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From taxes to cats, May’s government has been an affront to Tory ideology

From taxes to cats, May’s government has been an affront to Tory ideology

Theresa May has finally announced her resignation. How can we capture the flavour of her tenure in office?

This can be found in the dry and measured content of the Economic and Fiscal Outlook from the Office for Budget Responsibility (OBR).

The OBR stated in its latest publication in March 2019 that: “the tax receipts-to-GDP ratio ends the forecast in 2023-24 slightly higher than its 2018-19 level”.

Of course, this is a forecast, and all the usual caveats need to be attached. But, remarkably, it was the intention of a Conservative government for taxation to be higher in five years’ time than it is now.

Already, taxes are high. Taxes as a percentage of GDP in 2018/19 were higher than at any time since 1979, the first year with Margaret Thatcher as Prime Minister.

Gordon Brown effectively ran economic policy from 1997 until 2010. Even at the time, he was satirically referred to as the Great Helmsman, a name bestowed upon leaders of centrally-planned economies such as Joseph Stalin.

Brown could not resist detailed meddling of the most microscopic variety, exactly as if he were in charge of a Five Year Plan in the old Soviet Union. But during his long reign, taxes as a percentage of GDP remained lower than they are now.

And it’s not just taxes but regulation too where the government under May is behaving in a decidedly un-Conservative manner.

Despite what the Tories like to say, the culture of interference seems to have got even worse under May.

A rather minor issue symbolises the mentality of the May regime. This is the Cats’ Bill, a private member’s bill sponsored by Rehman Chishti, Tory MP for Gillingham and Rainham. Michael Gove has described the bill as an “inspiration”.

There is undoubtedly a problem with cats being hit by motor vehicles. Campaigners estimate that 250,000 are either killed or injured every year in this way. These incidents create a great deal of stress and unhappiness for the owners. It would obviously be good if the number could be reduced.

The bill would force owners to microchip their cats so that they could be identified. This seems reasonable. But Chishti proposes that a motorist hitting a cat should be required not just to stop, but to report the incident to a vet, on pain of a fine of up to £20,000.

The bill is brought in with the very best of intentions. But it will simply create another regulated industry.

Vets will demand that the motorist pay a fee for their effort in making a record of the accident – even better, that they get a special subsidy from the taxpayer.

Civil servants will be recruited to check that the vets’ forms are correctly filled in. There will be demands for new regulations on vets to ensure that they are trained to comply with the new law, and a way to enforce these rules for drivers.

None of this seems to have occurred to Chishti. For him, a problem exists, and the way you solve it is by state intervention.

Another way, of course, is for owners to take more personal responsibility for their cats, but that doesn’t seem to occur to politicians.

From cats to taxes, May essentially created a social democratic government, not a Conservative one.

As published in City AM Wednesday 29th May 2019

Image: British Cat by Colicaranica via Wikimedia is licensed under CC BY-SA 3.0
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Britain is more optimistic about Brexit than gloomy forecasts suggest

Britain is more optimistic about Brexit than gloomy forecasts suggest
The International Monetary Fund (IMF) is up to its usual tricks. Last week, it predicted a two-year recession in the UK in the event of a no-deal Brexit. Even in the main forecast, involving a mild Brexit, GDP was projected to grow by only 1.2 per cent this year and 1.4 per cent in 2020. These are very gloomy numbers. If they were correct, it would be the weakest period of growth since the financial crisis itself in 2008 and 2009. The IMF has form on this matter. Six years ago, in the spring of 2013, mainstream economists were full of doubt that the government’s policy of austerity would work. In January that year, the IMF projected only one per cent growth, which in April it slashed to just 0.6 per cent. In fact, economic growth accelerated from 1.4 per cent in 2012 to 2.0 per cent in 2013 and 3.0 per cent in 2014.   In line with the thinking of Project Fear, in the middle of June 2016 the IMF predicted an immediate recession if the UK voted to leave. Exactly the opposite happened. The economy continued to grow, and unemployment to decline.   To be fair, this time around there does seem to be evidence of a slow-down. The Office for National Statistics (ONS) suggests only modest growth at an annual rate of around one per cent in the last three months of last year. A recent Deloitte’s survey of chief financial officers found only 13 per cent of them more optimistic about prospects than they were three months ago. Does the online world tell us anything different? The ONS is making progress here. The agency is starting to use so-called big data to try to get faster and more accurate fixes on what is happening to economic activity. Online information such as value added tax returns and road traffic is being analysed. Given that this is the first time it has ventured into this field, the ONS is understandably cautious about its initial estimates. It says, rather cryptically, that the indicators they are using are broadly in line with their long-term averages and paint a mixed picture. Since 2016, with my UCL colleague Rickard Nyman, I have been monitoring on a daily basis how people in London are feeling. The conventional measurement of wellbeing is based on responses to surveys. In contrast, the Feel Good Factor (FGF) extracts the sentiments which people reveal, knowingly or unknowingly, in their online posts, using advanced machine learning algorithms. There were big drops immediately after Brexit and after Donald Trump’s election. But the FGF recovered in a matter of days. Averaging the data over each quarter, optimism peaked at the start of 2017. By early 2018, a sharp drop took place, but sentiment was still around its 2016-19 average. During early 2019, the FGF is down again, but only slightly, and the past few weeks show no change compared to the same period last year. Uncertainty over Brexit does seem to be having a negative impact on sentiment in the short term. But the overall trend offers some sunny perspective on the IMF’s dismal economic forecasts.
As published in City AM Wednesday 17th April 2019
Image: British Weather by Wikimedia is licensed under CC BY 2.0
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No matter how we measure inflation, politics will forever trump economics

No matter how we measure inflation, politics will forever trump economics

THE ECONOMIC Affairs Committee of the House of Lords has got its bovver boots on. Last week, the government was given a sound kicking.

The issue was the seemingly esoteric one of how to measure inflation. Inflation tells us how much the prices of goods and services are going up. The question is: what do we put into the basket when we are working this out?

The most general measure is the consumer price index (CPI). This takes into account literally everything which individuals in the UK buy. Something which is widely purchased, such as rail journeys, will carry more weight than, say, spending on parts for model railways. But they all count. The percentage change in the CPI is one measure of inflation.

Gathering all this information obviously takes time. In contrast, the retail price index (RPI) is quick and easy to calculate. It is, quite literally, based on a basket of products available in shops. The basket gets changed from time to time to reflect changes in spending patterns. The disadvantage of the RPI is that it is much more focused on goods than on services.

In recent years, inflation as measured by the RPI has been higher than the CPI. Between 2014 and 2018, the respective rises were 9.7 and 5.9 per cent.

These differences have important practical consequences. All sorts of things get increased each year by the “rate of inflation”.

The Lords accused the government of using the RPI for uprating stuff like rail fares and student loans, where directly or indirectly the government rakes in money. But it uses the CPI when it comes to paying out on pensions and benefits. “Index shopping” was their Lordships’ neat description of this practice.

But in top academic circles, much more fundamental attacks have been made on both these traditional metrics.

Measuring inflation faces a very difficult problem. How do you take into account changes in the quality of goods and services?

A simple example is a car. A particular model may cost exactly the same as the identical model last year. But suppose that, unlike last year’s model, this car has heated seats and parking sensors. The measured price has not changed, so inflation is zero. But you are getting more for your money.

The problem becomes acute in any area of new technology. Smart phones did not exist 30 years ago, and the internet was not yet developed for general use. How much have their prices changed since then? We have only to ask the question to see the problem that the vast advances in technology pose.

Even back in 2003, the top MIT econometrician Jerry Hausman estimated that the CPI was systematically overstating inflation by as much as two per cent each year, because of this quality issue.

Measured correctly, inflation could well have been negative in the current decade. But it will be hard to get politicians to take an interest in this. Imagine having to tell people that their pensions would be reduced because prices were falling.

Even if we could improve the measurement inflation, as the Lords demand, politics is forever likely to trump science here.

As published in City AM Wednesday 23rd January 2019
Image: Maths Equation by World Bank Photo Collection under CC BY-NC-ND 2.0
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Britain’s stagnant regions are stuck in a monetary union trap

Britain’s stagnant regions are stuck in a monetary union trap

The Economic Statistics Centre of Excellence created a bit of a stir at the end of last week with its estimates of growth in the regions of the UK.

Since the recovery from the financial crisis began during 2009, London’s economy has grown by 26 per cent.

At the other end of the scale, output in the north east has expanded by only six per cent, less than one per cent a year. Yorkshire has grown by just eight per cent, and the north west, which includes both Liverpool and Manchester, by 11 per cent.

The economies of the Eurozone show a similar pattern. Since 2009, Germany has expanded by 20 per cent, growth in Spain has only been six per cent, and the numbers for Portugal and Italy are even lower, at just two and one per cent.

The regions of the UK and the Mediterranean economies of Europe have an important feature in common: both groups are in a monetary union with more dynamic and innovative economies. Newcastle is in the sterling monetary union with London, and Portugal is in the euro with Germany.

The weaker economies are not sufficiently competitive to produce enough goods and services that others want to buy. They run a balance of payments deficit with the world outside their borders.

And in a monetary union, a balance of payments deficit translates into lower growth and higher unemployment. Standard trade theory in economics shows this clearly.

At least in the UK, the poorer regions get compensation in the form of large transfers of money from the more successful ones to finance their trade deficits.

London generates a fiscal surplus – the difference between income raised by taxes and public spending – of £3,700 per head, according to the latest Office for National Statistics estimates. But only two other regions – the south east and the east of England – run surpluses. The rest are in deficit – they spend more than they raise in tax.

Northern Ireland gets the biggest per capita subsidy, to the tune of £5,000 a year for every single person living there. The DUP might usefully contemplate the fact that the rest of us would be better off if we got rid of the province altogether.

A devaluation for the UK’s regions against London and for the economies of southern Europe would help to make them more competitive. In a monetary union, this is simply not possible.

The problem goes deeper than a simple lack of price competitiveness. The British regions just do not attract enough high-skilled workers to produce the quality goods and services which are in demand in the twenty-first century.

We might imagine that low housing costs would attract people, but the price mechanism works very slowly and imperfectly in this context. Over the past couple of years, there has been a trickle of people out of London to the regions, while the inflow from them to the capital has been halted. But there is a long way to go.

And that means that, whatever form Brexit takes, the economic trends of Britain’s monetary union are such that the future for Britain’s regions still looks grim.

As published in City AM Wednesday 29th November 2018

Image: Derelict Factory by Will Lovell via Geograph under CC BY-SA 2.0
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The evidence is in from across the Atlantic, and tax cuts benefit everyone

The evidence is in from across the Atlantic, and tax cuts benefit everyone

From discussions on how the UK should reform its tax and regulatory landscape to make the most of post-Brexit opportunities, to the rallies midterm election candidates have been holding across the US championing or lambasting the President’s tax cuts, the debate is still raging about how changes to taxes impact economies.

But if you need convincing, or even if you’re just curious, events across the Atlantic provide a natural experiment in which we can observe in real time the effects of big tax cuts on an economy.

Nearly a year ago, on 22 December 2017, President Donald Trump signed the Tax Cuts and Jobs Act (TCJA), the most sweeping revision of US tax law since the Tax Reform Act of 1986.

Since then, economic growth has gone up. Between the fourth quarter of 2016 and the fourth quarter of 2017, GDP grew by 2.5 per cent in the US. In each quarter since, the annual growth rate has accelerated. The provision estimates for the third quarter of 2018 – the latest we have – suggest growth is now three per cent.

The jobs market is also booming. In the year to October, employment rose by over 2.5m. In that month alone, there was a rise of 250,000 jobs on the previous month.

Of course, all sorts of things can contribute to a strong economy. The headline figures simply support rather than confirm the narrative that tax cuts work.

A paper published this week in the leading Journal of Economic Perspectives focuses specifically on the corporate tax changes in Trump’s TCJA.

Beginning in 2018, the federal corporate tax rate fell from 35 per cent to 21 per cent, some investment qualified for immediate deduction as an expense, and multinational corporations faced a substantially modified treatment of their activities.

Alan J Auerbach of Berkeley sets out a detailed theoretical and empirical analysis of the Trump legislation. He is careful to qualify his findings with the usual kind of academic hedges. But they are unequivocal: tax cuts work.

The loss of revenue to the government of the various corporate tax changes in 2020 is estimated to be some $130bn. What will companies do with this money?

Auerbach concludes that at least a half of this will go on increases in wages. There are some 125m families in America, and on average they will be at least $500 a year better off.

Much of the rest will be spent on additional investment, which will further stimulate the economy.

And Auerbach cites a paper by the Harvard economist Robert Barro, due to be published in the Brookings Papers series, which suggests that the impact of the tax cuts will be even higher.

Leading American economists writing in leading academic journals are examining the Trump corporate tax cuts. They are concluding that everyone – both the companies and their workers – benefits from them.

Perhaps Philip Hammond should take a break from his spreadsheets and catch up with his reading.

As published in City AM Wednesday 7th November 2018

Image: Statue of Liberty by National Park Science
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John McDonnell’s ideology won’t lead Britain to a bright new future, but to the dismal 1970s

John McDonnell’s ideology won’t lead Britain to a bright new future, but to the dismal 1970s

The focus this week has been on Philip Hammond’s Budget.

The opinions of the shadow chancellor have been rather in the background by comparison.

But John McDonnell is doing us all a favour at the moment. He is busily promoting a collection of essays which he edited, under the title “Economics for the Many”.

These cover a wide range of policy areas, and are written by a mixture of politicians, think-tankers, and academics sympathetic to the shadow chancellor. The book contains a substantial introduction by McDonnell himself, and so is a useful guide to his thinking.

McDonnell appears to believe that spending vast amounts of money on nationalising industries will cost the taxpayer nothing.

From a balance sheet perspective, this is technically correct. The government could issue debt to take over the rail companies, say, but this would be balanced by the value of assets acquired.

This misses the point. If someone were mad enough to lend you £10m to buy a house valued at that amount, your household balance sheet would not have changed. But how would you service the debt, and what rate of interest would you be required to pay?

The rate of interest on UK government bonds is currently low, at around 1.5 per cent. But this is determined by the markets, not by government diktat. If the markets lose confidence, the rate can change rapidly. In recent years, Italy, Spain and Portugal have all seen rates in the six to eight per cent range. And in Greece, they were as high as 23 per cent.

McDonnell is silent on how he would ensure that the same thing would not happen here.

Some of the essays in his edited volume share this silence. One of them, somewhat ironically, points out the dangers of debt levels being too high. Admittedly this refers to household debt and not public sector debt, but no recommendation is made on how the problem can be solved.

In the same way, several contributors attack the discipline of economics. We read, for example, that it needs to be “more diverse and representative of the society it serves”. Yet no argument is put forward which offers a scientifically superior explanation of events to that of standard economic theory.

To be fair, most of the essays do put forward proposals. But the striking feature is not their radicalism – it is how dull and unimaginative they are.

So, for example, when new firms are launched based on new technologies, they should be set up as cooperatives. Cooperation as a form of business model has been around since the Rochdale Pioneers in 1844. It has not exactly set the world alight.

There is much talk in the media about how Jeremy Corbyn’s Labour party has captured the zeitgeist. This is not reflected in the opinion polls, where the Tories remain obstinately in the lead.

But if it has, these essays suggest that we are not in for an exciting and innovative future. Rather, we will be condemned to a repeat of the dismal and depressing 1970s.

As published in City AM Wednesday 31st October 2018

Image: John McDonnell by Rwendland via Wikimedia is licensed under CC BY-SA 4.0
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