Sunday, June 25, 2017
Britain's Brexit journey could yet end up in Norway
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.

One year on from the vote, and a couple of weeks on from an election that threw an almighty spanner into the works, the formal negotiations to take Britain out of the European Union have begun.

There will be plenty of ups and downs over the next 21 months, though the “row of the summer” promised by David Davis, the Brexit secretary, never transpired because the government agreed to the EU’s negotiating timetable of divorce bill and citizens’ rights first, a new deal and new trading arrangements later.

There is, however, a puzzling absence from the negotiating stance of both sides, and even of the politicians pushing for a softer Brexit. Philip Hammond did not mention it in his Mansion House speech, and neither did the 50 Labour MPs, or the London mayor Sadiq Khan, who are pushing for Britain to remain in the EU single market.

I am referring to continued British membership of the European Economic Area (EEA) after Brexit, the so-called Norway option. EEA membership would provide for continued membership of the single market but not the customs union, so freeing Britain to negotiate its own trade deals with the rest of the world.

The idea of post-EU EEA membership used to be very popular, particularly among Brexiteers in the run-up to the referendum. Many argued that Britain would be mad to leave the single market, and would not need to do so, and that the be like Norway – “rich”, “happy” and “self-governing” to quote one – was the thing to aim for. One plus for them, apart from the freedom to conduct trade deals, was that EEA membership does not include agriculture and fisheries, thus sparing us the hated common agricultural and fisheries’ policies. The big minus was that EEA membership meant accepting, with one or two wrinkles, free movement of people.

People like me argued that EEA membership would be inferior to being in the EU. We would be subject to single market rules (most of the “laws” imposed by Brussels), but not be able to influence them. We would still pay the equivalent of an EU budget contribution. There were questions about whether the rest of the EU, while happy to accept the smaller economies of Norway, Liechtenstein and Iceland into the family, would be prepared to do so for Britain, or see us as a cuckoo in the nest. Switzerland like these three is a member of the European Free Trade Association (EFTA), the body Britain helped found in 1960, but its people rejected EEA membership in a referendum in the early 1990s.

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Sunday, June 18, 2017
Austerity has further to run, however you define it
Posted by David Smith at 09:00 AM
Category:

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

Many years ago, as somebody who took a keen interest in monetarism, I was interested to see how a precise economic term – controlling the money supply to keep inflation under control and stabilise the economy – became a catch-all for much more.

So in the 1980s monetarism became, for many people, “the cuts” in public spending, laws to reduce the powers of the trade unions, in fact pretty much anything announced by the Thatcher government.

So it is now with austerity. The 1940s and 1950s version was about paying for an expensive war and accepting the loss of empire, and the years of rationing and other constraints.

21st century British austerity is different and should be easy to define; the process of deficit reduction, mainly by restraining and in some cases cutting public spending but also some tax increases. Even on that narrow definition I have heard some strange contributions in recent days from people purporting to be economists.

Austerity has like monetarism taken on a wider definition. It includes deficit reduction and conventional austerity, which for some takes in the appalling Grenfell Tower fire in London.

But it also includes falling real wages, now lurching downwards at an accelerating pace. It is that, while the jobs being created in Britain are overwhelmingly full-time and permanent, a sense of insecurity stalks the labour market, hence the unusual weakness of wages at a time of near full employment. It is the fact that, eight years on from the financial crisis, interest rates are still at rock bottom and savers cannot get a decent return on their money.

When people say they want an end to austerity, therefore, they want to go back to how things were. For some that would be a return to the time when public spending grew in line, or faster, than the economy as a whole and pay in the public sector grew in line with the private sector average.

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Sunday, June 11, 2017
Hung vote hangs over the economy
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.

This time last week I devoted quite a lot of space to the prospect of a hung parliament, pointing out that whereas two years ago it was the expected outcome for one Tory prime minister, David Cameron, this time it would be seen as a catastrophe for Theresa May. Combine a hung parliament with EU exit negotiations scheduled for June 19, and you had a recipe for something really destabilising.

Though a hung parliament was a risk, as set out then, I thought along with most other people that the Tories would secure a somewhat larger majority than the one May inherited from Cameron. It would have been one of the least deserved majorities in recent political history. So, while a hung parliament has made us something of a laughing stock and is on the face of it bad for the country – more in a moment on whether it is or not – there was quite a lot of poetic justice in it.

Why undeserved? Any prime minister who ignores the economy in an election campaign and expects voters to troop loyally into the polling booths when their real wages are falling did not deserve victory. People need something to latch onto, some grounds for economic hope and May’s Tories did not provide it. Austerity fatigue is another factor on which no reassurance was offered.

I also think that she made a huge miscalculation, which goes back some time, about Brexit. As a Remainer, albeit a soft one, she overcompensated by either focusing exclusively on the 52% who voted to leave the EU – and implying that those did not were “citizens of nowhere” – or wrongly suggesting that the country was coming together on the issue when it was clearly not. As many people think it was wrong to vote to leave the EU as think it was right,
according to polls. Some out and out Leavers, such as the Brexit secretary David Davis, took a more conciliatory approach to Remainers.

And the hard line Brexit that she decided on – out of the single market and customs union and cutting net migration to less than 100,000 a year, even apart from the “no deal is better than a bad deal” nonsense – appeared designed to inflict maximum damage on the economy.

What does the hung parliament mean for the economy? I think it useful to split this into the short term and the longer-term.

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Sunday, June 04, 2017
Election uncertainties to be followed by many more
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.

I know you are as keen for this general election to be over as much as I am, and that you are probably not expecting Friday morning to mark the dawn of a bright new era. We have all learned that you can have too much of politicians and that reputations can be lost, or diminished, as well as enhanced.

There is still a possibility, of course, that the election could throw up something really destabilising. Two years ago a hung parliament with the Tories as the largest party was the expected outcome. Now it would be greeted as a catastrophe, not least for the prime minister.

Combine a hung parliament with Brexit and you compound the uncertainty considerably, though some would see it is as pushing the country towards a softer Brexit. The narrowing of the polls has been driving the currency markets, and sterling, in recent days, but it should be said that markets are still assuming a Conservative majority.

If that turns out not to be the case we can expect a much bigger market reaction, though Simon Derrick, veteran chief markets strategist at BNY Mellon, points out that markets are not always averse to hung parliaments and coalition governments over the medium-term.

Sterling was stable when Labour lost its majority in 1977. It fell briefly, by around 5%, after the May 2010 election, when the election failed to deliver a Tory majority, but reached its low point a week after the election, a low point that was to last for several years. It recovered when the Conservative-Liberal Democrat coalition was formed. As he puts it: “Neither a minority government nor a moderate coalition is an automatic negative for the pound.”

Those earlier episodes did not, however, have the additional huge complication of Brexit. As in the past few months, we can expect sterling to be a Brexit barometer. For the moment, to repeat, the assumption in markets is of a Conservative majority this week, though there is not a great deal of enthusiasm for it.

The election is just the latest hurdle for the economy, and business, to negotiate. It is a reminder that these things are never as straightforward as they appear beforehand. This was, after all, expected to be a cake walk for Theresa May.

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Sunday, May 28, 2017
Taxes are going up, whoever wins the 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.

There are only 11 days to go until the general election and there is still a lot we do not know. That is even on the assumption that we see the Conservative party returned with a larger majority, which remains the most likely outcome despite narrowing polls.

We do not know for sure whether Philip Hammond will be kept in his post as chancellor, Theresa May having so far refused to guarantee his position after reported bust-ups between 10 and 11 Downing Street.

When Hammond presented the budget in March he was happy to describe it as his first and last spring budget. What he meant, of course, was that the spring budget is being abolished but that he would be around for plenty of autumn budgets. Now that is not so certain.

I hope for his sake he is kept in the job. By the time of the election he will have been at the Treasury for 11 months. Most recent chancellors have been long-serving ones, including more than six years for George Osborne and 10 for Gordon Brown. The last short-stayer was John Major in 1989-90, 13 months, though his consolation was being promoted to prime minister.

Personnel uncertainties are one thing, policy uncertainties for the Tories another. A week ago I wrote here that the Conservative policy on social care were messy, incoherent and unfair and “will need to be revisited”. I did not expect them to be revisited, in a tyre-screeching U-turn by the prime minister, the very next day.

For the Tories too, things are more uncertain than they should be on tax. An Ipsos-Mori poll the other day showed that 54% of people expect income tax to rise in the event of a Conservative victory, not that much below the 70% who think it would happen under Labour.

Labour, it should be noted, has said explicitly that it would put up income tax, though only on incomes of £80,000 and above. But for more than half of people to think income tax will rise under the Tories is quite something. The most explicit tax pledge in a not very explicit manifesto was to cut income tax by raising the personal allowance, currently £11,500, to £12,500, and the higher rate threshold from £45,000 to £50,000.

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Sunday, May 21, 2017
Polls apart, but the Tories and Labour both pose risks to the economy
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.

This election is turning out to be a bit more interesting than I was expecting although, unless the polls are spectacularly wrong, though they are narrowing, it is still unlikely to be much of a whodunnit.

It is interesting because, for the first time in a very long time – perhaps since Michael Foot in 1983 – nobody, not even the Tories, has had to speculate about what dark, left-wing ideas lurk behind a bland Labour programme.

This time, instead, the left-wing ideas are in full view. Labour has produced a manifesto in the image of its leader, which means that a fascinating experiment is now unfolding. There has always been a strand of Labour opinion which holds that the party has suffered electorally, most notably under Ed Miliband two years ago, from not being left-wing enough.

Now that proposition is being tested, though sadly it will not settle the issue. If Labour’s vote share is in the low 30s, similar or better than Miliband in 2015 (30.4%), it will be greeted as progress, with alleged media bias against Jeremy Corbyn blamed for the message not fully getting through.

There are, as with all manifestos, good and bad ideas in Labour’s proposals. A National Transformation Fund, which would take advantage of low borrowing costs to invest an additional £250bn in Britain’s infrastructure over the next 10 years, has a lot to be said for it.

Though the arguments are not as strong as they were, there is also an argument for Labour’s National Investment Bank and its proposed network of regional development banks, which would draw on private finance to generate £250bn of what Labour calls “lending power”, operating in the gaps left by the commercial banks, particularly in small business lending. Calls for such an institution, modelled on European lines, go back a very long way.

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Sunday, May 14, 2017
Our nation of borrowers is storing up trouble
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 governor of the central bank was perfectly clear. High and rising household debt “has made the economy less resilient to future shocks”. It is more likely that, in future, households will respond to an economic shock, or a rise in interest rates, by cutting their spending more sharply than in the past.

“Double-digit growth in debt … at a time of weak income growth cannot be strengthening the resilience of our economy,” he added.

This was not, for once, Mark Carney, but his Australian counterpart, Philip Lowe, governor of Australia’s Reserve Bank, in a speech a few days ago to the Economic Society of Australia, but the parallels with Britain are close.

The good news is that we are not alone in the vulnerabilities and challenges that high levels of household debt, alongside high house prices, pose. The bad news is that household debt in Britain, £1.53 trillion on Bank of England figures, higher on other measures, is higher in relation to income than in most other countries, as are house prices.

The Bank, for its part, has expressed its concern over the rapid growth in consumer credit, currently rising by more than 10% a year, its fastest since before the financial crisis. In its latest inflation report, published on Thursday, the Bank noted that the Prudential Regulation Authority is looking into whether credit quality is suffering, while the Financial Conduct Authority is examining assessments by lenders of the creditworthiness of borrowers.

Figures on Friday from the Finance and Leasing Association showed £5bn of car finance – new and used – in March, up 14% on a year earlier. Over the past 12 months, consumer car finance has totalled £32.6bn. Though this sharply rising debt is mainly on the books of finance companies and the motor industry, with 86.5% of new cars bought with finance it represents a significant monthly payments’ burden for households.

The bigger picture is what high levels of household debt mean for the stability of the economy and, for central bankers, whether they tie their hands when it comes to future interest rate hikes.

The numbers, for Britain, are striking. In the 1980s, after credit controls were abolished as part of a wave of financial liberalisation, concerns were expressed over high levels of household borrowing. Back then, however, we were merely in the foothills. Household debt in 1987 was £185bn. Including both mortgage and non-mortgage borrowing. Thirty years on it is more than eight times that, and has trebled relative to incomes.

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Sunday, May 07, 2017
Ultra-low rates made us lose our productivity mojo
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 have been times in the past when voters were entitled to be nervous about interest rates in the run-up to a general election, because of the fear that nasty surprises would be on the way after polling day.

So, in the six months after Margaret Thatcher’s May 1979 victory, interest rates rose by no less than five percentage points (from 12% to 17%), while in the year after her 1983 victory they went up from 10% to 12%. In 1987, rates went up a couple of months after the election, though only briefly.

Before the May 1997 election the Bank, in the person of Eddie George, had been agitating for higher rates, without success. The task of raising them after the election initially fell to Gordon Brown – the last chancellor to raise rates – before being handed over to the newly independent Bank of England. There were six rate rises in the 12 months or so after May 1997.

It is fair to say that few are on tenterhooks this time. Under independence, the interest rate and electoral cycles have not been aligned. In 2001 the monetary policy committee (MPC) was cutting rates before the election and carried on afterwards. In 2005 the MPC held off a rate cut until after polling day. The 2010 election was held with Bank rate at a then record low of 0.5% and it stayed there for the whole five years of the following parliament.

Not only that, but the Bank has shown little inclination to budge from its new record low for official interest rates of 0.25%. It will put flesh on the bone of its intentions with an interest rate decision and new inflation report in one of its periodic “super” Thursdays this week.

But, while one MPC member, Kristin Forbes, has voted for a hike in rates and another, Michael Saunders, recently set out the arguments for doing so, it would be a big surprise if a rate hike happened this week or, indeed, if the Bank signalled its intention of moving on rates in the coming months. Forbes has one more MPC meeting after this one before she steps down.

The markets do not expect a rate hike until 2019 – the 10th anniversary of the move to ultra low interest rates – and some have not given up on the idea of a further rate cut, even from 0.25%, if the economic going gets tougher.

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