Sunday, May 01, 2016
There's no magic money tree if we leave the EU
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.

There are two things that even the most casual observer of the EU referendum debate will have heard. One is that we “send” £350m a week to Europe. The other is, in a pattern familiar in politics, those who favour Brexit have come up with various ways in which this money could be better spent, the latest being to settle the junior doctors’ dispute.

If there is one thing I can impress on you as we approach our date with destiny on June 23, it is to expunge that £350m figure from your mind, because it is wrong. That is not an easy thing to do because it is so often said. But ignore any politician who says we send £350m a week to the EU. Tear up any leaflet that makes that claim.

A second thing I would urge is to reject what I would call the crude accountancy approach to Britain’s contribution to the EU budget, or others might term a reductio ad absurdum about this debate. In other words, the effect on Britain’s public finances, or for that matter the balance of payments, will be dwarfed by the wider effects of a decision to leave the EU. The analogy is not perfect, but it is a bit like deciding whether or not to buy a prestigious car on the basis of the cost of replacing the wiper blades. There is a lot more to it than that.

Let me start with the contribution itself. The odd thing about the £350m figure is that it is widely used by many Brexit campaigners who profess admiration for Margaret Thatcher, while conveniently ignoring the EU rebate she successfully negotiated at Fontainebleu in 1984 and which for three decades has reduced Britain’s budget contribution before anything is “sent” to Brussels.

The rebate has outlasted her, and it will outlast the current generation of politicians should Britain remain in the EU. The rebate was worth £4.4bn a year in 2014, the latest full year for which data is available, and averaged of £3.5bn over the period 2010-14. It is deducted from the £17.4bn annual gross contribution over that period.

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Sunday, April 24, 2016
In or out of the EU, we need a euro with stronger foundations
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.

There are now just two months to go (two months!) to the referendum and as promised another instalment in my series on the economic issues. So this week, the euro. Do the single currency’s flaws mean we would be better off leaving the EU?

A few days ago the Treasury produced a comprehensive and rather impressive 200-page assessment of the impact of EU membership and the alternatives, taking the economic debate to a new level. I suspect most of its critics either have not read it or did not understand it. This week the Paris-based Organisation for Economic Co-operation and Development (OECD) will be the latest heavy-hitter to warn of the consequences of Brexit.

Even the most sophisticated economic modelling cannot, however, either product or sufficiently allow for disaster and crisis, as we saw in 2008. What if the subsequent near break-up of the euro was just one of a series of damaging convulsions that will be the norm for the eurozone in coming decades?

The euro and I go back a long way. Two decades ago, with my former colleague Andrew Grice, we had the world exclusive on the single currency’s name. Like all great stories, it did not make it onto the front page.

In 1999, my book Will Europe Work? was published, which concluded that the euro, as it had been set up, could not. The euro lacked the conditions of a so-called optimal currency area and would struggle. When it was published I encountered a small army of enthusiasts for early UK membership of the euro. They included Adair Turner, now Lord Turner, when he was director-general of the CBI. He has since admitted that he was wrong to advocate membership. Most of the others have airbrushed it from their memories.

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Saturday, April 16, 2016
Let's hope it's just fear of Brexit hitting growth
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 sun has been shining, the birds singing and the days getting longer. But if the economy has a spring in its step it is keeping it well hidden. That squelch you hear underfoot is a soft patch.

The National Institute of Economic and Social Research, which uses official data and other information to calculate gross domestic product a monthly basis, reckons growth slowed to just 0.3% in the first quarter, half its rate in the final three months of last year, and its slowest since late 2012.

The British Chambers of Commerce, in its latest quarterly survey a few days ago, reported that growth had softened in the first quarter, “with most key survey indicators either static or decreasing”.

A similar message has been emerging from the monthly purchasing managers’ surveys compiled by Markit, the information services provider. As Chris Williamson, its chief economist, put it: “Survey data indicate a slowing in UK economic growth in the first quarter, with the suggestion that the pace is more likely to ease further rather than recover in coming months as business confidence remains unsettled by worries at home and abroad.”

In fact, though these things can change, it has been hard to find very much of cheer in the recent numbers. Even consumers appear to have been letting the side down. The British Retail Consortium reported that the value of retail sales in March was flat compared with a year earlier, with so-called like-for-like sales down by 0.7%. It ascribed this “relatively disappointing” picture to the timing of Easter, though in the past Easter has often provided a spending boost.

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Sunday, April 03, 2016
Britain would struggle to maintain inward investor appeal after 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.

The referendum on Britain’s membership of the EU is still more than two months away, though the campaign seems to have been going on forever. Given that most election campaigns do not get properly in their stride until the final weeks, I cannot offer any early relief.

Instead, as promised, I will continue my series on the economic aspects of Leave and Remain. Shortly before the referendum, all these will be pulled together in a single piece and a verdict.

So far I have done five pieces. I began last November with trade, pointing out if you leave the EU then, unless you replicate the conditions of membership (including free movement of people and a budget contribution) you lose the single market. There is a lot of misunderstanding about that, mainly because many do not appreciate the difference between a trade agreement and the single market.

At the start of the year I warned, even when talk was of global risks to the recovery, that the referendum represented the biggest threat to Britain, a theme that has since been widely taken up. In February I looked at migration, under the heading economically beneficial, politically toxic.

I also examined in February at how Britain’s relative economic performance had improved since we joined the European Economic Community (EEC), the EU’s forerunner, in 1973. Mark Carney, the Bank of England governor, got into trouble with some Tory MPs for making a similar point. Finally, ahead of the budget, I wrote about how the chancellor would be seeking to emphasise the economic dangers of Brexit, while presenting a safety-first budget to minimise referendum risks. Whether or not he succeeded with the first, he failed with the second.

Today, let me examine another aspect of the economic debate, inward investment into Britain. The starting point, overwhelmingly supported by the evidence, is that EU membership has been good for inward investment, particularly foreign direct investment (FDI), for entirely logical reasons. The question is whether Britain’s attractions for inward investors could be maintained outside the EU.

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Sunday, March 27, 2016
A big rise for the low paid - will it cost jobs?
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.

On Friday this week, the biggest government intervention in wage-setting since the introduction by the Blair government of the minimum wage in 1999 will occur.

The national living wage of £7.20 an hour for the over-25s will come into force. It is, curiously, exactly double the original minimum wage of £3.60 an hour of April 1999. More importantly, it is 50p an hour, or 7.5%, above the existing minimum wage of £6.70 an hour.

It seems a long time since George Osborne announced his version of the living wage in his post-election budget last July. Iain Duncan Smith, who had apparently not been told in advance, celebrated with some energetic fist-pumping on the floor of the House of Commons. It was probably the moment of maximum togetherness between the chancellor and the former work and pensions secretary.

Incidentally, there has been far too much excitement about the supposed “black hole” in the public finances following the abandonment of the disability cuts that supposedly provoked Duncan Smith’s departure. £4.4bn between now and the end of the parliament and £1.3bn in 2019-20 does not constitute even a pale grey hole. There are many much larger challenges on the chancellor’s rocky road to a budget surplus, not least the questions of whether he will ever raise fuel duty and the cost of further raising the personal tax allowance and higher rate threshold.

But back to the living wage. It was, in many ways, a curious policy announcement from a Tory chancellor. At the time I noted that had the election turned out differently, and the living wage had come from Ed Balls in an Ed Miliband government, the response might have been quite different. Many in business, and many commentators, would I suspect have said that it was an intervention that showed how little Labour understood how the economy really worked.

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Sunday, March 20, 2016
Why two Osbornes and one Duncan Smith don't mix
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.

My initial reaction to Wednesday's budget was that, apart from being the fiddliest I could recall, it would not stay long in the memory. That was before it exploded on Friday evening with Iain Duncan Smith's resignation.

We are four days on from a budget that included 77 separately costed measures – more in a single budget than anybody can remember – as well as some of most obvious and ungainly fiscal gymnastics.

So, I was fully geared up to hold forth on a chancellor more addicted to unnecessary tax tinkering and more prone to using smoke and mirrors to meet his fiscal rules than that legendary exponent of the art, Gordon Brown.

And I was all ready to weigh in an assault on George Osborne for failing so soon in this parliament on two of his fiscal targets; the so-called welfare cap (breached in November and still breached now) and reducing debt as a percentage of gross domestic product every year, which is breached now according to the Office for Budget Responsibility. If this, his eighth budget, were also to be his last because of a Leave vote in the EU referendum, it would not have been a great swan song. It wasn’t even the safety-first budget the referendum had apparently required.

Then, two things happened. One was that plenty of other people immediately weighed in with a similar critique of the chancellor, so there was no point in repeating what is already out there. The other was the surprise resignation of Duncan Smith as work and pensions secretary on Friday evening, ostensibly about cuts to disability benefits. In leaving, he attacked Osborne’s entire approach.

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Sunday, March 13, 2016
Osborne skates on thinner ice as Brexit fears hit growth
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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When George Osborne started thinking about his eighth budget a few weeks ago he probably knew that by the time March 16 came around the EU referendum battle would be in full swing. That did not, however, stop him pushing ahead with ambitious plans to reform the way pensions are taxed, with his preference for a wholesale switch to a so-called pension ISA (individual savings account).

We know now that this will not happen, or at least not this week. Fear of doing anything potentially unpopular in the run-up to the referendum, as changing the existing system of tax relief would have been, led to the plans being shelved. There had been murmurings from Tory MPs.

Chancellors are supposed to do unpopular things in the interests of the longer-term good of the country. Osborne is finding it difficult to do so, particularly since the election. We may look back on the 2010-15 coalition as a model of stable government, certainly in comparison with what has followed.

Tory MPs have discovered their power. It only takes 30 or so of them, sometimes less, to force a retreat. That, more than the chancellor’s political opponents, forced the U-turn on cuts to tax credits last November. Tory MPs, by voting against the government, helped defeat plans to relax Sunday trading laws. There is a gathering revolt against a fuel duty rise this week, a rise that is counted in the government’s fiscal calculations. With dozens of Tory MPs openly campaigning against the EU stance of the prime minister and chancellor, this is turning out to be a chaotic government.

Osborne is quite good at pulling rabbits out of the hat, even if often on closer examination they turn out to be tiny kittens, so do not discount the possibility of a populist surprise or two this week. Even if there are, however, the chancellor will not want to let the moment pass without issuing stark warnings against the dangers of a vote to leave the EU.

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Sunday, March 06, 2016
Let's relax and learn to live with low productivity
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.

We all need a break from the referendum this week, so I will provide one here. The only thing I will mention in passing is the question of whether Brexit fears are already weakening the economy as they have weakened the pound.

Brexit uncertainty is one factor cited by Markit, which produces the monthly purchasing managers’ surveys, all three of which (manufacturing, construction, services) weakened last month. If Brexit is indeed a factor in what looks to be a slowdown, it plays both ways.

The Remain camp will say it shows anticipation of how the economy will suffer if we leave. The Leavers will argue that it is not Brexit fears hitting growth but wider worries about the global economy. The rest of us might conclude that a government that says we should not take risks with the economy has itself introduced risk by holding the referendum.

Anyway, it is another area of weakness I want to address this week; productivity. Britain’s poor productivity performance has been one of the stories of the post-crisis period. Productivity – output per hour or output per worker – is the lifeblood of the economy, the source of all our prosperity. In the famous phrase, “productivity isn’t everything but in the long run it is almost everything”.

But if productivity is almost everything, in recent years it has not been very much at all. Output per hour across the whole economy has crept above its pre-crisis level, but only just. In the latest figures last year it was 1.6% higher than in early 2008. That, however, was nothing to celebrate. The Office for National Statistics points out that had it kept up with the pre-crisis trend it would be 13% higher than it is.

I should say at the outset that plenty of business people dispute the extent of the productivity gloom. My colleague Dominic O’Connell encountered such scepticism at a high-level dinner a few days ago. The EEF, the engineering employers, published a major report on productivity recently which found that for many in industry, official measures of productivity are poorly specified and poorly measured. Economists at Legal & General, in a new report, say official statisticians are “failing to capture the revolution in distributed networking and cloud computing”.

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