Sunday, April 05, 2020
Despatches from an economy operatng at two-thirds of normal
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 a big and difficult question. How much is the economy being shut down by the lockdown? Is very little happening, as it can easily seem, or is quite a lot of activity happening alongside social distancing and a huge increase in the number of people working from home? How much below normal are we?

And, as importantly, which I shall come on to, is it possible to increase the amount of economic activity that is taking place? Let me be clear, I am not about to join the ranks of the irresponsible, and advocate that we ignore the virus and carry on as normal for the sake of the economy. But there may be room for a bit of nuance in this debate, to gradually bring on stream some activities that have been suspended as a result of the government’s measures.

Let me start with the first question. How much below normal is the economy operating at? It is a question where the usual visual aids do not work. If you looked at the station car park not far from my home, you would conclude that normal activity has slumped by 90%, with just a handful of cars where it is normally packed out.

There are, of course, good reasons for that, as there are for the slump in all forms of transport in recent weeks. So I am indebted to the economists at the Centre for Economics and Business Research (CEBR) for an innovative attempt to estimate just how much is being lost at present.

Gradually in coming weeks more statistical information will emerge, though it will be harder for the Office for National Statistics (ONS) and others to collect the normal run of data as a result of shutdown measures. We know the second quarter of the year, which has just started, will be awful for the economy, but it will be a while before we know just how awful.

The CEBR’s approach, carried out by economists Daryn Park and Owen Good, was to look at the nearly 100 detailed sectors of the economy, on the basis of the standard industrial classification, and assign each a score. For some, economic activity was continuing as normal, with most employees still in work. For many others, most workers had been sent home and were still working, and were reckoned to be "producing" at 90% of normal. A final category was where workers had been sent home and, by nature of their job, were not producing anything.

After looking at whether the sectors could produce, they then did a separate analysis of whether at present there was likely to be any demand for the sector’s products. Their final estimate of the sector’s lost output took both production constraints and the likely change demand into account.

The results showed sharp differences in the scope for different sectors of the economy to carry on at anything like normal. Most sectors are on track to lose a significant proportion of normal output, though a small number; healthcare, pharmaceuticals and food retail, will do more than usual.

The broad results, taking aggregated sectors of the economy, are that during the lockdown the percentage of output lost will be 14% in agriculture, 60% in mining and quarrying, 69% in manufacturing, 10% in electricity and gas supply, zero in water and sewerage, 50% in construction, 58% in wholesale and retail, 39% in transport, 79% in accommodation and food services, 7% in information and communication, 18% in finance and insurance, 20% in real estate, 10% in professional and scientific activities, 46% in education and 81% in arts, entertainment and education.

Sunday, March 29, 2020
Whatever it takes - but with an eye on the public finances
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.

For those of us who were not around at the time, one of the most impressive things that happened during the Second World War was that, even when the outcome was highly uncertain, planning for a post-war future took place. The Beveridge report, which formed the basis of the post-war welfare state, was published by the wartime coalition government in December 1942. The Bretton Woods conference in America, which put into place the post-war architecture of the international economic and monetary system, notably the International Monetary Fund and World Bank, was in July 1944.

The coronavirus crisis is not a war, though it has been widely described as our biggest peacetime challenge since then, including by the prime minister. It has not yet reached its peak.

The view of most economists is that there is a path to the other side and that this year’s terrible numbers will be followed by a strong bounce next year, partly a statistical effect arising from year-on-year comparisons with the very weak numbers in prospect for coming months.

Some, it should be said, are gloomier. Nouriel Roubini, who made his name during the global financial crisis, and became known as Dr Doom, warned last week of “persistent depression and runaway financial market meltdown” as a result of “uncontained pandemics, insufficient economic-policy arsenals” and other risks.

We shall see. But to return to my theme, you see the hand of post-coronavirus or at least post-crisis planning in the way the Treasury has approached its response. Though the chancellor, Rishi Sunak, has repeatedly promised to do “whatever it takes” and the government has been urged by many people to spend big now and ask questions later, the Treasury is keen to avoid doing now what the country, and the public finances, will regret later.

The chancellor has been criticised for the fact that his 80% income support for the employed will not be available until next month, and for the fact that the generous 80% support scheme for the self-employed will not be available until early June. That delay, which is understandable, together with a hint that the tax treatment of the self-employed will change in the future, predictably met with a very mixed response.

Sunak and his officials resisted what many urged on him, to introduce a universal basic income (UBI), even on an emergency basis. A UBI, a guaranteed weekly sum payable to everybody, has had many advocates, including Silicon Valley billionaires – as a response to artificial intelligence, not the coronavirus – for some time.
Its flaws in normal times have been pointed out here before. Welfare systems are complicated for a reason; people have different needs. Providing a UBI to everybody would discriminate against those with needs and provide free money to those that do not need it. Setting the UBI at more than a very low level would require punitive taxation. And, crucially is the current situation, there is no obvious way of delivering it, particularly to low-income people without bank accounts.

So the Treasury is right to resist it, and I hope that resistance continues. Similarly, while exceptional times require an exceptional response and justify a ballooning in government borrowing and a sharp rise in public sector debt, care has to be taken, not just to avoid saddling us with bad policies, but also an unnecessary burden.

There were strong expectations last weekend of a big rescue package for the airlines, including the possibility of the government taking equity stakes in them. But the Treasury remembers the last time it took equity stakes, in the banks, and how long it has taken to get rid of them.

The Resolution Foundation is a think tank devoted to improving the lot of those on low incomes. But, in a paper published a few days ago Richard Hughes, a research associate at the Foundation, also stressed the importance of keeping the public finances sustainable. Hughes, a former senior Treasury and International Monetary Fund official, looked at the experience of previous pandemics for his paper, “Safeguarding governments’ financial health during coronavirus; what can policymakers learn from past viral outbreaks?”.

Sunday, March 22, 2020
The deeper the dive, the longer the way back
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.

If you can keep your head when all about are losing theirs, to paraphrase Rudyard Kipling, then you are the right person for a crisis. Britain has gone into this one with a new chancellor and a new Bank of England governor and it is only fair to say that both deserve congratulation for both keeping their heads and their speed of response.

Rishi Sunak is having a good crisis and has shown a sure touch in extraordinary circumstances. When he says “whatever it takes” he means it. He and the Bank’s Andrew Bailey, some of whose emergency measures were done with outgoing governor Mark Carney, are safe hands and bring confidence.

It is important to see the Treasury and Bank’s measures working in tandem. Friday’s huge commitment by the chancellor, to meet 80% of the wages of staff - from March 1 - if employers agree to keep them on, up to £2,500 a month, and in theory £30,000 a year, will be costly. It is a gamble worth taking, to limit some of the inevitable rise in unemployment that we will see in coming weeks and which, indeed, is already happening. The more that the rise in unemployment can be contained, the better the economy will recover once the public health emergency eases.

Sunak also announced a boost to universal credit, direct help for renters and other measures adding up to a further £7bn.

His actions need to be seen in the context of Thursday’s announcements by the Bank of England. The least important bit of that announcement, though historic, was the cut in Bank rate to 0.1%. The most important was the £200bn of additional quantitative easing (QE), mainly in the form of purchases of gilts (UK government bonds) and probably front-loaded.

The significance of this, at a time of jittery financial markets, is that the Bank will buy from the markets the extra gilts issued by the government to fund the substantial extra borrowing that its measures will require. And this is effectively interest-free borrowing for the government, because any interest due to the Bank on gilts is returned to the Treasury.

It would be easy to get punch drunk with the speed and size of the Treasury and Bank announcements. As well as the rate cut and extra QE, the Bank announced an expansion of the newly created term funding scheme for smaller firms, and a scheme of large-scale commercial paper purchases by the Bank, intended to support larger firms.

Even in the financial crisis, interest rates were not cut this low, the lowest ever, while the extra £200bn of QE is the same as the inaugural amount announced during the crisis in March 2009. This is big stuff.

It is worth remembering, amid these historic moves by the Bank, how quickly all this has come about. At the end of January the Bank’s monetary policy committee (MPC) voted 7-2 to keep Bank rate on hold at 0.75%. Since then there have been two emergency packages and rate cuts. The new governor’s first scheduled MPC meeting was not supposed to be until this Thursday.

As for the Treasury, it is true that its response has been done in stages, and as with designing direct income support for workers forced to stay at home and suffering a loss of income, has sometimes appeared slow-footed. But there is no point in announcing schemes until the details have been worked out, and some of these things are easier said than done.

With so many big numbers around, and they genuinely are very big - a monetary and fiscal bazooka – a word of explanation might be useful. There is tendency to confuse apples and pears when describing some of the actions that Sunak has announced.

Many newspapers reported his second coronavirus package (the first being in the budget, the third on Friday) as a £350bn lifeline, or rescue, for the economy. I do not blame them. But £20bn of this was an additional short-term fiscal boost, to be added to the £12bn announced in the budget, and which will be added to further. The bulk, £330bn, was in the form of loan guarantees. Things would have to go really badly wrong for these guarantees to eventually cost the government anything more than a tiny fraction of that, though anything is possible..

People can debate whether the measures announced by the Bank and the Treasury are the right ones, though they seem to me to press the right buttons, but it is worth setting out what the aim of it all is.

The Bank described what is happening as “an economic shock that could be sharp and large but should be temporary”. The shock has three components; the initial supply disruptions from the first outbreak in China, the reduction in activity resulting from the government’s actions in shutting down or discouraging normal activities; and decisions by businesses and individuals, some of them arising from government advice, some independent of it.

Sunday, March 15, 2020
The chancellor places his bets on a £1 trillion gamble
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 always a challenge writing about a budget a few days after the event, particularly when the ensuing period has included a further big slump in the stock market – making this bear market very grizzly - the government’s response to the coronavirus outbreak moving into a new phase and Donald Trump’s ban on travel from most European countries to America.

There is the bigger question of whether the impact of Covid-19, on public health, society and the economy, will be so severe as to make the budget irrelevant. I do not want to be alarmist about this, and have not been, but the dangers cannot be ignored and a recession now looks very likely. It is not every week, after all, that you get a 7 am announcement of an interest rate cut and other emergency measures from the Bank of England.

But let me draw you in. Once upon a time I used to write about budgets in terms of millions. Then we moved on to billions. Now, we can talk about trillions, in other words thousands of billions, as will be explained in a moment.

Let me draw you in also with a couple of bits of history. When I saw a headline “Stonehenge scheme gets go-ahead”, my first thought was that they had finally got some ancient Britons to drag some more bluestones from the Preseli Mountains in Pembrokeshire to finish it off. But no, it was another bit of ancient history, a two-mile tunnel for the A303 near Stonehenge which, as the former chancellor Lord (Alistair) Darling revealed, he had given approval for when transport secretary nearly 20 years ago.

There is a bit more history. The government’s fiscal watchdog, the Office for Budget Responsibility (OBR) said that the plans announced by Rishi Sunak on Wednesday represented the largest budget giveaway, in the form of higher public spending (the government is raising taxes overall) since March 1992.

I remember that episode well. When I wrote a piece pointing out the extent of the Tory government’s spending largesse, it was picked up and written about by William Rees-Mogg, father of Jacob.

Things changed. Michael Portillo was appointed Treasury chief secretary after the April 1992 election and was irked to find that he was presiding over a spending splurge. That and the Black Wednesday crisis a few months later, when the markets forced sterling out of the European exchange rate mechanism (ERM), brought a big change. Instead of a big spending boost, the Tory government adopted plans that, in the words of Kenneth Clarke, the then chancellor, were “eye-wateringly tight”. It remains to be seen whether anything like that is the fate of this government’s plans.

I promised some trillions in the context of the budget, so here they are. In two years’ time, on the new plans, overall government spending, total managed expenditure in the jargon, will reach £1 trillion for the first time ever in 2022-23.

That is up from £851bn in 2018-19, the last full year for which we have data. It represents a more-than-doubling in less than 20 years compared with 2003-4, when spending was less than £500bn. Adjusted for inflation this is more than a 40% real rise.

Government receipts, mainly taxes, are also on track to top £1 trillion, although not until a couple of years later, 2024-25. The tax burden – and the government is raising taxes overall – will be its highest since the late 1960s.

Monday, March 09, 2020
Get businesses to invest or you can forget about levelling up
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 beginning to look a lot like the curse of the budget. This time last year the last chancellor but one, Philip Hammond, unveiled his spring statement for the economy, having had a budget the previous October.

In it, he looked forward both to an autumn budget and a three-year public spending review, which would conclude at the same time. Neither happened. Sajid Javid, his successor, having only managed a one-year spending review in September, was all ready to roll with a budget in November but the election was called instead.

Now, unless the Treasury or Parliament is put into lockdown, it looks as if we will get a budget on Wednesday, one of what officials describe as the new chancellor Rishi Sunak’s “three bites of the cherry” this year, to include a summer spending review and an autumn budget.

The task for this week is to ensure that the government’s planned big “levelling up” announcements, which the Treasury is still planning to deliver – a few days ago it proclaimed in a tweet, “we’re going to level up opportunity across the country” – are not overshadowed by coronavirus and the response to it. At the very least, the health emergency will provide the chancellor with cover for relaxing the fiscal rules.

Important though coronavirus is, it would be a pity if it overshadows everything else. When a chancellor makes big announcements, particularly on infrastructure spending, and the expected additional £100bn over five years, the announcement part of that policy is important.

Infrastructure projects take years to deliver, and are subject to delays and cost overruns. It is an important part of the strategy, therefore, that those who stand to benefit from this part of the government’s levelling-up agenda know that it is on its way. Otherwise, “levelling up” might soon be in danger of becoming as mocked as David Cameron’s “big society” programme.

Infrastructure announcements have also become more complicated, following the recent court decision on the Heathrow third runway. They have to be zero carbon compliant, which is why, as the BBC has reported and the Treasury confirmed, the full detail of the government’s national infrastructure strategy will not be published this week.

An additional problem, identified by the Resolution Foundation think tank, is that it is no use investing in shiny new infrastructure when existing facilities are crumbling. As it puts it: “The legacy of three decades of relative underinvestment has been a decline in the quality of our stock of infrastructure assets relative to other advanced economies, particularly in areas like health, social housing, prisons, and transport links outside of London. Future increases in investment need to focus on reversing this legacy as well as equipping the country to meet new challenges.”

There is another key challenge, which is to ensure that infrastructure investment in the regions is accompanied by business investment by firms. When, last weekend, Javid the former chancellor gave an interview outlining what he would like to have put in the budget. Most of the attention focused on an apparent plan to cut the basic rate of income tax from 20p to 18p in the pound. Though anything is possible these days, briefing in recent days suggests that this is unlikely to see the light of day.

Less noticed was another part of the Javid plan, which was to reduce the tax burden on business and introduce “full expensing”, allowing firms to immediately and entirely deduct the cost of investment from their tax bill. Such a move “could make a difference quite quickly” particularly to productivity.

As it happens, there is an oven-ready plan to do this, devised by Professor Peter Spencer, himself a former Treasury official, and colleagues at York University. It was sent to Dominic Cummings, Boris Johnson’s chief adviser, two months ago.

Saturday, February 29, 2020
A nasty shock - but only if we panic about 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.

Once it would have been easy. People like me would have looked at the deadly effect of the coronavirus Covid-19 outbreak on the stock market, concluded that it must be telling us something important and worrying, and wheeled out our recession predictions.

Times have changed. The FTSE 100 and other markets have taken a very nasty tumble and, as I write this, London’s main index has not only wiped out all its post-election gains but is quite a bit lower than it was a year ago.

But the mechanism through which falling stock markets were traditionally supposed to feed through to the economy, notably wealth effects on households as they saw their financial wealth battered, is very weak. Business investment is adversely affected by a very weak stock market, but in the case of the UK it was very weak anyway.

The old joke about stock markets having predicted five of the last two recessions also applies. The stock market matters a lot to Donald Trump, who regards what happens on Wall Street as a key measure of US economic success, but it does not matter so much to the economy.

There was a big fall in global stock markets at the end of 2018 and, while it was followed in 2019 by the weakest year for the world economy since the global financial crisis, which is interesting, it was not followed by recession.

Stock markets are telling us something, which is that many people, and many businesses, are worried about the impact of this coronavirus. Goldman Sachs says that earnings growth for US companies will be knocked down to zero by it. But markets are not telling us everything.

What else is driving the economic impact of Covid-19? Last year was a poor one for world trade, which fell by 0.4% according to the CPB think tank in the Netherlands, the recognised source for monitoring trade.

The OECD, which released its latest trade update for G20 countries last week, noted that merchandise trade “continued its downward path” in the final quarter of last year and added: “Evidence of significant disruption to Asian (in particular) supply chains related to the Covid-19 outbreak suggests that this downward trend is likely to continue into the first quarter of 2020.” Hopes that the small thaw in trade relations between America and China would lift trade have been dashed by the virus.

There is also the impact of cancelled events, including Six Nations’ rugby games and business conferences and exhibitions. Having been in Barcelona when the Mobile World Congress was taking place in past years, I know how big it is. It was cancelled last month after a number of big firms pulled out. Other events will follow.

Sunday, February 23, 2020
Sunak gets ready to do a reverse Osborne
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.

Nothing is predictable these days, which may be the government’s guiding principle, but for this week I am making two assumptions. The first is that, unlike his predecessor, Rishi Sunak will be around for long enough as chancellor to deliver a budget. The second is that the budget will go ahead, as planned, on March 11, as he suggested a few days ago. I hope I am right.

What can we say about a budget from a chancellor whose rise has been rapid, if not quite without trace, and whose views are not yet well known? We are told that he is a fiscal conservative and, interestingly, was allowed at his first cabinet meeting as chancellor to say that he expected departmental ministers to come up with 5% cuts in their programmes.

This does not mean that we will see such cuts in government spending, and most of this is ground to be covered in the summer spending review. But the Treasury, as under Sajid Javid, is keen to make room for the government’s priorities. Quite a lot of work in the presentation of the budget will go into emphasising that the government has not given up in fiscal responsibility.

The responsibility resting on Sunak’s shoulders is considerable. The first budget of what is effectively a new government is very important, in setting the direction for what it hopes will be the next few years. The first budget of a new chancellor who hopes to be around for some time is also very important for him.

History tells us that first budgets matter a lot. Sir Geoffrey Howe, Margaret Thatcher’s first chancellor, used his in 1979 to cut the basic and higher rates of income tax dramatically, funded by a big increase in VAT. Nigel Lawson in 1984 used his first to establish his reputation as a tax reformer, particularly on corporation tax. Gordon Brown’s first budget in 1997 was preceded by his announcement of Bank of England independence, introduced a windfall tax on the utilities and set in train far-reaching reforms, notably the abolition of the dividend tax credit, which hit pensions hard.

The interesting comparison for Sunak is with George Osborne’s “emergency” budget in June 2010. It announced an increase in VAT from 17.5% to 20%, to take effect at the start of 2011. It also announced the start of the austerity programme, what was described at the time as “taking a chainsaw” to public spending, including deep cuts to capital spending, infrastructure, some of them inherited from Labour. So it began, and so it lasted. Javid’s one-year spending review last September, when he announced £13bn of additional spending for 2020-21, was officially labelled as the end of the austerity Osborne had embarked on all those years before. Sometimes, though, these things are harder to shake off than merely announcing them.

Even so, it is fair to regard Sunak as a reverse Osborne. While his predecessor but two had the clear aim of cutting back the public sector and thus leaving it to the private sector to deliver growth, which after a shaky start it did, the new chancellor will be using public spending, and in particular the £100bn of additional infrastructure spending over five years he has inherited from Javid, to drive the economy. The private sector is expected to be weak, so the public sector will fill the gap.

It is a significant moment. The Resolution Foundation, a think tank, noted last week that the new chancellor is set to announce the first government spending boost to the economy since the financial crisis. It expects the baseline growth forecast from the Office for Budget Responsibility (OBR) to be weak, as was the Bank of England recently.

Sunday, February 16, 2020
When a chancellor quits, we should all be unsettled
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.

In the many years I have been doing this job, two chancellors, John Major and Gordon Brown, have left their post to move onto greater things; becoming prime minister Two have lost therole of chancellor as a result of election defeats for the governing party; Kenneth Clarke and Alistair Darling. Three have been sacked, sometimes after being offered demotions; Norman Lamont, George Osborne and Philip Hammond.

Only two, however, have resigned and, curiously enough, both did so over the question of advisers. Nigel Lawson resigned in October 1989 because Margaret Thatcher refused to rein in her economic adviser Sir Alan Walters. Sajid Javid resigned on Thursday, honourably, because Boris Johnson wanted him to get rid of his advisers, the most blatant Downing Street Treasury power grab I can remember.

It would be going too far to say I shall miss Javid, because he had been chancellor for such a short time, and one of the few in history never to have presented a budget, the last being Iain Macleod in 1970, who died before being able to do so. Javid knew the significance of that – a bit like a footballer declaring himself unable to play just before a World Cup final – so his decision to step down was a big one. He came close to presenting a budget in November but was scuppered by the election announcement. He expected March 11 to be his day. He was, additionally, well-liked by Treasury officials.

His signature policy, pursued over many years before he became chancellor, was to take advantage of low bond yields to borrow to invest, which I discussed with him. He will no longer be there to announce the £22bn a year of extra infrastructure spending that he promised, but that policy should be pursued by his successor, Rishi Sunak, who as Treasury chief secretary (the minister in charge of spending) has already been closely involved with it.

So there should be continuity on infrastructure spending but other things may be different. After all, Johnson and his chief adviser Dominic Cummings – who is the opposite of an eminence grise – did not want to get rid of Javid’s advisers just for show.

Markets have concluded that Javid’s departure means that the fiscal boost in next month’s budget will be bigger, even at the expense of bending or breaking the fiscal rules, or coming up with new ones. We have been here before, though not usually so soon after an election. No doubt John McDonnell, Labour’s shadow chancellor, condemned by the Tories for fiscal irresponsibility just weeks ago, will be watching with interest. He is now onto his fourth Tory chancellor.

I discussed here last week how tight rules for day-to-day spending, implied by the policy of balancing the so-called current budget, sat badly along the planned big increase in infrastructure spending. You cannot have the latter, without some more of the former.

It is reasonable for markets to conclude that Javid’s departure means a looser fiscal policy. Sunak is a fiscal conservative but the circumstances of his appointment, and the clear desire of Downing Street to take more control of the Treasury, means that matters may not entirely be under his control. Either in the budget or in the spending review planned for later this year, we may see a stronger “austerity has ended” theme than Javid was planning, in other words more day-to-day spending.