Sunday, May 10, 2015
A victory for common sense - and the Bank
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.

This time last week, when you could still get very good odds on a Tory majority, I missed out on yet another good investment opportunity. In other respects, however, the election showed that, outside Scotland at least, the wisdom of crowds works.

The election, and the unexpected Tory majority, was a victory for economic common sense, though I was sorry to see the Liberal Democrats so badly punished. Whatever voters thought about the future fiscal plans of the parties, they had enormous doubt about putting Labour back in charge of the economy.

Had Ed Miliband conceded when he became leader in 2010 that Labour both messed up on banking regulation and overspent, he would have endured flak but could have had a clean slate. Denying overspending right up to election day, when the numbers show it clearly with hindsight, was a fatal error.

As it is, George Osborne now faces having to accommodate a series of campaign pledges – right to buy for housing association tenants, a law not to raise any of the main taxes and £8bn more for the NHS by the end of the parliament – into a tight fiscal framework. Whether these pledges made any difference is hard to say, but compared with the alternative of defeat, these are headaches the chancellor will regards as the most minor of ailments.

What was most encouraging for me was that voters did not fall for Labour’s populist interventions. I do not want to revisit the columns of recent weeks but there was something fundamentally wrong about an agenda of price freezes and rent controls, a return to “government knows best” interventions in business and the attempt to persuade people that pain could be avoided by soaking the rich, preferably the foreign rich. I have no doubt that all this would have harmed the economy. It is good that voters recognized that.

The other encouraging thing was that the markets never panicked about the election, even when a hung parliament looked likely. For this, we should pay some tribute to the strength of Britain’s institutional set-up, and in particular the independent Bank of England.

The Bank has been a quiet place, a haven of tranquility, amid the pre-election political uncertainty. Mark Carney, no doubt enjoying a quiet cup of Nespresso with his lieutenants, was able to keep a calm eye on what looked like a close race for power in Westminster.

When Gordon Brown announced independence for the Bank five days after the May 1997 election (alongside a rise in interest rates) he perhaps did not have events of the past few days in mind.

Ed Balls, who did much to initiate and design Bank independence back then, certainly would not have expected the outcome he suffered early on Friday morning.

Had things turned out differently, he would have been chancellor this week (I don’t think we would have had an easy relationship). He almost was before the 2010 election. Now I suspect he never will be.

But the independent Bank Brown and Balls forged proved its worth in the run-up to the election, and it will do so again now.

Markets approached the election, if not in a state of serenity, then a long way from panic. The pound’s average or trade weighted value, measured by the sterling index, stood at 89.1 on the eve of the election, 1% up on its level at the start of the year, and 2.5% up on 12 months earlier. The pound is lower against the dollar (though it jumped when the election result became clear) but higher vis-à-vis the euro.

That stability, which also applies looking forward, has much to do with the fact that the Bank has control of the monetary levers.

The markets no longer wait with trepidation for a post-election rise in interest rates. Rates increased soon after the polls of 1979, 1987 and 1997. They did not after the three post-independence elections, in 2001, 2005 and 2010. They will not now.

The Bank’s nine-member monetary policy committee (MPC) deliberated on Thursday and Friday about interest rates and will announce its decision at noon tomorrow. It is fair to say that it will be the shock to end all shocks if it announces a rise. The most we can expect from Carney this week is another open letter to explain why inflation is more than a percentage point below the official 2% target.

There will be a few more “no change” meetings if the markets, which do not expect a rate rise for the next 9 to 12 months, are right. Bank independence takes the pressure off the politicians.

Where do we go from here? Osborne did not like to be reminded a few days ago that Britain has a bigger budget deficit than Greece; 4.8% versus 0.8% of gross domestic product, according to the International Monetary Fund. More comfortable for him, perhaps, is the fact that Britain’s deficit is smaller than Japan’s, 6.2%, and only a bit above America, 4.2%.

But it was a reminder that there is work to do. In contrast to Greece’s brutal austerity, most of which is complete, deficit reduction in Britain has been milder. Though much of the low-hanging fruit has been plucked, and though there are those campaign pledges to accommodate, I think it can continue to be milder than people fear, though getting from 4.8% to zero will require grit and imagination.

The interaction of weak productivity and weak wages of recent years is another challenge. It is clear from the latest US figures, weak productivity is a problem afflicting most advanced economies.

In the end, higher productivity requires an economic climate that encourages business investment and innovation.

This should be the time when it can occur, with post-crisis pressures on funding and credit availability easing. I do not think there is a serious prospect of EU exit, so there are good post-election reasons to be optimistic on productivity and investment. Let us hope so. Finally, politicians from all parties — except perhaps the Greens — talk a good game when it comes to streamlining the planning system and pushing through infrastructure and housing projects, but nothing much happens.

There is a crying need for more airport capacity in London and for investment in transport and energy infrastructure around the country. There is a similar need for much more housing. Planning is the sand that gets into the cogs and stops the economy operating efficiently. It needs fixing, and there is no reason now to delay.