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.

Sunday, August 03, 2014
It can get sticky when you're a honeypot for migrants
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.

Immigration is an issue it would be easy to file away in the “too difficult” drawer. Is it one of those where good economics – most economists would say it brings net benefits for the country – can never be good politics? Or is it a bit more complicated than that?

A few days ago the International Monetary Fund, in its annual assessment of Britain’s economy, was generally supportive of the coalition government’s policies but warned that “restrictive immigration policies could have a negative impact on productivity growth”.

It called for a relaxation of immigration restrictions in areas where there are labour shortages, as well as a loosening the visa regime for foreign students, which it said “could contribute to expanding the skilled labour force and to improving the prospects of higher education exports”.

The Office for Budget Responsibility (OBR), the government’s fiscal watchdog, in its latest assessment of Britain’s long-term fiscal sustainability, demonstrated that the lower the level of net migration, the higher the level of future government debt. Migrants tend to be of working-age and pay more in taxes than they take out in benefits.

In 50 years’ time, in 2063-64, public sector net debt will be just over 40% of gross domestic product in a “high migration” assumption; net migration continuing at 225,000 a year, similar to its recent rate. If, however, net migration was reduced into the “tens of thousands” as suggested by ministers – the OBR uses a figure of 90,000 a year – net debt in half a century will be closer to 90% of GDP. Migration is good for the public finances.

Shadow MPC votes for half-point rate hike
Posted by David Smith at 08:59 AM
Category: Independently-submitted research

At its meeting of Tuesday 15th July, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) recommended that Bank Rate should be raised on Thursday 7th August, including five votes for a rise of ½%.

Those urging a rate increase took the view that with GDP growing strongly, then even though inflation is low and monetary growth weak, the case for emergency interest rates has lapsed and there should be some normalisation.

They viewed with scepticism the idea that rate rises would seriously derail the recovery, with some members doubting whether initial rate rises would be reflected in rises in the structure of market rate to any significant degree. One member (switching from a hold to a raise vote) noted the growth in aggregate lending in the second quarter of 2014 took it to a five year high.

Those urging rates remain unchanged felt there was no urgency about raising rates and if inflationary pressures or credit or asset price bubbles do in due course emerge, there would be time and scope to raise rates in response. They were sceptical about the view that keeping rates near zero for an extended period is intrinsically damaging to growth or financial stability. Their view was that rates will rise eventually, but there is no reason to raise them yet.

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.