Sunday, July 27, 2014
The black hole's still huge - but Osborne's slowly filling it
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.

The latest figures for Britain’s public finance a few days ago produced an interesting reaction. Either Britain’s budget deficit is soaring, and George Osborne’s strategy for reducing it is in tatters, or it has stopped falling, which is hardly any better.

Neither of those verdicts is correct, as we will see in the coming months. But they are part of a wider problem when it comes to assessing Britain’s fiscal policy. Those on the right of the chancellor – there are some – say he should have cut spending harder in the face of disappointing deficit reduction, claiming that he has left all the hard work, two-thirds of it some say, until the next parliament.

Those on the left, meanwhile, accuse Osborne of inflicting untold misery on large sections of the population with his unremitting austerity, while some economists – mainly on the left – say the only reason Britain’s economy is recovering is because he abandoned that austerity.

Let me guide you through this minefield, starting with the latest figures. They showed that the budget deficit, public sector net borrowing, was £11.4bn last month, up £3.8bn on June 2013. The figures a year ago were, however, artificially helped by a £3.9bn payment from the Bank of England to the Treasury of interest it receives on its holdings of gilt-edged securities under the quantitative easing (QE) programme. Adjusting for that, borrowing last month was marginally (£111m) down on a year earlier.

That does not sound like much of a deficit reduction programme and borrowing in the April-June period, the first three months of this fiscal year, was £36.1bn, £2.5bn up on a year earlier.

Again, however, there were special factors at work. In the spring of 2013, as noted here before, both wages and salaries and income tax receipts benefited from income being shifted into the 2013-14 tax year to benefit from the cut in the top rate of tax from 50% to 45%. The silver lining for this year, as the Office for Budget Responsibility (OBR) pointed out, will be that self-assessment receipts due in January will be similarly boosted.

Friday, July 25, 2014
Back to the peak
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

For all the caveats about per capita GDP - not something that usually gets much emphasis in the policy debate - this was another good GDP number, following on from the symbolic uprating of UK growth forecasts by the International Monetary Fund on July 24.

GDP rose by 0.8% in the second quarter and is now 0.2% above its pre-crisis peak in the first quarter of 2008. After falling by 7.2% in 2008-9, the worst post-war recession, GDP needed to rise by 7.8% to get back to that pre-crisis level, which may of course have included an element of unsustainable growth. It has now more than done so.

The economy began to grow, tentatively, in the fourth quarter of 2009, so has taken four and a half years to grow by 8%. It is a long time but, given the headwinds, perhaps growth averaging a little under 2% a year, pending revisions, was the best we could expect.

The latest figures show that the service sector grew by 1% in the second quarter, while production rose by 0.4% and construction fell by 0.5%. The construction number looks too weak against the surveys (the the Q1 flood effect), while the manufacturing rise of only 0.2% may also be revised up over time. More here.

Sunday, July 20, 2014
An independent Scotland risks a Greek tragedy
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.

This will not be my last look at Scottish independence between now and the September 18 referendum but it will keep us going for now. I urge readers in other parts of the UK not to switch off now. It matters, and it matters rather a lot.

Independence is not all about economics but if the economics does not work it will be a pyrrhic and ultimately damaging victory for its supports.

My focus today is on Scotland’s fiscal and financial position, not least because voters are not in my view getting the true picture. Of course this piece, along with pretty much everything else produced south of the border, will be dismissed by the nationalists. But it is accurate.

So, I have two aims. The first is to briefly set out a few basic facts on Scotland’s fiscal position. The second, more substantive aim is to introduce a rather interesting forthcoming report from Fathom Consulting, a firm which has no political axe to grind on independence, one way or the other, but which has a new take on it.

Let me begin with those fiscal facts. You may get the impression from listening to some Scottish politicians that Scotland is in a healthy fiscal position. Most nationalists have stopped claiming that Scottish taxpayers pay more into the UK Exchequer than they take out but nonetheless give the impression of rude fiscal health.

It is not true. The latest Scottish official figures, taken from Government Expenditure and Revenues Scotland (GERS), show that if calculated on the same basis as the rest of the UK, a so-called per capita basis – with oil revenues shared equally across the UK - Scotland had a budget deficit of 13.3% of gross domestic product in 2012-13, the latest year for which figures are available. That compares with 7.3% for the UK as a whole; the Scottish deficit is nearly twice as large.

Sunday, July 13, 2014
Don't blame Superpound for Britain's export woes
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.

Official figures a few days ago for industrial production in Britain produced a surprise. And, for once, it was not a pleasant one. Overall industrial output fell by 0.7% between April and May and within that manufacturing recorded a hefty 1.3% drop.

It was not the only disappointment. Britain’s trade deficit widened from £2.1bn in April to £2.4bn in May on the back of a meagre £0.1bn monthly rise in exports, more than offset by a bigger rise in imports. In the latest three months exports of goods have risen by just 0.1% to £72.6bn, while imports are up 0.5% to £98.9bn.

The industrial figures appear to be an aberration and are at odds with much stronger survey evidence. Manufacturing output in the latest three months was up by 1.1% on the previous three and, this – annual growth of around 4% - is a better guide to what remains a pretty robust industrial recovery.

But the trade figures tell a familiar and more believable story, which is that the great export revival that was going to be an important driver of growth and rebalance the economy, is still eluding us. Total exports in the latest three months in cash terms were 3.6% down on a year earlier. The volume of goods exports was 2% down. It is a strange kind of revival when exports are falling.

The question is whether this is due to the strength of the pound. Sterling Is flavour of the month among currency traders, At $1.71 it is more than 20 cents up on where it was a year ago, and at more than €1.25, it has gained roughly 10 euro cents.

Sunday, July 06, 2014
Inequality: always with us but less than it was
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.

Inequality is always with us and it never loses its power to provoke debate. This year, of course, we have had a bestselling book on it, Thomas Piketty’s Capital in the 21st Century.

The politics of inequality will feature in the run-up to the next election. Though official estimates suggest a 50p top of income tax will raise no additional net revenue compared with 45p, Labour is pledged to reintroduce it if re-elected.

The default position of the comfortably off, whether they are Church of England bishops, Bank of England governors, academics or think-tank researchers, is that “something must be done”.

Often, of course, that something would end up damaging those on low incomes, whether it is requiring all employers to pay a co-called living wage, or paying over-generous benefits that trap people on welfare.

I quite liked the formulation used by Tony Blair and Gordon Brown, which was that governments should strive to improve equality of opportunity but accept that inequality of outcomes are inevitable. Such inequalities can be and are reduced by the tax and benefits system but take that too far and you destroy incentives and growth.

IEA's shadow MPC votes 8-1 to hike rates
Posted by David Smith at 08:59 AM
Category: Independently-submitted research

In its email poll closing Wednesday 2nd July, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) recommended by eight votes to one that Bank Rate should be raised on July 10th, including five votes for a rise of ½% and three for a rise of ¼%.

Those advocating a rise acknowledged that the economy is not yet over-heating, money growth is low, and inflation overshoots are not an immediate risk. They did not propose raising rates to cool down the economy but, instead, sought to withdraw some of the excess monetary stimulus introduced at the time of the financial crisis so as to allow the price mechanism to allocate loans and capital. The current strategy of keeping interest rates very low whilst using bank regulation to prevent money and credit growth was loudly condemned.

For several of the members the Bank of England has already waited far too long before raising rates, with some criticising its “neglect” whilst others focused upon the confusion created by the signals from forward guidance. The main way to signal should be by changing a price — the interest rate — not by speeches or regulatory changes.

The member that preferred to keep rates on hold noted that not only is inflation low, but pipeline inflationary pressures are also low, as are wage growth, money growth and credit growth. For that member there was simply not enough reason in the data to raise yet.

Sunday, June 29, 2014
Global winds can blow us to a long-haul recovery
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.

Britain’s economy is expanding at a healthy rate. This month, for the first time, the average growth prediction for 2014 has hit 3% among the independent forecasters surveyed each month by the Treasury.

With half the year gone, you may say that this is not a particularly bold forecast. The numbers and the surveys are heading that way, with no sign yet of the feared slowdown in the second half of the year. If anything, growth is looking stronger.

It is, however, a milestone. This year see the strongest growth since 2007, the year when the crisis began to wreak havoc but before its economic impact was felt. This year’s growth is a powerful sign that the crisis’s deadly grip is weakening.

Not only that but I began to fear that growth numbers beginning with a “3”, normal in past recoveries, were going to be denied to us this time. Maybe those banking and fiscal hangovers had left us so groggy that the last thing we could do was run faster.

So this is good news. The question is whether this is the only 3% year we see, a bit of a flash the pan, or whether there can be more of them. In other words, is this stronger recovery sustainable?

Sunday, June 22, 2014
Enough 'will they, won't they?' - time for the Bank to act
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.

The Bank of England has got itself into a terrible tangle over interest rates, which is threatening to make it look rather foolish.

The big question for monetary policy was how, after more than five years with Bank rate at a record low of 0.5%, the Bank would approach the tricky task of managing the first of what will be a sequence of hikes.

We have become so used to announcements of unchanged rates each month from the Bank that the first move was always going to be a very big story. Maybe not on the scale of the moon landing but big nonetheless.

So far at least, the Bank has botched the job of preparing the ground for that first hike. And I am afraid the buck for this has to stop with Mark Carney, the big-bucks earning Bank governor.

In August last year Carney launched forward guidance, which tied the point at which the Bank’s monetary policy committee (MPC) would begin considering rate hikes to the unemployment rate. The MPC would not necessarily hike rates when unemployment hit 7% but it would think about it. But, because unemployment was unlikely to fall that much until 2016, people and businesses could relax.