schemes. These sessions were littered with incomprehensible jargon! Accordingly, I made a glossary of all the legal terms I learnt.

Perhaps the most rewarding task I completed was my note on "Responses to Industrial Action." The note, based on research from books on employment law, outlined how a firm could deal with official and unofficial strikes from their employees. It was sent to the whole department for future reference!

After three fruitful days of working at Freshfields, my passion for this area is burning stronger than ever!

Tonight's the night

Perhaps it is slightly pertrubing that tonight's election debate (just 15 minutes to go!) excites me just as much as the World Cup in June. Eeek!

Tonight could prove to be a game changer yet it could also be a damp squib. As its the very first election debate in British politics, no one quite knows how it will turn out. With trust in politics at a low ebb, it is essential that this debate is an engaged and responsive one. Although it will be fantastic for tomorrow morning's soundbites, I hope the debate does not prevail as one full of recited lines and bunch of pretty phrases. I hope for substance over style.

More than anything, I hope the rules are broken! The crowd are forbidden from cheering and booing - ridiculous!

Negotiating with the non-negotiable

With the military offensive in Afghanistan looking bleak, politicians are considering another route - negotiation with the Taliban.

The thinking is that in exchange for a better future, many of the Taliban will put down their arms. It is said that most fighter are not ideologically driven, but instead, are forced into a life of fighting because it is their only option. If they are offered a better path - not bags of money - but the prospect of an education and jobs they will stop fighting.

Perhaps this solution is unsustainable. Even if we can "buy out" some of the smaller fighters, until we can eradicate the leaders we have very little chance.

This new idea taps into the debate about negotiating with terrorists. In principle, it is wrong to negotiate with people who try to achieve their aims through violence. However, there are those who claim these principles pale into insignifcance when we consider the benefits. If negotiation can ultimately lead to lives being saved, this must be the priority. The British government, under John Major, held secret talks with the IRA which led to the first breakthrough to a ceasefire. The ends justifies the means.

However, the idea of negotiation with the Taliban is nothing less than idealistic. The very nature of terrorists is that they want all or nothing. They are not prepared to make concessions.

Negotiation with the Taliban is unworkable.

"We are all Keynesians now"

It is what we have all been waiting for: slamming the door on the recession.

However, we must not be too hasty - the prospect of a strong recovery lies in the balance. Figures that the economy grew by 0.1% in the last quarter of 2009 was substantially weaker than what most economists predicted. More worrying is that the figure could yet be revised downwards. The latest reading is only the first of three. The next two will come in February and March. It is entirely plausible that we could record minus growth again, just like in the recession of 1990-2.

There are two factors that will jeopardise the recovery. Firstly, with the election battle in full swing, Labour and Conservatives are keen to show that they can handle the budget deficit. In many areas they will be looking for spending cuts. This is a risky business. If any good can come out of Japan's demise in the 1990s, it is that there are pertinent lessons to be learnt. Japan tightened their fiscal policy before private demand could sustain itself. We must not take the same path and risk a double-dip recession. The second threat to our recovery is inflation. There has been a sharp rise in inflation to 2.9% (CPI index). Although this can be largely attributed to the VAT rise back to 17.5%, consumers will nevertheless cut spending. The Bank of England sees the hike in inflation as temporary, but the public may not.

It is in this dire context that the government must sustain the recovery. The goverment must continue to sustain demand through big spending to encourgae businesses to invest. It is the proper role of government to fill the shorfall in private demand - "we are all Keynesians now." However, this will come at a cost. Our budget deficit is utterly unsustainable. If the government continue to spend more than it recieves from tax receipts for much longer, confidence will plummet. Credit agencies have already warned that our AAA status is being threatened. A downgrade will have catastrophic results. Interest rates will soar as creditors judge loans to be very risky. The rate at which the goverment must press the brakes on our aggressive fiscal policy is very much a judgement call. The rate of growth, unemployment levels and credit levels must all be considered.

Britain were worryingly sluggish out of recession. These new figures of timid growth is not a poll asset for Labour. But it can be used to scare the public away from Conservative plans for unprecendented cuts.

Self-defence: a case of proportionality

It is contentious to argue that when an intruder enters private property, they forgoe their rights and are at the wrath of the owners - this is essentially what the Tories propose. The Conservative Party want to stretch existing legislation to give householders more power in the event of a burglary. This is wholly unreasonable and unecessary.

The status quo is sufficient. It recognises that householders have a right to self-defence and are likely to act violently in the heat of the moment. It recognises that householders have an inalienable right to protect their property, family and themselves. The case of the Hussein brothers, who were shown "mercy" by the jury, attests this.

It is pertinent to stress the notion of proportionality. When tackling a criminal, it is permissible to use physically hurt him to defuse the situation. However, it is then unjustified if the householder then proceeds to kick him in the head twenty times. The law currently recognises this difference. Yet the Tories still want to effectively grant householders a 'licence to kill burglars.' This encourages vigilantist behaviour. People must not take the law into their own hands - that is the role of the courts.

Furthermore, giving householders the right to use disproportionate force against a burglar is counterproductive. More burglars will feel the need to carry extreme weaponry. In the USA, as citizens have the right to keep handguns in their house, criminals, who otherwise may not, must do the same. The same principle applies to this case.

Householders must have the right to proportionate self-defence, but the law already caters to this. However, they do not have the right to take the law into their own hands.

A US-style levy on banks?

President Obama has outlined plans for a $117bn bank levy - in order to recover money that was spent by the taxpayer on the bailouts. Britain must not follow suit.

Although such a move would prove to be a substantial vote-winner, it does not make any economic sense. The situation in Britain is different to the USA. When Britain bailed out banks, the process partly involved buying shares of the company.

However, a Labour backbencher, MP John Mann called for tougher restrictions. He claimed that bankers have "nowhere else to [threaten] to go" if we levy taxes on banks because America is no longer an option. This statement is utterly fallacious. Banks could easily move to the far east, where costs are substantially cheaper. We must be careful not to overreact to public outrage by being too harsh on banks. It will simply prove counter-productive for us in the long-term. Nevertheless, a tax could be more justified if several major economies agreed as well.

If punitive taxes were levied on banks because the government succumbed to public pressure, it could be fatal. Instead of punishing banks, the public may be punished. The taxes could translate into higher prices for consumers.

There is a need to reform banks in Britain. However, our desire to eradicate the reckless behaviour of bankers must not result in any rash decisions. We must err on the side of caution, if London is to remain competitive in the future.

Angola: premature trust?

The African Cup of Nations is meant to be a celebration of African football; the continent united in one competition. However, the decision to host the African Cup of Nations in Angola was not the wisest idea.

Angola emerged from civil war in 2002. The Foreign and Commonwealth Office advises not to travel to the region of Cabinda, in the north-west of the region. Perhaps the country wanted to host the tournament to prove that they had become a safe, stable nation. It is unfortunate that this terrorist group have rendered Angola's efforts vain. For Angola, one isolated incident has meant that this whole tournament has been counter-productive for the country. Its prestige has been vitiated by terrorists.

What promised to be the zenith of Angola's decade has turned into the nadir. This does not bode well for the continent, especially when they play host to the world's biggest festival in June.

Britain vs Greece

Both countries have racked up similarly farcical debt levels, around 13 per cent of the GDP - yet Greece are in much more trouble.

The problem started when Greece joined the ERM at a rate that suited Germany. This is attested by the rising prices in Greece. They are bound by eurozone regulations to keep below 3 per cent. Good job Britain left the ERM in 1992! Otherwise, our debt levels would be even more pressing than it already is.

So what's the difference between Greece and Britain? Although our debts may be equally dire proportionally, the markets have a markedly lower confidence with Greece. They are more incredulous that Greece will be able to 8.7 per cent this year, as forecasted by their finance minister. Like Britain, for years the government have underestimated the structural budget deficit. The difference between tax receipts and government spending have worringly diverged this decade. To put it simply, they have overspent.

It must be noted that Greece is plagued by a black economy, whereas Britain is not. Tax evasion in Greece is prominent, which is a significant drain on the public purse on an already poor country.

Age of Austerity

The stock markets may have rallied over the last year but the effects are longer-lasting. Britain is the last of the G7 countries to be in recession in the third quarter of 2009. Although it may have been right to pursue Keynesian policies of big government and explosive public spending, we must now start to face the prospect of an age of austerity.

The unprecedented scale of the budget deficit can only be stemmed by drastic action. The government must curb public spending on every level and raise taxes. However, raising taxes is perhaps not the best idea - household debts are equally high. If taxes are raised, then consumer demand would contract sharply, threatening a double-dip recession. Although the probability may be small, the consequences are far too much.

There are a plethora of ways to cut our fiscal policy but only one can be certain: our debt needs to be better managed. Throughout the decade, public finances have been grossly mismanaged. We must stop this before we hit a catastrophe. If our debt rises much further, currently at 13% of our GDP, our credit rating could be slashed. Britain will have to pay for this through sky high interest payments.

Whatever happens, we are entering an age of austerity...

The Gulf of Mistrust.

It is undoubtedly the toughest and most pivotal foreign policy challenge of them all: dealing with the fierce hostility of Iran. That is the biggest foreign policy challenge for us in 2010.

The Iranian government try to suppress its dissidents into submission, destabilise its neighbours and is contemptuous towards UN nuclear regulations. To deal with these types of unpalatable regimes is like playing with fire. But if you keep working at it, it will subside in time. It is a similar story with Iran - if we keep an open dialogue and are patient, they will become less of a rogue state.

Lessons from Japan

Japan's sad plight over the last two decades have taught us some very pertinent lessons. Britain is the most indebted country in the Western world and it is important that this is fixed in order not to undermine confidence in the markets.

The Conservatives speak of tax increases in the near future. However, we must not be too hasty to tighten our belts. Like Japan found out, it is unwise to tighten fiscal policy before we are completely certain that consumer demand is strong enough to carry itself. Otherwise, we risk a double-dip recession.

The dearth of credit means it is important that we keep public spending up. If the government can stimulate demand in the private sector, then we will see industry grow again and unemployment will fall. It is only then, that we must start looking for 'savings'.

Affordable housing? Surely not.

It is a truth universally known that British house prices are utterly unaffordable, especially for the first-time buyer. Yet research indicates that property has now become affordable in 39% of local authority districts.

From the start of the decade, house prices have steadily risen, peaking in 2007. Between 2007 and 2008 house prices decreased. This decrease and lower interest rates meant that first-time buyers could, in theory, get on to the property ladder. However, this proved very much futile because credit had dried up when confidence plummeted and banks were lending very cautiously.

Perhaps, the housing market, not our national debt is the worst legacy this recession will leave.

The divergence of fate between Britain and the developing nations.

Many developing economies are heavily reliant on the manufacturing industry and several commodities. Thus, when there was a dearth of global demand in 2009, they were heavily hit. Not only did demand sharply drop but the prices also followed a similar fate. Prices have been volatile, adding to the huge amount of uncertainty.

There has also been a decline in remittances sent to developing nations. The World Bank predicts that remittances have fallen by up to 10% in 2009.

However, many of these manufacturing, export based economies have recovered quicker than the likes of Britain. For example, Germany, although not a developing nation, recorded quarters of growth far before Britain did.

This can be attributed to two reasons. First, it must be noted that the average Briton is in far more debt than anywhere else. Thus, when hit by a recession, unlike Germany, we were unable to simply spend our way out of a storm. This is precisely why it is of utmost importance that in times of boom we save up, to act as a cushion for times of slump.

Secondly, this crises was a financial one. Britain is heavily reliant on the financial sector - in fact, 7% of our GDP growth comes from our financial sector. Thus, it comes as no surprise that we were heavily hit.