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.

Sunday, June 15, 2014
GDP revisions will give us a different picture
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.

Gross domestic product, which came into being in Britain just before the D-Day landings we were commemorating earlier this month, is about to undergo one of its periodic transformations, and this is one of the dramatic ones.

It may change the way we think about how the economy has done, and is doing. It may help solve the puzzle of strong employment growth and weak productivity. It will inevitably result in more flak for the Office for National Statistics (ONS), after the ribaldry it has endured for including the proceeds of illegal drugs and prostitution in GDP (as part of new international statistical conventions).

The context of this is that a few days ago the National Institute of Economic and Social Research declared to some fanfare that Britain's economy surpassed its pre-crisis peak - recorded in early 2008 - at the end of May. The economy, now 0.2% above that pre-crisis peak, has taken nearly five years to recover the 7.2% plunge in GDP it suffered in 2008-9 and – taking that plunge into account – more than six years to get back to where it started. If you can remember where you were in early 2008, on current figures you are back there now.

It has taken a long time, reflecting both the extent of the 2008-9 drop in GDP, which on existing figures was easily the worst in the post-war period, and the stop-start recovery that followed it. It is, the National Institute says, the slowest of any recovery in living memory, including those that followed the recessions of the early 1920s, early 1930s (in both cases for which the institute constructed GDP data), the mid 1970s, early 1980s and early 1990s.

Friday, June 13, 2014
Carney gets a little hawkish
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

It may be that Mark Carney simply likes drawing attention to himself, in which case last night's Mansion House speech was a success. His was not the first hint that rates could rise sooner rather than later - the May monetary policy committee minutes said that the debate on rates was becoming more balanced - but it was surprising coming from him.

Anybody who attended last month's inflation report press conference saw a governor bending over backwards to steer people away from the idea of early rate rises, emphasing the financial policy committee as the first line of defence and the amount of spare capacity in the economy.

What's changed? Maybe the pressure is starting to come from the rest of the MPC which seems on balance more hawkish than him. Maybe it was the strength of recent data, particularly this week's employment figures (though they were balanced by weak pay growth).

Whatever it is, things have changed, and only 10 months after the Bank's forward guidance was launched - pointing households and businsess to a prolonged period of low rates - they are starting to move. The end of the long period of 0.5% interest rates is not here yet, but it is in sight. The speech is here.