Sunday, November 22, 2020
In a deep fiscal hole - and the government is still digging
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.

November can be a cruel month for chancellors. The last thing Rishi Sunak wanted was a second national lockdown and on Wednesday we will all find out what the additional measures he has been forced to put in place, including the extension of the furlough scheme until March, will cost.

On Wednesday the chancellor will announce the results of his one-year public spending review, covering 2021-22, the fiscal year starting next April. Shortly after that the Officer for Budget Responsibility (OBR) will unveil its latest fiscal assessment and economic forecast.

There is plenty to consider on both fronts. On the face of it, the spending review will process has been a gain for the often wasteful defence budget and a loss for overseas aid and for public sector workers, who face a one-year pay freeze. The chancellor could yet surprise us and not cut overseas aid from the 0.7% of gross national income the government delivered even during the austerity years, or not freeze public sector pay, but both have been briefed. So the Ministry of Defence has been celebrating what Sunak himself has described as the biggest defence boost in nearly 30 years. I shall come back to that.

More attention, I suspect, will be devoted to the latest assessment from the OBR. Its last assessment, in its fiscal sustainability report in July, set out three scenarios. Even in the most optimistic it expected gross domestic product (GDP) to drop by more than 10% this year, which would mean the biggest annual fall since 1709, which as you will know, was the year of the Great Frost. This month’s national lockdown will have tilted the balance towards a bigger rather than smaller hit to GDP.

I read a headline the other day saying that the chancellor faces the worst hit to the public finances since the war. That was hardly news. In August, the OBR updated its central scenario to take into account Sunak’s July economic measures, to predict a budget deficit of £372bn this year.

Nothing like that has ever been seen before in peacetime, either in comparison with its cash level – the previous peak was £158bn during the financial crisis – or as a percentage of GDP, which is the high teens.

This week’s OBR exercise will take into account the chancellor’s many variations in his winter economic plan, originally announced in September with a new and less generous job support scheme but later modified to include the extension of the furlough scheme, initially for this month and subsequently until the end of March.

It is not all one-way traffic. While the monthly public borrowing figures have broken records this year, they have come in below what the OBR feared. Figures released on Friday showed that public sector net borrowing was £22bn last month, for a cumulative total of £215bn so far this fiscal year. That is lower than the cumulative figure of £291bn for the first seven months of the fiscal year consistent with the OBR’s projections. This week’s figures will be horrible but they might not be as horrible as they could have been.

Wednesday, November 18, 2020
Three Old Hacks
Posted by David Smith at 02:30 PM
Category: Thoughts and responses

With my very good friends Mihir Bose and Nigel Dudley, I have been recording the Three Old Hacks podcast. The third episode has just gone live, and the previous two are also available on the Chiswick Calendar website:

Sunday, November 15, 2020
Record growth disappoints -but the job market offers hope
Posted by David Smith at 09:00 AM

My regular column is available to subscribers on This is an excerpt.

We will look back on this time with wonderment. Economists who are young now will be telling their grandchildren about the time that there was a 15.5% rise in gross domestic product in a single quarter, admittedly preceded by a 19.8% drop in the previous three months. We will never see figures like that again.

Explaining too that even a 15.5% quarterly rise in GDP – three times the previous record (recorded during the Barber boom of the early 1970s) - was disappointing, not least because growth faded over the course of the quarter, will add to the oddity of those recollections. From now on we will gradually move back to more normal numbers, beginning with a small fall in GDP during the current quarter.

A good September increase in monthly GDP would have raised the bar from which that fall occurs. But September saw a modest 1.1% rise, modest by current standards that is, despite a boost from the return of schools. I shall say it again, just to add to the anguish of parents who were tearing their hair out in the spring. Home tutoring by parents, like housework, does not contribute to GDP.

The UK’s economic performance, like its pandemic performance, compares badly with most other countries. UK GDP in the third quarter was down by 9.7% on pre pandemic levels. Some of that reflects the way public services are measures but the underperformance is across the board, including manufacturing and household spending.

There are ramifications in that but for now I want to focus on something more positive, Britain’s labour market. It may seem odd to do that after a week in which the official unemployment rate has risen to 4.8% (equivalent to 1.62m people), a quarterly record of 314,000 redundancies and a drop of nearly 800,000 in the number of workers on payrolls since March.

Sunday, November 08, 2020
After another handout from Sunak, how do we pay for 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.

Like a lot of other people, I am finding that there is something missing in my life at the moment. It is not just that, thanks to the second lockdown, I can’t browse in a non-essential shop, sit in a pub or restaurant, have a haircut or beauty treatment, or play tennis or gold. I haven’t played golf for a while but in my case it was always socially distanced, most of the time trudging through undergrowth in search of lost balls.

No, apart from all those, I am missing the budget. For people like me the run-up to the budget always provides plenty of material, whether it is speculation of tax changes that may or may not happen, or trying to guess the rabbit that the chancellor will pull out of the hat.

Sadly, however, the November budget has, like the other things I mentioned, fallen victim to the coronavirus. The two big “fiscal events” planned for this autumn, the budget and a three-year comprehensive spending review, have been replaced by one tiddler, a one-year spending review due on November 25.

There is much anguish in Whitehall over the cancellation of the three-year spending review. Many hours have been wasted in government departments preparing for it, at a time when there have been plenty of other things for them to be getting on with. It has also created new uncertainty about medium and long-term strategy.

The Treasury would say that, instead of a proper budget this month, we have had a series of mini budgets. They have come thick and fast, sometimes at a rate of one a month, and we had another on Thursday.

That, however, creates a sense in which policy is rudderless. Rishi Sunak is being forced to provide more and more support for the economy, either by the coronavirus, or by Downing Street, or a combination of the two. He had hoped by now to have said farewell to the furlough scheme. Indeed, as a I wrote last week, he hoped to have done so many months ago.

Now, in the mother of all rushed U-turns he has extended it and the self-employment scheme until the end of March, meaning that it will be around – depending on a January review – for more than a year. There is good news and bad news in this. The good news is that many people who would have become unemployed will stay on company payrolls. The bad news is that it could be seen to imply that serious restrictions, if not lockdown, will be in place until the spring, with no guarantee that there will not be another U-turn then.

The chancellor’s U-turn has gone down badly with experts. Paul Johnson, director of the Institute for Fiscal Studies, said nothing had been learnt since this spring: the new package was “wasteful and badly targeted for the self-employed”, with no effort to target sectors and viable jobs for employees.

The chancellor did not have a budget, but in short statement in the House of Commons he handed out tens of billions. We cannot be sure how much. The Treasury estimates that extending furlough costs between £2bn and £10bn a month; the self-employment scheme £7.3bn and money allocated to the other nations of the UK under the Barnett formula £2bn. Against this, the job retention bonus he announced for employers in September, which was dependent on the furlough scheme ending, ahs been scrapped. A conservative assessment was that the furlough extensions (for lockdown and beyond) and the other measures will cost a further £35bn to £40bn.

The question, and it is one I get asked a lot, is how to we pay for all this. £5 million was an important sum for the Treasury when it was at loggerheads with Greater Manchester over Tier 3 support, and money may have been at the heart of the government’s refusal to provide meal vouchers to underprivileged children during half-ter. Suddenly, however, whether Sunak wanted to or not, the taps have been turned on full. What can and will be done to repair the public finances?

The chancellor could, of course, do nothing on the assumption that the Bank of England will always be around to make things easy for him. Britain has won praise for the co-ordination of fiscal (the Treasury) and monetary (the Bank) policy during the pandemic. On Thursday the Bank not only provided a further £150bn of quantitative easing (QE) but helpfully moved its announcement forward to 7am, to leave the airwaves free for the chancellor at lunchtime.

The Bank’s purchases of government bonds (gilts) make even a huge budget deficit – which could hit £400bn or 20% of gross domestic product this year – easier to fund and keeps the cost of doing so low. The Bank, coincidentally, has announced £400bn of additional QE.

This is not, however, a permanent solution. One of the Bank’s deputy governors, Sir Dave Ramsden, said recently that the Bank was getting closer to its self-imposed limit for QE. Thursday’s £150bn announcement ahs taken it much closer to that limit, leaving only £100bn or so to go. It has already become the dominant holder of gilts. There would still be demand for gilts after the Bank stopped buying, from pension funds, insurance companies and overseas buyers, but that is not limitless either, and investors might well require a higher return, pushing up the government’s cost of borrowing. When the Bank is buying, the cost of borrowing is zero.

Sunday, November 01, 2020
Sunak's bridge to normality proves to be a rickety one
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.

Who would be a chancellor? As the second wave of the coronavirus intensifies, and national lockdowns are unveiled in France and Germany, albeit less strict ones than before, the direction of travel in the UK looks clear. Last night, as people will be aware, the prime minister announced a government U-turn and another national lockdown.

For the Treasury, this can only mean that the bill for responding to the crisis, which was already breaking records, goes up further, as does the challenge of restoring the public finances to health in the medium to long term.

Sometimes I think back to February, when Rishi Sunak was happily carrying out his duties as Treasury chief secretary, deputy to the then chancellor Sajid Javid. Sunak was a cabinet new boy, having only been elected as an MP in 2015, and having been a junior local government minister until late July 2019.

Javid, in contrast, was on his fifth cabinet role and, after less than seven months as chancellor, and fully committed to the government’s “levelling up” agenda – which is looking a bit lopsided at the moment – and looked to be at the Treasury for the long haul.

It did not happen. Javid resigned, Sunak got the call, giving rise to a conversation with Boris Johnson which might have gone something like this. “Rishi, the good news is that you are going to eb chancellor. The bad news is that the coronavirus pandemic is going to give us the biggest recession in a century and a budget deficit two and a half times the previous annual record.”

It did not happen. On February 13, the date of his appointment, the UK had had nine reported cases of coronavirus but the prime minister had not then woken up to the danger. Sunak’s first budget, nearly a month later on March 11, including a response to the emerging Covid-19 crisis but this was only a taste of what was yet to come.

As poisoned chalices go, this one competes with that of Alistair Darling’s appointment of chancellor at the end of June 2007, weeks before the financial crisis came to Britain with the run on Northern Rock. Sunak, however, had even less time to get his feet under the table when his crisis hit.

That he has handled it with aplomb is a credit to him. He is the most competent and popular member of what, admittedly, is a dysfunctional government. The unprecedented furlough scheme was announced on March 20, days before the national lockdown and only nine days after the budget.

This was a time of all hands to the economic pump. One the previous days, March 19, the Bank of England had announced a record low of 0.1% for interest rates and a further £200bn of quantitative easing. While other parts of the government’s response to the coronavirus were struggling, and in some respects continue to do so, the economic response was fast and formidable.

The furlough scheme has so far prevented an unemployment tsunami. The unemployment rate at the latest count, June-August, was 4.5%, from a pre-Covid low of 3.8%, though roughly 700,000 payroll jobs were lost between March and September.

But it was due to end yesterday - before last night's month-long extension - and the normally surefooted Sunak stumbled last month when he announced the first iteration of his winter economic plan in September.

Sunday, October 25, 2020
Consumers will stay wary as long as the virus stalks us
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.

We enter a new period of uncertainty, in response to which the chancellor, Rishi Sunak, has announced another set of job support measures, which is becoming a regular occurrence. The Bank of England is heading for a Bonfire Night announcement of another £100 billion of quantitative easing (QE), which will mean almost as much of this kind of help for the economy this year as in the previous 10 years combined.

A month ago here, I wrote about the importance of confidence in driving the economic recovery. This was after Boris Johnson had announced new restrictions, including the closure of pubs and restaurants ay 10pm, following hard on the heels of the so-called “rule of six”. The confidence killer was the messaging that surrounded the new rules, that they would probably be around for six months.

Since then evidence of the Covid-19 second wave has become clearer and we have had a bitter North-South battle over the confusing three-tier restrictions, as well as a new set of support measures from the chancellor. A growing proportion of the UK population, though not yet the majority, is operating under more severe restrictions, including those introduced in Wales, Scotland and Northern Ireland.

These new restrictions came too late to affect the September retail sales figures, released on Friday. They showed a robust rise 1.5% rise in sales volumes in September, up 5.5% on pre-Covid levels in February, and 4.7% up on a year earlier. More than a quarter, 27.5%, of sales were online in September, compared with 20.1% in February. The key question, however, is what happens next.

I was right to worry about confidence, though. While not all of the latest measures will have been reflected in the surveys, consumer confidence has taken a battering. The closely watched GfK consumer confidence index, released on Friday, showed a drop of six points to -31, almost down to its levels during the national lockdown in the spring.

And, according to Joe Staton of GfK: “The prospect of rising unemployment is severely depressing our outlook. Worryingly, this data was collected before the new round of COVID-19 restrictions came into force and the end of the furlough scheme, so this will negatively impact the Index in the run-up to Christmas and the months beyond. Expect the autumn chill to give way to much stormier conditions.”

If the GfK measure is almost down to its lockdown lows, another consumer confidence indicator, from Bank of America’s UK team is even gloomier. The 28-day moving average of its index has hit a new low, thus falling below where it was in March-April this year. People are wary of making major purchases, and gloomy about pay, jobs and the impact on them of Covid-19.

Robert Wood, its UK economist, highlighted what is an important feature of the coronavirus crisis, and a shortcoming of attempts to isolate parts of the country with low infections from the economic damage. As he puts it: “This consumer reaction is larger than consistent with the direct effects of government mandated business closures.”

We all watch the same news on television and read the same newspapers, whether we are in high infection Merseyside, Nottingham and Lancashire, or low-infection Cornwall, Isle of Wight and Somerset. We all see the same downbeat Downing Street briefings and see the same national figures for rising coronavirus infections and cases.

The direct effects of even Tier 3 restrictions on the economy are small, even if they are devastating for the hospitality sector. Estimates by J P Morgan suggest that these direct effects are equivalent to 1% or less of gross domestic product. But it also cites the downside risks to this assessment as a result of changes in behaviour.

This has become one of the most important aspects of the economic effects of the pandemic, as highlighted by Gertjan Vlieghe, a member of the Bank of England’s monetary policy committee, in a thoughtful speech a few days ago.

Looking at evidence and studies on the impact of restrictions, some of it dating back to the Spanish flu pandemic of a century ago, most more recent, Vlieghe argued that the typical pattern is one in which governments introduce restrictions, but only after virus cases have started to increase, by which time people have already started to respond to the danger by reducing their spending.

“The overall conclusion that I take away from this rapidly growing literature is that the bulk of spending reductions are due to restrictions that people voluntarily impose on themselves, not due to government imposed restrictions,” he said. “People react strongly to actual or perceived virus risk, and government measures that reduce the spread of the virus are good for public health as well as for the economy, relative to a counterfactual where the virus is allowed to spread more widely.”

Sunday, October 18, 2020
How the 'China virus' hurt China less than most others
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.

As we approach the end of this Covid year, with new restrictions popping up all over the place, cast your mind back nine months to January, when we had barely heard of the coronavirus, and it had yet to be christened Covid-19, let alone SARS-Cov-2, its current scientific identifier.

Nobody at that time expected a world recession. The UK economy was set merely for weak growth. The International Monetary Fund (IMF), which has just released a new world economic outlook, predicted in January that the world economy would enjoy a slightly better year in 2020 than in 2019, 3.3% growth versus 2.9%.

Its main worries then were rising global geopolitical tensions, and what it described as a further worsening of relations between the United States and its trading partners. Those issues remain important but they have been put in the shade by the coronavirus.

The time of deepest gloom about the global economy was in the spring and early summer, and again that can be tracked by the IMF’s forecasts. In June it predicted a huge 4.9% contraction in the global economy this year; a negative swing of more than eight percentage points compared with January. Advanced economies were predicted to slide by 8%, while a double-digit decline was forecast for the UK economy.

All these things are relative, but the latest position in slightly less gloomy than it was. This is because downturns in the April-June quarter in America and the eurozone were less extreme than feared, and in some cases recoveries have been stronger. It now expects a 4.4% slump in the world economy this year, followed by a 5.2% recovery next year.

The big difference is for advanced economies, now predicted to shrink by “only” 5.8%, followed by growth of 3.9% next year, which will leave some ground to be made up before getting back to 2019 levels. The UK numbers have been shaded slightly less than most; a 9.8% drop this year followed by a 5.9% recovery next.

The IMF was not the only body to have a look at global economic performance in a time of Covid in recent days. Citi, the investment bank, also did so as part of the Institute for Fiscal Studies’ annual green budget.

It found, perhaps unsurprisingly, that countries with the most effective lockdown and containment strategies had the best economic and political outcomes. In this respect, Britain is part of a cluster of poorly performing European countries along with France, which has just also introduced new restrictions, along with Spain and Italy. Japan, Germany and, in economic terms, America, have done much better.

One interesting aspect of this, highlighted by Citi is that, despite the heroic efforts of NHS workers, the UK entered the crisis with an underpowered health service. There were seven intensive care beds per 100,000 people, compared with 29 in Germany and 35 in America. Health spending as a proportion of gross domestic product, 10.3%, was among the lowest.

As Citi’s economists put it: “The UK had the worst starting point among the G7 countries and Spain.” That may be marginally better than having a good starting point and still getting it wrong. As they also point out: “The US had the best starting point but has had the worst pandemic, while Japan had one of the worst starting points but the best outcomes [in the G7] so far.”

Sunday, October 11, 2020
There's no quick fix for Britain's deep productivity problem
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.

One of the topics I get asked a lot is about productivity. People don’t necessarily put it this way, but is this crisis unleashing the “creative destruction” that will propel us out of more than a decade of productivity stagnation? Is the working-from-home revolution and other changes that businesses have adopted, which in other circumstances could have taken years, good or bad for productivity?

What about the nature of the shakeout in jobs that we are seeing? Is the very bad news for the UK’s hard-hit hospitality sector, and the people who work in it, good news for economy’s overall productivity?

These are big questions and I cannot promise definitive answers on all of them. Before I try, let me give you another in the series of extraordinary statistics this crisis is throwing up. The Office for National Statistics (ONS) has just published figures for productivity in Britain’s public services. The measure used is slightly different from the way we typically measure productivity for the economy as a whole, which is on an output per hour or output per worker basis. Public services productivity is measured by the amount of inputs going in – public spending – versus the outputs emerging in return.

On this basis, productivity in public services plunged by 35.7% in the second quarter, compared with a year earlier. This was comfortably the largest fall since it was first measured on this basis, the previous record being the 3.8% annual drop in the first quarter.

It happened because inputs into public services, mainly health and social protection (benefits, free school meals, etc), increased sharply, while outputs fell. School closures hit the output of education, while non-Covid work in the NHS also dropped. No public sector workers were furloughed even when they were unable to work. The drop in the output of public services was a contributor to the 19.8% second quarter fall in gross domestic product.

These huge falls in productivity should not be taken as evidence that the public sector can never deliver productivity gains. Between 2010 and last year productivity in public services rose by more than 5%, with the biggest gains occurring during the period of maximum austerity. Old Treasury hands used to say that putting the squeeze on spending was the only sure ay of delivering such gains.

The official statisticians are still working on final productivity data for the whole economy in the second quarter, which will be published shortly. We will have to wait even longer to see how much productivity bounced back in the third quarter, if it did, as the economy recovered from its second quarter slump. Friday’s monthly GDP figures were a touch disappointing, showing only a 2.1% rise in August, but they left the economy on course for a 16% third quarter rise.