Sunday, June 28, 2015
Cut tax rates at the bottom, not at the top
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.

There is more than a touch of déjà vu about George Osborne’s summer budget on July 8. In June 2010, when Osborne presented his first “emergency” budget, Greece dominated the headlines, having agreed to its first bailout package amid deadly riots and a flurry of ratings downgrades.

Then as now, Britain had a substantial budget deficit which had to be tackled. And, while it has fallen by more than half as a percentage of gross domestic product, at 4.9% of GDP or nearly £90bn in 2014-15 (though falling this year) it remains too high for comfort. Hence, one of the sounds you hear from the Treasury is that of knives being sharpened.

True, this is the first budget in a Conservative-only government since Ken Clarke’s last outing nearly two decades ago in November 1996 (at that time the spring budget had been abolished). And true, the fact the chancellor no longer has to get everything past coalition partners will change the character of next month’s budget. In other respects, however, things are rather familiar.

Let me address three aspects of the upcoming budget: the economic backdrop, whether welfare cuts can be achieved and whether in the context of such cuts, the first Tory budget for almost 20 years should include a cut from 45% to 40% in the top rate for very high earners.

Sunday, June 21, 2015
Booming job market gives Britain a pay rise
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.

Apart from a Greek crisis that is in danger of giving a whole new meaning to the term brinkmanship – the usual idea is to stop before you go over the edge – the past few days have brought some other interesting developments.

Though the latest figures show that Britain has edged out of deflation after just a month, the combination of negligible inflation and a strengthening of pay growth means real wages are growing at their fastest since 2007; before the crisis hit home.

Some said this would not happen for a very long time, or that the return of real wage growth last year was merely a product of very low inflation. But the latest rise in average earnings, 2.7%, is enough to outstrip inflation even when it returns to the 2% target.

It runs alongside what the Office for National Statistics says is the longest spell of sustained retail sales growth since records began almost two decades ago. In May, retail sales volumes were 4.6% up on a year earlier. Low inflation has certainly helped here. A drop in petrol prices of more than 10% over the past 12 months has had the predictable effect of increasing the volume of spending, not just on fuel but on other products as well.

The earnings figures provide me with a peg to address three things. One is that the job market is changing as its recovery matures. The second is the sustainability of stronger pay growth when overall productivity is weak. The third is what the numbers tell us about the consumer recovery.

Sunday, June 14, 2015
First get your budget surplus, then try to keep it there
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.

Neither will welcome the comparison but George Osborne since the election reminds me of Gordon Brown in the weeks after Labour’s 1997 victory. Both hit the ground running, with a flurry of announcements and initiatives while their cabinet colleagues were getting used to being in office or, in the case of the Tories, back but with an overall majority.

For Osborne, it is like a weight has been lifted. Though I am sure he enjoyed the company of Danny Alexander, his former Liberal Democrat Treasury chief secretary, and all those “quad” meetings with Nick Clegg and Alexander as well as David Cameron, the sense of liberation is palpable. The sometimes Eeyore-ish presence of Vince Cable at the business department might have meant slower progress on selling the rest of Royal Mail and embarking on the disposal of RBS. No more.

The chancellor’s biggest offering, however, is what he described in his Mansion House speech as his “new settlement” for the public finances, “a permanent change in our political debate and our approach to fiscal responsibility”.

That new settlement, to legislate for future governments to run a budget surplus “in normal times”, “to bear down on debt and prepare for an uncertain future”, has been widely greeted as a political trick, intended to kick Labour when it is down, by forcing the main opposition party to commit to a fiscal rule it is probably not comfortable with.

There is some truth in that, as there is in the fact that fiscal rules, even those enshrined in law, are made to be broken, and that no government can bind the hands of its successors. On the latter, however, the chancellor may be aiming for the kind of consensus there is now on Bank of England independence. Just as it is hard to see any new government reversing that, it could be a very big deal if future politicians decided to abolish the proposed fiscal law.

Sunday, June 07, 2015
After wasting five years, Labour will struggle to rebuild economic credibility
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 general election is becoming a fading memory but its implications will be with us for some time. For the Conservatives, there is the task of delivering the spending cuts necessary to complete the task of eliminating the budget deficit.

The Paris-based Organisation for Economic Co-operation and Development (OECD) has offered advice, suggesting to George Osborne that “evening out the profile of fiscal consolidation” would make sense. I don’t think this piece of OECD advice will be particularly unwelcome.

In his March budget, the chancellor left us with a “roller-coaster” public spending outlook; down sharply in the first two years of the parliament, then up dramatically at the end. As I have written before, it will be very surprising if, now he is safely back in 11 Downing Street, he does not take the opportunity, in his July 8 budget and the spending review later in the year, to indeed even out this profile. Thursday’s announcement of a £4.5bn package of cuts and asset sales, includingof £3bn of a £1.5bn sell-off of the government’s remaining 30% stake in Royal Mail, were part of the smoothing process.

To the victors go the spoils, however, and the challenges for the Tories are as nothing compared with those for Labour. Labour has now lost two elections, largely because of a lack of public trust in its ability to run the economy. The task for its leadership hopefuls is to rebuild economic credibility, and it will not be easy.

We will never know whether Labour was ever in with a shout of winning the election, or even being the largest party. One thing that helped guarantee it would not happen, even apart from Ed Miliband’s absurd “Ed Stone”, was the Labour leader’s refusal to concede that his party had overspent when in government.

In 2011, Miliband appeared to be on the brink of wiping the slate clean, apologising for the regulatory failures that contributed to the crisis. Given that London was at the heart of the crisis that was probably the least he could have done. And, given that politicians do not get themselves directly involved in financial regulation, blaming the failure of officials at the Financial Services Authority, Treasury and Bank of England was not too hard.

That same year Ed Balls, then the shadow chancellor, also appeared to be on the brink of truth and reconciliation, apologising both for regulatory failings and for the fact that “we didn’t spend every pound of public money well”. But that was it. The attitude then appeared to shift to blaming everything on the bankers and conceding nothing on the disaster that befell the public finances.

Sunday, May 31, 2015
Trade is such a drag for Britain's 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.

A new government is in place and we have had its first Queen’s speech. As far as the economy is concerned, the two most important aspects of its programme are the referendum on European Union membership and the second-half of the deficit reduction programme.

On the first, of which much more no doubt in coming months, I still think it will be a story of some occasionally fraught renegotiation, followed by a yes vote, but we shall see.

On the second, the task for the Tories – given that many people seem to feel curiously cheated by the election result – will be to make deficit reduction seem fair. Without the cover provided by the Liberal Democrats, George Osborne will be under even greater pressure to demonstrate that we are all in it together. Anyway, more on that later too, in the run-up to and after the July 8 budget.

As always, what happens to the economy is not exclusively reliant on what politicians do. They can declare until they are blue in the face that they want to raise productivity but in the end the decisions by tens of thousands of private sector firms will determine whether it happens or not.

Similarly they can set a target, as Osborne has, for doubling Britain’s exports but, again, in a period of slow world trade growth, they cannot guarantee it will happen.

Trade is a big issue for Britain’s economy, as figures a few days ago showed. Against expectations of an upward revision in first quarter gross domestic product growth, the quarterly increase was left unchanged at 0.3%. Manufacturing and construction were stronger than first estimated but services a little weaker. Business services and finance appear to have had an unusually weak quarter.

In the detail of the figures, however, the standout drag on growth was what economists call net trade; exports less imports. Net trade, in fact, was not so much a drag as a giant millstone round the economy’s neck.

IEA's shadow MPC votes 6-3 to hold rates
Posted by David Smith at 08:59 AM
Category: Independently-submitted research

Following the pattern of the last few meetings, albeit with a smaller majority,
the SMPC has voted to hold Bank Rate in June. The election result, and
the consequent removal of some of the political uncertainty, had little
impact on the voting.

The majority continued to argue that rates should remain on hold due to
negative inflation and worries about growth later in the year.

Those arguing for higher rates remain worried about financial market
distortions caused by leaving rates ‘too low for too long’, and wanted to
at least start to normalise rates.

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 polls will be released on the Sundays of 5th July and 2nd
August 2015, respectively

Sunday, May 24, 2015
A little bit of deflation does you good
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 drop into deflation has produced a mix of curiosity, celebration and, in some quarters, alarm. The fact that the consumer prices index (CPI) last month was 0.1% lower than a year earlier (as distinct from unchanged in February and March) is of little practical significance.

But it has certainly provoked a lot of curiosity. Though the CPI was not even a twinkle in the statisticians’ eyes in 1960 – back then inflation was measured by the retail prices index – the Office for National Statistics (ONS) has managed to “backcast” the data to then. So we have been treated to comparisons which show this is the first episode of CPI deflation since Princess Margaret married the future Lord Snowdon, the skiffle artist Lonnie Donegan topped the charts and Wolverhampton Wanderers last won the FA Cup.

If the current deflation episode is as short-lived as many believe, it is a slightly sobering thought that in 55 years’ time somebody could be looking back and running comparisons to the quaintness of life in 2015, and which tunes we were all whistling from the charts. I should probably add a "not" there.

Mostly, the reaction to the drop into mild deflation has been to celebrate it. This has to be right. When I wrote about “good” deflation last year, I think I was one of the first, if not the first in this episode, to do so.

Good deflation in when prices fall in response to a favourable global price shock, in this case a sharp fall in oil prices. Bad deflation is when prices are dragged down by a lack of demand in the economy and is associated with stagnation.

Monday, May 18, 2015
Austerity myths revisited
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

My piece on Friday, The Myth of Abandoned Austerity, has attracted quite a lot of interest. It had a simple aim - to demonstrate that fiscal consolidation, deficit reduction, continued throughout the parliament, alongside recovery.

Simon Wren-Lewis, a professor of economics at Oxford, devoted a blog post to it, here.

Jonathan Portes, director of the National Institute of Economic and Social Research, was typically condescending, tweeting that I was "confused (& confusing)". I find it best to ignore him.

Let me respond to Simon. He wonders whether I was having a go at him with my piece. To that the answer is no. I think we used to talk many years ago about the exchange rate but I have not been a close follower of his recent work.

But Simon answers the question himself: “I know this cannot be the case because I have never said that austerity was abandoned in 2012. In fact I cannot think of anyone who did.”

That means, he suggests, that I am guilty of creating a straw man. Is it a straw man, to say that some people claim the coalition abandoned austerity halfway through the last parliament? I don’t think so. I hear it a lot but let me offer one or two examples.

The Guardian for example, in its pre-election leader on the economy, on April 17, was clear:
“By 2012, with his own backbenchers in revolt, Mr Osborne abandoned austerity; from then on, aided by a steadier world economy, the UK has enjoyed moderate growth.”

This is not quite the same, of course, as economists that Simon might know saying austerity has been abandoned. So how about Paul Krugman?

As Krugman put it in his long piece, again in The Guardian, last month:
‘A return to growth after austerity has been put on hold is not at all surprising. As I pointed out recently: “If this counts as a policy success, why not try repeatedly hitting yourself in the face for a few minutes? After all, it will feel great when you stop.”

There was also this, from Krugman, in June last year:
“As Simon Wren-Lewis has pointed out repeatedly, the Cameron government essentially stopped tightening fiscal policy before the upturn.”

That prompted me to look at what Simon has been saying, for example this piece, from 2013:
“Plan A was in fact put on hold, and the recovery we have had has followed a suspension of austerity.”

In 2014, he bemoaned the fact that the Left had missed a trick by not capitalising on Osborne’s “U-turn”:
“They could say the recovery only took place once austerity was (temporarily) abandoned.”

I am not sure when the suspension or (temporary) abandonment of austerity Simon refers to is supposed to have come to an end. One thing is clear, this was no straw man.