I'm increasingly convinced that the best way forward for the UK will be what is portrayed as a hard Brexit, although given its negative connotations I would prefer to call it a clean Brexit. While we can't completely rule out the prospect of staying in the customs union and some access to the single market, the intransigence of the EU authorities and undoubted complexity of the negotiations with 27 countries plus other regional authorities mean a clean and swift break will probably be the best way forward. In any case I would argue joining the European Economic Area which involves continuing to pay into the EU budget and accepting numerous rules and regulations including free movement of labour would be a betrayal of the referendum result. Furthermore if we retained membership of the customs union this would preclude the prospect of securing free trade arrangements with the US, Canada, Australia, New Zealand and many others that have emphasised their keenness to do so and quickly. And remember food prices would fall if we left the customs union.
There is also a reasonable case for some ultra-Brexit whereby we trade not just under WTO rules, but with zero tariffs on all imports into the UK, yielding massive gains to consumers, although personally I would prefer to retain bargaining power in free trade negotiations.
Even hopes for an interim transitional deal involving membership of the EEA will be difficult to secure in negotiations. The EU negotiators are very keen to penalise the UK and see this wrongly as a zero-sum game hoping to take business away from us to themselves. As a result, they want to discuss payment for leaving first, then the main deal, and then any transitional arrangements. Even a deal on existing EU workers in the UK and vice versa will have to wait they say.
And I certainly do not subscribe to all the pessimism we see in much of the media regarding the result and future prospects. So far on the narrow measure of GDP, Brexit has not been a disaster as Remainers suggested it would. I personally said there would be no recession even though the economy was slowing even before the referendum. Indeed in 2016, GDP will have grown by at least 2% (with an upwardly revised Q3 GDP from 0.5% to 0.6% quarter on quarter showing there remains strong momentum) and I believe we will see growth of not far short of 2% next year despite the impact of inflation on real disposable incomes. The idea that consumer confidence would be battered by the vote was never credible. Such an outturn would leave growth higher than all major Eurozone economies, the US and Japan.
But equally important is that the referendum settled once and for all our status with respect to the EU. It has given us back our sovereignty. Already we see this in parliament with the debates about Article 50. In addition it importantly gives us back control of borders. Of course we need to have access to top talent from overseas to sustain our financial services industry and even labour from the Balkans to maintain our fruit picking, but we need to maintain controls to avoid the destabilisation of the society and diminishing of British values. Although we also need to improve British education and labour skills. Finally we need to prevent the awful terrorist activity seen in Germany, France and Belgium and thankfully largely avoided here. This is due partly to our superior security services and somewhat better integration, but also so far to largely avoiding the ridiculous open refugee policies of Merkel.
And I'm also optimistic because we will be able to be a champion of free trade again as happened in the nineteenth century after the abolition of the Corn Laws. There is no doubt that the Anglo-Saxon world is desperate to negotiate trade deals with us. And further down the line once the EU realises its mistakes of protectionism and unneccesary rules of free movement of labour we can secure free trade deals with them too.There is no doubt that the UK is well-placed to take advantage of a post-Brexit world. For example according to the Indigo Index, which seeks to measure a country's entrepreneurial eco-system, and therefore it's potential to adapt and develop, it is ranked fifth out of 152 countries - only behind small countries in Scandinavia as well as Switzerland. This does not mean we should stop still. We need to go further in boosting infrastructure and education, but also cutting taxes and shrinking the public sector.
Anyway I wish you all a merry Christmas and another successful and happy new year!
Friday 23 December 2016
Saturday 22 October 2016
Time for the "Baby Boomers" to give something back
While there is little doubt that it will be Brexit - and the success thereof - that will define Mrs May's administration, a secondary theme will be that of how far she succeeds in implementing greater fairness in the country - in her own words "a country that works for everyone". While every PM in the last 25 years has made similar noises she has seemed to have a greater commitment. And there is evidence that the policies of the last Cameron government are all being reevaluated not least in terms of their fairness. But, no doubt though that any politician should be judged by actions not words!
An important aspect of the fairness agenda, but one not as often mentioned as others, is what economists call intergenerational equity - a concept of fairness between children, youth, adults and seniors. It is a term often used in investment management but has become more prominent in the world of economics in recent years because governments have run up large deficits and debts which have benefited a current generation through welfare benefits, tax cuts and government jobs, potentially at the expense of future generations.
Baby boomers refer to a cohort of the population born between 1946 and 1965 when the birth rate materially accelerated. It was thought that because this cohort was very big, a person born then would suffer in terms of greater competition for jobs and housing. But the reality has been that they have been the beneficiaries of a number of developments and events at the cost of other mainly future generations.
The welfare system may be seen as having a natural life cycle. Thus we tend to mainly benefit from it in our youth and in our old age. Conversely our contribution to government revenues tend to occur during our working life in between. Keeping this in mind, baby boomers, as the biggest group, when they started working, they tended to push the dependency ratio sharply down, ie the number of people earning rose relative to the number of dependents, whether the young or retired. During this period, roughly from Thatcher to the coalition administration, the government was able to spend more freely because of this, and also over and above this they spent during the Labour government years stacking up debt for future generations to pay for. But now that the baby boomers are increasingly retiring, the dependency ratio has in the last couple of years increased significantly. Immigration actually delayed this phenomenon, but it will continue rising for a long time yet. This means that those working now have to pay for more dependents than in the past and for excess spending in the Labour years.
This demographic trend is storing up massive problems for governments not just in this country but most of the developed world, most notably in Japan and Germany. Moreover, baby boomers have benefited from a number of other events.
In the housing market, baby boomers were relatively easily able to afford to get a deposit and buy a house. Today so many people cannot do so. In fact on average it takes them 22 years to save for a deposit! In pensions they have done well too. Pensions have been heavily protected from welfare cuts, by the infamous triple-lock, while other pensioner benefits have been protected too. Furthermore, the massive rise in the pensions deficit (notably due to low long term interest rates) has been primarily responsible for driving a wedge between productivity growth and pay growth. Companies have had to pay into their pension funds, so that people working today are not benefitting from rising productivity.
Only in one respect are pensioners losing out, that is in terms of very low savings rates, while mortgage holders, who tend to be workers from generations after the baby boomers, have done very well. Nevertheless, overall the baby boomers have done exceedingly well.
It is time that government policy looks at rectifyting this siuation. This includes reducing pensioners benefits, increasing inheritance tax, and raising housing supply at a more rapid rate.
An important aspect of the fairness agenda, but one not as often mentioned as others, is what economists call intergenerational equity - a concept of fairness between children, youth, adults and seniors. It is a term often used in investment management but has become more prominent in the world of economics in recent years because governments have run up large deficits and debts which have benefited a current generation through welfare benefits, tax cuts and government jobs, potentially at the expense of future generations.
Baby boomers refer to a cohort of the population born between 1946 and 1965 when the birth rate materially accelerated. It was thought that because this cohort was very big, a person born then would suffer in terms of greater competition for jobs and housing. But the reality has been that they have been the beneficiaries of a number of developments and events at the cost of other mainly future generations.
The welfare system may be seen as having a natural life cycle. Thus we tend to mainly benefit from it in our youth and in our old age. Conversely our contribution to government revenues tend to occur during our working life in between. Keeping this in mind, baby boomers, as the biggest group, when they started working, they tended to push the dependency ratio sharply down, ie the number of people earning rose relative to the number of dependents, whether the young or retired. During this period, roughly from Thatcher to the coalition administration, the government was able to spend more freely because of this, and also over and above this they spent during the Labour government years stacking up debt for future generations to pay for. But now that the baby boomers are increasingly retiring, the dependency ratio has in the last couple of years increased significantly. Immigration actually delayed this phenomenon, but it will continue rising for a long time yet. This means that those working now have to pay for more dependents than in the past and for excess spending in the Labour years.
This demographic trend is storing up massive problems for governments not just in this country but most of the developed world, most notably in Japan and Germany. Moreover, baby boomers have benefited from a number of other events.
In the housing market, baby boomers were relatively easily able to afford to get a deposit and buy a house. Today so many people cannot do so. In fact on average it takes them 22 years to save for a deposit! In pensions they have done well too. Pensions have been heavily protected from welfare cuts, by the infamous triple-lock, while other pensioner benefits have been protected too. Furthermore, the massive rise in the pensions deficit (notably due to low long term interest rates) has been primarily responsible for driving a wedge between productivity growth and pay growth. Companies have had to pay into their pension funds, so that people working today are not benefitting from rising productivity.
Only in one respect are pensioners losing out, that is in terms of very low savings rates, while mortgage holders, who tend to be workers from generations after the baby boomers, have done very well. Nevertheless, overall the baby boomers have done exceedingly well.
It is time that government policy looks at rectifyting this siuation. This includes reducing pensioners benefits, increasing inheritance tax, and raising housing supply at a more rapid rate.
Friday 7 October 2016
A shift from monetary to fiscal stimulus a sensible one economically and politically
PM May's speech at the annual Tory party conference is being viewed as a massive change in policy direction. In a populist speech, in some ways, she talked about a need for greater fairness, to help those, the poorest that have been most affected by austerity. As well as talking about greater intervention to attend to market failures, she signalled changes in economic policy to, if you like, a greater emphasis on Keynesian policies.
Clearly her speech made sense from a political viewpoint. May is laying claim to the centre ground of politics which has been vacated by the Labour party. Labour continues to shift to the hard left, and under an unelectable leader does its best to make sure it is the case it will not be elected. Corbyn has refused to make any attempts to unify the parliamentary party with his latest reshuffle electing only his very closest allies, which is likely to lead to further infighting. Corbyn also refuses to acknowledge that the levels of immigration seen is a problem, a key issue for many traditional working class supporters. But at the same time, May's speech also tried to appeal to UKIP supporters by emphasising the importance of control of borders and by adopting about the only non-Brexit UKIP policy - namely allowing new grammar schools. UKIP continues to implode struggling with finding a raisin d'etre and a new leader to follow the highly successful Nigel Farage. But what I would say is that Theresa May should be judged not by what she says but what she does. Many new administrations start off with such sentiments of fairness but fail to follow through not least because of events as well as other priorities. This is not to say she is not committed to making a fairer society.
A shift from monetary stimulus to fiscal stimulus makes sense from both a fairness and macroeconomic point of view. When the coalition government came to power in 2010, it inherited a massive structural budget deficit partly due to the global financial crisis but largely reflecting years of irresponsible spending from the previous Labour administration. The government was left with little choice but to cut spending and raise taxes. This resulted in a greatly reduced budget deficit albeit that debt continues to accumulate and targets to balance the budget have been missed.
At the same time, monetary policy was eased. And in common with most other advanced countries we have experienced ultra low interest rates. Base rate was cut to a record low 0.5% over seven years ago and further to 0.25% in August. Quantitative easing (QE) has seen some £375bn of gilts purchased, with a further programme announced in August of an additional £60bn of gilts and £10bn of corporate bonds in response to the Brexit vote and largely unfounded fears that the economy would be plunged into recession.
Now there is no doubt that monetary policy has been overburdened and there have been many side effects from the semi-permanent monetary stimulus. One of these side effects has been the distributional consequences. Economic policy has favoured holders of fixed assets and mortgage holders as against savers and potentially pension holders. A Bank of England study found for example that QE did boost growth but that the benefits tended to go to the richest 5% who own 40% of assets. And of course spending cuts have impacted on the poorer too.
It is not good that savers cannot get a decent return as it disincentivises, especially people to do so for retirement, increasing the prospect that people will rely on the government and increase their own already high household debt. Similarly long-term investors like pension funds and insurance companies can no longer earn a real rate of return threatening their solvency. It is also not good if the burden of providing a pension falls on the government when we have an ageing population. Corporate pension fund deficits reached a record high at £459bn at the end of August due to plunging bond yields which have also raised fears that firms might cut their investment plans. Although as has been pointed out by our UK economists at Oxford Economics, assets held by defined benefit schemes have actually increased by £135bn in the four months to August. Bank's profitability have been badly impacted by low interest rates too, affecting their ability to lend.. And while most people would not be sad about bank'statement plight, it could also contribute for the need for expensive bailouts given the pivotal role that banks do play in the economy. As it is not good for savers, low interest rates are great for borrowers. However again we are storing up problems for the future in building up such debt. If and when interest rates rise again, we are likely to see many distressed borrowers given the highly leveraged position of the household sector. Finally, ultra low interest rates lead to the mispricing of financial markets pushing up equity and bond prices. In addition they lead to a misallocation of capital with a rash of low-return capital projects.
There is no doubt that monetary policy has been asked to do too much and that it has reached the end of its effectiveness. Thus for example, negative interest rates will not work in the UK. But with a greatly reduced budget deficit and long term rates close to zero, this is an ideal time to ease fiscal policy a little to meet the uncertainty regarding the medium term impact of Brexit. The government has built up a lot of policy credibility so can afford some slippage towards its aim of balancing the budget. It certainly makes little sense to remail committed to reach budget balance by 2020 at such a time. Increased spending on infrastructure can boost growth and boost the supply side of the economy without "crowding out" the private sector given the low cost of funding. But it will still be important to not waste money on cost ineffective and spurious projects which offer political rather than any economic returns. It will be important to identify "shovel ready" projects. We shall have to wait until the Autumn Statement on 23 November to see what exactly the Chancellor does to reset fiscal policy, but there was speculation already yesterday of the re-introduction of government backed high interest fixed-term bonds (and not just for the over 65s) which could be a good move.
Clearly her speech made sense from a political viewpoint. May is laying claim to the centre ground of politics which has been vacated by the Labour party. Labour continues to shift to the hard left, and under an unelectable leader does its best to make sure it is the case it will not be elected. Corbyn has refused to make any attempts to unify the parliamentary party with his latest reshuffle electing only his very closest allies, which is likely to lead to further infighting. Corbyn also refuses to acknowledge that the levels of immigration seen is a problem, a key issue for many traditional working class supporters. But at the same time, May's speech also tried to appeal to UKIP supporters by emphasising the importance of control of borders and by adopting about the only non-Brexit UKIP policy - namely allowing new grammar schools. UKIP continues to implode struggling with finding a raisin d'etre and a new leader to follow the highly successful Nigel Farage. But what I would say is that Theresa May should be judged not by what she says but what she does. Many new administrations start off with such sentiments of fairness but fail to follow through not least because of events as well as other priorities. This is not to say she is not committed to making a fairer society.
A shift from monetary stimulus to fiscal stimulus makes sense from both a fairness and macroeconomic point of view. When the coalition government came to power in 2010, it inherited a massive structural budget deficit partly due to the global financial crisis but largely reflecting years of irresponsible spending from the previous Labour administration. The government was left with little choice but to cut spending and raise taxes. This resulted in a greatly reduced budget deficit albeit that debt continues to accumulate and targets to balance the budget have been missed.
At the same time, monetary policy was eased. And in common with most other advanced countries we have experienced ultra low interest rates. Base rate was cut to a record low 0.5% over seven years ago and further to 0.25% in August. Quantitative easing (QE) has seen some £375bn of gilts purchased, with a further programme announced in August of an additional £60bn of gilts and £10bn of corporate bonds in response to the Brexit vote and largely unfounded fears that the economy would be plunged into recession.
Now there is no doubt that monetary policy has been overburdened and there have been many side effects from the semi-permanent monetary stimulus. One of these side effects has been the distributional consequences. Economic policy has favoured holders of fixed assets and mortgage holders as against savers and potentially pension holders. A Bank of England study found for example that QE did boost growth but that the benefits tended to go to the richest 5% who own 40% of assets. And of course spending cuts have impacted on the poorer too.
It is not good that savers cannot get a decent return as it disincentivises, especially people to do so for retirement, increasing the prospect that people will rely on the government and increase their own already high household debt. Similarly long-term investors like pension funds and insurance companies can no longer earn a real rate of return threatening their solvency. It is also not good if the burden of providing a pension falls on the government when we have an ageing population. Corporate pension fund deficits reached a record high at £459bn at the end of August due to plunging bond yields which have also raised fears that firms might cut their investment plans. Although as has been pointed out by our UK economists at Oxford Economics, assets held by defined benefit schemes have actually increased by £135bn in the four months to August. Bank's profitability have been badly impacted by low interest rates too, affecting their ability to lend.. And while most people would not be sad about bank'statement plight, it could also contribute for the need for expensive bailouts given the pivotal role that banks do play in the economy. As it is not good for savers, low interest rates are great for borrowers. However again we are storing up problems for the future in building up such debt. If and when interest rates rise again, we are likely to see many distressed borrowers given the highly leveraged position of the household sector. Finally, ultra low interest rates lead to the mispricing of financial markets pushing up equity and bond prices. In addition they lead to a misallocation of capital with a rash of low-return capital projects.
There is no doubt that monetary policy has been asked to do too much and that it has reached the end of its effectiveness. Thus for example, negative interest rates will not work in the UK. But with a greatly reduced budget deficit and long term rates close to zero, this is an ideal time to ease fiscal policy a little to meet the uncertainty regarding the medium term impact of Brexit. The government has built up a lot of policy credibility so can afford some slippage towards its aim of balancing the budget. It certainly makes little sense to remail committed to reach budget balance by 2020 at such a time. Increased spending on infrastructure can boost growth and boost the supply side of the economy without "crowding out" the private sector given the low cost of funding. But it will still be important to not waste money on cost ineffective and spurious projects which offer political rather than any economic returns. It will be important to identify "shovel ready" projects. We shall have to wait until the Autumn Statement on 23 November to see what exactly the Chancellor does to reset fiscal policy, but there was speculation already yesterday of the re-introduction of government backed high interest fixed-term bonds (and not just for the over 65s) which could be a good move.
Saturday 1 October 2016
From the impact of Brexit to the prospect of a European Banking Crisis
Well it is becoming increasingly clear that the initial impact of Brexit or more strictly the announcement of a Brexit will not bring forth recession. This is indeed what I said in my blog of 14 July when it was very much a minority view. Forecasts have all been revised up by various institutions like the OECD and the IMF and by international banks to around the GDP growth numbers that I suggested back in the gloom of July, namely 1.75% for this year and 1% next year - and if anything I would say these are now on the Conservative side. Thus nearly all major indicators are doing well including retail sales and consumer confidence, house prices, services sector output, and business confidence. In addition financial market variables have generally done well, with even sterling recovering somewhat.
So why were the forecasts so gloomy and clearly wrong? Well I think there are four reasons. Firstly the economic data underestimated the strength of the economy going into the referendum. For example, GDP in Q2 is now thought to have risen by 0.7% on the quarter well above initial estimates. Secondly it was due to the politicisation of key institutions including the IMF (see blog 29 July) and more obviously the UK Treasury and Bank of England. Thirdly, is reflects the state of macroeconomics and the herd instinct of many economic commentators (wait for a future blog here) and finally it is fair to say that the Bank of England took prompt and appropriate action in loosening monetary policy via a number of methods.
But of course I am not naive to believe it is all going to be rosy. In the medium-term there will be adverse consequences on what will be difficult and protracted negotiations with an EU which is standing firm on its unwillingness to compromise on the trade-off between access to the single market and control of borders, despite the prospect of the EU being adversely affected too. However as we seemingly move towards a hard Brexit again as previously predicted, it is hoped that these negotiations can be completed more quickly enabling us to travel to the point where we can free trade with the rest of the world and hopefully with the EU too, via being an independent member of the World Trade Organisation. I continue to have a very positive outlook for the UK in the long term, perhaps as part of a Commonwealth free trade union with Australia, Canada and New Zealand leading the way. These are countries we have so much more in common with than the EU.
Finally I would also like to mention the banking problems in Italy and now Germany. While not wanting to minimise the impact of Brexit on the UK and on the Eurozone too, the biggest immediate fear is that of a European Banking Crisis. The problems are hardly surprising in that they largely reflect the poor health of the Euro Zone and the flaws of European monetary union without fiscal and political union. At the moment the problems at Deutsche are unlikely to be Europe's Lehmann moment and a boost its capital should help. I am more concerned about the solvency of Italian banks and the not unrelated constitutional referendum in early December which will in effect be another big test for the EU and could see the Italian government fall.
So why were the forecasts so gloomy and clearly wrong? Well I think there are four reasons. Firstly the economic data underestimated the strength of the economy going into the referendum. For example, GDP in Q2 is now thought to have risen by 0.7% on the quarter well above initial estimates. Secondly it was due to the politicisation of key institutions including the IMF (see blog 29 July) and more obviously the UK Treasury and Bank of England. Thirdly, is reflects the state of macroeconomics and the herd instinct of many economic commentators (wait for a future blog here) and finally it is fair to say that the Bank of England took prompt and appropriate action in loosening monetary policy via a number of methods.
But of course I am not naive to believe it is all going to be rosy. In the medium-term there will be adverse consequences on what will be difficult and protracted negotiations with an EU which is standing firm on its unwillingness to compromise on the trade-off between access to the single market and control of borders, despite the prospect of the EU being adversely affected too. However as we seemingly move towards a hard Brexit again as previously predicted, it is hoped that these negotiations can be completed more quickly enabling us to travel to the point where we can free trade with the rest of the world and hopefully with the EU too, via being an independent member of the World Trade Organisation. I continue to have a very positive outlook for the UK in the long term, perhaps as part of a Commonwealth free trade union with Australia, Canada and New Zealand leading the way. These are countries we have so much more in common with than the EU.
Finally I would also like to mention the banking problems in Italy and now Germany. While not wanting to minimise the impact of Brexit on the UK and on the Eurozone too, the biggest immediate fear is that of a European Banking Crisis. The problems are hardly surprising in that they largely reflect the poor health of the Euro Zone and the flaws of European monetary union without fiscal and political union. At the moment the problems at Deutsche are unlikely to be Europe's Lehmann moment and a boost its capital should help. I am more concerned about the solvency of Italian banks and the not unrelated constitutional referendum in early December which will in effect be another big test for the EU and could see the Italian government fall.
Saturday 3 September 2016
What form of Brexit becomes a little clearer.
After correctly taking her time and postponing triggering Article 50 until the government's negotiating position is settled (still expected in early 2017 despite pressures from some to wait until September after French and German elections), PM May is beginning to make some decisions and decide what form Brexit will likely take.
Mrs May has correctly ruled out another general election. She could have capitalised on her party's huge poll lead over a warring and inward looking Labour party. But people have had enough of elections and it would only add to uncertainty in the unlikely event of a Labour election. But above all there is no rationale or precedent for a new leader to go to the country. We elect a party to government in this country not a PM. Similarly, a full vote on Brexit for parliament has been ruled out quite correctly as the people have already spoken, although it will be given "a say" on the process. Furthermore, a second referendum has also been ruled out, since if the terms of exit were defeated, this at best would increase the uncertainty, but most likely leave the country in limbo.
And above all, Mrs May has made clear that the government would pursue some form of hard Brexit. And that there would be no attempts to "stay in the EU by the backdoor". A hard Brexit will be much easier to negotiate from both a political and probably a technical perspective too. As the people voted for major control of borders and to take back their sovereignty, retaining membership of the single market will very likely be a non-starter. Thus the so-called Norway option is ruled out (although there may be a role in the interim period for this option).
Furthermore, it will be a bespoke one says Mrs May. So talk of an "off the shelf" option like the Swiss or Canada one has been rejected. Even so one might expect that the deal pursued would be close to a Canada plus deal. Under this option we would secure a free trade agreement with the EU in whatever sectors are covered by the agreement. Ideally this would cover services as well as manufacturing and agriculture. The key issue here however, is that the EU may not be willing to extend any agreement to services and above all financial services (despite the obvious benefit for consumers throughout the EU) given the UK has a large surplus and comparative advantage with the EU, so it would harm EU producers.
If the EU refused to extend to services, there is still plenty to be optimistic about in that we can revert to trading with the EU according to World Trade Organisation rules. Though we would be subject to the EU''s Common External Tariff (and to non-tariff barriers), we would cut out all the uncertainty of negotiations with the EU as well as maintain full control of borders and maintain sovereignty as promised to the electorate. But from an economic perspective we would be in a position to negotiate free trade deals with countries throughout the world much more quickly. For example, the infamous Transatlantic Trade and Investment Partnership (TTIP) free trade deal between US and EU is very unlikely to be concluded successfully ( which I hope to explain why in a future blog). The UK is much better placed to succeed in talks with the US and more speedily, contrary to the intervention of President Obama in the run up to the referendum. We could also negotiate trade deals with other countries, most notably Australia, NZ, Canada and Singapore with their shared values, but also other bigger countries like China and India again more easily.
Under hard Brexit we would be free to boost the supply side of the economy further, by lowering taxes, and reducing EU related regulations - boosting product and labour market flexibility. Our international competitiveness and growth prospects would be raised. In recent days the EU has shown it's interventionist, collectivist, centralising, protectionist and high tax tendencies through its failure of the TTIP and it's war on tax competition and Ireland. The UK is right to go it alone, particularly as it also plans to deepen European integration at the expense of non-euro zone countries. But the UK must also make sure that UK growth benefits everyone. This means getting rid of tax loopholes, perhaps as a complete overhaul and simplification of the tax system, clamping down on certain corporate behaviour, but also social justice.
Mrs May has correctly ruled out another general election. She could have capitalised on her party's huge poll lead over a warring and inward looking Labour party. But people have had enough of elections and it would only add to uncertainty in the unlikely event of a Labour election. But above all there is no rationale or precedent for a new leader to go to the country. We elect a party to government in this country not a PM. Similarly, a full vote on Brexit for parliament has been ruled out quite correctly as the people have already spoken, although it will be given "a say" on the process. Furthermore, a second referendum has also been ruled out, since if the terms of exit were defeated, this at best would increase the uncertainty, but most likely leave the country in limbo.
And above all, Mrs May has made clear that the government would pursue some form of hard Brexit. And that there would be no attempts to "stay in the EU by the backdoor". A hard Brexit will be much easier to negotiate from both a political and probably a technical perspective too. As the people voted for major control of borders and to take back their sovereignty, retaining membership of the single market will very likely be a non-starter. Thus the so-called Norway option is ruled out (although there may be a role in the interim period for this option).
Furthermore, it will be a bespoke one says Mrs May. So talk of an "off the shelf" option like the Swiss or Canada one has been rejected. Even so one might expect that the deal pursued would be close to a Canada plus deal. Under this option we would secure a free trade agreement with the EU in whatever sectors are covered by the agreement. Ideally this would cover services as well as manufacturing and agriculture. The key issue here however, is that the EU may not be willing to extend any agreement to services and above all financial services (despite the obvious benefit for consumers throughout the EU) given the UK has a large surplus and comparative advantage with the EU, so it would harm EU producers.
If the EU refused to extend to services, there is still plenty to be optimistic about in that we can revert to trading with the EU according to World Trade Organisation rules. Though we would be subject to the EU''s Common External Tariff (and to non-tariff barriers), we would cut out all the uncertainty of negotiations with the EU as well as maintain full control of borders and maintain sovereignty as promised to the electorate. But from an economic perspective we would be in a position to negotiate free trade deals with countries throughout the world much more quickly. For example, the infamous Transatlantic Trade and Investment Partnership (TTIP) free trade deal between US and EU is very unlikely to be concluded successfully ( which I hope to explain why in a future blog). The UK is much better placed to succeed in talks with the US and more speedily, contrary to the intervention of President Obama in the run up to the referendum. We could also negotiate trade deals with other countries, most notably Australia, NZ, Canada and Singapore with their shared values, but also other bigger countries like China and India again more easily.
Under hard Brexit we would be free to boost the supply side of the economy further, by lowering taxes, and reducing EU related regulations - boosting product and labour market flexibility. Our international competitiveness and growth prospects would be raised. In recent days the EU has shown it's interventionist, collectivist, centralising, protectionist and high tax tendencies through its failure of the TTIP and it's war on tax competition and Ireland. The UK is right to go it alone, particularly as it also plans to deepen European integration at the expense of non-euro zone countries. But the UK must also make sure that UK growth benefits everyone. This means getting rid of tax loopholes, perhaps as a complete overhaul and simplification of the tax system, clamping down on certain corporate behaviour, but also social justice.
Friday 19 August 2016
What type of Brexit will we get?
In my last blog, I discussed the daunting administrative and political challenges in exiting an organisation we have been a member for 43 years and of negotiating a new relationship with the EU and the rest of the world. When to trigger Article 50 will be a critical issue given the political timetable of elections in Germany and France, of European Parliamentary elections and finally UK elections in May 2020. This is particularly so when Article 50 gives us just two years from when it is triggered which is not a lot of time when you are dealing with 27 countries and given how long it takes to negotiate trade deals. Thus one likely option is an interim deal before a final agreement.
One of the principal options the UK could go down is the so-called Norway option. This involves membership of the European Economic Area (EEA). This gives full access to the single market but we would not need to participate in a number of EU policies including agricultural, fisheries, security, foreign, and justice. We could also negotiate trade deals with non-EU countries. However, I think this is exceedingly unlikely to be the favoured route. It would require free movement of labour which is clearly unacceptable to the majority of the population who voted to leave. Furthermore, it would also require us to be subject to EU regulations. Given the importance of sovereignty to much of the population and the Tory right, again this would be a red line that could not be negotiated on. Furthermore, the City has also said it does not like the idea of financial regulation being imposed over which it has no influence over. Finally, we would still have to make contributions to the EU budget, which could even exceed what we pay now, without any rebate being on offer.
More appetising would be some sort of Swiss-style deal. Switzerland has access to the single market without some of the burdens of membership. Even so it has involved some contributions to the EU budget and some acceptance of regulations. But the main downside has been acceptance of free movement of labour. In February 2014 Switzerland voted narrowly for quotas on EU immigration. This has put existing bilateral deals under threat. Yet there is talk of introducing an"emergency brake" procedure to halt immigration if the country becomes overwhelmed. Similarly there is now talk of an emergency brake lasting up to 7 years for the UK. This option is possible for the UK and given its greater leverage than Switzerland they would hope to negotiate a more favourable package although it could work against us. This is now seen as the favoured option for the City, an industry critical for the wealth of this country and potentially badly impacted from lack of access to the single market. It hopes to negotiate trade deals in individual sectors and secure asort of Swiss plus deal. While a number of EU leaders have expressed a willingness to secure a special deal, success will not be easy given not only the complexities but also that many EU players want to penalise the UK.
The final option I wish to mention is the World Trade Organisation (WTO) option. This is much favoured by the Brexiteers as it would not only enable us to "get back" our national sovereignty including control of borders and regulation but also have the freedom to agree trade deals with third countries and avoid contributions to the EU budget. Here the UK would rely on WTO rules for access to European markets but would be subject to the EU's external tariffs as well as non-tariff barriers. But this will not be easy either and take a number of years to achieve.
Given that the UK and EU's likely negotiating positions will start very far apart, this is perhaps still the most likely option. However I personally feel that the Swiss plus option will in the end be the path that we will go down and achieve, albeit over many years of painful negotiations.
One of the principal options the UK could go down is the so-called Norway option. This involves membership of the European Economic Area (EEA). This gives full access to the single market but we would not need to participate in a number of EU policies including agricultural, fisheries, security, foreign, and justice. We could also negotiate trade deals with non-EU countries. However, I think this is exceedingly unlikely to be the favoured route. It would require free movement of labour which is clearly unacceptable to the majority of the population who voted to leave. Furthermore, it would also require us to be subject to EU regulations. Given the importance of sovereignty to much of the population and the Tory right, again this would be a red line that could not be negotiated on. Furthermore, the City has also said it does not like the idea of financial regulation being imposed over which it has no influence over. Finally, we would still have to make contributions to the EU budget, which could even exceed what we pay now, without any rebate being on offer.
More appetising would be some sort of Swiss-style deal. Switzerland has access to the single market without some of the burdens of membership. Even so it has involved some contributions to the EU budget and some acceptance of regulations. But the main downside has been acceptance of free movement of labour. In February 2014 Switzerland voted narrowly for quotas on EU immigration. This has put existing bilateral deals under threat. Yet there is talk of introducing an"emergency brake" procedure to halt immigration if the country becomes overwhelmed. Similarly there is now talk of an emergency brake lasting up to 7 years for the UK. This option is possible for the UK and given its greater leverage than Switzerland they would hope to negotiate a more favourable package although it could work against us. This is now seen as the favoured option for the City, an industry critical for the wealth of this country and potentially badly impacted from lack of access to the single market. It hopes to negotiate trade deals in individual sectors and secure asort of Swiss plus deal. While a number of EU leaders have expressed a willingness to secure a special deal, success will not be easy given not only the complexities but also that many EU players want to penalise the UK.
The final option I wish to mention is the World Trade Organisation (WTO) option. This is much favoured by the Brexiteers as it would not only enable us to "get back" our national sovereignty including control of borders and regulation but also have the freedom to agree trade deals with third countries and avoid contributions to the EU budget. Here the UK would rely on WTO rules for access to European markets but would be subject to the EU's external tariffs as well as non-tariff barriers. But this will not be easy either and take a number of years to achieve.
Given that the UK and EU's likely negotiating positions will start very far apart, this is perhaps still the most likely option. However I personally feel that the Swiss plus option will in the end be the path that we will go down and achieve, albeit over many years of painful negotiations.
What type of Brexit will we get?
In my last blog, I discussed the daunting administrative and political challenges in exiting an organisation we have been a member for 43 years and of negotiating a new relationship with the EU and the rest of the world. When to trigger Article 50 will be a critical issue given the political timetable of elections in Germany and France, of European Parliamentary elections and finally UK elections in May 2020. This is particularly so when Article 50 gives us just two years from when it is triggered which is not a lot of time when you are dealing with 27 countries and given how long it takes to negotiate trade deals. Thus one likely option is an interim deal before a final agreement.
One of the principal options the UK could go down is the so-called Norway option. This involves membership of the European Economic Area (EEA). This gives full access to the single market but we do not need to participate in a number of EU policies including agricultural, fisheries, security, foreign, and justice. We can also negotiate trade deals with non-EU countries. However, I think this is exceedingly unlikely to be our favoured route. It would require free movement of labour which is clearly unacceptable to the majority of the population who voted to leave. Furthermore, it would also require us to be subject to EU regulations. Given the importance of sovereignty to much of the population and the Tory right, again this would be red line that could not be negotiated on. Furthermore, the City has also said it does not like the idea of financial regulation being imposed over which it has no influence over. Finally, we would still have to make contributions to the EU budget, which could even exceed what we pay now, without any rebate being on offer.
More appetising would be some sort of Swiss-style deal. Switzerland has access to the single market without some of the burdens of membership. Even so it has involved some contributions to the EU budget and some acceptance of regulations. But the main downside has been acceptance of free movement of labour. In February 2014 Switzerland voted narrowly for quotas on EU immigration. This has put existing bilateral deals under threat. Yet there is talk of introducing an"emergency brake" procedure to halt immigration if the country becomes overwhelmed. Similarly there is now talk of an emergency brake lasting up to 7 years for the UK. This option is possible for the UK and given its greater leverage than Switzerland they would hope to negotiate a more favourable package although this would not necessarily be so. This is now seen as the favoured option for the City, an industry critical for the wealth of this country and potentially badly impacted from lack of access to the single market. It hopes to negotiate trade deals in individual sectors and secure a sort of Swiss plus deal. While a number of EU leaders have expressed a willingness to secure a special deal, success will not be easy given not only the complexities but also that many EU players want to penalise the UK.
The final option I wish to mention is the World Trade Organisation (WTO) option. This is much favoured by the Brexiteers as it would not only enable us to "get back" our national sovereignty including control of borders and regulation but also have the freedom to agree trade deals with third countries and avoid contributions to the EU budget. Here the UK would rely on WTO rules for access to European markets but would be subject to the EU's external tariffs as well as non-tariff barriers. But this will not be easy either and take a number of years to achieve.
Given that the UK and EU's likely negotiating positions will start very far apart, this is perhaps still the most likely option. However I personally feel that the Swiss plus option will in the end be the path that we will go down and achieve albeit over many years of painful negotiations.
One of the principal options the UK could go down is the so-called Norway option. This involves membership of the European Economic Area (EEA). This gives full access to the single market but we do not need to participate in a number of EU policies including agricultural, fisheries, security, foreign, and justice. We can also negotiate trade deals with non-EU countries. However, I think this is exceedingly unlikely to be our favoured route. It would require free movement of labour which is clearly unacceptable to the majority of the population who voted to leave. Furthermore, it would also require us to be subject to EU regulations. Given the importance of sovereignty to much of the population and the Tory right, again this would be red line that could not be negotiated on. Furthermore, the City has also said it does not like the idea of financial regulation being imposed over which it has no influence over. Finally, we would still have to make contributions to the EU budget, which could even exceed what we pay now, without any rebate being on offer.
More appetising would be some sort of Swiss-style deal. Switzerland has access to the single market without some of the burdens of membership. Even so it has involved some contributions to the EU budget and some acceptance of regulations. But the main downside has been acceptance of free movement of labour. In February 2014 Switzerland voted narrowly for quotas on EU immigration. This has put existing bilateral deals under threat. Yet there is talk of introducing an"emergency brake" procedure to halt immigration if the country becomes overwhelmed. Similarly there is now talk of an emergency brake lasting up to 7 years for the UK. This option is possible for the UK and given its greater leverage than Switzerland they would hope to negotiate a more favourable package although this would not necessarily be so. This is now seen as the favoured option for the City, an industry critical for the wealth of this country and potentially badly impacted from lack of access to the single market. It hopes to negotiate trade deals in individual sectors and secure a sort of Swiss plus deal. While a number of EU leaders have expressed a willingness to secure a special deal, success will not be easy given not only the complexities but also that many EU players want to penalise the UK.
The final option I wish to mention is the World Trade Organisation (WTO) option. This is much favoured by the Brexiteers as it would not only enable us to "get back" our national sovereignty including control of borders and regulation but also have the freedom to agree trade deals with third countries and avoid contributions to the EU budget. Here the UK would rely on WTO rules for access to European markets but would be subject to the EU's external tariffs as well as non-tariff barriers. But this will not be easy either and take a number of years to achieve.
Given that the UK and EU's likely negotiating positions will start very far apart, this is perhaps still the most likely option. However I personally feel that the Swiss plus option will in the end be the path that we will go down and achieve albeit over many years of painful negotiations.
What type of Brexit will we get?
In my last blog, I discussed the daunting administrative and political challenges in exiting an organisation we have been a member for 43 years and of negotiating a new relationship with the EU and the rest of the world. When to trigger Article 50 will be a critical issue given the political timetable of elections in Germany and France, of European Parliamentary elections and finally UK elections in May 2020. This is particularly so when Article 50 gives us just two years from when it is triggered which is not a lot of time when you are dealing with 27 countries and given how long it takes to negotiate trade deals. Thus one likely option is an interim deal before a final agreement.
One of the principal options the UK could go down is the so-called Norway option. This involves membership of the European Economic Area (EEA). This gives full access to the single market but we do not need to participate in a number of EU policies including agricultural, fisheries, security, foreign, and justice. We can also negotiate trade deals with non-EU countries. However, I think this is exceedingly unlikely to be our favoured route. It would require free movement of labour which is clearly unacceptable to the majority of the population who voted to leave. Furthermore, it would also require us to be subject to EU regulations. Given the importance of sovereignty to much of the population and the Tory right, again this would be red line that could not be negotiated on. Furthermore, the City has also said it does not like the idea of financial regulation being imposed which it has no influence over. Finally, we would still have to make contributions to the EU budget, which could even exceed what we pay now, without any rebate being on offer.
More appetising would be some sort of Swiss-style deal. Switzerland has access to the single market without some of the burdens of membership. Even so it has involved some contributions to the EU budget and some acceptance of regulations. But the main downside has been acceptance of free movement of labour. In February 2014 Switzerland voted narrowly for quotas on EU immigration. This has put existing bilateral deals under threat. Yet there is talk of introducing an"emergency brake" procedure to halt immigration if the country becomes overwhelmed. Similarly there is now talk of an emergency brake lasting up to 7 years for the UK. This option is possible for the UK and given its greater leverage than Switzerland they would hope to negotiate a more favourable package, although this is hardly guaranteed. This is now seen as the favoured option for the City, an industry critical for the wealth of this country and potentially badly impacted from lack of access to the single market. It hopes to negotiate trade deals in individual sectors and secure a sort of Swiss plus deal. While a number of EU leaders have expressed a willingness to secure a special deal, success will not be easy given not only the complexities but also that many EU players want to penalise the UK.
The final option I wish to mention is the World Trade Organisation (WTO) option. This is much favoured by the Brexiteers as it would not only enable us to "get back" our national sovereignty including control of borders and regulation but also have the freedom to agree trade deals with third countries and no contributions to the EU budget. Here the UK would rely on WTO rules for access to European markets but would be subject to the EU's external tariffs as well as non-tariff barriers. But this will not be easy either and take a number of years to achieve.
Given that the UK and EU's likely negotiating positions will start very far apart, this is perhaps still the most likely option. However I personally feel that the Swiss plus option will in the end be the path that we will go down and achieve albeit over many years of painful negotiations.
One of the principal options the UK could go down is the so-called Norway option. This involves membership of the European Economic Area (EEA). This gives full access to the single market but we do not need to participate in a number of EU policies including agricultural, fisheries, security, foreign, and justice. We can also negotiate trade deals with non-EU countries. However, I think this is exceedingly unlikely to be our favoured route. It would require free movement of labour which is clearly unacceptable to the majority of the population who voted to leave. Furthermore, it would also require us to be subject to EU regulations. Given the importance of sovereignty to much of the population and the Tory right, again this would be red line that could not be negotiated on. Furthermore, the City has also said it does not like the idea of financial regulation being imposed which it has no influence over. Finally, we would still have to make contributions to the EU budget, which could even exceed what we pay now, without any rebate being on offer.
More appetising would be some sort of Swiss-style deal. Switzerland has access to the single market without some of the burdens of membership. Even so it has involved some contributions to the EU budget and some acceptance of regulations. But the main downside has been acceptance of free movement of labour. In February 2014 Switzerland voted narrowly for quotas on EU immigration. This has put existing bilateral deals under threat. Yet there is talk of introducing an"emergency brake" procedure to halt immigration if the country becomes overwhelmed. Similarly there is now talk of an emergency brake lasting up to 7 years for the UK. This option is possible for the UK and given its greater leverage than Switzerland they would hope to negotiate a more favourable package, although this is hardly guaranteed. This is now seen as the favoured option for the City, an industry critical for the wealth of this country and potentially badly impacted from lack of access to the single market. It hopes to negotiate trade deals in individual sectors and secure a sort of Swiss plus deal. While a number of EU leaders have expressed a willingness to secure a special deal, success will not be easy given not only the complexities but also that many EU players want to penalise the UK.
The final option I wish to mention is the World Trade Organisation (WTO) option. This is much favoured by the Brexiteers as it would not only enable us to "get back" our national sovereignty including control of borders and regulation but also have the freedom to agree trade deals with third countries and no contributions to the EU budget. Here the UK would rely on WTO rules for access to European markets but would be subject to the EU's external tariffs as well as non-tariff barriers. But this will not be easy either and take a number of years to achieve.
Given that the UK and EU's likely negotiating positions will start very far apart, this is perhaps still the most likely option. However I personally feel that the Swiss plus option will in the end be the path that we will go down and achieve albeit over many years of painful negotiations.
Thursday 18 August 2016
The complexity of implementing Brexit
One of the main themes of my blogs will be Brexit. I have largely avoided focusing on this so far. We all know in the words of PM May that "Brexit means Brexit" is her government's slogan. Yet in reality we dot not know what Brexit will be. There are so many options to consider with the trade-off between access to the single market and the control of the borders at the root of most of them. Certainly a key decision for the government will be to set out its strategy including its red lines. I shall return to these options in future blogs.
What is becoming clearer is the complexity of these negotiations. Not only will there need to be talks covering the UK's divorce from the EU, but there will have to be talks on securing a free-trade agreement with the EU, one likely for interim measures, another with the World Trade Organisation to regain full membership, some on securing free trade deals with non-EU countries and even more talks with the EU on foreign and defence policy etc.
None of these talks will be easy, yet the civil service and the three key departments of the Foreign Office, Brexit and international trade are ill-prepared. There is now talk that article 50 of the Lisbon Treaty, which gives us just 2 years to sort everything out before leaving the EU, may not be triggered until late 2017, with additional problems of the French elections next May and German elections next September to be considered. Yet this would push back Brexit to late 2019 dangerously close to our own general elections in May 2020. Furthermore, such a long period of uncertainty will be damaging economically.
Thus it is imperative the new government not only makes clear it's negotiating situation, but unifies it's own party and the nation as a whole - neither of which will be easy. It must emphasise business as usual, reassuring different sectors of the economy such as farmers and science that they will not lose out, and that EU nationals can still work here. The country should take maximum advantage of a more competitive currency and loosen fiscal policy to boost aggregate demand in these uncertain times.
What is becoming clearer is the complexity of these negotiations. Not only will there need to be talks covering the UK's divorce from the EU, but there will have to be talks on securing a free-trade agreement with the EU, one likely for interim measures, another with the World Trade Organisation to regain full membership, some on securing free trade deals with non-EU countries and even more talks with the EU on foreign and defence policy etc.
None of these talks will be easy, yet the civil service and the three key departments of the Foreign Office, Brexit and international trade are ill-prepared. There is now talk that article 50 of the Lisbon Treaty, which gives us just 2 years to sort everything out before leaving the EU, may not be triggered until late 2017, with additional problems of the French elections next May and German elections next September to be considered. Yet this would push back Brexit to late 2019 dangerously close to our own general elections in May 2020. Furthermore, such a long period of uncertainty will be damaging economically.
Thus it is imperative the new government not only makes clear it's negotiating situation, but unifies it's own party and the nation as a whole - neither of which will be easy. It must emphasise business as usual, reassuring different sectors of the economy such as farmers and science that they will not lose out, and that EU nationals can still work here. The country should take maximum advantage of a more competitive currency and loosen fiscal policy to boost aggregate demand in these uncertain times.
Tuesday 16 August 2016
First hard data for UK economy post-Brexit
This week is being seen as an important week by many in the markets for evidence of the impact of the Brexit vote on the UK economy. We have the first hard data for July for inflation, for unemployment, for retail sales and for the public finances.
Sterling has fallen further against a background of a package of monetary policy easing measures and the disappointment of the latest gilt auction, reinforcing the prospect of further monetary policy easing, with Base rates likely to be reduced to 0.1% from their present 0.25% in the coming months, and raising the likelihood of fiscal policy measures in the forthcoming Autumn Statement. Certainly prospects are that sterling will remain weak against this background and little expectation of clarity regarding the UK's Brexit negotiating position.
But I don't believe in reality that there will be much light shed on the initial impact of the Brexit vote on the UK economy this week. The plunge in the pound is unlikely to have fed through in July's CPI numbers much, with base effects and a sharp rise in petrol prices predominating. The excellent UK economists at Oxford Economics expect the inflation rate to remain at 0.5% y/y. I personally believe the impact further out will be more modest than consensus. Unemployment is a lagging indicator so expect the rate to remain at its near 11 year low of 4.9% or even fall back slightly. Perhaps the most eagerly expected release will be retail sales, given the importance of consumer spending for driving UK growth. Key survey data has given us conflicting stories. The official data has been especially volatile of late and I would anticipate we will not be able to conclude anything much because of the noise.
The plunge in sterling should be very positive for the UK economy as we aim to boost exports particularly in light of poor current account data. Anecdotal data shows a very strong upturn in tourism from foreigners taking advantage of a cheap pound and increased staycation.
The feelgood factor from our sporting successes continues too. The UK amazingly lies second in the Olympic medals table equal to the combined total of Germany and France, and ahead of China. It could even be more successful than in London 2012! The success of the National Lottery, introduced by the Major government, has contributed most of the £350m into UK sport for the Olympics and Paralympics. Money is focused on those sports where we are successful. But the fact is that the number of sports we are successful in is increasing. We have also done well in swimming, diving and gymnastics this time as well as in rowing, sailing, cycling and equestrian where we lead the world. The National Lottery may be a regressive tax in effect but this is not a reason to abolish it.
Sterling has fallen further against a background of a package of monetary policy easing measures and the disappointment of the latest gilt auction, reinforcing the prospect of further monetary policy easing, with Base rates likely to be reduced to 0.1% from their present 0.25% in the coming months, and raising the likelihood of fiscal policy measures in the forthcoming Autumn Statement. Certainly prospects are that sterling will remain weak against this background and little expectation of clarity regarding the UK's Brexit negotiating position.
But I don't believe in reality that there will be much light shed on the initial impact of the Brexit vote on the UK economy this week. The plunge in the pound is unlikely to have fed through in July's CPI numbers much, with base effects and a sharp rise in petrol prices predominating. The excellent UK economists at Oxford Economics expect the inflation rate to remain at 0.5% y/y. I personally believe the impact further out will be more modest than consensus. Unemployment is a lagging indicator so expect the rate to remain at its near 11 year low of 4.9% or even fall back slightly. Perhaps the most eagerly expected release will be retail sales, given the importance of consumer spending for driving UK growth. Key survey data has given us conflicting stories. The official data has been especially volatile of late and I would anticipate we will not be able to conclude anything much because of the noise.
The plunge in sterling should be very positive for the UK economy as we aim to boost exports particularly in light of poor current account data. Anecdotal data shows a very strong upturn in tourism from foreigners taking advantage of a cheap pound and increased staycation.
The feelgood factor from our sporting successes continues too. The UK amazingly lies second in the Olympic medals table equal to the combined total of Germany and France, and ahead of China. It could even be more successful than in London 2012! The success of the National Lottery, introduced by the Major government, has contributed most of the £350m into UK sport for the Olympics and Paralympics. Money is focused on those sports where we are successful. But the fact is that the number of sports we are successful in is increasing. We have also done well in swimming, diving and gymnastics this time as well as in rowing, sailing, cycling and equestrian where we lead the world. The National Lottery may be a regressive tax in effect but this is not a reason to abolish it.
Thursday 11 August 2016
Hinkley. Should we say no?
Last year, the Conservatve government under PM Cameron and Chancellor Osborne, announced a series of economic initiatives with China which was said to have started a "golden era" between the two countries. But new PM May's government, surprised everyone recently when they put on hold final approval for a new nuclear power station at Hinkley Point, in South-West England, so they could review it. The new French-built power station, was set to receive some US8bn in Chinese investment for the project.
It has been said that PM May is reviewing it principally because of security concerns with China's role in the project. That this is the reason, is based on a blog post from her chief of staff and comments from former government (but Liberal-Democrat) Vince Cable. In any case such fears are probably overblown given that security checks are rigorous, that China's role is purely on the money side and that any attempt of China to compromise our national security would damage China's reputation and ability to work on infrastructure investments in the West again.
In any case, there are far more important reasons to cancel this project. John Maynard Keynes, the greatest economist of the 20th century, is purported to have said, "that when the facts change, I change my mind. What do you do sir?" Well the facts have changed since the original decision to back the project was made in 2010. As the Economist magazine reported on August 6th the project now looks "extraordinarily bad value for money". The UK has promised to pay some £92.50 per megawatt hour for Hinkley's output compared with wholesale prices of some £40 today, and perhaps lower in 2025 when it due to open. Furthermore we have promised to pay this for 35 years! Yet the government has reduced the forecast cost of producing electricity from various renewables in 2025 by a third for onshore wind and by nearly two-thirds for solar power - both well below the £92. They will only come down further after 2025. Renewables are the future, and big new nuclear power stations like Hinkley (which would fulfil some 7% of our needs) have no real future and certainly with such price guarantees. In the short-run we will need more electricity, but these should be from gas-powered plants, that can be built quickly, run cheaply and turned on and off quickly to offset fluctuations in renewable supply.
What of the relationship with China? Well the Chinese are clearly not happy. And it is not great timing, when we have a Brexit to implement, when we are emphasising trade deals and being open to the rest of the world and when our economic relationship was already lagging Germany and France's relationship with the Middle Kingdom. However, it should be made clear that the decision to not go ahead with Hinkley is purely a financial one. There may be a short-term impact on the relationship but I am confident it can flourish. There is a lot more than nuclear power out there. However, there is a final point. At this time of a possible economic downturn and virtually 0% gilt yields, there is no reason why the UK cannot fund far more infrastructural projects itself!
It has been said that PM May is reviewing it principally because of security concerns with China's role in the project. That this is the reason, is based on a blog post from her chief of staff and comments from former government (but Liberal-Democrat) Vince Cable. In any case such fears are probably overblown given that security checks are rigorous, that China's role is purely on the money side and that any attempt of China to compromise our national security would damage China's reputation and ability to work on infrastructure investments in the West again.
In any case, there are far more important reasons to cancel this project. John Maynard Keynes, the greatest economist of the 20th century, is purported to have said, "that when the facts change, I change my mind. What do you do sir?" Well the facts have changed since the original decision to back the project was made in 2010. As the Economist magazine reported on August 6th the project now looks "extraordinarily bad value for money". The UK has promised to pay some £92.50 per megawatt hour for Hinkley's output compared with wholesale prices of some £40 today, and perhaps lower in 2025 when it due to open. Furthermore we have promised to pay this for 35 years! Yet the government has reduced the forecast cost of producing electricity from various renewables in 2025 by a third for onshore wind and by nearly two-thirds for solar power - both well below the £92. They will only come down further after 2025. Renewables are the future, and big new nuclear power stations like Hinkley (which would fulfil some 7% of our needs) have no real future and certainly with such price guarantees. In the short-run we will need more electricity, but these should be from gas-powered plants, that can be built quickly, run cheaply and turned on and off quickly to offset fluctuations in renewable supply.
What of the relationship with China? Well the Chinese are clearly not happy. And it is not great timing, when we have a Brexit to implement, when we are emphasising trade deals and being open to the rest of the world and when our economic relationship was already lagging Germany and France's relationship with the Middle Kingdom. However, it should be made clear that the decision to not go ahead with Hinkley is purely a financial one. There may be a short-term impact on the relationship but I am confident it can flourish. There is a lot more than nuclear power out there. However, there is a final point. At this time of a possible economic downturn and virtually 0% gilt yields, there is no reason why the UK cannot fund far more infrastructural projects itself!
Friday 5 August 2016
How is new UK PM May's policies evolving?
Theresa May has come to power being dealt a difficult and constraining hand in terms of the Brexit vote. But most indications are that she was at best a reluctant Remainer and that she believes in controls on immigration and looser ties with Europe anyway.
Her brand of Consevatism is very much pragmatic, but like Cameron, also modernising and certainly not idealistic like Mrs Thatcher who she has superficially been compared with. Though she does have two key advisers that provide idealistic input to her thinking now and when she was at the Home Office. Her stated aim is to help those that have been left behind by the UK economy's success which has partly fed on globalisation. They are mainly the white working classes, particularly in the North. There is a clear shift to the left which will do the party no harm electorally. Not only is the main opposition, Labour party, sadly for democracy, tearing itself apart, but it is shifting sharply left with policies even to the left of previous leader Ed Miliband who was soundly beaten at the previous general election. And current leader Corbyn, unlikely to be beaten by challenger Owen Smith, is seen as even more incompetent than Miliband. Indeed polls already give the Conservatives a massive 14% point lead over Labour. Furthermore the Liberal Democrats will take a generation to recover from electoral defeat, and UKIP having achieved their main objective of Brexit are squabbling over some new policies without their highly effective leader Nigel Farage, and could become sidelined like the Liberals..
So as I see it, the key changes will be greater emphasis for industrial policy, hence a new department and a commitment to rein in foreign takeovers. She dispensed with a department dedicated to climate change, reflecting reduced emphasis there. There will be a greater emphasis on reducing inequalities. so do not expect cuts in direct taxation especially corporate and income taxes but increases in infrastructure spending and generally more state intervention. Also controls on corporate pay and an emphasis on multinationals paying their "fair share" of taxes. Expect to see less emphasis on globalisation with not only cooler ties with Europe, but also China (look at Hinkley power station being put on hold) and even the US. Commonwealth ties will likely be revived. Finally expect tough measures against crime and new grammar schools being permitted.
However, I have some concerns. Firstly an industrial policy or strategy smacks of the failed policies of the 60s and 70s. More of this another time. .Secondly as I mentioned above the UK's rapid growth rate in comparison to its European peers over the last 30 years has been due to taking full advantage globalisation, open to foreign direct investment, to immigration, to flexible labour markets, to free trade, to low taxation and so on. But at this difficult time we should be careful not to abandon these things or to permanently increase state spending when we are left with a massive government debt burden following the excesses of previous Labour administrations and the impact of the global financial crisis. More equality could mean much less wealth for every one, lower growth and ever rising government debt.
Her brand of Consevatism is very much pragmatic, but like Cameron, also modernising and certainly not idealistic like Mrs Thatcher who she has superficially been compared with. Though she does have two key advisers that provide idealistic input to her thinking now and when she was at the Home Office. Her stated aim is to help those that have been left behind by the UK economy's success which has partly fed on globalisation. They are mainly the white working classes, particularly in the North. There is a clear shift to the left which will do the party no harm electorally. Not only is the main opposition, Labour party, sadly for democracy, tearing itself apart, but it is shifting sharply left with policies even to the left of previous leader Ed Miliband who was soundly beaten at the previous general election. And current leader Corbyn, unlikely to be beaten by challenger Owen Smith, is seen as even more incompetent than Miliband. Indeed polls already give the Conservatives a massive 14% point lead over Labour. Furthermore the Liberal Democrats will take a generation to recover from electoral defeat, and UKIP having achieved their main objective of Brexit are squabbling over some new policies without their highly effective leader Nigel Farage, and could become sidelined like the Liberals..
So as I see it, the key changes will be greater emphasis for industrial policy, hence a new department and a commitment to rein in foreign takeovers. She dispensed with a department dedicated to climate change, reflecting reduced emphasis there. There will be a greater emphasis on reducing inequalities. so do not expect cuts in direct taxation especially corporate and income taxes but increases in infrastructure spending and generally more state intervention. Also controls on corporate pay and an emphasis on multinationals paying their "fair share" of taxes. Expect to see less emphasis on globalisation with not only cooler ties with Europe, but also China (look at Hinkley power station being put on hold) and even the US. Commonwealth ties will likely be revived. Finally expect tough measures against crime and new grammar schools being permitted.
However, I have some concerns. Firstly an industrial policy or strategy smacks of the failed policies of the 60s and 70s. More of this another time. .Secondly as I mentioned above the UK's rapid growth rate in comparison to its European peers over the last 30 years has been due to taking full advantage globalisation, open to foreign direct investment, to immigration, to flexible labour markets, to free trade, to low taxation and so on. But at this difficult time we should be careful not to abandon these things or to permanently increase state spending when we are left with a massive government debt burden following the excesses of previous Labour administrations and the impact of the global financial crisis. More equality could mean much less wealth for every one, lower growth and ever rising government debt.
Friday 29 July 2016
Quelle Surprise! - The IMF
As an economist I have always been wary of our ability to forecast, believing we fall well short even of weather forecasters - perhaps not surprising given that economics is not really a science, although the subjects share one feature - they are both chaotic. It is indeed not easy, and of course we all came under scrutiny following our collective failure to forecast the global financial crisis, Thus I do have sympathy when Michael Gove said in the leadership election that we have had enough of experts!
For me the IMF has always been at the forefront of my criticism. They have been consistently wrong on so many things, in contrast to others including myself on many subjects. Take the UK as one example. They heavily criticised the UK for a policy of fiscal austerity after the global financial crisis, forecasting a recession, based on their analysis of multipliers. In the end we had one of the best performing advanced economies and they had to admit they got it badly wrong. Then they forecast a recession if we voted Brexit. Yet now they are predicting faster growth for the UK than most countries in the eurozone in 2016 and 2017. Similarly the UK Treasury talked about another austerity budget. Talk of this has quite correctly miraculously vanished.
Apart from poor economic analysis, the so blatantly wrong IMF's forecasts are sometimes due to political pressures from governments in the West. Indeed this has just been revealed in a damning internal report on bailout strategy during the eurozone debt crisis.The report said that the IMF repeatedly came under pressure from eurozone governments during the crisis bending its rules to help them. It casts doubt over the fund's rescue strategy for the peripheral eurozone countries including Greece. It also reaffirms the view that the IMF treats advanced countries much more favourably than emerging markets.
Quelle surprise!
For me the IMF has always been at the forefront of my criticism. They have been consistently wrong on so many things, in contrast to others including myself on many subjects. Take the UK as one example. They heavily criticised the UK for a policy of fiscal austerity after the global financial crisis, forecasting a recession, based on their analysis of multipliers. In the end we had one of the best performing advanced economies and they had to admit they got it badly wrong. Then they forecast a recession if we voted Brexit. Yet now they are predicting faster growth for the UK than most countries in the eurozone in 2016 and 2017. Similarly the UK Treasury talked about another austerity budget. Talk of this has quite correctly miraculously vanished.
Apart from poor economic analysis, the so blatantly wrong IMF's forecasts are sometimes due to political pressures from governments in the West. Indeed this has just been revealed in a damning internal report on bailout strategy during the eurozone debt crisis.The report said that the IMF repeatedly came under pressure from eurozone governments during the crisis bending its rules to help them. It casts doubt over the fund's rescue strategy for the peripheral eurozone countries including Greece. It also reaffirms the view that the IMF treats advanced countries much more favourably than emerging markets.
Quelle surprise!
Thursday 28 July 2016
Policy stimulus not a panacea for driving up UK economic growth
There is much talk of the need for policy stimulus following the vote for Brexit and the inevitable uncertainty it has unleashed and the potential for recession. Certainly policy stimulus has a role to play. The Bank of England's role in pumping liquidity in the system has been useful, but scope for further cuts in interest rates are fairly limited, with a cut in base rate from 0.5% to 0% likely to have little impact on the pace of economic activity. And it is the same for further quantitative easing which is likely to suffer severely diminished marginal returns. I am much more positive regarding the stimulus from lower sterling. There is plenty of evidence that competitive devaluations still work for advanced economies and I think we can potentially replicate the situation of 1992 when the UK left the European exchange rate mechanism (ERM) and growth boomed.
As regards fiscal stimulus, there is a strengthened case for it, given the risk of a sharp downturn in aggregate demand. And also with respect to increased investment spending given the plunge in government yields, meaning servicing any increased debt is now close to zero, minimising the risk of "crowding out" private sector investment. But the focus on infrastructure spending and hopes not only for boosting demand but also increasing much-needed productivity is weakened by previous government's (both in the UK and overseas such as most notably Japan) track record in picking projects with poor returns. The HS2 project is probably a good example of this given its escalating costs.Furthermore there is always the danger that any increased spending on projects may come at the wrong time in the economic cycle, given one cannot just start a project right away.
I believe there is a stronger case for cutting taxes to a modest degree (without threatening a big increase in the budget deficit given their supply benefits) such as lower corporate taxes, as part of a strategy to boost growth and to reduce uncertainty following the Brexit vote. Uncertainty could be reduced by outlining as quickly as is feasible, the UK's plans for Brexit including not only its relationship with the EU but also its trade strategy with the rest of the world. We need to know what the trade-off between access to the single market and immigration controls will be, if the EU will not offer any special deals. We can clarify the position on existing EU migrants in the UK as well. We can trigger Article 50 in a matter of months. Within our growth strategy, we can follow a policy of lowering of taxes; of unilateral free trade (which I do not think will weaken our bargaining position), loosening planning controls; securing cheaper energy and increasing airport capacity and so on.
As regards fiscal stimulus, there is a strengthened case for it, given the risk of a sharp downturn in aggregate demand. And also with respect to increased investment spending given the plunge in government yields, meaning servicing any increased debt is now close to zero, minimising the risk of "crowding out" private sector investment. But the focus on infrastructure spending and hopes not only for boosting demand but also increasing much-needed productivity is weakened by previous government's (both in the UK and overseas such as most notably Japan) track record in picking projects with poor returns. The HS2 project is probably a good example of this given its escalating costs.Furthermore there is always the danger that any increased spending on projects may come at the wrong time in the economic cycle, given one cannot just start a project right away.
I believe there is a stronger case for cutting taxes to a modest degree (without threatening a big increase in the budget deficit given their supply benefits) such as lower corporate taxes, as part of a strategy to boost growth and to reduce uncertainty following the Brexit vote. Uncertainty could be reduced by outlining as quickly as is feasible, the UK's plans for Brexit including not only its relationship with the EU but also its trade strategy with the rest of the world. We need to know what the trade-off between access to the single market and immigration controls will be, if the EU will not offer any special deals. We can clarify the position on existing EU migrants in the UK as well. We can trigger Article 50 in a matter of months. Within our growth strategy, we can follow a policy of lowering of taxes; of unilateral free trade (which I do not think will weaken our bargaining position), loosening planning controls; securing cheaper energy and increasing airport capacity and so on.
Friday 22 July 2016
Caution required from latest PMI survey
The latest PMI survey of the UK economy clocked a figure consistent with recession. Many commentators are now indeed predicting an imminent downturn, with Q3 GDP set to fall they say.
I would urge great caution. This survey has regularly given false readings of recessions in the past because of the way it is compiled. We need also to see if this is not just reflecting some kind of kneejerk panic as we initially saw reflected in the financial markets. Moreover the Bank of England survey of agents report was much more sanguine. We do really need to see concrete data before making any conclusions.
Finally, the reading suggests nothing like that seen in 2009 after the global financing crisis.
I would urge great caution. This survey has regularly given false readings of recessions in the past because of the way it is compiled. We need also to see if this is not just reflecting some kind of kneejerk panic as we initially saw reflected in the financial markets. Moreover the Bank of England survey of agents report was much more sanguine. We do really need to see concrete data before making any conclusions.
Finally, the reading suggests nothing like that seen in 2009 after the global financing crisis.
Thursday 14 July 2016
UK economy to avoid recession post-brexit?
Before the uncertainty surrounding the EU referendum vote and then shock related to a leave vote, the UK economy was already slowing. Growth, though solid, was unbalanced and largely concentrated on consumer spending, which in turn was dependent on growth of real wages. Household debt remained high, productivity and business investment low, and the public finances continued to be squeezed. Furthermore external factors were continuing to depress the economy and above all exports.
The reaction in the financial markets has been relatively modest compared with the expectations of the doomsters. The most obvious one has been the depreciation of sterling, but its fall to below US$1.30 at one point is likely to be a net benefit for the economy: Growth and above all the balance of growth will improve, though the prices of petrol and certain foods will inevitably rise. Nevertheless, I see this as like 1992, when the economy did very well from the plunge in sterling after we exited the exchange rate mechanism.
Also market rates have fallen, partly due to the expectation that base rates will be cut but also because of safe-haven effects. That 5-year gilt yields are around 0.3% is great news for reducing the cost of servicing the ever rising government debt burden (although this is having an adverse impact on already large pension deficits). The FTSE 100 is already back in positive territory, while the more domestically-oriented FTSE 250 has recovered the majority of its losses. However bank and construction shares remain sharply down indicating where the potential pain could be concentrated. Nevertheless, financial stability seems reasonably assured in the short-term at least aided by Bank of England action including pumping liquidity into the system and cutting bank's requirements for counter-cyclical capital buffers.
Regarding real data, the evidence of a slowdown comes mainly from confidence, sectoral and internet data. There have been a number of business and consumer confidence surveys released and they do suggest there has been an adverse impact. But so far this appears insufficient to imply a prospective recession. Moreover, these surveys often do give false readings of downturns or do not have an established track record of prediction. High frequency indicators tend to suggest that retail spending is holding up such as John Lewis' sales data. But there is evidence of delays in investment decisions and a reluctance to take on new staff at the moment. There are also clear signs of a slowdown in the housing market, with London house prices in particular no longer rising and sales taking time to time. The commercial property market is going through bad times, and banks have sharply cut lending to this sector.
But in reality there is a lack of hard macro data available so far to judge the impact. Monthly data will only be available for July from mid-August and the key GDP Q3 data is not out until late October. This indeed was a key reason (along with the monetary easing from the plunge in sterling and preference to keep limited ammunition in reserve) I believe for the Bank's monetary policy committee to leave base rates unchanged at 0.5% yesterday. Nevertheless expect a cut to 0.25% in August unless there are signs of things turning for the better perhaps because of the improvement in the political situation following the acceleration of the anointing of a new PM.
While many economists are predicting a recession in 2017, I believe that we should just be able to avoid such a situation with GDP still growing by some 1% next year after may be 1.75% this year. This will be aided by a slowdown in fiscal austerity, further monetary easing and reasonable progress in the Brexit negotiations. The German finance minister has already given a hint that there is plenty of room for negotiation in the trade-off between control of labour movement and access to the single market. Further out my positive vision regarding Brexit means I think we can see the return of 2% plus growth potentially as soon as 2018. The UK economy finds itself in a difficult situation but it is not one, for example,to compare with the global financial crisis of 2009.
The reaction in the financial markets has been relatively modest compared with the expectations of the doomsters. The most obvious one has been the depreciation of sterling, but its fall to below US$1.30 at one point is likely to be a net benefit for the economy: Growth and above all the balance of growth will improve, though the prices of petrol and certain foods will inevitably rise. Nevertheless, I see this as like 1992, when the economy did very well from the plunge in sterling after we exited the exchange rate mechanism.
Also market rates have fallen, partly due to the expectation that base rates will be cut but also because of safe-haven effects. That 5-year gilt yields are around 0.3% is great news for reducing the cost of servicing the ever rising government debt burden (although this is having an adverse impact on already large pension deficits). The FTSE 100 is already back in positive territory, while the more domestically-oriented FTSE 250 has recovered the majority of its losses. However bank and construction shares remain sharply down indicating where the potential pain could be concentrated. Nevertheless, financial stability seems reasonably assured in the short-term at least aided by Bank of England action including pumping liquidity into the system and cutting bank's requirements for counter-cyclical capital buffers.
Regarding real data, the evidence of a slowdown comes mainly from confidence, sectoral and internet data. There have been a number of business and consumer confidence surveys released and they do suggest there has been an adverse impact. But so far this appears insufficient to imply a prospective recession. Moreover, these surveys often do give false readings of downturns or do not have an established track record of prediction. High frequency indicators tend to suggest that retail spending is holding up such as John Lewis' sales data. But there is evidence of delays in investment decisions and a reluctance to take on new staff at the moment. There are also clear signs of a slowdown in the housing market, with London house prices in particular no longer rising and sales taking time to time. The commercial property market is going through bad times, and banks have sharply cut lending to this sector.
But in reality there is a lack of hard macro data available so far to judge the impact. Monthly data will only be available for July from mid-August and the key GDP Q3 data is not out until late October. This indeed was a key reason (along with the monetary easing from the plunge in sterling and preference to keep limited ammunition in reserve) I believe for the Bank's monetary policy committee to leave base rates unchanged at 0.5% yesterday. Nevertheless expect a cut to 0.25% in August unless there are signs of things turning for the better perhaps because of the improvement in the political situation following the acceleration of the anointing of a new PM.
While many economists are predicting a recession in 2017, I believe that we should just be able to avoid such a situation with GDP still growing by some 1% next year after may be 1.75% this year. This will be aided by a slowdown in fiscal austerity, further monetary easing and reasonable progress in the Brexit negotiations. The German finance minister has already given a hint that there is plenty of room for negotiation in the trade-off between control of labour movement and access to the single market. Further out my positive vision regarding Brexit means I think we can see the return of 2% plus growth potentially as soon as 2018. The UK economy finds itself in a difficult situation but it is not one, for example,to compare with the global financial crisis of 2009.
Tuesday 12 July 2016
Mrs May planning her new cabinet
Before the new PM gets down to business and faces all the issues concerning Brexit and more specifically the Trident vote scheduled for Monday, she will have to pick her cabinet.
Mrs May will need to weigh up the need for continuity (and finding room for big-hitters) with the need for unity in the party, so promoting a number of the leading Brexiteers. There will also be the secondary issues of gender balance, ethnicity and even social background.
Her first decision will be what to do with George Osborne. Clearly he would only accept one of the big offices of government. He is likely to covet the foreign office, but Brexiteers would be deeply unhappy with this. And I don't believe that Theresa May would like him still as Chancellor given his highly political performances. There is not a great relationship there either, so I would not be surprised to see him omitted from the cabinet. She may well go with the relatively underwhelming but another safe pair of hands in Phillip Hammond who she could trust to stay at the Foreign Office.
A possible contender for Chancellor is Michael Gove, although he may be retained in his existing role as Justice Secretary, or even axed given his poor relationship with May and her stress on trust. Sajid Javid may stay as business secretary, although Andrea Leadsom is a possibility, though she may perhaps be offered Education. Stephen Crabb may stay as work and pensions secretary. Chris Grayling or James Brokenshire could become the new Home Secretary. Boris Johnson could come in as culture secretary or communities secretary. Expect roles for other prominent Brexiteers including David Davis, Liam Fox, Pritti Patel and Theresa Villiers. Davis and Fox for example could be put in the new department in charge of leaving the EU. Both Justine Greening and Amber Rudd, prominent supporters of Theresa May can expect important roles too.
Mrs May will need to weigh up the need for continuity (and finding room for big-hitters) with the need for unity in the party, so promoting a number of the leading Brexiteers. There will also be the secondary issues of gender balance, ethnicity and even social background.
Her first decision will be what to do with George Osborne. Clearly he would only accept one of the big offices of government. He is likely to covet the foreign office, but Brexiteers would be deeply unhappy with this. And I don't believe that Theresa May would like him still as Chancellor given his highly political performances. There is not a great relationship there either, so I would not be surprised to see him omitted from the cabinet. She may well go with the relatively underwhelming but another safe pair of hands in Phillip Hammond who she could trust to stay at the Foreign Office.
A possible contender for Chancellor is Michael Gove, although he may be retained in his existing role as Justice Secretary, or even axed given his poor relationship with May and her stress on trust. Sajid Javid may stay as business secretary, although Andrea Leadsom is a possibility, though she may perhaps be offered Education. Stephen Crabb may stay as work and pensions secretary. Chris Grayling or James Brokenshire could become the new Home Secretary. Boris Johnson could come in as culture secretary or communities secretary. Expect roles for other prominent Brexiteers including David Davis, Liam Fox, Pritti Patel and Theresa Villiers. Davis and Fox for example could be put in the new department in charge of leaving the EU. Both Justine Greening and Amber Rudd, prominent supporters of Theresa May can expect important roles too.
Monday 11 July 2016
One step towards better political stability
Congratulations to Theresa May who is the new Tory Party leader, and set to be the new PM by Wednesday evening. The withdrawing of Andrea Leadsom from the Tory party leadership contest has spared us one problem. Namely we now have in place probably the strongest candidate available to lead this country in difficult times two months earlier than originally planned. She can get on now with the negotiations over Brexit, to governing this country more generally - offering a positive vision for the future, and also trying to unite the country at a time when the sharp divisions have been exposed.
But there are still issues for the Tory party. There is resentment among a significant core on the Tory right about how they feel Leadsom was forced to withdraw and also that they will be led by a leader who actually voted Remain, even if it was a reluctant one and she has said Brexit means Brexit! She also has not entered a contest among Tory party members, who are naturally more Eurosceptic and Thatcherite. Remember also the government only has a small majority of 12 in parliament. So expect Mrs May to offer Leadsom a senior position in Cabinet to placate the Tory right. But even then the Tory right will be worried that Mrs May will follow a centrist path continuing the agenda of David Cameron. So watch out for splits continuing.
Mrs May has dropped a hint that there will be no general election until the scheduled date of 2020. This will certainly aid stability but it will cause an outcry among all other political parties who will say she does not have a mandate from her party members let alone the voters. But surely the referendum vote for Brexit is enough of a mandate particularly when we really need stability and action?
But probably the biggest concern is the continuing crisis in the Labour Party as Corbyn refuses to go continuing to talk disingenuously about a new type of politics. When 80% of his party has no confidence in him given his lamentable performances not least with respect to the Remain campaign, how can he stay? Power is achieved through parliament. His own mandate comes mainly from people who are not real Labour supporters, but are mostly Marxists and disaffected. Corbyn and his supporters would genuinely like to split the party and realign the left and have little interest in power. This is very sad above all for the country. A weak political opposition (the SNP, Lib Dems and Greens can do only so much particularly in the face of a Tory dominated press) usually means poor government.
I would contend the Conservative government has performed poorly since being re-elected. Much worse than the previous coalition, where the Tories were kept in check by the Lib Dems. But there are plenty of examples worldwide. Take South Africa. Since the end of apartheid the African National Congress has ruled with very little opposition not just in parliament but elsewhere. This has resulted in corruption and poor government effectiveness. Similarly the Liberal Democratic Party in Japan has ruled for most of the post-war period and the country's well known poor governance has been a major factor in the the country's economic performance since the asset bubble burst in the early 1990s.
So please Jeremy Corbyn. Do the honourable thing. This country needs an effective opposition.
But there are still issues for the Tory party. There is resentment among a significant core on the Tory right about how they feel Leadsom was forced to withdraw and also that they will be led by a leader who actually voted Remain, even if it was a reluctant one and she has said Brexit means Brexit! She also has not entered a contest among Tory party members, who are naturally more Eurosceptic and Thatcherite. Remember also the government only has a small majority of 12 in parliament. So expect Mrs May to offer Leadsom a senior position in Cabinet to placate the Tory right. But even then the Tory right will be worried that Mrs May will follow a centrist path continuing the agenda of David Cameron. So watch out for splits continuing.
Mrs May has dropped a hint that there will be no general election until the scheduled date of 2020. This will certainly aid stability but it will cause an outcry among all other political parties who will say she does not have a mandate from her party members let alone the voters. But surely the referendum vote for Brexit is enough of a mandate particularly when we really need stability and action?
But probably the biggest concern is the continuing crisis in the Labour Party as Corbyn refuses to go continuing to talk disingenuously about a new type of politics. When 80% of his party has no confidence in him given his lamentable performances not least with respect to the Remain campaign, how can he stay? Power is achieved through parliament. His own mandate comes mainly from people who are not real Labour supporters, but are mostly Marxists and disaffected. Corbyn and his supporters would genuinely like to split the party and realign the left and have little interest in power. This is very sad above all for the country. A weak political opposition (the SNP, Lib Dems and Greens can do only so much particularly in the face of a Tory dominated press) usually means poor government.
I would contend the Conservative government has performed poorly since being re-elected. Much worse than the previous coalition, where the Tories were kept in check by the Lib Dems. But there are plenty of examples worldwide. Take South Africa. Since the end of apartheid the African National Congress has ruled with very little opposition not just in parliament but elsewhere. This has resulted in corruption and poor government effectiveness. Similarly the Liberal Democratic Party in Japan has ruled for most of the post-war period and the country's well known poor governance has been a major factor in the the country's economic performance since the asset bubble burst in the early 1990s.
So please Jeremy Corbyn. Do the honourable thing. This country needs an effective opposition.
Sunday 10 July 2016
UK leads soft power rankings
As most people know, the UK is the fifth largest economy in the World. But another reason to be optimistic in the future is our lead in the UK soft power rankings.
From below I give the definition lifted from Wikipedia
"Soft power is a concept developed by Joseph Nye of Harvard University to describe the ability to attract and co-opt rather than by coercion (hard power), using force or giving money as a means of persuasion. Soft power is the ability to shape the preferences of others through appeal and attraction. A defining feature of soft power is that it is non-coercive; the currency of soft power is culture, political values, and foreign policies"
In the rankings from 2015, we came first followed by Germany, US, Canada, France and Australia.
So why first?
Again let me quote Wiki.
"Since the period of Pax Britannica the United Kingdom has held significant soft power. Today it remains one of the most influential countries in the world, coming first in the 2015 Portland Group, Comres, Facebook report. The UK also came first in the Monocle survey of global soft power in 2012.
The UK has strong diplomatic relations with countries around the world, particularly countries in the Commonwealth of Nations and many others in Europe, Asia, the Middle-east, Africa and the United States. Diplomatic missions between Commonwealth countries are known as High Commissions rather than Embassies to indicate the closeness of the relationship. As a member of the European Union, the UK exerts influence both on countries within the Union, and on other countries around the world. The United Kingdom has one of the largest global networks of diplomatic missions. Many countries around the world use the British form of democracy and government known as the Westminster system.
The influence of British culture and sports are widespread, particularly notable during the British Invasion, Cool Britannia, and more recently the Diamond Jubilee and 2012 Summer Olympics. The opening and closing ceremonies celebrated British culture and achievements with the world. London is the only city to have hosted the modern Olympics three times. British media is broadcast internationally, notably the BBC World Service, BBC World News and The Economist magazine. British film and literature have international appeal, and British theatre helps make London one of the most visited cities in the world. Schools and universities in Britain are popular destinations for students of other nations.
Alongside the English language, English contract law is the most important and most used contract law in international business. London is the headquarters for four of the world's six largest law firms. The UK and more specifically London is a centre of international finance where foreign participants in financial markets come to deal with one another. It is headquarters for major international corporations, many of which choose to be listed on the London Stock Exchange."
So lets not run ourselves down. Because pessimism can become self-fulfilling.
Sporting success a boost to the UK economy
Today was a very good today for British sport. Lewis Hamilton won the F1 Grand Prix and looks on course for a fourth world championship. Then Andy Murray secured his second Wimbledon title and third grand slam to continue his journey to secure his place among the best of all time.
This builds on success of recent performances this year for the England cricket and England rugby union sides, with further success coming and likely to be forthcoming at the Tour de France with Chris Froome and Mark Cavendish. Sadly success is not matched in international football for the English, but Wales and Northern Ireland did do well.
In August will come the Olympics and the British will hope to match the phenomenal successes of 2012 when London saw so much excitement and comradery.
The UK governments in common with other advanced countries pump in lots of money into elite sport. We do in particular into Olympic sports. Why? Well there is much evidence to show that success in elite sport leads to rising international prestige for a nation, an increased participation among the masses ( which aids a healthier and more productive population), and above all creates a feelgood factor. At a time when economic confidence has fallen back markedly, particularly following the Brexit vote (and in turn partly because of the unjustified scaremongering by politicians, Bank of England officials and so-called experts like the IMF), I believe this can only help to restore confidence in the economy and ourselves.
Lets be far more positive for the future!
This builds on success of recent performances this year for the England cricket and England rugby union sides, with further success coming and likely to be forthcoming at the Tour de France with Chris Froome and Mark Cavendish. Sadly success is not matched in international football for the English, but Wales and Northern Ireland did do well.
In August will come the Olympics and the British will hope to match the phenomenal successes of 2012 when London saw so much excitement and comradery.
The UK governments in common with other advanced countries pump in lots of money into elite sport. We do in particular into Olympic sports. Why? Well there is much evidence to show that success in elite sport leads to rising international prestige for a nation, an increased participation among the masses ( which aids a healthier and more productive population), and above all creates a feelgood factor. At a time when economic confidence has fallen back markedly, particularly following the Brexit vote (and in turn partly because of the unjustified scaremongering by politicians, Bank of England officials and so-called experts like the IMF), I believe this can only help to restore confidence in the economy and ourselves.
Lets be far more positive for the future!
Keynesian stimulus required
One subject that I will return to regularly and in some depth will be the appropriate macro policy for the UK economy. During the global financial crisis I broadly favoured the government's policy of austerity. Now I think the pendulum has swung. The chancellor took the opportunity to fix the public finances when the economy was not doing too bad. The budget deficit fell from some 11% of GDP in 2010 to around 3.8% of GDP now. As a result we have fiscal space to ease I believe in these uncertain and potentially difficult times, so supplementing monetary easing, both the unplanned devaluation of the sterling pound as well as cutting short-term interest rates to zero (probably very soon) and some further quantitative easing. The cost of borrowing has shrunk. Key 10-year bond yields have fallen to 0.69% (with 1-year bonds at a ridiculously low 0.04%), meaning it costs virtually nothing to service the debt. So this is the time to allow the automatic stabilisers operate, to cut taxes and raise government investment.
What precisely should the government do? Well to boost productivity (a persistent UK weakness) and boost long-term growth prospects, we should spend on better infrastructure including roads, rail and airports, making final decisions on expanding Heathrow, on HS2 and CrossRail 2, and looking at many other lower profile projects. Increasing housebuilding is necessary too, even if eventually there is better control of migration into the country. More vocational training schemes are important too. We must look also at how we can help to heal the wounds of a divided society, clearly exposed by the Brexit vote. The cut in corporation tax to 15% from 20% would seem a good move too as we boost the attractiveness of this country, though one concern remains that doing this may annoy the EU, at a time we are negotiating with them.
What precisely should the government do? Well to boost productivity (a persistent UK weakness) and boost long-term growth prospects, we should spend on better infrastructure including roads, rail and airports, making final decisions on expanding Heathrow, on HS2 and CrossRail 2, and looking at many other lower profile projects. Increasing housebuilding is necessary too, even if eventually there is better control of migration into the country. More vocational training schemes are important too. We must look also at how we can help to heal the wounds of a divided society, clearly exposed by the Brexit vote. The cut in corporation tax to 15% from 20% would seem a good move too as we boost the attractiveness of this country, though one concern remains that doing this may annoy the EU, at a time we are negotiating with them.
Who should be Tory Leader?
Well I think out of the original five candidates the two best remain. Andrea Ledsom was very impressive in the Brexit debates. But since then she has shown some inexperience, not least with her comments re the advantages of being a mother. Then evidence has come from a number of sources, namely people she worked with that her cv has been embellished to exaggerate her importance in two separate jobs. Who knows, she might have the potential to be another Mrs Thatcher and a great reformer. But these are times to not take risks. Mrs May is by all accounts a solid performer, and will likely be a tough negotiator in what will be difficult and protracted talks with the EU. It is time for experience which she clearly has in spades, given her record time at the Home Office - the graveyard of all Cabinet posts. My vote goes to Theresa May. Plus she was born in Sussex, Eastbourne precisely, my home county!
But why do we have to wait until September 9 to have a new Prime Minister? Surely as a matter of urgency, the vote of 150K members can take place in a few weeks? May be something to do with allowing David Cameron to enjoy a final G20 meeting?
But why do we have to wait until September 9 to have a new Prime Minister? Surely as a matter of urgency, the vote of 150K members can take place in a few weeks? May be something to do with allowing David Cameron to enjoy a final G20 meeting?
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