Sunday, May 20, 2018
Long hours are part of the productivity problem
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

After Ben Broadbent got into hot water a few days ago for his clumsy metaphor, I am determined today not to follow the Bank of England deputy governor and use language that anybody of any sex or age will be offended by. Having said that, I must also comment on what I can only describe as a worrying droop in productivity. Whatever the opposite of a virility symbol is, we appear to have it.

Those who have been following the productivity story will know that it is not been a happy one. I was sceptical about whether an apparent rebound in the second half of last year was another false dawn and rightly so, it turns out. The latest “flash” estimate from the Office the National Statistics showed a drop of 0.5% in productivity, gross domestic product per hour worked, in the first quarter, leaving it just 1.5% higher than ten years ago in the spring of 2008. In 10 years Britain has achieved less growth in productivity than would have been expected in a normal year in the past.

When I talk to business people about productivity, there is often puzzlement. Most are committed to raising productivity in their organisations, and can point to successes in doing so.

Rarely a day goes by when I do not receive a report pointing to ways of raising productivity. The Federation of Small Businesses says small firms could boost productivity significantly if given help by larger businesses further up the supply chain. A study by Oxford Economics, commissioned by Ricoh, says that £37bn of productivity gains could be unlocked, if we invested in what they describe as “the optimal office”; a better workplace resulting in greater efficiency.

When it comes to the macro figures for productivity, as opposed to micro solutions, the calculation is a very simple one. You have GDP which, despite its faults, is still the best overall measure of economic activity. And you have the labour input, measured in hours worked, of which more in a moment.

There are many reasons for Britain’s poor productivity performance. Investment as a share of GDP over the period 1997-2017 was the lowest of 34 advanced economies, including Greece and Italy. Low business investment and inadequate infrastructure are bad for productivity. Levels of skills also compare badly with other countries.

Since the crisis, the normal forces of “creative destruction”, in which inefficient, low-productivity firms fail and new growth leaders emerge has been thwarted. Too many zombies still roam Britain’s economy. A service-sector dominated economy is likely to be less productive than one with a larger manufacturing base.

There is, though, another factor and it goes back to the way that productivity is calculated. We can debate whether the numerator, GDP, is under-recorded, particularly in an increasingly digital age. It may be, but probably not by enough to make a serious difference.

The denominator, however, is also of interest. Throughout modern economic history, it appeared to be a certainty that the working week would decline. So, in Britain, the average working week, 60 hours or more in the 1850s, 55 by 1900, less than 50 in the inter-war years and close to 40 in the post-war period, would fall much further. Computers and automation would reduce the need for people to be in the workplace for so long.

This was the context in which Keynes, in his Economic Possibilities for Our Grandchildren in 1930, speaking out against “a bad attack of economic pessimism”, wrote of the prospect of 15 hour working weeks becoming the norm.

Sunday, May 06, 2018
Manufacturing's new dawn is starting to look like a falso one
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

When it comes to bright spots for Britain’s economy over the past couple of years, probably the best place to look has been in Britain’s factories. While the pound’s Brexit tumble pushed up inflation and squeezed household incomes, it provided a shot in the arm for manufacturing exporters.

Manufacturing has, additionally, looked like the one part of the economy taking advantage of the strengthening world economy. The upturn in global growth to something close to pre-crisis norms (the pre-crisis norm being 4%), has been good for industry globally, and in Britain. Until very recently, based on official figures, ministers could boast of the longest run of monthly growth in manufacturing since the late 1960s.

This bright spot was to be welcomed, and we should never fall into the trap of thinking that, because of the rise of services, we are now a post-industrial economy and manufacturing does not really matter.

Though manufacturing has a weight of only 10.1% in the official gross domestic product (GDP) calculation, new research suggests it is much more important and influential than that. The research, by the consultancy Oxford Economics for the Manufacturing Technologies Association, suggests the true impact of manufacturing, taking into account its direct impact, its effect on supply chains and the spending power of people employed directly and indirectly in the sector, is equivalent to 23% of GDP. And, rather than the conventional figure of 2.6m people employed in manufacturing, the “true” figure for jobs dependent on the sector is 7.4m, according to the research.

As the report puts it: “Those numbers give a truer picture of the importance of manufacturing to the UK economy. The reasons are clear: over the last 40 years, manufacturing has increasingly outsourced activities which used to be done in-house—in areas as diverse as logistics and catering. There are also companies, from design houses to accountancy practices, whose activity, or at least a large part of it, is predicated on serving manufacturing businesses.”

It is not just nostalgia that has led some people to yearn for a future in which Britain’s factories play an even more important role in the economy, though it is hard to fund any examples of economies in which the share of manufacturing in GDP has risen after a long decline.

Though some visions of Britain’s post-Brexit future, including those set out by certain Brexit supporters, see only further decline, for others hope springs eternal, and for good reason. Compared with the economy as a whole, manufacturing jobs are characterised by higher skill levels, higher productivity, and better pay and job security.

There is also the not-so-small matter of Britain’s trade deficit in manufactured goods. It appeared for the first time since the industrial revolution in 1982 and has not gone away since. Last year it was an eyewatering £97.6bn.

Sunday, April 29, 2018
A record spending squeeze puts us back in the black
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

A milestone has been reached, somewhat earlier than officially expected, and I feel honour bound to take note of it. After the global financial crisis wreaked havoc on Britain’s public finances, part of the repair process has now been completed.

The current budget, the difference between day-to-day public spending and tax revenues moved back into surplus in the fiscal year just ended, 2017-18. This was the first time this has happened for 16 years. The deficit on this measure peaked at £100.4bn in 2009-10. Now it is surplus, admittedly by a tiny amount, £112m, but in surplus nonetheless.

In the context of the disappointing growth figures, a 0.1% increase in gross domestic product in the first quarter and just 1.2% over the past year, this is surprising.

In eight years, more than £100bn has been taken off the deficit. George Osborne’s original 2010 target, of eliminating the current budget deficit, has been achieved, admittedly a couple of years later than he hoped. He also hoped to still be around as chancellor to celebrate this moment but events intervened.

True, Britain still las an overall budget deficit, £42.6bn in 2017-18. But that was the lowest since 2006-7, has come down to just 2% of gross domestic product, and was £2.5bn lower than the Office for Budget Responsibility predicted only last month. It, by the way, was more than £110bn below its 2009-10 peak.

The OBR’s forecast miss, which may or may not be confirmed as more data become available for last year’s revenue and spending, provides a snapshot of what has been an extraordinary period of spending restraint. The OBR did not get its forecast wrong because tax revenues beat its forecast. They actually came in a little lower than it had expected.

The biggest mistake it made was in overestimating government spending. It came in some billions of pounds lower than it had expected. Spending undershot and local authorities borrowed less than expected.

And that, in a nutshell, is the story of Britain’s public finances and the fiscal repair of recent years. Look at government receipts, mainly tax revenues, relative to GDP and not much has happened. Their current level of between 36% and 37% of GDP is no different to what it was in 2010-11 and 2011-12.

This measure of the tax burden, which has not been above 37% of GDP in the past 30 years, has not broken new ground, despite some well-publicised tax hikes (alongside some notable reductions).

Sunday, April 22, 2018
Reasons to be cheerful as the rest of the world blooms
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

I return at a time of good news about the world economy. Despite worries about rising trade tensions, and a slight softening of economic activity surveys since the start of the year, optimism persists.

The International Monetary Fund, holding its spring meetings in Washington, has stuck to its January forecasts for global growth of 3.9% this year and next, in line with the average for the 2000s and thus similar to pre-crisis norms. The world economy, which grew by 3.8% last year, appears to have settled into a run of stronger growth.

Oxford Economics concurs, noting that despite weaker numbers in some countries, world growth is “still running at a solid pace” and set to continue.

The IMF is concerned about trade tensions, though its chief economist Maurice Obstfeld described what we were seeing so far as mainly a “phoney war”, with only warning shots fired. It is also concerned that, because of rising debt since the crisis, countries will not have the ammunition to fight the next downturn.

That is for later. For now, however, things look set fair, particularly in the so-called advanced economies. Not so long ago they were struggling, dragged down by the eurozone recession and sluggish growth in America. In 2012 and 2103, advanced-economy growth was just over 1% a year. Now it is 2.5%, boosted by an expected recovery in eurozone growth to 2.4% this year, and in US growth to an impressive 2.9%. Donald Trump will not achieve his promise of doubling US growth from its post-crisis average of 2% but he has helped shift it significantly in the right direction.

It is at a price – America is the only advanced economy projected by the IMF to see a rise in its debt to gross domestic product (GDP) ratio over the next five years – but he would no doubt say that is a price worth paying.

This matters a lot for Britain. When the world economy is strong, it is hard for anything really bad to happen to an open economy like ours. Growth has weakened – the latest four-quarter growth rate of 1.4% for gross domestic product (GDP) was less than half of its rate three years’ earlier even as the world economy has strengthened – but it would have weakened a lot more if not for the upside surprise on global growth.

That upside surprise is reflected, though sadly not yet by enough, in a stronger performance for exports of goods. On the most flattering measure, excluding oil and erratic items, export volumes in the latest three months were up by 4.2% on a year earlier.

Exports of services are also doing well. They are rising at a 7% annual rate in value terms, and were boosted by a very strong rise in exports to the rest of the EU last year.

Sunday, March 25, 2018
A green light for the Bank to keep on raising rates
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

It is reassuring, for those of us who write about economics, when things happen the way that economic theory says they should. When unemployment is low, pay pressure should increase, and it is finally happening.

Though the latest official figures were not as clean as might have been hoped – the number of people unemployed rose by a tiny 24,000 in the latest three months though the unemployment rate fell from 4.4% to 4.3% - they were accompanied by an acceleration in earnings growth.

The Phillips curve, the inverse relationship between unemployment and wage growth, is one of the first thing students of economics learn. Earnings growth excluding bonuses picked up to 2.6% and to 2.8% including them. Inflation, though for a little later than the November-January period to which those figures apply, is now 2.7%.

Behind these bald comparisons, and the welcome news that the Phillips curve is alive and well, though not necessarily for employers facing higher wage bills, there are quite a few implications. Let me take just two of them.

The first is whether the end of the wage squeeze, and the return of modest pay growth, will do anything for attitudes towards a job market which has been extraordinarily successful in generating unemployment but is still widely regarded as insecure and exploitative. The second is whether anything will stop the Bank of England raising interest rates in May, and again later in the year.

Britain’s flexible labour market continues to generate jobs at a significant rate, as it has done for several years. In the latest three months employment increased by 168,000, while over 12 months there has been an increase of 402,000.

There is a downside to this in the sense that rising employment alongside weaker economic growth means stagnant productivity, and the latest figures for hours worked suggest that that the pick-up in output per hour in the second half of last year was indeed a blip.

Overall, however, this is a picture of success. Some of the rise in employment has been achieved by bringing people out of economic inactivity, when they are not working or seeking work. The rate of inactivity among working-age people, 21.2%, is at its joint lowest since records began in 1971.

Sunday, March 18, 2018
In spring a chancellor's thoughts turn to tax hikes
Posted by David Smith at 09:00 AM


My regular column is available to subscribers on This is an excerpt.

One of the biggest challenges for people like me is writing about budgets. Though in recent years they have been held on Wednesdays at 12.30, just after prime minister’s question time, for a long time they were on Tuesday, with a 3.30 kick-off. The gap between a Tuesday budget and a Sunday economics column is a long one.

Now, sympathise with me if you will about the even longer gap between something that was not even a budget – Philip Hammond’s spring statement at 12.30 last Tuesday – and the time that you are reading this.

Fortunately, there is something to say, and it is what you might call a taxing question. How much will taxes need to go up to pay for the public services voters want, and provide the Conservatives with a better electoral platform? And which taxes might they be?

The scene was set, as so often on these occasions, by the Institute for Fiscal Studies. Paul Johnson, its director, provided a neat summary of the pressures on the public finances.

“The fact that even on current plans debt is not really due to fall is likely to make the chancellor especially cautious about opening the spending taps,” he noted. “Yet the pressures are undeniable. Many of the public services are struggling in a way that they were not two or three years ago. Safety in prisons is being compromised.

“The NHS is visibly failing to cope as well as it was. Local government, having done a remarkable job of coping with cuts, is showing the strain. The cap on public sector pay may have been lifted, but we don’t know where the money to pay for any increases above 1% will come from.“ A spending review is planned for next year.

But the tax side, as Johnson also noted, is in a bit of a mess and is vulnerable. Hammond hoped last year to tackle the tax gap between the self-employed and the employed by raising national insurance but had to admit defeat and, according to the Office for Budget Responsibility (OBR) the cost of these changing patterns of work will rise from £10bn to £15bn over the next five years.

Old reliables in the tax system like fuel duty are being allowed to wither on the vine. Not only has raising fuel duty apparently become impossible for any chancellor – for British politicians upsetting the motoring lobby is a bit like taking on the National Rifle Association in America – but the switch to alternative fuels will in any case erode this part of the tax base.

The biggest problem of all lies with income tax. Raising the personal allowance, the coalition policy enthusiastically maintained by this Tory government, takes increasing numbers of people out of tax every year. The result of this is a system even more skewed towards higher earners. This year, according to official figures, the top 1% of earners will account for 27.7% of income tax revenues, with the top 5% responsible for 48.1%.

Sunday, March 11, 2018
The deficit's down - but Hammond can't risk a spending spree
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

If I were to allow a robot to take over the writing of this column, something I am gradually working towards, it would take previous known patterns and run with them. So a piece starting with the words ‘the chancellor will this week make a statement on the economy’, would automatically be followed by ‘and we can expect more bad news on growth and borrowing’.

The robot would be blameless. I have written something like that so often that, even under human control, I am struggling to prevent the keyboard from doing so again.

But not this week. On Tuesday, Phillip Hammond will deliver his spring statement. Advance briefing suggests it will be short, no more than 15 minutes or so. Though it is roughly on what would be budget day in normal years, it will lack most of the usual paraphernalia. It will not, the Treasury says, be a “fiscal event”, in other words there will be no important tax and spending decisions (though the option to include some exists). That is why my inbox, usually creaking with budget submissions and predictions, has been empty of such things.

The spring statement will nevertheless contain good news. Growth this year and next will be forecast to be a little higher than the Office for Budget Responsibility (OBR) predicted in November. Instead of the 1.4% growth for this year and 1.3% for 2019 predicted then, consensus forecasts point to figures of 1.6% and 1.5% respectively, perhaps even a little higher. Growth over the next few years is still likely to be a little weaker than the OBR predicted in March last year but it is heading in the right direction.

Even more dramatic will be the figures on government borrowing, the budget deficit. Instead of the £49.9bn the OBR expected for this year, 2017-18, in November, and the £58.3bn it predicted a year ago, the deficit is likely to come in at around £40bn.

The greater significance of this is that it will show that the deficit is 2% of gross domestic product or below, a level not seen since 2001-2. The current budget deficit, borrowing excluding public investment – spending on the infrastructure and so on – has been eliminated.

Achieving that, which again has not happened since the early 2000s, was George Osborne’s original aim in 2010. It has come about three years too late, and it was superseded by a tougher target of getting to an overall budget surplus. But it is a milestone nonetheless.

It raises a couple of questions. Was the austerity needed to get the deficit down worthwhile? And, with the deficit down to a level which bothers nobody very much, is it time for the government to start spending a lot more?

First, for those who are unaware of the history and wondering why it is necessary for the chancellor to be on his feet at all this week, a brief recap. For the past 40 years or so, since the 1975 Industry Act became law, the government has been required to publish two economic forecasts a year.

Sunday, March 04, 2018
Don't worry, be happy - even when confidence is weak
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

If we’re happy and we know it we should probably clap our hands, as I think I remember singing many years ago. And, however you may feel today, the official verdict is that we are indeed getting happier.

Thanks to an initiative a few years ago by David Cameron, the former prime minister, the Office for National Statistics now measures happiness, alongside whether life is worthwhile, life satisfaction and anxiety.

The latest results, just released, show that in the year ending last September there were what the ONS described as slight improvements in all these wellbeing measures.

Anxiety has risen over the past two years, is higher among women than men, and is only up compared with when it was first measured in 2011-12 among the young, those aged 16 to 24, and the old, those of 90-plus. High anxiety, as in the Mel Brooks film, has been broadly stable.

Though the measures only go back a few years, you could say that we have never felt happier since records began. Many would choose to go back a bit further, perhaps to the 1950s, for a time when they were really happy and you could leave your back door unlocked at night. Even then, however, Harold Macmillan had to reassure voters that they had never had it so good.

Only after a longer run of data will a fuller picture emerge. It is worth saying that the survey was launched when things were pretty grim, a combination of high inflation and a lot of worries about unemployment and austerity.

The official happiness measures raise some questions. How do the statisticians know? And how do we square rising happiness with other measures, like consumer confidence, which suggest people are feeling squeezed and rather miserable?

The answer to the first is that the ONS carries out a survey of a sample of people aged 16 and over. They are asked to respond to four questions: how satisfied are they with life, whether the things they do are worthwhile, how happy were they yesterday and how anxious did they feel.