Sunday, November 03, 2019
Beyond Punch & Judy, some good ideas for the economy
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 hard to feel much enthusiasm for a general election nobody really deserves to win, and which seems certain to be dominated by Brexit. Financial markets, taking their cue from betting markets, are seeking reassurance in the prospect of a Tory majority. I would warn them that the betting markets have not covered themselves in glory in recent elections and referendums, and that Theresa May was a hotter favourite in 2017 than Boris Johnson is now, and achieved a bigger share of the vote then (43%) than the Tories are polling now.

The last Tory leader to win a comfortable majority was Margaret Thatcher in 1987, more than three decades ago, the majorities achieved by John Major in 1992 and David Cameron in 2015 being uncomfortably small.

As for the outcome and Brexit, a Tory majority would probably not deliver Brexit by Christmas, as ministers are suggesting, but should do so by January 31. The Tories as the largest party in a hung parliament would have to make concessions on labour rights and possibly customs union membership to secure support for its withdrawal agreement.

Labour, say in power with the support of the Scottish National Party, would negotiate a softer Brexit and put it to a second referendum, opening up the prospect of a very long goodbye. In all cases, of course, we are not talking about “getting Brexit done” but merely bringing an end to the first phase. It is not a happy thought but there are years to come of this.

The question is what we should be hearing from the parties apart from Brexit. How do we prepare for a successful post-election and, eventually, a post-Brexit economy?

I commend, in this regard, the efforts of the newly-formed Policy Reform Group (PRG), whose recommendations are published under the auspices of the National Institute of Economic and Social Research (NIESR). The group includes John Llewellyn, Jeremy Greenstock, Russell Jones, Andrew Gowers, Preston Llewellyn, Nick Greenstock, Gerald Holtham, Terry Scuoler and Rhys Bidder. A range of other authors has contributed to its policy ideas.

John Llewellyn, a former chief economist at the Organisation for Economic Co-operation and Development (OECD), who now runs his own consultancy, says that nobody else has attempted such a comprehensive review of UK policy-making, which includes recommendations not in the economic sphere. He is also aware that most people will not agree with all of the PRG’s ideas, called Beyond Brexit: A Programme for UK Reform but that the aim is to stimulate debate.

Let me take five of the proposals. Readers wanting more can find them in the latest National Institute review, published last week. The first proposal is, I think, uncontroversial, which is that Britain, still operating with 20th or even 19th century infrastructure, needs an urgent renewal of energy, water, transport and communications infrastructure. Sajid Javid, the chancellor, planned to announce a big rise in infrastructure spending in the “budget that never was” on November 6.

Historically, the UK has invested too little in infrastructure. The remedy is to set a target of 3.5% of GDP, which the OECD regards as the norm for developed economies, for public and private sector infrastructure spending. Currently the UK spends just over 2% of GDP. The National Infrastructure Commission could, the report says, evolve into a National Investment Bank, with infrastructure bonds used as source of funding.

Housing is infrastructure and another set of suggestions from Kate Barker in the report, is for redesigning housing policy. Barker, who undertook reports on housing supply for the last Labour government, when she was a member of the Bank of England’s monetary policy committee, advocates an increase of 100,000 a year in the number of social homes being built, to alleviate the “real and acute” crisis, particularly at the bottom of the market.

Though she is on the board of Taylor Wimpey, the housebuilder, she also advocates the winding down of the “much-criticised” Help to Buy scheme, to be replaced by a capital sum for young people which could be used towards the purchase of existing as well as new homes.

More radically, recognising that neither of these proposals would be a panacea, Barker also advocates a change in the tax treatment of owner-occupied housing, to include a wealth tax or capital gains tax on the profits made from rising house prices. Nothing, it should be said, is more guaranteed to produce a wailing and gnashing of teeth among homeowners.

Another strand of ideas which caught my eye was what to do when monetary policy has lost its potency. The authors do not favour raising the inflation target, discussed here recently. They do think that fiscal policy needs to take on more of a role. Older readers may recall that fiscal fine-tuning used to be in vogue, varying taxes and public spending to smooth the economy’s path. The “regulator” allowed chancellors to vary indirect taxes by up to 10% for this purpose. It fell into disuse with the rise of monetarism in the 1970s and 1980s.

There may be a case for it to make a comeback, in an era of very low interest rates. There may also be a case for more dramatic measures. The authors touch on the idea of “helicopter money”; electronically created money handed out to boost demand in a downturn rather than used to purchased gilts as under quantitative easing. More interesting, perhaps, is the idea of keeping markets onside by creating a special emergency fund, used only in downturns. The very good idea underpinning this is that governments should have their weapons ready in advance, not improvise when trouble hits.

If we are going to make the best of the future, improving skills, a long-term Achilles’ heel for Achilles heel for Britain will be vital. Skill levels, particularly basic and intermediate skills, compare badly with other countries. The government’s experiment with technical A-levels, T-levels, is not going well.
The report calls for” the enhancement of active labour market policies, especially for 16–24 year-olds and low-educated/low-skilled job seekers, closer to best practice in OECD countries. They should be buttressed by substantial investment in lifelong learning, with a focus on upskilling workers.”

I have left one idea until last, because I know it will provoke a response from people who, irrationally, have come to regard the EU’s single market, a proud legacy for Margaret Thatcher, as something to be avoided at all cost.
That is not so, or it should not be. “The EU single market is the world’s largest free trade area, and the UK’s closest,” the authors say. “Staying closely integrated with it is the most important measure that the UK can take to ensure that trade continues to be a positive force for its living standards.

“There are new and rapidly growing markets beyond Europe, but most are small. And the UK already has, by virtue of agreements concluded on its behalf by the EU, access to all but 17% of the global economy. Meanwhile, international trade is at growing risk from protectionism and attacks on the international institutions.”
Perhaps it is too late for a rapprochement with the single market, or perhaps our future relationship with the EU is more up for grabs than it sometimes seems to be. We shall soon see.

In choosing these ideas, I have left a lot out, including a suggested programme for decarbonising the economy and for spending significantly more than 2% of gross domestic product on defence. But these are the kind of ideas we should be discussing over the next few weeks, not just watching a Brexit Punch and Judy show.