Monday, November 30, 2015
A interview with the MPC's Jan Vlieghe
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


A version of this interview appeared in The Sunday Times

In his job as an economist for one of the world’s biggest and most aggressive hedge funds Gertjan “Jan” Vlieghe tried to second-guess what the Bank of England would do.

Now, as a member of the monetary policy committee (MPC), he offers a pretty clear signal to the markets. As far as he is concerned, interest rates in Britain are going nowhere for some time.

In his first newspaper interview since joining the MPC in September, he reveals himself to be firmly in the dovish camp. While some have speculated that a raising of interest rates by America’s Federal Reserve next month could push the MPC into an early hike, he says he is in no rush at all.

For Vlieghe, who has joint British-Belgian nationality, his MPC appointment marked a return to the Bank, having worked there from 1998 to 2005, latterly as Lord (Mervyn) King’s economic assistant. After that he moved into the City with Deutsche Bank and then Brevan Howard, the hedge fund run by Alan Howard, Britain’s wealthiest hedge fund boss, according to the Sunday Times Rich List.

“In financial markets there is more pressure to be fast, to get there first,” Vlieghe said. “But the fundamental questions are the same. The analysis is the same.” What does his analysis tell him now?

Sunday, November 29, 2015
Osborne keeps the ball rolling on public spending
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.

It is five days since the autumn statement and spending review but it is not too late to give credit to the man who made it possible. Sometimes we do not praise enough.

I refer, of course, to Robert Chote, chairman of the independent Office for Budget Responsibility (OBR). He and his team, by uncovering a £27bn underlying improvement in the public finances over the next five years, drove last week’s announcements.

Most of the improvement was due to a more optimistic view of future tax revenues. Without it, George Osborne would have been in some difficulty.

I should also single somebody else out for a mention: Mark Carney, governor of the also independent Bank of England. When, earlier this month, the Bank clarified its position on quantitative easing, saying that there would be no reversal until interest rates hit 2%, I don’t suppose many people considered the implications for the public finances.

But the OBR did. The £375bn of gilts – government bonds - the Bank holds on its books are effectively an interest-free loan to the government. The longer they are held, the lower the government’s debt interest bill. For complicated reasons, extending the period the Bank holds these gilts adds to government debt. But it reduces borrowing, which was more important in the context of last week’s announcements, by about £6bn over the next five years.

I am not suggesting for a moment that either the OBR or the Bank of England are anything other than independent. Chote and his team made life much easier for the chancellor this time but during the last parliament often made things more difficult. There are swings and roundabouts.

Wednesday, November 25, 2015
The Autumn Statement & Spending Review - three quick thoughts
Posted by David Smith at 02:30 PM
Category: Thoughts and responses

There are always surprises in budgets, autumn statements and spending reviews and this one was no exception. There will be much more to uncover in the coming days but three initials things - all of them to a greater or lesser extent surprises - stand out.

1. The Office for Budget Responsibility, whose forecasts during the last parliament often made life more difficult for the chancellor - this time made it considerably easier. A £27bn underlying improvement in its forecasts for the public finances, overwhelmingly used for higher spending, eased the burden. Within that, however, getting in below the March forecast for this yera's deficit, predicted by the OBR, still looks on the face of it very tough.

2. That underlying improvement enabled Osborne not just to mitigate the effects of his tax credit cuts but to abandon them. This was a political coup, though presumably his earlier views on the unaffordability of the tax credit system still stand.

3. Osborne was able to be fast on his feet over police funding, another clever move. Following the Paris attacks, any cut in police funding would have been seen by critics as irresponsible. The police deal, apparently settled late, sees the budget protected in real terms.

There is much more to dig into. In the meantime, the Treasury document is here.

Sunday, November 22, 2015
It isn't just the deficit where Osborne is struggling to hit his targets
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.

Though it is easy to dismiss such things as pieces of political theatre, Wednesday’s announcements from George Osborne – an autumn statement and a spending review – are rather important.

Autumn statements, it is true, come round once a year. If you think of them as mini budgets, which the headline writers often do, we have a budget or a mini budget every few months. Spending reviews are rarer. There was only one proper one in the last parliament, five years ago, and Wednesday’s is the big one for this parliament. It is big in more ways than one. As Osborne observed a couple of weeks ago, it will set out how the government will spend an eyewatering £4 trillion - £4,000bn – over this parliament.

What should we be looking for from the chancellor this week? I would say he has four targets. He has to detoxify the tax credit changes he announced in his summer budget, which were subsequently voted down by the House of Lords.

He has to demonstrate that his deficit reduction strategy is on course in this parliament, having been blown off it in the last one. That target will only be achieved if a third one, credible plans for reducing public spending, are in the spending review. Finally, there is a fourth target. Having talked up his commitment to infrastructure spending, and tempted Lord Adonis away from Labour to chair his new national infrastructure commission, Osborne has to match words with deeds.

Sunday, November 15, 2015
Leave the EU and you lose the single market
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 battle over Britain’s membership of the European Union is now officially joined. It could be all over by next summer, though it could drag on for the next two years.

I presume that if, as is likely, David Cameron decides that the EU has not turned a deaf ear to his fairly modest renegotiation demands, Downing Street will choose a referendum timing which offers the best prospect of a yes vote. That probably means waiting until the refugee crisis has subsided.

Anyway, there is a long way to go, and a lot of areas to cover, between now and even an early referendum. But let me focus on just one today: the issue of trade and access to the single market.

Last week I quoted projections from PWC which demonstrated that, though the share of exports of Britain’s goods and services going to the rest of the EU is in decline – from 55% in 1999 to 45% last year and a projected 37% in 2030 – it will remain, assuming continued EU membership, the key trading partner.

The EU is important even if you adjust for the so-called Rotterdam effect; exports destined for the rest of the world which are shipped via Rotterdam in the Netherlands, and imports from the rest of the world which come in the same way. Exclude all exports to the Netherlands from the numbers and it would still be the case that more than 40% of Britain’s overseas sales are to the rest of the EU.

Sunday, November 08, 2015
Risks start to rise as rates get stuck again
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.

Forecasts are always risky, but if I wanted to venture a couple, it would be these. At some stage next summer Mark Carney, the Bank of England governor, will make a speech warning that interest rates could be going up, perhaps around Christmas.

Then, at roughly this time next year, when it becomes clear they are not, the markets and the Bank will between them push out their expectations of the first rate hike into late 2017 or beyond.

This is not, I should say, some bold leap into the dark, though it could still turn out to be wrong. Friday's strong US jobs report put the Federal Reserve's on-off December rate hike back on again again, showing that these things can change quickly. But expecting a hint next summer from Carney that rates could soon be on the up merely assumes the governor will follow the pattern of the past two years.

In the summer of 2014, at the Mansion House in the City, and in the summer of 2015, at Lincoln Cathedral, Carney put markets, households and businesses on alert for higher rates. And, while he pointed out on Thursday that we have not yet reached the turn of the year, which is when he said the decision on rates would come into sharper relief, the tone of Bank’s latest inflation report was that everybody can stand down; rates are going nowhere.

My other prediction is not particularly bold either. All it assumes is that the history of the past few years will repeat itself and that the Bank’s monetary policy committee will continue to find more reasons not to raise interest rates than to do so. For added comfort, the market assumptions on which the Bank’s latest growth and inflation forecasts are based are for no change in rates next year.

Tuesday, November 03, 2015
Leicester's Business Festival
Posted by David Smith at 02:30 PM
Category: Thoughts and responses


A few days ago I spoke at the Leicester Business Summit, held on the first day of the two-week Leicester Business Festival. While festivals for art, music, film and literature are commonplace, business festivals are still quite unusual, but are an excellent idea.

The business summit included, as well as me, Bonita Norris, the youngest British woman to climb Everest, and Gareth Davis, chairman of William Hill and Wolseley. It was lively.

Even more impressive were the 80 or so events in the festival, put together at short notice by Champions, the events company. They included topics as diverse as big data, apprenticeships, succession planning, advanced materials, the creative industries, pensions and auto-enrolment, infrastructure supply-chain opportunities, women in business, defending yourself against the commercial "dark arts", and accelerating growth for small businesses. The festival also hosted the Bank of England. The festival website is here.

The festival has already been recommissioned for next year. Like me, you may even get a chance to visit Richard III's tomb in Leicester Cathedral.

I was hired to be a motivational speaker by Champions, the after dinner speaker agency.

Sunday, October 25, 2015
A fine mess: How Osborne can dig himself out of his tax credit hole
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.

George Osborne, it seems, is on a three-year cycle. Much of the time he gets a pretty good press, given that he has presided over some unpopular policies, and he has had the last laugh over his austerity critics.

Every three years, however, something goes badly wrong. Three years ago it was his “omnishambles” budget, which combined the brave move of cutting Labour’s 50% top rate of tax to 45% with some unwise tinkering with the tax privileges of Cornish pasties and caravan owners.

Now it is his “toxic” cuts to tax credits, which are in danger of joining a long list of policies which look elegant and logical on a Whitehall computer screen are disastrous when implemented. They include Gordon Brown’s abolition of the 10p tax band, the bedroom tax and Osborne’s own child benefit cuts, which penalised higher-paid single-earner families, while letting two-earner couples with high household incomes off the hook. Some are even drawing comparisons with the poll tax, the policy which more than any other brought down Margaret Thatcher.

The chancellor, political to his fingertips, will be aware of all these precedents. But when he presented his summer budget in July, his second in the space of four months, he was perhaps still in the first flush of excitement after the Tories unexpected majority in the May election. As in the early months after the 2010 election, when he was in the first flush of excitement of becoming chancellor, things were done that on reflection might have been done differently.

Let me start, however, with praising Osborne on tax credits. Having inherited a system that was becoming ruinously expensive, and which benefited nine in 10 families with children in 2010, the reforms the chancellor steered through in the last parliament, largely without fuss, went a long way towards putting things right.