Sunday, February 19, 2017
Our Goldilocks job market and its three lurking bears
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

There is some news we should make a point of celebrating. The announcement a few days ago that Britain’s employment rate hit a record high of 74.6% in the final three months of last year was a good example.

What the figure meant was that in records dating back to 1971, there has never been a higher proportion of 16-64 year-olds in work. Though the records go back only 46 years, I doubt there has been a time in Britain’s history when the employment rate has been higher.

Britain’s employment rate is not only the highest on record but is around five percentage points higher than that of America and some seven percentage points above the European Union average. Among advanced economies, only Denmark, Sweden, Germany and Japan have higher employment rates. At the other end of the scale, Italy has an employment rate of 57.6%, Greece just 53%.

Think about that record for a second. Over the period since 1971 very many more young people stay in full-time education beyond the age of 16, which in normal circumstances ought to mean a decline in the 16-64 employment rate, even allowing for the fact that many students have part-time jobs.

Until recently, there was also a significant erosion of employment among older age groups. Many is the piece I have written over the years about declining employment in the 50-64 age group. The employment rate in that age group in currently just below 71%, up from 69% two years ago. And these days a different phenomenon is at work. On top of 16-64 employment, there are 1.2m people aged 65 and over in work. That may not be an all-time record but it is close to recent highs and underscores the labour market’s success.

The record employment rate is, first and foremost, a reflection of the welcome flexibility of Britain’s labour market, a flexibility which is reflected in the fact that what is now the Cinderella measure of unemployment, the claimant count, is at 745,000 in January, lower than the number of officially-record vacancies, 751,000. If that has ever happened before, it has not done so for a very long time.

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Sunday, February 12, 2017
Spending down, taxes up - but we will keep on borrowing
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

The Institute for Fiscal Studies has been producing its “green” budget for 35 years, through changing economic and political circumstances. The latest, the final one (for now) at this time of year because Philip Hammond is moving the budget timetable to the autumn, is a bit of a humdinger.

The IFS pulls few punches in laying out the scale of Britain’s fiscal challenge, leaving me a little punch-drunk. Seven years after the start of post-crisis deficit reduction, the budget deficit is 4th largest, relative to gross domestic product, of 28 advanced economies. Public sector debt, on the same basis, is 6th largest among the same group of advanced countries. It has not been higher relative to GDP since the mid-1960s, when the post-war unwinding of debt was still in full swing.

This is despite a fall in real-terms public spending of 10% since 2009-10, the longest and biggest on record, with more to come. By 2019-20, on present plans, real departmental spending will be 13% lower than in 2009-10.

For every Scylla, meanwhile, there is a Charybdis. With £17bn of tax rises planned for the rest of this parliament, the tax burden will rise to more than 37% of GDP by the end of the parliament, its highest since 1986-7, when the Thatcher government was in the process of aggressively reducing income and corporate taxes. Even then, we will still have a budget deficit.

I have always adopted a “something will turn up” approach to the public finances. In the past, time and economic growth proved to be great healers. In the 1980s, economic revival turned a budget deficit of 4.3% of GDP into a surplus within eight years. In the 1990s the timetable was even shorter. Britain went from a 6.7% of GDP deficit to a budget surplus in just five years.

This time the challenge was greater, with a deficit of 10.1% of GDP in 2009-10. Progress has been made. The latest full-year deficit, for 2015-16, was 4% of GDP. But that is still high, as is this year’s projected deficit of 3.5% of GDP. As the IFS points out, in the 60 years before 2008, Britain has run a bigger deficit in only 13 years, mainly when the economy was in recession.

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Sunday, February 05, 2017
Basic income, an old idea whose time has not come - until the robots take over
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

Sometimes ideas that have been around for a long time suddenly build up a he
ad of steam. So it is with one such idea at the moment, that of a universal basic income, an unconditional payment to every individual in the country, regardless of their circumstances.

A universal basic income (UBI) was last week endorsed by the Indian government’s 2016-17 economic survey, as “a powerful idea …. whose time is ripe for serious discussion” and which would be more effective than the existing system of state benefits.

A trial of the system began at the start of this year in Finland, and there are plans for similar trials in Fife and Glasgow in Scotland. It is part of the policy platform of Benoit Hamon, the French Socialist presidential candidate, admittedly a very long shot for the Elysee Palace. It was part of the Green party’s manifesto in the 2015 general election. Groups like the Citizen’s Income Trust have been advocating it for years.

UBI attracts some strange bedfellows. Though usually associated these days with the political left, it has sparked the interest of Silicon Valley tech entrepreneurs. In the 1960s both Milton Friedman and Martin Luther King advocated versions of it as, more recently, has the libertarian Charles Murray, who has written extensively for this newspaper. Friedrich von Hayek, beloved of Margaret Thatcher, though this was one of his ideas she did not take up, also favoured a guaranteed minimum income.

Why is the basic income idea, sometimes known as a guaranteed or citizen’s income, having been around a very long time, gaining new interest now? There are two main reasons.

One is the rise of what Professor Guy Standing of SOAS (The School of Oriental and African Studies) has described as the rise of the “precariat”. Standing, who presented his arguments at this year’s Davos world economic forum, describes the precariat as the “many millions of people experiencing a precarious existence, in temporary jobs, doing short-time labour, linked strangely to employment agencies, and so on, most without any assurance of state benefits or the perks being received by the salariat or the core.”

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Sunday, January 29, 2017
Smooth so far - but plenty of Brexit bumps on the road ahead
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

The scores are in, and they show that Britain’s economy held up very well in the second half of last year, in the aftermath of the vote to leave the EU. I and many others expected weaker growth, and we have yet to see it.

Right to the last, with the 0.6% rise in gross domestic product (GDP) in the fourth quarter reported by the Office for National Statistics on Friday, the numbers surprised on the upside. The expectation was 0.5%.

And, while last year’s growth rate was the weakest for three years, it was the strongest in the G7, and far better than the overwhelming majority of economists expected in the immediate aftermath of the referendum.

The figures are a vindication for those who said that, while the medium and long-term consequences of Brexit would be significant, the impact on growth in 2016 would be negligible. This was the conclusion, for example, of the National Institute of Economic and Social Research (Niesr), in a May 2016 article, The Short-Term Impact of Leaving the EU.

The Treasury, which has a close relationship with Niesr, should have taken a leaf out of its book, though it was under political direction. GDP is the best overall measure of economic activity, though it has its critics and often fails to tell the full story.

The story we have is that in the final quarter of 2016, and indeed in the second half of the year. Buoyant consumer demand led to strong growth in the dominant service sector of the economy. That the service sector is dominant – its output in the final quarter was 1.8% up on the April-June quarter – was a good thing. Had we relied on manufacturing, overall industrial production, construction or agriculture, the economy would be in the doldrums. All ended 2016 with lower output than in the second quarter.

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Sunday, January 22, 2017
An EU cliff edge looms - May has to avoid taking us over it
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

Certainty and uncertainty. The certainty from Theresa May that Britain will be leaving the European Union’s single market is enabling some businesses to prepare now for that eventuality.

For some that is a good thing and for some it will make no difference. But those who need more of their operations to be inside the single market can now plan for that. The car industry is worried. So are others. HSBC and UBS have already told us what they are intending in terms of moving some jobs from London. Others will do so.

Those who think the loss of some investment banking jobs is nothing to worry about, something I hear quite a lot, should remember that the City generates a disproportionate amount of the tax revenue needed to pay for public services.

It still will; on any plausible scenario London will remain comfortably the biggest financial centre in Europe. But such is its lead that it will remain the biggest even if it were to lose a chunk of it activity, and its generation of tax revenues, which seems likely, and which will be bad for Britain.

On top of the certainty of leaving the single market, of which more in a moment, there is the massive uncertainty of what happens after two years. The two-year article 50 period, intended to set the terms of Britain’s departure from the EU, is now intended by the prime minister to also include a “bold and ambitious” trade deal with Europe. That looks not merely ambitious, but unachievable.

In setting a high bar, and an over-ambitious timetable, May has significantly increased the chances of failure. Britain’s combined Brexit and free trade agreement talks with the EU could founder for any number of reasons, including the cost of the divorce settlement, with Brussels talking about a figure of at least €60bn (£52bn).

If not a good deal then, as the prime minister has promised, she will walk away. The “cliff edge” that many thought should be avoided at all costs, and which the government would seek to avoid at all costs, is now part of the official negotiating position. The logic is that the EU would be hit by such an abrupt breaking-off of economic relations, which it would. But Britain would be hit very much harder. That is not bold; it is irresponsible. The prime minister is not only given us a harder Brexit than business feared, but has also inserted a “hardball” element.

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Sunday, January 15, 2017
Inequality is falling - somebody should tell Theresa May
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

Inequality has become the fallback position for politicians in need of a theme, or organisations which want to show they care. Inequality, it seems, is driving political change – pushing voters to extremes - and uncomfortable electoral outcomes.

Inequality threatens the very survival of capitalism, which is why the World Economic Forum, as it gathers in Davos this week, has named it as one of the three key risks facing the world economy over the next 10 years and has as its theme “responsive and responsible leadership”.

Inequality provided the backdrop to Jeremy Corbyn’s populist relaunch and his proposal for a pay cap. Or was it a pay ratio? The maximum wage, last seen in British football in the early 1960s (it was £20 a week, now some earn that a minute), seems to appeal to the Labour leader.

I don’t worry too much about the World Economic Forum, which has to find something to talk about and has a habit of picking the wrong themes. I don’t worry very much about Corbyn either. The idea of a populist relaunch is to make yourself popular, and he is a very long way from that, and from power.

I do, however, worry about somebody who is in power, our prime minster. In her first big speech for a while, Theresa May warmed to a theme which I fear will become a motif for her premiership. Though her speech on the “shared society” focused on mental health, a worthy topic, it was interspersed with other references.

“We need to address the economic inequalities that have emerged in recent years,” she said, so that everybody shares in the country’s prosperity. She criticised “politicians who supported and promoted an economic system that works well for a privileged few, but failed to ensure that the prosperity generated by free markets and free trade is shared by everyone, in every corner and community of their land.”

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Sunday, January 08, 2017
Shock news: forecasters called the economy about right in 2016
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. The table to accompany the piece is available in the newspaper.

Of all the experts to be castigated in recent months in this strange climate in which we find ourselves, none have got it in the neck more than economic forecasters.

Those who try to predict the economy’s performance in uncertain and in some respects inherently unpredictable times have been attacked for getting things so badly wrong that we would have been better off consulting Paul the Octopus, who developed a reputation for correctly predicting the results of World Cup games, or popping along to the nearest fair and the fortune teller’s tent.

Even Andy Haldane, the Bank of England’s chief economist, has joined in, saying that forecasters had a “Michael Fish moment” in failing to predict the financial crisis, and an echo of it in overestimating the short-term damage from the Brexit vote. The profession, he said, was in something of a crisis.

It may surprise you, therefore, that had you taken most of the economic forecasts published this time last year, you would have been rewarded with a pretty accurate picture of what has happened to Britain’s economy over the past 12 months. In fact, in the very many years I have compiling my annual forecasting league tables, I cannot remember quite so many forecasts clustered around the outturns for the main economic variables.

At the start of last year forecasters were on average a little more optimistic on growth than turned out to be the case. But they were pretty close on inflation, expected the labour market to continue to improve and saw Britain’s balance of payments problem either persisting or getting worse.

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Sunday, January 01, 2017
Peering through the fog of 2017 uncertainty
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 new year is upon us, and with it the challenge of trying to plot a path through the uncertainty. That there is more uncertainty than usual is not in doubt, as is the fact that there is a range of possible outcomes – good and bad – for both Britain and the global economy.

Forecasting, meanwhile, has become more challenging. Even for those who correctly guessed the outcome of the momentous political events of last year, predicting the market and economic response to them was another story.

I thought, rather than getting bogged down in precise numbers for growth, inflation and other economic magnitudes – don’t worry there will be plenty of those in columns to come shortly – it would be useful to sketch out some broad themes.

The broad themes that will occupy us over the next 12 months, and no doubt there will be more, are Brexit, European politics (and the interaction of the two) Donald Trump’s America and China )and the interaction of those two too).

Let me take them in turn. In the next few months we will move from the phoney war on Brexit to the actual process. Theresa May, who has promised a big speech soon setting out the government’s priorities – it would be unwise to expect too much detail – remains committed to triggering article 50 by the end of March, whatever the Supreme Court decides.

The logic of that timetable, that we will clear the formal two-year Brexit process in time for us not to have European parliament elections in 2019, and well ahead of the 2020 general election, is not that strong. It will be better to have a proper strategy in place than rush it. But, one way or another, it is reasonable to expect article 50 to be triggered in the coming months. That in itself is testimony to how rapidly events have moved. This time last year we did not even know for sure whether there would be a referendum in 2016.

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