Sunday, April 23, 2017
Hard decisions will be ducked in this Brexit election
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

It is hard to think it was only two years ago. Then, in the run-up to the 2015 election, it was important to dig into the economic policy agenda offered by Ed Miliband and Ed Balls for Labour, and contrast it with David Cameron and George Osborne’s for the Tories.

Labour’s plans included, for those who have forgotten, no plan for a budget surplus but instead continuing to borrow to invest (in practice about £90bn more debt by 2020 according to the Institute for Fiscal Studies), but alongside a “budget responsibility lock”, bringing back the 50% top rate of tax and a mansion tax.

Apart from the fact that it looks as if we will end up with something like the fiscal numbers set out by Labour two years ago, and not the budget surplus promised by the Tories, so much has changed). We did not get the 50% tax rate or the mansion tax, though some say Osborne’s stamp duty reforms were worse.

And, as we head into another election, which even tests the appetite of an enthusiast like me, the rules of the game have been transformed. So far has Labour moved away from the political mainstream, and so distant is the main opposition party from returning to government, that it is not worth spending time on its economic plans.

The shadow chancellor could propose a 100% tax rate on anybody with two pennies to rub together and we could still relax in the knowledge that it is never going to happen. In all the time I have been writing about these things, there has never been anything quite like this.

The other rule-breaker, and for similar reasons, is that governments usually seek to ensure that voters are nicely buttered up in time for a general election, and feeling confident about the future. But consumer confidence, while a little higher than immediately after last summer’s referendum, is 10 points lower than it was in April 2015.

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Sunday, April 16, 2017
Pay hit again by the shrinking pound in your pocket
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

The squeeze is back. Real wages have stopped growing in Britain, a few months earlier than expected, thanks to the combination of rising inflation and sluggish pay growth.

After just over two years in which households appeared to have put the financial crisis behind them, and average earnings comfortably outstripped the rise in prices, a couple of years in which real wages fall is in prospect. Regular pay rose by just 0.1% in the year to the December-February period, and that tiny rise looks to be the last for a while.

The first and prolonged fall in real wages from mid-2008 to the autumn of 2014 was directly attributable to the crisis. It was the mechanism by which living standards fell to reflect Britain’s permanent loss of gross domestic product; the lost growth that will never be recovered.

This second fall in real wages reflects two things. Weak oil and commodity prices provided the basis for the recovery in real incomes from autumn of 2014, with the plunge in oil prices from $110 a barrel in mid-2014 to below $30 a barrel in early 2016. The partial recovery from that fall has been one factor pushing up inflation.

The other is sterling’s Brexit-related drop. The pound’s fall, which was the direct result of last summer’s referendum result, and to the Theresa May’s approach to the negotiations – no single market and no customs union – is now the factor coming through most strongly in the inflation figures.

One way of measuring the sterling effect is the difference between Britain’s inflation rate last month, 2.3%, and that in the eurozone, 1.5%. That difference will grow in coming months as inflation in Britain heads towards and possibly above 3%.

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Sunday, April 02, 2017
The inscrutable in pursuit of a softer Brexit
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

If you were looking for single word description of our prime minister it would be inscrutable. Her ability to pad away difficult questions with non-answers rivals that of Geoff Boycott. When it comes to inscrutability, the Great Sphinx of Giza has nothing on her.

It would be unwise therefore to read too much into the tone of her letter on Wednesday to Donald Tusk, the European Council president, invoking Article 50. Perhaps, apart from an eye-catching link between trade and security co-operation, which nobody in Europe seems to have much minded, she was just being polite.

But, having warned myself off, I will read something into it anyway. It is that, having talked the language of hard Brexit over the past nine months, not least to convince the Brexiteers in her party that she as a Remainer could be trusted, she is now embarking on a softer and more pragmatic course.

The hard Brexit language – no single market, no full membership of the customs union, reflecting the will of the people on EU migration, no deal is better than a bad deal – will still be wheeled out from time to time.

But it is now possible to see something softer emerging, assuming it can be negotiated and is acceptable to the other members of the EU, the so-called EU27.

What would this kind of softer Brexit entail? In talking to businesses, I have always seen it as including the following. It would involve, not single market membership but a comprehensive trade deal with the EU. Britain would have no influence on drawing up single market rules and directives, as May has conceded, but, except in the few cases where they are inappropriate or irrelevant, British business would still abide by the rules of our biggest market.

There would also be lengthy transitional arrangements, providing for a gradual adjustment for business to a post-Brexit world, as the prime minister has hinted. Nobody with any sense should have any problem with this. There were transitional arrangements stretching for at least eight years when Britain joined the European Economic Community in 1973. If they were appropriate on the way in, they are even more suitable on the way out.

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Sunday, March 26, 2017
Upbeat manufacturers and the drag from rising costs
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

They are the two sides of the same pound coin. Sterling’s sharp post-referendum fall has pushed inflation above the 2% target and is squeezing household incomes but it is also providing a boon for exporters.

Ben Broadbent, one of the Bank of England’s deputy governors, pointed out in a speech on Thursday that the weaker pound boosted export prices, in sterling terms, by 12% during the course of last year.

Though the pound has perked up a little in recent days that effects, which as Broadbent says “will have significantly boosted exporters’ profitability” is still coming through.

No part of the economy is more exposed to these conflicting effects than manufacturing. For manufacturers, 2.3% inflation – the latest reading for the consumer prices index – is child’s play. They have seen a 19.1% rise in raw material and fuel costs over the past year.

They are also, it is clear, benefiting from the upturn in exports as a result of the weak pound. The latest CBI industrial trends survey, published last week, showed export order books at their healthiest since December 2013, with total order books close to a two-year high and output expectations buoyant.

Surveys by the EEF, the engineering employers’ federation, which represents manufacturers, have shown a similar strong picture, as have recent official figures. The surveys show that industry’s optimism is tempered by its concern over sharply rising costs, but that there is optimism nonetheless.

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Sunday, March 19, 2017
After the U-turn - thank the self-employed for Britain's jobs' miracle
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

It might be an age thing but the pace of life these days can be dizzying. There was a time when budgets rarely unravelled, and even bad and unpopular measures were seen through to the bitter end. Then, more recently, they started unravelling, but not usually for a few weeks.

Now Philip Hammond has set something of a record, though not of his own making, by dropping his main budget tax-raising measure, the 2 percentage point increase in Class 4 national insurance contributions (Nics) within a week.
Though I argued last week against this tax hike on the self-employed, I am not going to crow about the U-turn. The chancellor has enough enemies. He and the Treasury will take comfort from the argument that they were trying to do the right thing by the public finances and the tax system; correcting important unfairness in the latter. They will argue that politics got in the way of good economics.

I am not sure about that. The Nics’ increase is dead, for this parliament at least, so is water under the bridge. But the review that Theresa May commissioned from Matthew Taylor, chief executive of the Royal Society of Arts, will still be published in the autumn and could recommend enhanced rights for the self-employed. Taylor backed the increase in Nics though said it should not go any further.

The rise in self-employment has been a key contributor to the employment “miracle” in Britain in recent years. Without it, we would have seen a decent post-crisis jobs’ recovery. With the growing army of the self-employed, we have seen a record employment rates, and an unemployment rate, 4.7%, which equals the lowest since the mid-1970s.


The question is whether, once you start to tamper with the self-employment model we have in Britain, which is less-regulated, lower-taxed and on average lower-waged than employment, you kill it off. Has the self-employment boom, in other words, only been possible because of the existing model?

Looking at the numbers, there are 4.8m self-employed people in Britain, 3.44m of them full-time self-employed and 1.37m part-timers. The increase in the number of self-employed people in the past eight years, 1m, compares with a rise of 500,000 in the eight years leading up to the crisis. Without it, the employment rate would be closer to 72% than the current 74.6% record, and unemployment near to 2.5m, or nearly 7.5% of the workforce, instead of 1.6m and 4.7%.

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Sunday, March 12, 2017
Now, more than ever, we need productivity to move up through the gears
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

When it comes to budgets, there are some eternal verities. One is the contrast between the picture of the economy painted by the chancellor and the reality of the numbers. Another is the ability of chancellors to get into political hot water even when apparently treading with the utmost care.

George Osborne managed to do so a year ago when trying not to frighten the horses ahead of the referendum. Philip Hammond has followed his predecessor into the mire by announcing increases in Class 4 national insurance contributions for the self-employed and cutting the dividend tax allowance from £5,000 to £2,000.

In the speech the chancellor lauded the “entrepreneurs and innovators” who are the lifeblood of the economy and said he wanted Britain to be the best place in the world to start and grow a business. But fine words butter no parsnips for those facing these tax hikes.

I do not want to dwell on Hammond’s NI problem and his breaking of what was not a very sensible manifesto promise; no government should tie its hands by ruling out increases in the major taxes. But suffice it to say that the contributory principle, which he used to justify raising the contributions of the self-employed, has worn rather thin in recent years.

And, while tax neutrality is a laudable aim, the implicit understanding has always been that the self-employed deserve to be cut some slack because their incomes are less secure and because they do not enjoy the employment rights of the employed. The £500m a year the NI increases will bring in when fully in place could have been secured in other ways, notably by a modest increase in fuel duty, which would probably have been more palatable to white van man. In net terms, after other NI changes, they will bring in only £145m a year.

Not only that, but if you really wanted to tackle the discrepancies in the system – the chancellor cited a £32,000 employee attracting £6,170 of NI contributions and a self-employed person on the same income just £2,300 – you would address the biggest source of that discrepancy, which is that employers pay 13.5% contributions for their employees, but not self-employed contractors.

Anyway, no doubt this will all come out in the wash in the autumn. The Treasury seems determined not to U-turn on the NI increase, though we have heard that at this stage before.

What I did want to focus on was the big disappointment in the budget, the fact that the government’s fiscal watchdog, the Office for Budget Responsibility (OBR), sees virtually no follow-through from the recent better performance of both the budget deficit and growth.

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Sunday, March 05, 2017
Better news - but look before you leap, Phil
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Philip Hammond would rather he did not have to present a budget this week. We know that because, in November, he told us so. The spring budget, he said, had outlived its usefulness, providing chancellors with more opportunities to tinker than is healthy. In future, there will be a single budget in the autumn.

His reluctance may also be because, not for the first time, great things are expected within Theresa May’s government, and probably on Tory backbenches, of this final spring budget. The chancellor is expected to apply some hefty sticking plaster to the social care crisis, ease the burden of business rate changes for the hardest hit firms and provide one or two crowd pleasers for households squeezed by the rise in inflation. There is a bigger demand on him, which is to ameliorate the pressure on low-income and vulnerable households from spending cuts.

For the Treasury, this week’s budget carries an added danger. Had the books been closed for a year in November, when Hammond presented his autumn statement, the Treasury would have had little difficulty fending off demands for largesse.

At the time, the Office for Budget Responsibility (OBR) unveiled a cumulative, like-for-like increase in public borrowing of £114bn by 2020-21, compared with its projections last March, mainly due to weaker actual and potential economic growth, and its resulting impact on tax revenues and spending. There was also a smaller effect from deliberate policy actions; mainly increased capital spending by the chancellor. The OBR wiped away George Osborne’s ambitions of achieving a budget surplus; under Hammond there would still be a deficit of nearly £21bn in 2020-21.

There was an even bigger addition to government debt, up £210bn by 2020-21 to £1,950bn. Debt was predicted to rise by more than the increase in borrowing because the Bank of England’s term funding scheme for the banks counts as an addition to debt.

Since then, however, as a result of methodological changes, stronger economic growth than feared and reasonably healthy revenues, the position has improved. The picture unveiled by the OBR this week will be better than it expected in November, with an upgrading of growth and a downgrading of public borrowing, though still considerably worse than it was projecting a year ago.

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Sunday, February 26, 2017
This nation of shoppers needs a new growth model
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Every little bit of information adds to our knowledge, and changes our perceptions. In recent days we have had a flurry of such information from the official statisticians. Let me try today to steer through it, and try to answer some key questions about the outlook.

The questions are these. Can the consumer continue to be the mainstay for the economy during 2017? Will imports and exports respond to the weak pound? Are businesses already throttling back on investment and will they continue to do so?

There is another question, and it is whether Britain can move away from a growth model which depends excessively on consumer spending to something more sustainable. The London School of Economics’ Growth Commission, whose first report four years ago was very good, published a second report on last week. More in a moment on whether it has some of the answers.

Starting with those statistics, the second release of gross domestic product figures for the final quarter of last year were rather bitter-sweet. They confirmed the expected upward revision of growth to 0.7% for the quarter, which is above-trend, but they also showed a surprise downward revision of growth from 2016 as a whole from 2% to 1.8%.

Amid the uncertainty of last year, 1.8% growth was perfectly respectable, exceeding most of the G7, though just below Germany. But it was driven, to an almost embarrassing extent, by consumer spending.

While the economy grew by 1.8%, consumer spending rose by 3.1%. The consumer, in fact, accounted for all of Britain’s growth last year and a little more, 1.9 percentage points. Government spending also contributed 0.2 points of growth. The circle is squared by the fact that business investment fell, subtracting 0.1 points from growth, and that net trade, exports minus imports, also acted as a drag on growth, to the tune of 0.4 percentage points. Investment and export-led growth it was not.

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