Sunday, June 26, 2022
Six years on, there's no plan to deal with the Brexit damage
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. Not to be reproduced without permission

I can remember vividly June 23 2016, the sixth anniversary of which we have just passed. During the afternoon I gave a talk to some schools in Guildford in Surrey, after which the heavens opened in a storm of Biblical proportions. Perhaps somebody was trying to tell us something. The short train journey back to Waterloo took hours, because of the rain not strikers, though I did get back in time to vote in the referendum.

Damage was done that day, with widespread flooding. Today I want to start by reviewing the damage done to the economy by the decision voters took that day. Polls show that they now think by a significant margin it was a mistake, though it is a little late for that.

Then, in the spirit of constructive engagement, I want to examine what we should do about it. It is not, spoiler alert, about rejoining the European Union, though it was a massive economic policy error to leave. The Labour Party is as scared about saying anything positive about the EU as it is about being caught offering support for striking railway workers. That ship has sailed and will not come back into port for many years.

The experience of the past six years is gratifying for economists, including me, because they have panned out as expected. Apart from an explicitly political Treasury forecast commissioned by George Osborne, most economists did not expect a post-referendum recession. That Treasury short-term forecast, of the mildest recession ever, was wide of the mark.

Other forecasts had two central features. One was that sterling would suffer a sharp fall, which it did, the biggest short-term drop of any major currency in the floating era. The other was that the economy would suffer from many years of attrition as a result of the Brexit vote, slow-burn damage, in other words.

I wrote once that there was a danger that people would lose sight of that damage as other things intervened. Other things have indeed intervened, notably the pandemic and the Russian invasion of Ukraine, so it is important that we do not lose sight. And before anybody says it, while the editor of this newspaper at the time backed Brexit, I and many of my colleagues strongly took the opposite view.

How do we measure the damage? An intriguing and widely accepted method, which has been used by the Bank of England among others, is the doppelganger approach. If that sounds a bit sci-fi, it is quite straightforward. The average performance of advanced economies similar to the UK, but which did not Brexit, is the control. Doppelganger UK reflects what would have happened had we not decided to leave, against which the performance of the actual UK can be compared.

The doppelganger approach has been used extensively by John Springford, deputy director of the Centre for European Reform. His latest update, covering the period to the end of last year, was published earlier this month, and the results are striking.

Sunday, June 19, 2022
The UK's 'no mates' economy is down, but not quite out
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. Not to be reproduced without permission

The sun may have been shining but some of the lights have been going out all over the UK economy. There have been many falls from grace over the years, but the one that has occurred over the past few months has been particularly sharp.
Not so long ago, around the turn of the year, the UK looked well set. The government, preening itself on getting through the Covid-19 crisis, boasted of the strength of the recovery, which was to be the strongest in the G7. That was the case last year, partly reflecting the UK’s bigger fall in 2020.

Then, reality struck. The big inflation shock that was already building before the Russian invasion on Ukraine, and which has been made worse by it, has exposed the UK’s vulnerabilities. The British economy is weak and skirting perilously close to recession. You can see it in the forecasts.

Last November the Bank of England was predicting a modest 1.5 per cent growth rate for 2023. Now it thinks the economy will instead shrink by 0.25 per cent, though that did not prevent it from raising interest rates again on Thursday, for the fifth time in a row.

Its quarter-point rate rise to 1.25 per cent, on a split vote, with three monetary policy committee members preferring half a point, was its way of balancing a weak economy – it expects the economy to shrink by 0.3 per cent this quarter - and high inflation, with a new predicted peak of 11 per cent. Scary.

The Organisation for Economic Co-operation and Development (OECD) thought last December that the economy would grow by 2.1 per cent next year. Now it predicts zero growth. Consensus forecasts for growth are being cut. The CBI has just cut its growth forecast for 2023 from 3 per cent to 1 per cent and warns that even that will require government action to boost business investment.

Even last year’s strong growth story was not quite what it seemed. The economy has not been particularly strong since the middle of last year. The “oomph” it got from the lifting of Covid restrictions after the third lockdown in early 2021 did not follow through.

Sterling, meanwhile, has become a “no mates” currency, trading at times below $1.20 in recent days, which is even weaker than it fell during its initial post-referendum slump in 2016, the biggest of any major currency in the floating rate era. Some of this is due to a strong dollar, but the pound, trading below €1.15 at times in recent days, before recovering some ground, has also been plumbing the depths against the euro. Foreign holidays beckon for many people but they will cost.

A weak currency tells us something. International investors do not like what they see about the UK economy or British politics. Breaking international law in a way that threatens a trade war with your biggest set of trading partners to shore up a deeply flawed leader is a “sell” signal. Whatever the results of confidence votes among Tory MPs, there is not much confidence out there in this government.

Tony Danker, the CBI’s director general, said that government “grandstanding” over the Northern Ireland protocol was making international businesses think it was maybe not the time to invest in the UK right now. The money flowing into the UK may take the form of foreign buyers snapping up British firms at bargain prices as a result of low valuations and the weak pound.

What happens to the pound matters a lot, particularly at present. The weaker it is, the bigger will be the cost-of-living crisis and the pressure on business costs. Global oil prices have been higher than now than in the past but, priced in dollars as they are, the weaker the pound, the higher the sterling price, which has hit £100 a barrel in recent days. That is why petrol has been touching and in some cases exceeding £2 a litre. The UK is uncomfortably close to the top in one league table, that for the highest petrol and diesel prices in Europe.

Sunday, June 12, 2022
With tax cuts, you can't have your cake and eat 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. Not to be reproduced without permission

There is a lot of talk of tax around. Boris Johnson, having scraped through a confidence vote among his own MPs, is being urged by some of them to repair relations with his party by pushing through big tax cuts. Tax Freedom Day – the point in the year when according to its inventors we stop working for the government and start working for ourselves – was marked on June 8, a week later than last year, and the highest it has been for 40 years.

The OECD – the Organisation for Economic Co-operation and Development – said in an updated Economic Outlook that the UK will have the slowest growth next year not just in the G7 but in the wider G20 group of countries, except Russia. In fact, the OECD says the UK will have no growth in 2023, which brings to mind the Monty Python election night sketch and the candidate who polls no votes at all and is asked: “Are you disappointed with this performance?” The candidate’s response is a rendition of Climb Every Mountain. I don’t think we will see that from ministers, but you never know.

According to the OECD, UK growth will be a victim of the Russian invasion of Ukraine but also the combination of a monetary and fiscal tightening; higher interest rates and higher taxes. The higher personal taxes this year, increases in both income tax (through freezing allowances and thresholds) and national insurance (NI), will be followed next April by the big rise in corporation tax, from 19 to 25 per cent.

I have described these before as the most ill-timed tax increases in recent history, particularly in the context of the cost-of-living crisis. Some of them are already in place, despite next month’s softening of the NI rise by increasing the threshold at which it starts to be paid. The corporation tax increase next year could be delayed, though I suspect the government would think the optics of that would be terrible against the backdrop of struggling families.

The freeze on income tax allowances and thresholds, which brings more people into paying income tax of paying it at a higher rate, could also be suspended. It is intended to last until 2026. There is a difference, however, between delaying or suspending the planned increases in tax - which will take the tax burden to its highest since the late 1940s - and actively cutting tax. That is the red meat some Tory MPs are pressing for.

The confidence vote revealed that the prime minister is held in low regard by more than two-fifths of Tory MPs. He is not going down a bundle with the public either, 60 per cent of whom wanted Tory MPs to remove him last week, and with a popularity rating plumbing new depths.

In an important respect however, the prime minister and Tory MPs and party members urging tax cuts are at one. They all want to have their cake and eat it. They want the government to recreate the tax-cutting spirit of Margaret Thatcher, but without replicating the conditions which allowed those tax cuts.

Sunday, June 05, 2022
Northern lights have dimmed as the South powers ahead
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. Not to be reproduced without permission.

The big picture is important when it comes to looking at what is happening. But an economy is comprised of many smaller parts, and for the UK those smaller parts are its regions and nations. It is, of course, possible to drill down even further, to local level.

Staying with those regions and nations, though, the Office for National Statistics (ONS) has just published some new figures. They are not as up to date as the national figures, but they tell an interesting story.

In the latest quarter for which figures are available, the July-September period of last year, the London economy grew strongly, up by 2.3 per cent, even as most other regions stagnated or shrank.

In the Armageddon year of 2020, the latest annual figures, when the economy overall recorded its biggest slump since 1921, the smallest annual falls were in London and the southeast, the biggest was in the northeast, followed by the West Midlands.

The recession pushed London and the southeast, unusually, into having budget deficits – normally they are in surplus – though these deficits were much smaller than in other parts of the country, particularly when adjusted for population.

This is quite interesting, because it runs against the general perception, which is that London was hardest hit by the pandemic, knocked by a plunge in commuter numbers and a loss of city centre activity. But London and the southeast may have adapted more quickly to working from home and local town centres appear to have thrived even as the centre was struggling.

It is part of a longer-term pattern. If we take the period since the financial crisis, when people also thought that London was badly wounded, its economy, measured by gross value added, grew by more than 35 per cent to the end of last year, compared with just 1.4 per cent for the northeast.

Measured from another recent big event, the EU referendum, it is notable that three of the regions which voted most heavily and enthusiastically for Brexit, the West Midlands, the East Midlands and the northeast, had economies at the end of last year which were smaller than at the time of the vote. So was the northwest. Scotland, which did not vote for Brexit, also had lower output at the end of last year than in 2016, though London was well up.

The West Midlands has suffered particularly because of the woes of the motor industry. Globally, the industry is in trouble because of supply-chain problems, particularly for microchips. But the UK appears to have particular problems, and a debate and a battle is under way over whether Jaguar Land Rover will manufacture its electric vehicles in the UK or in Slovakia.

A few years ago, UK-based car manufacturers were hopeful of surpassing the all-time record for vehicle production, 1.92 million cars, which was achieved as long ago as 1972. In 2016 the total was 1.7 million. But it has been downhill pretty much all the way since then, even before the pandemic. The latest 12-month rolling total is just 752,612. Engine production is also weak, down 19 per cent so far this year on last year’s depressed levels though, not to overdo the gloom too much, commercial vehicle manufacture in holding up better.

The West Midlands has always fascinated me, and not just because I come from there. Students of UK regional policy, which is going through another iteration as we speak, though with the “levelling up” label attached to it, will know that there was a time when parts of the UK were regarded, for policy purposes, as too successful. Regional policy actively discouraged industrial development in London and the southeast and the West Midlands. Things have changed.

Sunday, May 29, 2022
A different Jubilee story - 70 years of roaring house prices
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. Not to be reproduced without permission.

There is a war on, and inflation has risen to uncomfortably high levels, having gone from less than 2 per cent to more than 10 per cent in the space of a couple of years. Households feel badly squeezed and are having to penny-pinch to make ends meet. People were looking forward to the sunlit uplands, but times are very tough.

This is not, though it could easily be, a description of where we are now but of the economy at the start of the Queen’s reign, in 1952. The war was in Korea and 60,000 British troops were involved, 1,100 of whom lost their lives, alongside 37,000 US troop losses and 227,000 South Korean deaths.

As we mark the Queen’s Platinum Jubilee, a length of a reign which will surely never be repeated, the economics of that 70-year period are fascinating. In 1952, according to modelled estimates of the current consumer prices index (CPI) by official statisticians, inflation peaked early in the year at just over 12 per cent, though ended the year below 7 per cent and during 1954, after the end of eh Korean War, dropped below 1 per cent. The Treasury and Bank of England would love a repeat performance now.

The Queen’s reign has been bookended by high inflation, and inflation has also in many ways been the story of her reign. For a long time, the UK was thought to be the most inflation-prone of the big economies. Today, with the highest inflation rate in the G7, that label is back, though this time it is to be hoped only temporarily.

Over the 70 years, again on the basis of the CPI, prices overall are more than 18 times what they were in 1952. For inflation, it has been roughly a game of two halves. From 1952 to 1988, consumer price inflation averaged 6.4 per cent. Since 1989, the average has been 2.5 per cent. That includes the period since Bank of England independence in 1997 in which the average, despite the current surge, is still clinging on to 2 per cent.

The difference between the two periods shows the power of compounding. A 6.4 per cent inflation rate, sustained over 35 years, would leave prices at the end roughly nine times where they were at the start. If inflation after the current episode was to settle at 3 or 4 per cent rather than 2 per cent, the implications would be significant.

In the 1950s, people really could enjoy a night out with a ten-shilling note; to remind younger readers, that was the pre-decimal half of £1. But ten shillings then is equivalent, in real terms, to about 2.5p now, and even I would struggle for a night out on that.

Sunday, May 22, 2022
The Bank's problem is not being independent enough
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. Not to be reproduced without permission.

The last time inflation, measured by the consumer prices index, was higher than last month’s rate of 9 per cent, revealed a few days ago, was in March 1982, more than 40 years ago. Things were different back then, when inflation was 9.1 per cent. The unemployment rate was more than 10 per cent and its level was on the way to more than three million. Inflation, though, was on its way down from more than 20 per cent.

Perhaps that is why consumer confidence, as recorded by the long-running GfK survey, was higher than now. On Friday GfK announced that its consumer confidence index has fallen to a record low of -40 as this inflation squeeze bites. In March 1982, despite the uncertainty and rising unemployment, the reading was -18.

There are other differences. These days the unemployment rate is just 3.7 per cent, although that low rate is partly due to the shrinkage of the workforce, and employment is lower than before the pandemic. Most strikingly, while an official interest rate of more than 13 per cent was regarded as necessary to fight inflation in March 1982, these days Bank Rate is just 1 per cent.

One big similarity, though, concerns the Bank of England. In 1982, under the governorship of Gordon Richardson, later Lord Richardson, the Bank was at loggerheads with the government. It never bought into the Thatcher government’s monetarist experiment and relations were not good. The Bank only needed to bide its time. Even then the writing was on the wall for the experiment. But the writing was also on the wall for Richardson, who the following year was replaced by Robin Leigh-Pemberton, former chairman of NatWest Bank and Tory leader of Kent County Council.

These days the Bank is again at loggerheads, if not with the government as a whole, certainly with many Tory MPs and some unnamed cabinet ministers. The jump in inflation to 9 per cent and the current governor’s admission a few days ago the Bank feels “helpless” in the face of the current inflation surge and that “apocalyptic” food price rises are in store, has focused attention on the Bank, and not in a good way.

The 25th anniversary of Bank independence was not supposed to be marked by mutterings from the governing party that it might be no bad thing to take back control, so to speak, of interest rate decisions. They are only mutterings, but we should remember that, under the Bank of England Act, the Treasury has reserve powers to direct the Bank on monetary policy in “extreme economic circumstances” if that is deemed to be in the public interest.

The Bank, as is clear, should not be immune from criticism. It has got some things seriously wrong, including its inflation forecasting. But we should be very wary of moving beyond criticism into a change that would be seriously economically damaging. There is another example of this happening, though I can’t quite put my finger on it.

The Bank’s defence is that even it had acted earlier last year in raising interest rates and halting quantitative easing (QE), as many, including me, urged, it would have made no significant difference to the current inflation surge.
We cannot know whether that is the case, although it is reasonable for the Bank to point to the lags in monetary policy, and the difficulty of tightening it when we were still in the depths of the pandemic, in the second half of 2020 or early 2021.

Sunday, May 15, 2022
The drivers of growth risk going into reverse
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. Not to be reproduced without permission.

The mood has darkened, even as the days are getting longer. The economy is not so much falling off a cliff as entering a kind of deep freeze, which unintentionally rhymes with one of the main causes, the cost-of-living squeeze. Recent surveys showing sharp falls in business and consumer confidence show that the wisdom of crowds works. People and businesses knew instinctively that something was up, and they were right. The pound’s weakness is becoming quite a thing too, so the foreign exchange markets are also on to the story.

At times like this, it is useful to go back to first principles, and what I describe in my book Free Lunch as “the most useful equation in economics”. This tells us that the economy, gross domestic product (GDP), consists of consumer spending, plus investment, plus government spending, and plus exports, though minus imports.

On the face of it, the figures we had a few days ago, for the first quarter of the year, were not that bad. GDP rose by 0.8 per cent on the quarter, which is better than it does in normal times. Over 12 months the economy grew by a hefty 8.7 per cent, reflecting the comparison with a very weak first quarter of last year, when the country was in lockdown. That 8.7 per cent figure means that, while we have undoubtedly seen the best of the year already, it would be statistically very difficult, if not impossible, for the economy to show an annual fall this year, in the sense of 2022’s GDP being lower than in 2021.

I hate using the expression “the devil is in the detail” but on this occasion it really is. One bit of detail which was widely reported is the slowdown in GDP during the quarter, from a rise of 0.7 per cent in January, to no growth at all in February and a fall of 0.1 per cent in March.

When the February figures were published, I was able to offer the reassurance that, without a sharp fall in NHS test and trace activity, there would have been decent growth on the month. No such reassurance is available for March, sad to say. The weakness was genuine and bodes badly for the second quarter, which we are now in the middle of, and which will suffer from the twin effects of the intensification of the cost-of-living squeeze and the extra bank holiday for the Queen’s Platinum jubilee. To remind you, the economy shrank slightly in the second quarter of 2012, when there was an extra bank holiday to mark the diamond jubilee.

Going back to my equation, the March GDP data, in combination with the first quarter figures, tell us something useful about consumer spending, the biggest component of GDP, accounting for just over 60 per cent of it in normal times.

Consumer spending rose by 0.6 per cent in the first quarter, which again was not bad, but even before the intense phase of the cost-of-living crisis was 0.5 per cent lower than in the pre-pandemic period in the final quarter of 2019. There was also, as the monthly figures show, a lot of the weakness as the quarter went on, particularly affecting spending on cars. So-called consumer-facing services are 6.8 per cent down on where they were in February 2020 before the pandemic struck.

Sunday, May 01, 2022
£450bn and counting - the cost in debt of the pandemic
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. Not to be reproduced without permission.

There was a time, not so long ago, when it was impossible to get away from Covid-19, which dominated the news agenda for nearly two years. One day we will be able to tell our grandchildren that we were there when Professor Chris Whitty said: “Next slide please”. The pandemic, of course, had a huge human cost, which continues.

Latest estimates from the Office for National Statistics are that there have been 174,413 deaths involving Covid since March 2020 in England and Wales, and 126,619 “excess” deaths. For the latest reporting week, to April 15, there were 1,003 deaths involving Covid, in 644 of which it was the underlying cause. Other figures, from the government’s coronavirus dashboard – now of less interest because mass testing has ended – suggest 2,297 UK deaths within 28 days of a positive test in the latest seven days.

As well as the human cost, there has been a significant economic cost. You might think that is all behind us. Now that the unemployment rate is slightly below pre-pandemic levels, at just 3.8 per cent, and gross domestic product has recovered to where it was on the eve of the pandemic, it would be easy to conclude that we have quickly returned to normal. But there are still nearly 600,000 fewer people in work than there were, and some of the other economic effects are enduring.

That includes the impact on the public finances, and this is a good time to be looking at that. A few days ago, official figures covering the 2021-22 fiscal year were published. They showed that, while the budget deficit came down sharply compared with 2020-21, when most of the damage to the public finances was done, it was both above official forecasts and historically high.

The deficit fell from £317.6 billion in 2020-21 to £151.8 billion in 2021-22, thus dropping from the highest to the third highest on record (the second highest was during the financial crisis). For once the official forecaster, the Officed for Budget Responsibility (OBR) was too optimistic, the deficit coming in a hefty £24 billion above the forecast it made only last month, though the gap should narrow as later data comes in.

The latest figures also provide a running score for the effect of the pandemic, and the economic measures brought in to counter it, on government debt. At the end of March, roughly the wend of the 2021-22 fiscal year, public sector net debt was £2,343.8 billion, more than £2.3 trillion, and equivalent to 96.2 per cent of gross domestic product.

Two years earlier, at the end of March 2020, the debt was £1,793.1 billion, nearly £1.8 trillion, or 82.8 per cent of GDP. I could have started the comparison earlier, given that the first lockdown started in March 2020, as did the furlough scheme, but there was only a small increase in government debt between the end of February and the end of March then.

Both sets of numbers are large and the later ones are considerably larger than those earlier. Government debt at the end of March this year was £551 billion bigger than two years earlier. Relative to GDP it went up from just over 80 per cent to knocking on the door of 100 per cent.

Most of this increase in debt was due to the pandemic, both the effects of a profound economic shock on public expenditure and tax revenues, and the cost of the measures introduced by the chancellor in response to that shock. There was also, embarrassingly for the Treasury, as the guardian of the public purse, widespread waste and fraud. Purchases of unusable personal protective equipment and tales of suitcases of money at airports containing Bounce Back loans do not suggest a tightly run ship.