Sunday, May 19, 2019
EU workers are returning - but maybe not for long
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Every so often some figures come along which change your perceptions. This happened a few days ago. We have got used to the idea that the number of European Union nationals working in Britain has been falling. Indeed, this fall has contributed to a tight labour market and recruitment difficulties across many sectors.

So, for example, during the course of 2018 there was a 61,000 drop in the number of EU nationals working in Britain, and the total was down by almost 90,000 from its 2017 peak. Having risen by an average of nearly 140,000 a year since 2004, this drop in the number of EU workers represented quite a turnaround.

That was the story, and it chimed in with what businesses have been saying. It was a surprise, therefore, when official figures last week showed that, far from falling, the number of EU workers in Britain recorded a rise of 98,000 in the year to the first quarter. This meant, incidentally, that the cumulative rise in the number of EU nationals working in Britain since just before the referendum is 237,000, to the current total of 2.38m.

It was driven in the past 12 months by workers from Romania and Bulgaria, up by 70,000 over the year, with smaller rises of 9,000 in so-called EU8 workers – those from Poland, Hungary and the other countries which joined in 2004 – and 14,000 in workers from the longer-term EU14 Western European EU members. But it was a rise nevertheless. Does it mean the tide has turned?

Before answering that question, it is worth rehearsing why EU workers have been such a benefit for the UK economy. They have a high employment rate; 82.7% of EU migrants of working age are in jobs compared with 64.8% of non-EU foreign nationals in Britain.

They have not prevented a rise to record levels in employment levels and rates among UK nationals, have had a zero to minimal impact on wages for indigenous workers, and have been net contributors to the public finances, paying more in than they take out. Though freedom of movement has become toxic in the Brexit debate, it has been one of the great advantages of EU membership for this country, filling important gaps in the labour market.

If there is a concern about the latest figures, taking them at face value, it is the change in the mix of EU workers. Not to impugn Romanians and Bulgarians, but many of them find themselves in lower-skilled jobs, for which they are often overqualified, than earlier waves of EU migrants. Those lower-skilled jobs need to be filled but the contribution of these workers, including to the public finances, is proportionately lower.

The question is whether we should take the figures at face value, and I have to say that I smell a bit of a rat. The figures for EU nationals working in Britain are not seasonally adjusted, so have to be interpreted with care. There has in the past sometimes been an increase in the number of EU workers in the UK in the first quarter of the year, perhaps reflecting the fact that firms seek to recruit for the year in the early months.

This year, however, the jump was exceptional, 107,000 between the final three months of 2018 and the first quarter of this year. It contrasted with a quarterly fall a year earlier. It was entirely responsible for the turnaround.

What was going on? The Office for National Statistics has identified no special factors in the rise. It seems to me, however, that we might have seen the human equivalent of pre-Brexit stockpiling. Firms, in other words, rushed to recruit ahead of the initial March 29 Brexit date and EU nationals, keen to establish a foothold in the UK labour market, were keen to be recruited.

March 29 has come and gone and so might this temporary blip in the number of EU workers in Britain. It would be better if this were not so but normal service, in terms of a fall in the number of such workers, seems likely to be resumed, for familiar reasons. EU nationals feel less welcome, are uncertain about their future status and have suffered a pay cut measured in their own currencies because of sterling’s weakness. There are also often better opportunities closer to home.

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Sunday, May 12, 2019
There's no need to sacrifice growth to save the planet
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

It is hard to get away from climate change these days. Most people would agree that it is a bigger issue, certainly for the long-term, than the one that has been unnecessarily preoccupying us for the past three years. Parliament has trouble agreeing on much these days but it has this month declared “a climate emergency”. The Environment Agency has warned that entire communities may have to be moved because of flooding and coastal erosion.

Climate change is also actively affecting policy. The Scottish government has just cancelled a planned cut in air passenger duty, because reducing the cost of flying would run counter to its ambition of making Scotland a zero-carbon economy before the middle of the century. In a different political environment, Philip Hammond could use the same logic to end the long freeze on fuel duty, which has lasted all this decade.

That we should be concerned about climate change is not in doubt, and it did not take the recent Extinction Rebellion protests to create that concern. Sir David Attenborough tops the list of Britain’s national treasures and his warning of a climate “catastrophe” in his BBC programme, Climate Change – The Facts, had a big influence. As he put it, we face “irreversible damage to the natural world and the collapse of our societies"

Not all of the problems of the natural world.are due to climate change, but many are, and last week’s report from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES made for sobering reading.

Around a million of the world’s 8m plant and animal species (5.5m of which are insects), face extinction. Three-quarters of terrestrial environment and two-thirds of marine environments have been “severely altered” by human intervention and there has been an 85% drop in wetlands in the past thee centuries.

According to Sir Robert Watson, the chairman of IPBES: “The health of ecosystems on which we and all other species depend is deteriorating more rapidly than ever. We are eroding the very foundations of our economies, livelihoods, food security, health and quality of life worldwide.”

This is not something, in other words, we can ignore. There is a feedback loop from the natural environment to economic activity and prosperity. It is not a question of the economy or the environment; the two are intimately linked. A report on Thursday from the Institute for Public Policy Research’s Centre for Economic Justice declared that “environmental breakdown has reached a critical stage” and added: “Our current economic model is fundamentally unsustainable.”

Is it? Sometimes in this debate there is a crude lesson drawn on economic growth and the environ-ment, which is that the only way of saving the planet is by giving up on growth. Not many sensible people say this explicitly but many activists do, and it is not far below the surface even in some of the heavyweight reports. The IPBES notes a 15% increase in global per capita use of materials since 1980 as one of the factors behind environmental degradation.

It is, however, plainly the case that you can both have economic growth and do right by the planet. The UK’s expert committee on climate change, in a recent report, noted that there has been a 44% reduction in Britain’s greenhouse gas emissions since 1990, alongside a 75% increase in real gross domestic product. Economic growth and reduced greenhouse gas emissions have gone hand in hand.

Britain has had a better record than most, but in the first 15 years of the current century there were more than 30 other countries, mainly advanced industrial countries, which combined economic growth with falling emissions.

Those following this debate will be aware that the official way of measuring greenhouse gas emis-sions is not the only one. The young activist Greta Thunberg told MPs last month that Britain was guilty of “creative carbon accounting”. What she meant, I think, is the reduction in emissions since 1990 is on a production basis.

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Sunday, May 05, 2019
Robots aren't destroying jobs, but nor are they boosting productivity
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

The future is, by its nature, something that is yet to happen. In some ways though, what we think of as the future – things like artificial intelligence (AI) and robots – are already with us. So, without wanting to sound like some terrible advertising slogan, the future is now, and that allows us to make an early assessment of its impact.

To pessimists, new technologies like AI and robotics are always going to be a destroyer of jobs on a vast scale. People will be replaced by machines that, in many cases, will be a lot smarter than they are.

I have always argued, by the way, that while some jobs might be replaced by machines employment would not be. Technology would in future create as many jobs as it destroyed, if not more. It is not the best example but the cottage industry that has grown up to replace smashed smartphone and tablet screens, and can be seen in every high street and shopping centre around the country, clearly would not exist if there were no smartphones and tablets.

The optimistic argument about AI and robotics goes a lot further than “they won’t bring mass unemployment”. The argument here is that these technologies will unleash a period of strongly rising productivity and prosperity, shaking us out of our post-crisis lethargy and into a much brighter and better future. The march of the machines, in other words, should be something we welcome with open arms.

As it happens, a couple of new reports, one from the Organisation for Economic Co-operation and Development (OECD), its latest employment outlook, and the other from the Chartered Institute of Personnel and Development (CIPD) speak to this very subject.

The OECD’s outlook is called The Future of Work and goes into every aspect of the labour market effects of new technologies. It notes that we are in an era of more rapid diffusion of technology. In America it took seven decades for the proportion of households with landline phones to rise from 10% to 90%, while for mobile phones it took only 15 years, and for smartphones eight years. Business spending globally on information and communication technologies (ICT) has risen rapidly and there has been a fivefold increase in sales of industrial robots this century.

Across the 34 members of the OECD, 14% of jobs are said to be at high risk of automation and 31.6% at risk of significant change as a result of new technologies. For the UK the figures are 11.7% and 26% respectively. “The manufacturing sector is at high risk, but so are many service sectors.” It says. “And, even though the risk of automation is low in health, education and the public sector – many people will be affected because those sectors employ a large share of the workforce.”

On automation, the OECD agrees with me that we should not confuse the risk to individual jobs with the risk to overall employment. As it puts it: “Despite widespread anxiety about job destruction driven by technological change and globalisation, a sharp decline in overall employment is unlikely. While certain jobs may disappear, others will emerge, and employment has been growing overall.”

This does not mean we can relax entirely. People will need help, and training, to transition out of the jobs that are being replaced by machines and into new ones. Some workers, and some regions, are at greater risk. Young people, particularly those with no post-school education, are at the greatest risk says the OECD.


The CIPD, in a survey carried out with PA Consulting, found that a third of 759 businesses it questioned had invested in AI and automation over the past five years. The employment effects were, contrary to fears, positive; 35% saw more jobs in the areas affected, and 25% less. By nearly three to one, 44% to 18%, employers said AI and automation had made jobs more secure. Among employees, more than half, 54% said these new technologies had not helped them do their job better. There was little evidence that AI and automation were associated with significant productivity improvements, which the CIPD puts down to “lack of thought and planning on how people and technology are working together”.

It is, as I say, early days but it is fair to draw some initial conclusions. There are sector like retailing, which saw a 2.4% drop in employment in the year to the first quarter, where an effect on jobs from automation, such as customer-operated checkouts, can be detected, though separating that from other factors affecting jobs is difficult. In Northern Ireland I came across a firm that had no alternative but to automate because of the loss of EU migrant workers. I am sure there are many others.

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Sunday, April 28, 2019
This may be as good as it gets for the public finances
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

A few days ago we had an object lesson in how official figures can be simultaneously disappointing and very good. Not that many people follow these things closely, but for those who do, last month’s data for public borrowing – the budget deficit – represented a bit of a setback.

March’s borrowing total of £1.7bn was £0.9bn up on a year earlier, breaking a run in which the latest figures have tended to be lower. It was also more than £1bn above City expectations.

Thus, instead of coming in at or below the latest official forecast from the Office for Budget Responsibility (OBR), made just last month, the 2018-19 total for public borrowing, £24.7bn, was nearly £2bn above it.

It is testimony to the fact that Britain’s budget deficit has ceased to be a significant concern for markets that nobody much batted an eyelid at these numbers. The bigger picture, the unalloyed good news, was the huge fall in borrowing that occurred in 2018-19 compared with the previous year.

That £24.7bn total, 1.2% of gross domestic product, was £17.2bn lower than the near £42bn figure for 2017-18. From the giddy and dangerous heights of £153bn and 9.9% of GDP in 2009-10, this has been a formidable fiscal repair job.

Before answering the question of whether the process of deficit reduction can go any further from here, and whether it should, let me provide a bit of perspective.

There is a lot of popular misunderstanding about what was promised on the budget deficit and what has been achieved. When, in 2010, George Osborne embarked on his deficit reduction strategy, the aim was not to have got rid of the entire budget deficit by now.

What he intended to do was eliminate the deficit on current public spending – so only borrow to invest – adjusted for the economic cycle, together with lowering public sector debt as a percentage of GDP.

Both aims have been achieved, though a little later than hoped. The cyclically-adjusted current budget deficit was supposed to have bene eliminated by 2015-16. It all but happened a year later, falling to 0.1% of GDP in 2016-17, and the government has now been in surplus on that measure for two years in a row, by 0.9% of GDP in 2018-19. Public sector net debt did fall as a percentage of GDP in 2015-16 but then rose again. It is now falling. At the latest count it is 83.1% of GDP, though that equates to a hefty £1.8 trillion.

The budget deficit fell a lot in the latest fiscal year, because tax revenues were buoyed by faster growth in pay, strong retail sales boosted VAT receipts and public spending remained under tight control. Low unemployment helped in this regard.

How does the performance of the public finances compare with what was expected around the time of the referendum? The last “clean” forecast from the OBR, in November 2015, before the referendum was announced, anticipated borrowing figures of £49.9bn in 2016-17, £24.8bn in 2017-18 and £4.6bn in 2018-19. The outturns have been a cumulative £32bn higher than that.

The OBR’s first post-Brexit forecast in November 2016 got the economy right, its GDP forecast was the most accurate in its history, but the deficit wrong. Compared with that borrowing is a cumulative £60bn lower, though that gap will narrow if, as seems likely, the deficit figures for the next three years are higher than predicted then. The big picture is that borrowing is higher than expected before the referendum – by now it was expected that we would be moving into a run of overall budget surpluses – but so far lower than predicted immediately afterwards. Growth has been more deficit-friendly than expected.

Where do we go from here? There is a notional target of balancing the budget by the mid-2020s but few, inside or outside government, take it too seriously. It would be easy to conclude at this stage that this, or rather 2018-19, will be as low as it goes for the budget deficit. The deficit has been fixed, and the political incentive to go further is no longer there.

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Sunday, April 14, 2019
The trade deficit soars, in a terrible time to be an exporter
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Now that the Brexit process is guaranteed to stretch on for many more months, if not years, there is a limit, which may be close to being reached, on how much new there is to say. I shall bear that very much in mind in my choice of topics. We may be neither properly in, nor out, for a very long time, and most probably beyond October 31, the latest departure date.

Business is relieved that a no-deal Brexit has been avoided, and will continue to be avoided. But it is alarmed that the limbo could go on fo0r a very long time. Make UK, which represents Britain’s manufacturers, describes as a “heavy blow” the fact that firms will have to maintain “stockpiles of parts and materials at great cost” to cover all eventualities. Perhaps eventually, if this drags on long enough, firms will decide that Brexit is never going to happen and they can just carry on as before. But we are not there yet.

In the meantime, the false alarms and Brexit deadlines are having an impact on
the economic data, good and bad. The latest monthly gross domestic product (GDP) figures for February surprised on the upside, rising by 0.2% against expectations of no change on the month. These figures are still bedding in, as are analysts’ predictions for them. Nobody expected a sharp fall in GDP in December, initially reported as a 0.4% drop, although nobody thought either that it signalled that the economy was falling off a cliff.

The 0.2% rise, it seems, owed something to pre-Brexit stockpiling, with the Office for National Statistics (ONS) noting evidence that “some manufacturing businesses have changed the timing of their activity as we approached the original planned departure from the European Union”. There will be a degree of swings and roundabouts in this; there is only so much stockpiling that firms can do and this month’s production shutdowns in the motor industry, originally timed for Brexit, may drag down industrial output. But for now the GDP numbers have been helped.

A stockpiling effect can be observed when it comes to trade, and it is here in which the hope has to be that temporary factors are indeed at work. New figures show that in the latest the latest three months, December-February. The trade deficit in goods was £41.4bn, a record, and £6.5bn up on the previous three months.

Over the latest 12 months, Britain was in the red on trade in goods by a whopping £146.4bn, another record, and too close to £150bn for comfort. Even taking into account services, in which the UK runs a surplus, the deficit widened sharply in the latest three months and was just under £39bn over the latest three months.
That £146.4bn, by the way, compared with an annual goods trade deficit of £138bn for the whole of 2018 and £118bn in 2015. Until 2012, the deficit had never been above £100bn; 20 years ago it was comfortably below £30bn

How much of the latest deterioration was due to pre-Brexit stockpiling? Samuel Tombs of Pantheon Macroeconomics highlights a surge in trade with the EU; exports as well as imports were higher in February. But, given that we import more from the EU than we export, the net effect is to widen the deficit.

Beyond these temporary factors, however, there is an uncomfortable truth for a trading nation like ours. This is a terrible time to be an exporter. After a temporary fillip in 2017, thanks to a stronger global economy and sterling’s referendum fall, the volume of exports of goods fell last year and is falling now, with a sharper fall in non-EU than in EU exports. Both are down on a year ago, even with the stockpiling factor.

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Sunday, April 07, 2019
Britain's minimum wage, 20 years old, is an unlikely success story
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Today, to take your mind off other things, which will do us all some good, let me talk about a British success story. It has helped prevent low-paid workers being exploited by the minority of unscrupulous employers, it has put a brake on rising inequality and it has not prevented a strong and sustained rise in employment.

It is also celebrating an important milestone; 20 years old this month. I refer to the national minimum wage, now the national living wage for those aged 25 and over. It has just risen, on April 1, to £8.21 an hour, with lower rates ranging from £3.90 for apprentices to £7.70 for 21-24 year olds.

When it was introduced, in April 1999, there were 27m people in employment in the UK, and the employment rate for the 16-64 age group was 71.3%. Twenty years on, nearly 6m more people are in work – the total is 32.7m – and the employment rate stands at a record 76.1%.

I am going to own up at this point to the fact that at two points in those 20 years, I worried that there would be a cost to jobs as a result of this policy. One was when the minimum wage was introduced by Tony Blair’s Labour government, when it risked introducing an unnecessary inflexibility into Britain’s flexible Labour market. The other was after the 2015 election, when George Osborne announced the national living wage for those aged 25 and over, and provided low-paid workers with a significant pay boost, one which had not had the benefit of the expert analysis of the Low Pay Commission.

But, and this is a mea culpa, both Ed Balls, who was instrumental in the introduction of the minimum wage and Osborne, who increased it with the living wage, judged it well.

I remember Balls explaining to me how the government, on the advice of the Low Pay Commission, had chosen the initial level of the minimum wage, £3.60 an hour for those aged 22 and over, by careful consideration of where it fell within the existing wage distribution, Setting it too high, in other words, could have had adverse consequences for jobs. For Labour, the minimum wage was also important as a backstop at a time when tax credits were being introduced. Without it, employers might have passed on too much of the responsibility for workers’ incomes to the state.

Osborne’s living wage, similarly, has not hit employment, far from it, though it has put some sectors under strain, of which more in a moment. But if its aim was to create “an economy that works for everybody” after five years of austerity it may have come a little late.

The success of the minimum wage is set out well in a new report from the Low Pay Commission, chaired by Bryan Sanderson. In the past, the pay of the lowest-paid workers has risen more slowly than those in the middle and at the top. The minimum wage has ensured the opposite, boosting the annual pay of those at the bottom of the wage scale by roughly £5,000 a year.

As Sanderson says of its introduction 20 years ago: “The conventional wisdom of the time was that minimum wages simply forced low-paid workers out of their jobs. But over the last 20 years, the national minimum wage has shown that this is not necessarily the case. It has raised pay for the lowest paid without damaging employment.”

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Sunday, March 31, 2019
A customs union beckons - and it won't stop trade deals
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Another week on in the Brexit process and I am worried. I may have used up all my best adjectives too soon. This thing could get even madder. And, in a few weeks’ time, the short rein of Theresa May as prime minister will soon be over; the only former Bank of England official, as far as I know, to have made it to the top job. She lost heavily again on Friday.

For all her faults, there was always an element of “cling on to nurse for fear of something worse” about Theresa May. Who knows who the 100,000 members of the Tory party, one of the least representative electorates in the world, could inflict on us? And then there’s Jeremy Corbyn waiting in the wings.

But let me be positive. Last week saw the House of Commons seize control of the order paper for a series of indicative votes on the way forward. They have been criticised for failing to agree on any option but that rather misses the point. They do point to a way forward if MPs are prepared to remove their party blinkers.

So, for example, a perfectly sensible proposal from George Eustice, the Tory Eurosceptic former agriculture minister who resigned in protest over May’s withdrawal agreement, was the pure “Norway option” of Britain rejoining the European Free Trade Association (EFTA) and thus staying in the single market and European Economic Area (EEA). It was heavily defeated by 377 votes to 65. Only a minority of Tory MPs and a tiny handful of Labour MPs supported it. It suffered from its authorship.

EFTA countries have profited from their relationship with the EU, whether by being in the single market, as with Norway, Iceland and Liechenstein, or by mirroring it closely, as with Switzerland’s large range of bilateral deals with the EU. All have a higher proportion of trade with the EU than Britain does.

On the other hand, the “Norway-plus” Common Market 2.0 proposal, combining EFTA-EEA with a comprehensive customs arrangement, attracted a lot of Labour support but very lukewarm Tory backing. Combine the two and Norway – staying in the single market - favoured by me since immediately after the referendum, could yet still be a runner. I fear, however, that like Monty Python’s Norwegian blue it is now a dead parrot.

The two indicative votes which came closest last week, and around which a consensus could build this week, were for a permanent customs union with the EU, as proposed by Kenneth Clarke, the former chancellor, which lost by just 272 votes to 264, and a second or “confirmatory” referendum, defeated by 295 to 264.

Let me say at the outset that anything with Clarke’s name attached to it deserves to be taken very seriously. As chancellor from 1993 to 1997, not only was he a delight to deal with but he presided over a strong recovery in the economy that in normal circumstances would have seen the Tories romp home in the 1997 election.

But then, as now, the party was riven with disagreements over Europe – maybe it would have been better if it had split irrevocably back then – and also tarnished by the biggest government humiliation since the current one; Britain’s involuntary and embarrassing exit from the European exchange rate mechanism in September 1992.

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Sunday, March 24, 2019
Britain shouldn't be too glad to be grey
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

In recent days we have had another stunning demonstration of the potency of the job-creating machine that is the British economy. While surveys have suggested that employers are beginning to cut back on recruitment, there was no evidence of this in the official figures.

Overall employment rose by 222,000 in the latest three months for which data are available, November-January, and the employment rate for the 16-64 age group rose to 76.1%, a new record. The unemployment rate dropped to 3.9%, its lowest since November-January 1974-5. And, while only a minority of the net new jobs created over the latest three months were traditional full-time employee jobs, 93,000 out of 222,000, weaker than recently, the others being part-time employment and full and part-time self-employment, these were still strong figures.

And so we have the usual trade-offs. We have strong employment but weak business investment; the weakest of any major economy over the past 2-3 years. Are firms recruiting as an alternative to investing? For some that is not a choice, but for others it is, and it is being made.

There is also strong employment versus weak productivity, which has stagnated for a decade and has weakened again recently. These latest employment figures, alongside weak gross domestic product figures, guarantee further productivity weakness.

Then there is the pay puzzle. Average earnings growth is currently 3.4%, which in the case of total pay (including bonuses) is marginally lower than it was. Real wages are rising, but not by much. And, while you would not expect the kind of pay growth we had when unemployment was last as low as it is now, 44 years ago, when wage increases were well above 20%, you might expect it to be stronger than it is.

All these things; falling business investment, stagnant productivity and weak growth in wages are, of course, intimately linked. A return to the pay norms, not of the 1970s but the pre-crisis era, in which you would expect earnings to be rising by 4.5% to 5% rather than by less than 3.5%, requires a sustained revival in productivity.

There may, however, by another factor which helps to explain the current combination of circumstances, certainly weak pay and productivity, and it is the greying of the labour market. The average age of British workers is increasing and that may have important consequences.

More than half of the increase in employment over the past year has been concentrated in the 50-64 age group. And, if we look a little longer term than that, the concentration of employment growth in older age groups is striking.

Thus, in the past 10 years, there have been 3.175m net new jobs created in Britain, a great achievement. Of these, 591,000 have been among people aged 65-plus and 1.868m have been for those in the 50-64 age group. Thus, 77% of the rise in employment over the past 10 years has been among workers aged 50 and over. This is quite a figure.

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