Sunday, September 21, 2014
Weak pay and low inflation mean no rate hikes just yet
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 all the excitement - and for me the right result - time to return to some normal but rather interesting fare. While we have been preoccupied with other things, there have been developments. The question is which way they are pointing.

On the face of it the job market continues to roar away. The unemployment rate, now just 6.2%, is at its lowest since October 2008 – just as the financial crisis was starting to do really serious damage – and is down from 7.7% a year ago.

Without rubbing salt into old wounds, a year ago the Bank of England though it would take until 2016 just to get down to 7%, let alone to be knocking on the door of 6%.

The fall in unemployment over the past year, the fastest for 25 years, takes the wider jobless total down to just above 2m (2.02m), while the narrower claimant count has dropped below the symbolically important 1m level; it is now 966,500.

Add the rise in employment, an extraordinary 774,000 over the past year, with a record 30.61m people in work, and a near-record 73% of the workforce, and it looks like a job market on steroids.

Tuesday, September 16, 2014
A different kind of politics - and not in a good way
Posted by David Smith at 03:45 PM
Category: Thoughts and responses

The Scottish referendum campaign has engaged people in politics as never before, it is said, and this is a welcome and different kind of politics. It is, of course, welcome that voters in Scotland are engaged and mainly intend to vote on what is the most important issue they will ever vote on.

But it is also a different kind of politics in another, less welcome, way. In general elections, the political parties are required to come out with detailed manifesto plans. Spending commitments are carefully costed, and holes in their policies are teased out and exposed by the other parties or by the press. This does not stop politicians keeping unpleasant surprises until after they are elected, but it is a good form of scrutiny.

In Scotland we are seeing something very different. The Scottish Nationalists, despite being the governing party, gloss over enormous holes in their policies, and accuse anybody who exposes them as being biased or scaremongering. And, it seems, escape serious scrutiny. If the vote were won on Thursday on that basis, far from being good for democracy would be a terrible advert for it.

Among those holes:

- Scotland has a bigger budget deficit than the rest of the UK now, has averaged a bigger budget deficit for the past 25 years (Government Expenditure and Revenue Scotland). That deficit will have widened relative to the UK in 2013-14, and will widen further in coming years.

- There will thus need to be more austerity with independence, alongside higher taxes, in Scotland compared with the rest of the UK.

- Even with oil, Scotland pays a smaller share of taxation, 9%, than in gets in spending, 9.3%.

- The fantasy of the NHS, already devolved, 'only being safe with independence'.

- There will be no currency union with the rest of the UK.

- If Scotland were to renege on its debts it would be a pariah in the markets and would be unlikely to be admitted to the EU. EU membership will, in any event, be a complex and lengthy negotiation.

These are not small points, but they are glossed over in the SNP's "fact-free" campaign. For sensible views, see the National Institute here, and the LSE's John Van Reenen here.

Sunday, September 14, 2014
Don't go, but Scotland needs the UK a lot more than the UK needs Scotland
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.

With days to go, it it is still not clear whether Scotland will avoid the economic car-crash that would follow independence. It could still, as Deutsche Bank's chief economist puts it, be on the brink of a historic economic and political mistake.

The fact that independence will be bad for Scotland’s economy is so clear that it surprises and rather saddens me when some business people north of the border either say there will be little difference whichever way Thursday’s vote goes or that Scotland will be better off.

For a sensible business view of independence, I would look to Terry Scuoler, the Glaswegian chief executive of the EEF, which represents Britain’s manufacturers. As he wrote in The Times on Thursday: “A ‘yes’ vote would be deeply damaging for the Scottish economy, and thereby the living standards of ordinary Scots, for decades to come.”

That’s enough on that, without reprising all last week’s arguments. Let me move on to a different tack. Last week’s dash up to Scotland my the prime minister and the other Westminster leaders, together with the general air of panic about the risks of a “yes” vote, have led to some nationalists making an interesting claim. The reason the rest of the UK is so worried, they say, is because it has been exploiting Scotland all these years.

There are three things wrong with this argument. The first is that it is hard to claim exploitation when Scotland’s income per head – measured by gross value-added - is the highest in the UK outside London and the south-east, even without allocating it a geographic share of North Sea oil. Wales, Northern Ireland and the north-east of England, with income per head on this measure less than 80% of the Scottish level, are entitled to feel hard done by. Scotland is not.

Sunday, September 07, 2014
An independent Scotland would be poorer, more unstable and fiscally 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.

In 11 days, voters in Scotland will decide on whether their country should go it alone. The latest Sunday-Times YouGov poll shows a two-point lead for the "yes" camp. The outcome is now too close to call.

The closeness of the polls has been matched by a shift in the tone of some economic commentary on independence. Some say it would be a close-run thing whether an independent Scotland would be better or worse off than if it remains part of the UK. If this is the case, then Scots are free to vote with their emotions, their hearts.

Such talk is dangerously misleading. The economics of independence are not close at all. Scotland will be worse off in the short-term, in the medium-term and in the long-term if it votes for independence.

A vote for independence will be a vote for a Scotland that is poorer, more unstable, and will require deeper cuts in public spending than if it remains part of the UK.

In the short-term, a vote for independence would be followed by turbulence. Goldman Sachs has warned of a euro-style currency crisis within Britain, with the break-up threat providing investors with “a strong incentive to sell Scottish-based assets and households with a strong incentive to withdraw deposits from Scottish-based banks”.

Wednesday, September 03, 2014
A big day for data revisions
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Today's revised GDP and balance of payments data, taking us up to 2012, confirm what some of us have long suspected, that the recovery in recent years has been stronger than was initially reported.

The new numbers show that the peak-to-trough fall in GDP in 2008-9 was 6% rather than 7.2%, and that pre-crisis growth was somewhat weaker than earlier estimates. So growth in 2004 is revised down from 3.2% to 2.5%, 2005 from 3.2% to 2.8%, while 2006 is up from 2.8% to 3%, and 2007 down from 3.4% to 2.6%.

But the post-crisis recovery is significantly stronger, with 2010 up from 1.7% to 1.9%, 2011 from 1.1% to 1.6%, and 2012 from 0.3% to 0.7%. Some people got badly overexcited over double and triple-dips but we were never close.

The figures imply that when figures up to 2014 are released on September 30, they will show that the pre-crisis level of GDP was exceeded last year, and that GDP is currently some 2.7% above that pre-crisis peak. There is a good summary of the changes here.

We should remember that these are mainly the effect of methodological changes, plus reweightings. There are plenty more data revisions to come. These figures do not solve the productivity puzzle - it is still some 12% below its pre-crisis trend. Later changes may help to do so.

Sunday, August 31, 2014
French lessons in how not to run an economy
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 and France are two nations separated by just 21 miles of sea but sharply divided by their economic performance. France, economically stagnant, is experiencing rising unemployment and disagreements over policy which last week forced a serious cabinet shake-up.

Britain, in contrast, is growing well, unemployment is tumbling and, against the predictions of many when the coalition government was formed more than four years ago, has kept policy disagreements to a minimum.

This is not a “what I did on my holidays” piece. I did not contribute to the roughly 9m annual visits by Britons to France this year. But what is happening in France is interesting, and in some respects a warning; it could have happened to Britain.

The French economy did not grow in 2012, managed just 0.2% in 2013, and has growth by just 0.1% in the past 12 months, with little better in prospect for the rest of the year. That is what you really do call flatlining.

Britain did not grow much in 2012, 0.3%, but picked up to 1.7% in 2013 and has grown by 3.2% in the past 12 months.

IEA's shadow MPC votes 6-3 for rate hike
Posted by David Smith at 08:59 AM
Category: Independently-submitted research

In its email poll closing Thursday 27th August, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) recommended by six votes to three that Bank Rate should be raised on September 4th, including four votes for a rise of ½% and two for a rise of ¼%.

Those advocating a rise acknowledged that inflation is low and wage pressures are limited. Their case was that with growth strong and unemployment falling, this is an excellent opportunity to attempt some limited normalisation of interest rates (thereby reducing the economic distortions such low rates create) whilst still maintaining them very low and monetary policy in general highly accommodative.

Those 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 them there remains inadequate reason to raise yet.

The SMPC is a group of economists who have gathered quarterly at the IEA since July 1997. That it was the first such group in Britain, and that it gathers regularly to debate the issues involved, distinguishes the SMPC from the similar exercises carried out elsewhere. To ensure that nine votes are cast each month, it carries a pool of ‘spare’ members. This can lead to changes in the aggregate vote, depending on who contributed to a particular poll. As a result, the nine independent and named analyses should be regarded as more significant than the exact overall vote. The next two SMPC e-mail polls will be released on the Sundays of 28th September and 26th October, respectively.

Sunday, August 17, 2014
Baby-boomers take some of the rap for falling pay
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.

Strange things are happening. Pay should not be falling at a time when employment is booming – up by 820,000 over the past year – and unemployment is tumbling.

Yet it is. As most people will have noticed, the latest average earnings figures showed that total pay, including bonuses, was down 0.2% on a year earlier in the April-June period. This was not the first time this has happened – there was a bigger, though temporary, fall in pay in the depths of the crisis and recession in the early part of 2009.

This one will also be temporary. When the Office for National Statistics reports the next set of labour market numbers in a month’s time, I think I can guarantee that pay growth will have turned positive again. This is because part of the big distortion in the figures – both bonuses and regular pay were boosted in the spring of last year to take advantage of the cut in the top rate of tax from 50% to 45% - will have dropped out.

Most of this effect was in April, when total pay on a single-month basis was down by 1.5% on a year earlier, though some carried through into May and June.

That is the good news. The bad news is that, even as the pay picture turns positive, it will remain subdued. Getting back to 1% pay growth will take a while. Getting back above inflation, currently just below 2%, will take even longer.