David Smith's EconomicsUK – Easily digestible economics!

The best-laid economic plans usually go awry

My Sunday Times column is available on www.thetimes.co.uk – this is an excerpt. Not to be reproduced without permission.

Now official figures confirm that the economy has recovered from its dip in the second half of last year, and the Bank of England is a bit more optimistic on inflation, we can expect to hear a lot more from ministers along the lines of “the plan is working”. Rishi Sunak tweeted it within seconds of Friday’s first quarter gross domestic product (GDP) figures being released. It’s not all about me, but I sometimes think this slogan has been adopted with the specific aim of making me cringe.

I don’t blame the government for celebrating the 0.6 per cent first quarter rise in GDP, which was better than expected. Time will tell whether March and the first quarter were flattered by the early Easter, but the economy has clearly recovered well from the “technical” recession in the second half of last year. Even GDP per head, which rose by 0.4 per cent, broke out of its long fall, though was still down by 0.7 per cent on a year earlier.

And I know what the government is up to with this “plan is working” stuff, which is to try to draw attention to the lack of policy detail offered by Labour. But apart from the strong echoes of Baldrick’s “cunning plan” in Blackadder — or a smug managerial type saying “all going according to plan” when it is not — if there is anything that the past few years have taught us, it is that the idea of a plan for the economy is for the birds.

When the Tories were re-elected in December 2019, under the last prime minister but one, there was no plan for big tax hikes. Rather, there would be huge increases in infrastructure spending and an aggressive levelling up programme, as set out in the first budget of the Parliament in March 2020.

Then the pandemic happened, alongside the negative economic consequences of Brexit, which persist, and a huge expansion of the size of the state – some of which is permanent – necessitated big increases in tax. Infrastructure plans were scaled back and the abandonment of the northern leg of HS2, partly replaced by filling potholes in roads, was a symbol of the end of ambition. With one or two minor exceptions, levelling up has been a failure.

Even the current Tory “retail offer”, cutting and eventually abolishing employee national insurance (the abolition part will never happen), was never a plan. As chancellor Rishi Sunak insisted on an increase in NI, to form the basis of a new health and social care levy.

On inflation, the government has played at best a marginal role in its fall, though things could have been a lot worse had it not supported the Bank in raising rates. And are we supposed to think that part of the plan was to have a zany prime minister in office for less than 50 days, after which her sensible successor could restore stability?

Anybody with a sense of UK economic history should be very cautious about the idea of a plan. It is not just that Harold Macmillan’s “events, dear boy” are likely to mean that the best-laid plans are likely to be blown off course, and that the UK has shown itself to be unprepared for shocks.

The most famous example of a failed plan was in the 1960s, and the election of the Labour government in 1964. Based on the French model of indicative planning but sounding a bit too much for some like Soviet or Chinese five-year plans, the UK national plan, launched in 1965, was short-lived, as was the Department of Economic Affairs set up to administer it.

There are, though, other examples in less likely quarters. I thought I knew everything about Margaret Thatcher’s monetarist experiment of the 1980s, having written a book about it, The Rise and Fall of Monetarism, later that decade.

A new account from somebody who witnessed it from closer at hand, Thatcher’s former private secretary Sir Tim Lankester, has new things to say however. Inside Thatcher’s Monetarist Experiment: the Promise, The Failure, The Legacy, to be published shortly by Policy Press, is his account.

Lankester, on secondment from the Treasury, was private secretary to James Callaghan, the Labour prime minister, for seven months before the 1979 general election and retained that role when she became prime minister in May 1979. He got on well with Thatcher and, until the arrival of Alan Walters as her personal economic adviser in early 1981, was the only trained economist in Downing Street.

I had always thought that the Conservatives came to office well prepared, thanks to the work of the Economic Reconstruction Group chaired in opposition by Geoffrey Howe, who became her first chancellor (a different ERG to the one in the Tory party that has made headlines in recent years).

Rate cuts loom, but they won’t shift the economy, or politics

My Sunday Times piece is available on www.thetimes.co.uk – this is an excerpt, not to be reproduced without permission.

It is, as Sherlock Holmes might have said, a three-pipe problem, and it is preoccupying the Bank of England. When and by how much can it cut interest rates, while guarding against a return of the inflation which has been its problem over the past 2-3 years?

There is a lot of interest, certainly in financial markets, in what the Bank will say this week, on Thursday, when it will announce its latest decision, alongside a new monetary policy report and forecast.

It will be a major shock if, after deliberating, the Bank decides that now is the moment for a cut. I think rates were raised a bit too much but I would not cut this week, and the majority on the Bank’s monetary policy committee (MPC) is likely to take the same view.

Much of the interest will centre on the new forecast and whether anybody else has joined Swati Dhingra, who has been voting since February to cut rates. One possibility, following a recent “dovish” speech, is Sir Dave Ramsden, one of the Bank’s deputy governors supporting a reduction.

For the rest, the question of “how soon” will quicky come to the fore. Andrew Bailey, the governor, has said that rate cuts are “in play”. At one time it was thought that the Bank would not cut until both America’s Federal Reserve and the European Central Bank (ECB) had done so.

Things have changed. The Fed is likely to be the laggard because inflation is proving to be a tougher nut to crack in the context of a strong US economy. The ECB has signalled that it will start the ball rolling next month, with the Bank probably in the middle.

Its decisions over the next few months have more of a political angle than at any time I can remember since independence in 1997. Ministers are desperate for pre-election rate cuts, both to help borrowers and to draw a line under the economics of the short-lived Truss premiership.

Looking at previous general elections, the Bank cut rates a bit in the run-up to Tony Blair’s second victory in June 2001, though they were 5.25 per cent at the time of the vote, and bigger cuts came later. In May 2005, Blair’s third victory, the last decision before that vote was a hike.

By the time of the May 2010 election, pre-election cuts had vanished as a factor. The Bank had cut rates to a then all-time low of 0.5 per cent in March 2009, which is where they remained for the May 2015 poll. For the December 2019 election they had been nudged up to 0.75 per cent, but that happened in August 2018 and was soon more than erased by the Bank’s response to the pandemic.

Depending on the Bank’s signalling this week, would a couple of rate cuts between now and an autumn election make much difference? If we take the housing market, the evidence is decidedly mixed. Though mortgage approvals in March rose to their highest level since the Truss shock, the Nationwide Building Society has now reported two consecutive monthly falls in house prices.

Mortgage rates, which earlier in the year were falling sharply on market expectations of several cuts in official interest rates this year have edged higher in the belief that the Bank will proceed only slowly.

There are two further reasons to think that modest interest rate reductions between now and the election will not have a transformative effect on UK politics.

Spring has sprung, but chill winds are still blowing

My Sunday Times piece is published on www.thetimes.co.uk – this is an excerpt. Not to be reproduced without permission.

The weather has taken time to get the message, but spring appears to have sprung for the economy, both here and elsewhere in Europe. Though we must wait until May 10 for official confirmation, it will be a surprise if the UK economy did not return to growth in the first quarter of the year, and the evidence since then is that the recovery has gained momentum.

While waiting for the official data, economists tend to look at surveys, particularly those that form the basis of the purchasing managers’ index (PMI), which measures business-to-business activity.

The “flash” UK PMI for this month – so called because it is published ahead of the full version and based on partial data – showed a strong rise to 54, from 52.8 in March, and was at its highest for 11 months. Index levels above 50 are consistent with growth, and the further above 50 the reading, the stronger the underlying picture.

Some followers of the UK economy were enthused by the data. The investment bank Morgan Stanley said that the “robust growth momentum” shown in the figures, in combination with an indication in the survey of a slight weakening in firms’ pricing intentions, added up to “as healthy a print for the UK economy as it gets: solid growth combined with price disinflation”.

The UK is not alone in celebrating better news this spring. The eurozone flash PMI also reached its highest level for 11 months, while the equivalent survey for Germany showed a return to growth after a difficult time for Europe’s largest economy, and a 10-month high. Another survey for Germany, the Ifo index, was also upbeat.

The economic story for both the UK and the rest of Europe is a similar one. Both have been buffeted by two large shocks, the pandemic and the Russian invasion of Ukraine. The second of these is still regrettably ongoing but its impact on energy prices has waned.

Having been shocked into big recessions in 2020, and in some cases milder “technical” recessions later, the obstacles to growth have been largely removed, though Brexit remains as a growth dampener for the UK. That supposes no more shocks, for now at least, which may be a bold assumption given the level of international tensions and the reality of war in Ukraine and the Middle East.

It also assumes that economies can grow through the impact of much higher interest rates – and rising “real” interest rates as inflation falls – than we were used to until central banks started tightening policy aggressively in response to the earlier inflation surge.

Perhaps the best laboratory experiment on this in the UK is being conducted in the housing market, exposed to higher interest rates as it is, where the evidence from estate agents and housebuilders is that things are also turning up. The mortgage rate shock is, it appears, being absorbed.

So, is it all plain sailing? If we take the UK PMI, and indeed most of the others, the recovery is being led by the services sector. This poses something of a dilemma. The stronger the growth in services, the more likely it is that inflation in services’ prices, currently running at 6 per cent, will prove sticky. We will know on May 9, when the Bank of England publishes its next quarterly monetary policy report, how it sees the different forces playing out.

There are still quite a lot of bets in the market for a June rate cut from the Bank, though not many now for May. Service sector buoyancy could be one of the factors which may argue for a further delay.

If not that, then there is another concern. This is that, as you may have noticed, the PMI is merely the highest for 11 months, so only since May last year. That was just before the economy suffered a sharp slowdown in the second half of the year. Spring optimism turned into autumn pessimism last year. We have to hope there is no repeat this year.

Continue reading “Spring has sprung, but chill winds are still blowing”

Achieving a soft landing looks harder than it did

My Sunday Times piece is available on www.thetimes.co.uk – this is an excerpt. Not to be reproduced without permission

In deciding on a topic for this week, I could have just written about rising Middle East tension which, in combination with the war in Ukraine, could derail the global economy and with it the UK. It is a danger, and it adds to a troubling sense of uncertainty, but so far the economic damage appears to be limited.

It is more than two years since Russia illegally invaded Ukraine and, while that helped fuel uncomfortably high inflation, it did not stop the world economy from experiencing a reasonable post-pandemic recovery.

On International Monetary Fund (IMF) figures, world gross domestic product (GDP) grew by 3.5 per cent in 2022, the year of the Russian invasion, and by 3.2 per cent last year, a rate it is predicted to maintain this year and next. The UK economy had a good year in 2022, growing by 4.3 per cent, but managed a barely positive 0.1 per cent growth last year and is predicted by the IMF to grow by 0.5 per cent this year, only marginally better than flatlining.

Though they do not get much credit for it, and in the case of the Bank of England has been subject to some batty criticism recently, for the past two years central banks have been trying to get inflation down without driving their economies into recession. The soft-landing scenario, or what some call “immaculate disinflation”, has been the unofficial aim.

The Bank almost blotted its copybook on this when the UK went into “technical” recession in the second half of last year. But this not a useful way of looking at it, and the economy should have made up the small amount of ground it lost then by the end of the first quarter. The penalty for getting inflation down has, though, been an economy that has barely grown since early 2022 and has suffered a prolonged fall in GDP per head.

Now, however, the question is whether the road to a soft landing has become rather bumpier, and not just because of those international tensions. They have not been reflected yet in higher oil prices, the usual bellwether, with the price of Brent crude still stuck at about $90 a barrel. Gas prices, which we have learned to take more notice of, are however up over the past month, by a few per cent.

This is not a significant reason why the road has got bumpier. It is still likely that inflation figures for this month, to be published in May, will show a big fall to very close to the 2 per cent target because of the previously announced reduction in the energy price cap.

That will not remove some of the concerns, particularly for the Bank, about inflation. The devil is in the detail, and the detail of the latest inflation figures, published a few days ago, was that certain aspects of inflation remain too hot for comfort.

The headline figure for inflation, 3.2 per cent, was a touch lower last month than February’s 3.4 per cent and did not match the recent US consumer price index release in heading back higher (to 3.5 per cent). The UK annual rate fall was, though, smaller than expected and the monthly rise in prices, 0.6 per cent, was quite chunky. The hope is that some of this reflected the build-up to an early Easter, but that is not guaranteed.

Service-sector inflation, regarded by the Bank as the best measure of domestically generated inflation, stood at a high 6 per cent last month, boosted by a 15 per cent rise in insurance premia (and nearly 30 per cent for car insurance), as well as a 6 per cent annual rise in restaurant and café prices, and 7 per cent for accommodation.

These businesses would say they have no choice but to raise prices quite sharply when, for example, faced with a near 10 per cent rise this month in the national living wage, the old minimum wage.

“Underlying services inflation remains red hot even as goods has slowed sharply,” said Allan Monks, an economist with J.P Morgan. “Services inflation tends to be more persistent, and this is a warning sign that inflation may be set to stay high even after the dust settles on the recent swing lower in imported goods prices … it is hard to argue that the MPC (the Bank’s monetary policy committee) should feeling very confident at the moment about sustainably delivering inflation at 2 per cent.”

The inflation figures were not terrible but, as in America, they have punctured some of the euphoria about the consequences of an imminent drop in inflation to the target rate of 2 per cent. If that is seen to be purely an energy price effect, and possibly a temporary one, then the implications in terms of early interest rate cuts may be less than hoped.

In the labour market too, things remain bumpy. The latest figures suggested that the UK is, one hopes just for the moment, experiencing the worst of all worlds with strong wage growth alongside rising unemployment and higher economic inactivity and falling employment and job vacancies.

Continue reading “Achieving a soft landing looks harder than it did”

Will Tory tax cuts ever start shifting the political dial?

My Sunday Times piece is available on www.thetimes.co.uk – this is an excerpt. Not to be reproduced without permission

April is the cruellest month, at least according to T.S. Eliot’s The Waste Land, a challenging read. But this April, if you will forgive the clumsy lurch from high art to economics, itself something of an art as well as a social science, has been anything but cruel for many people.

This month has seen, for most workers, a second two percentage point in national insurance (NI). It has also seen a rise of 8.5 per cent in the state pension, which in the context of inflation of 3.4 per cent, represents a very substantial real increase.

That is not all. Though not welcomed by all employers, this April has also witnessed a 9.8 per cent increase in the national living wage, the old minimum wage, with increases ranging up to more than 21 per cent for younger workers.

The minimum wage, a Labour initiative originally opposed by the Conservatives, has become a source of Tory pride. It is up to two-thirds of median earnings, has risen by 70 per cent in real terms since its introduction in 1999 and will cover 6.7 per cent of all workers this year, including more than 16 per cent of 16–17-year-olds in work.

All these are what political pundits call “retail offers” to voters, and an advantage of incumbency – being in office – is that governments can implement such offers, while opposition parties can only promise them, and voters may take such promises with a pinch of salt. More on that in a moment.

I would be failing in my duty by not pointing out that the government is giving with one hand and taking away with another, by persisting with the long freeze on income tax and NI allowances and thresholds, a sustained stealth tax rise. Most people, though, will be net beneficiaries this year from the changes outlined above.

They are not expected to shift the political dial in time for next month’s local and mayoral elections, and senior figures in government caution against a sudden shift in the polls. Voters may have just decided that the Tories need to be booted out. A YouGov poll for The Times a few days ago suggested that even an improving economy and tax cuts will not be enough to prevent a very heavy Conservative defeat.

But some ministers are giving it a good go, particularly Jeremy Hunt, who has managed to construct a tax-cutting strategy out of the very difficult inheritance he was faced with when he succeeded Kwasi Kwarteng as chancellor in the autumn of 2022.

Treasury sources think a return to growth when GDP (gross domestic product) figures are published next month, in combination with a drop in inflation to the target rate of 2 per cent, will allow ministers to claim “the plan” is being delivered.

The NI cuts, meanwhile, are a useful signalling device for the Tories, contrasting their tax-cutting instincts, albeit alongside a rising tax burden, with Labour’s willingness to accept that higher tax burden.

Of the three retail offers, the state pension rise was forced on the government by the triple lock, which it would have been politically suicidal to abandon at this stage in the electoral cycle. The national living wage rise, similarly, arose straightforwardly out of an election pledge to lift it to two-thirds of earnings.

That makes the cuts in NI the most interesting. Two years ago, it was heading in the opposite direction, Rishi Sunak announcing in 2022 an increase of 1.25 percentage points on top of the then rate of 12 per cent to form the basis of a new health and social care levy.

That rise was scrapped during Liz Truss’s premiership, apparently never to return, so in the space of two years the employee rate has gone from 13.25 per cent to 8 per cent. How did this tax cut, which came out of the blue, occur?

Continue reading “Will Tory tax cuts ever start shifting the political dial?”

Industry’s looking up, but don’t celebrate too much yet

My Sunday Times piece is available on www.thetimes.co.uk – this is an excerpt. Not to be reproduced without permission.

We have become so used to manufacturing being the poor relation of the economy that it was encouraging, and novel, to see that a closely watched survey had some good news for the sector a few days ago. The purchasing managers’ index (PMI) for UJK manufacturing, published these days by S & P Global, rose above the key 50 level last month for the first time since July 2022. Levels above 50 are consistent with growth, those below it with contraction.

Manufacturing has not quite lost its poor relation status. The equivalent PMI for the UK services sector, published a couple of days later, stood at 53.1, so well above 50, compared with just 50.3 for manufacturing. But manufacturing’s momentum was strongly higher, while that for services was down.

It is time to ask the question, then, whether industry is starting to make a comeback. Some parts of it clearly are. Separate figures from the Society of Motor Manufacturers and Traders (SMMT) showed a strong rise in car output in February, with the 79,907 cars assembled representing a 14.6 per cent rise on a year earlier. Production for the home market was up very sharply, by 58 per cent, alongside a much smaller 4.6 per cent rise in production for export. The overall figure was up for the sixth month in a row.

There was an even bigger increase in commercial vehicle production, which had tis best February since 2008 according to the SMMT, and was up by 98 per cent, to 12,927 units.

Official figures for manufacturing, new ones of which will be published this week, suggest that manufacturing turned a corner some months ago. Manufacturing grew by 1.2 per cent last year, outstripping overall growth in the economy as measured by GDP (gross domestic product), which was a barely positive 0.1 per cent. The latest official figures show growth of about 2 per cent compared with a year ago.

That, perhaps, is not the most surprising thing about the performance of manufacturing in recent years. You will now that this has been a time of extraordinary volatility for the economy, which included a pandemic slump in GDP of 10.4 per cent in 2020, the biggest since the Great Frost of 1709, followed by two strong growth years of 8.4 per cent in 2021 and 4.3 per cent in 2022, as the economy bounced back from Covid.

Taken as a whole, however, manufacturing escaped most of this volatility. It grew by 2.2 per cent in 2020, when the rest of the economy tanked, and by a modest 1.6 per cent in 2021, before dropping back by 3.3 per cent in 2022 as rising energy costs and inflation took hold.

The relative stability of manufacturing during this period is partly explained by its composition. People are sometimes surprised to learn that food and drink, rather than metal bashing, precision engineering or assembling cars, vans or lorries is the biggest component of UK manufacturing, and it did well during the pandemic. So, unsurprisingly, did pharmaceuticals.

The other boost for manufacturing was that we bought a lot of goods during the pandemic, when there were many services that we could not access because of restrictions. And while many of these goods were imported, there was a spillover effect for domestic manufacturers.

Stable for very modest growth over the past few years is not necessarily something to send the champagne corks popping. After all, manufacturing output in the final quarter of 2023 was 0.8 per cent lower than its pre-pandemic level at the end of 2019, and only 5.4 per cent up on where it was in early 2008, before the onset of the financial crisis recession. That is precious little to show for 15 years.

How much should we celebrate the fact that manufacturing is looking up again now? Is this Cinderella sector, which sadly only has a 9.8 per cent weight in GDP, going to the ball?

Continue reading “Industry’s looking up, but don’t celebrate too much yet”

AI won’t mean mass unemployment – unless we fail to train people

My Sunday Times piece is available on www.thetimes.co.uk – this is an excerpt. Not to be reproduced without permission.

This is an important moment for artificial intelligence (AI). Not only will we be on the lookout for AI-generated deep fakes in this year’s many elections, but somebody is bound to declare 2024 the “year of AI”, just as many did in 2022 and, even more so, in 2023.

They all have a point. AI became widely used in business and was starting to be used in government last year and that trend is continuing. “Generative” AI, deep-learning models that can produce high-quality text and images, is sweeping through many sectors of the economy.

The mention of AI, apart from the fears it raises about misuse, brings an age-old question back to the fore. Will this be a technology that not only renders many jobs obsolete, but also leads to a big and sustained rise in unemployment?

That may seem a distant fear when the labour market is tight and the unemployment rate below 4 per cent, admittedly on official figures that come with a health warning, but it is a question that needs to be asked.

For me and most economists who have examined this question in the past, the usual answer is: why should this time be different? Technological advances in the past have not prevented a steady rise in the number of people in work, over decades, even centuries. It will be the same, we tend to argue, with AI. Some jobs will disappear, as they always have, but many others will be created and the technology will not result in mass unemployment.

If there is a concern about this view, it is that the way this has worked in the past is that there has always been an expanding sector to create the jobs destroyed by technology. When mechanisation replaced most jobs in agriculture, there were opportunities in manufacturing and mining. When automation, structural change and lack of competitiveness wiped out employment in these sectors, a fast-expanding services sector was there to take up the slack.

What happens, though, when it is service sector jobs which are most exposed to this latest technological wave? This is one of the gauntlets thrown down by a good new report on AI from the Institute for Public Policy Research (IPPR). The others, in the report, ‘Transformed by AI: How Generative Artificial Intelligence Could Affect Work in the UK, and How to Manage it’, by Carsten Jung and colleagues, is the sheer speed with which AI is spreading, which they argue is significantly faster than other technologies.

“It can hardly be overstated what an astonishing achievement this is. It was until recently thought to be feasible only in the distant future. And given many knowledge work processes are already digitalised, in many cases it does not require huge process changes or capital investments to introduce AI to these processes. The speed of adoption is likely going to be faster than during past technological waves.”

“Our central take is that, with the advent of generative AI, the game has changed,” the report says. “Rather than having to reason about possible future technical capabilities, a technology now exists that has now been proven to produce high quality outputs that are often indistinguishable from human ones, in a fraction of the time that a human would take, across a wide range of applications.

There are some interesting numbers to back up the report’s arguments. After analysing 22,000 different job tasks in the UK, they find that 11 per cent of jobs would be immediately affected simply by plugging generative AI into existing processes, and that back office and administrative roles are most exposed, including personal assistants and secretaries, typists, data entry administrators, writers and translators and marketing associates. This is the “low hanging fruit” of AI but could nevertheless result in significant job displacement, particularly of low and medium-paid occupations, and those mainly done by women.

Much bigger effects – five times as many, 59 per cent – occur if generative AI is fully integrated into the economy, and in this case the impact is on higher-paid jobs, including finance officers, brokers, tax experts and IT managers.

Reeves sets out her stall – but it’s not yet enough

My Sunday Times piece is available on www.the times.co.uk – this an excerpt. Not to be reproduced without permission

The two most important events of the past few days were the drop in inflation to a lower-than-expected 3.4 per cent and a long talk by the shadow chancellor, Rachel Reeves, setting out her economic approach. The government says the fall in inflation is all part of Rishi Sunak’s “plan” and the economy is now turning a corner.

There will be quite a lot more of this in coming weeks and months, as inflation falls further. I’m not sure how cunning a plan this is, however. Celebrating a fall in inflation partly has the effect of drawing attention to its earlier big rise. And people tend to think in terms of prices, which in most cases are still rising, rather than the inflation rate. Food prices are 5 per cent higher than a year ago, while service sector prices are up 6.1 per cent.

Still, the inflation nightmare is clearly subsiding, and Jeremy Hunt hopes that that will permit the Bank of England to cut interest rates significantly between now and an autumn election.

Getting invited to deliver the Mais lecture was something of a coup for Reeves. Many distinguished people have done so at the City University Business School (now called the Bayes Business School after the 18^th century mathematician and theologian Thomas Bayes, who is buried in nearby Bunhill Fields). It has played a significant part in modern UK economic history. The lecture, by the way, is named after Lord Mais, the 645^th Lord Mayor of London who had close connections with the university.

Sir Geoffrey Howe and Nigel Lawson, two of Margaret Thatcher’s three chancellors, delivered important Mais lectures, as did other chancellors, including Kenneth Clarke, Gordon Brown and, two years ago, Rishi Sunak. That was, in many ways, the high watermark of his period as chancellor, and perhaps his political career, and he hosted a celebratory dinner discussion at 11 Downing Street afterwards.

In inviting Reeves, the organisers were following the precedent set in 2010, when George Osborne delivered the lecture a few months before coming chancellor. In 1995 Tony Blair did the lecture a couple of years ahead of Labour’s landslide victory in 1997. Most recent Tory chancellors have not been around long enough to be invited. Hunt has, but I fear that he may have missed out.

Bank of England governors have also graced the Mais stage, including Gordon Richardson, Robin Leigh-Pemberton, Eddie George, Mervyn King and Mark Carney. I’m not looking for a gig, but it was once delivered by a journalist, the late Sam Brittan, doyen of economic journalism.

Reeves, who knows her economics and her UK economic history – everybody in the country will surely be aware soon that she once worked at the Bank of England, though as a graduate fresh out of university – delivered a lecture that was partly a long essay littered with references, and partly a critique of most chancellors who have gone before her in recent years. Even New Labour did not escape criticism.

It is easy to criticise, as people are always telling me, and partly because of this I do not think Reeves’s lecture contained as much useful and usable content as Sunak’s two years ago. His dissection of the UK’s problems of under-investment and low levels of skills and training was clinical.

Nor did it come anywhere near Lawson’s 1984 Mais lecture, which changed the way that politicians and economics thought about economic policy, and which I think Reeves got wrong. Lawson rightly buried the idea that you could control inflation with wage and price controls, then fresh in the memory from the 1970s. He also completed the task of burying post-war Keynesian demand management, a task begun by the Labour prime minister James Callaghan in 1976.

Beyond that, do we now have a coherent Labour economic policy? The Tories will keep saying Labour does not have a plan, unlike them, but that is an odd way of looking at it. We do not live in a planned economy, and there is a limit to the difference that chancellors can make. This idea of a plan is mainly the prime minister’s response to the fact that he took over after the most chaotic period of government in modern history, albeit presided over by his Tory colleagues.

Growth is driven by the private sector, and the question is whether government enables and encourages businesses and entrepreneurs or gets in the way. Political instability and crass policy errors during this parliament have undoubtedly held back growth and made many in business yearn for a change of government.

Those who warn that firms should be careful what they wish for tend to focus on Labour’s plans to boost the minimum wage/national living wage, which is already causing headaches in some sectors, and to strengthen workers’ rights. There may be some wiggle room on this. In her lecture, the shadow chancellor pledged a ban on “exploitative” zero hours contracts, giving workers the right to a contract which reflects the hours they generally work. That may fall short of an outright ban.

Continue reading “Reeves sets out her stall – but it’s not yet enough”

How GDP fails to take in the digital revolution

My Sunday Times piece is available on www.thetimes.co.uk – this is an excerpt. Not to be reproduced without permission.

Younger readers will think this quaint, odd, or both, but when I was a lot younger, there was nothing else to do on a rainy Sunday afternoon apart from watching old war films, the highlights of a football match played the previous day or The Golden Shot. This, a TV game show based on the German Der goldene Schuß (they didn’t have much to do either) had contestants calling out “up a bit, down a bit” to guide a blindfolded crossbow firer to an apple-themed target.

No, I don’t know why we watched it, but I think of it every time the official statisticians release the monthly figures for gross domestic product (GDP). They are always up a bit or down a bit but spark an enormous amount of analysis and comment, as my overflowing inbox confirms. I don’t want to sound jaded, but I think I preferred The Golden Shot.

The latest figures, a few days ago, showed an up-a-bit 0.2 per cent rise in January and led to the widespread conclusion that the “technical” recession was already over.

The bar is pretty low. Even if the monthly GDP in February and March shows no increase on January, there would be a 0.2 per cent GDP rise in the first quarter of this year compared with the final quarter of last year. The big picture is that the economy continues to flatline as it has since early 2022, productivity is stagnant or gently falling, and GDP per head may not yet have finished falling.

The Office for Budget Responsibility (OBR), the official forecaster, thinks the economy will start to lift itself out of its torpor quite soon, and it will take comfort from recent stronger surveys. The Bank of England, in contrast, believes it will be hard to detect a pulse for some time, in which case up a bit and down a bit will continue for a while.

But wait, I am falling into the trap of overanalysing the monthly GDP figures, and | wanted to write on something else, which is connected. A press release arrived from the National Institute of Economic and Social Research (Niesr) warning that Britain faces “economic disaster” unless we invest enough, and in the right way, in net zero and digital transformation.

I doubt that there have been many releases in Niesr’s long history which have warned explicitly of economic disaster, let alone ones which publicise a report by a Bank of England veteran. The report, for Niesr and the Productivity Institute, ‘Productivity and Investment: Time to Manage the Project of Renewal’, is by Paul Fisher. He spent 26 years at the Bank until 2016 and was its executive director for markets as well as a member of the monetary policy committee (MPC).

I thought this was going to be another report on the UK’s record on investment – private and public – and argue that if we are to lift productivity it is essential to invest more. There is nothing wrong with that message, but Fisher’s report is more nuanced.

On GDP, he argues that policy should not focus on it, but on improving what economists would call welfare, not to be confused with welfare payments. The changes that have taken place in recent decades that have not been fully picked up by the GDP figures but have been “one of the most astonishing transformations in human existence”.

“The creation of the internet, then personal computing and finally the smart mobile phone and related devices, means that there has been a massive change in the way people live,” he writes. “It is still changing. Transportation, communications, entertainment, education, how and where people work, how they socialise or even meet life-long partners. And this is pretty much available to everyone. In the UK, as of 2022, some 92 per cent of the adult population had a smart phone. Smart phone ownership ranges from 80 per cent of the over-55s to 98 per cent of the 16-24s.”

This transformation has changed people’s lives in numerous ways, including home shopping, tickets for travel and entertainment, car parking, banking, television and other entertainment, lifelong learning, and so on.

What this means, Fisher argues, is that while measured productivity, derived from GDP, has been stagnant, “the productivity of human life has changed in so many ways”.

Continue reading “How GDP fails to take in the digital revolution”

Hunt leaves things better – but Labour may reap the benefits

My Sunday Times piece is available on www.thetimes.co.uk – this is an excerpt. Not to be reproduced without permission.

I know what you are thinking. I hope he does not bang on about the budget today. We had enough of that last Wednesday, after weeks of speculation, and surely there is nothing new to say. I feel your pain but stay with me. Budgets are important milestones along the economic road, an opportunity to take stock. There are also loose ends I need to tie up.

I first need to check on how Jeremy Hunt did against the three tests I set last week. Then I should point to a minor victory for the chancellor. The third aim is to provide a slightly different take on the economic inheritance Rachel Reeves may be faced with should she become chancellor.

The tests, to remind you, were: was the budget based on a realistic fiscal outlook, will it do anything to boost growth, and was it nakedly political, cutting the legs from under the opposition? On test one, the budget was no more unrealistic than the chancellor’s autumn statement. There was widespread speculation that he would further reduce planned spending to make room for tax cuts but he did not, and he set out much-needed ways to boost public sector productivity.

On the second, there is a growth boost, from extra labour supply but also by putting more money into people’s pockets, from cutting national insurance. It wasn’t the elixir of growth, but it was a spoonful of sugar.

It was not, and this was my third test, a scorched earth budget. Hunt littered his speech with jibes at Labour and stole a couple of the opposition’s policies but stayed on the right side of responsibility. He did not pass the tests with flying colours but did better than you might have expected. Whether he can do as well if there is pre-election autumn statement in September, we shall see.

What about that small victory? The tax burden is going up, but by less than expected in the recent past. A year ago, in Hunt’s first budget, the Office for Budget Responsibility (OBR) said the tax burden would eventually rise to 37.7 per cent of gross domestic product (GDP), higher than in any year including 1948 (when the records start), probably the highest ever in peacetime.

The new official projection is for the burden to reach 37.1 per cent, a tad lower than 1948’s 37.2 per cent so no longer a record. He has clawed back a little of the tax rises announced in 2021 and 2022. 37 per cent may be about the maximum tax burden the UK economy can bear.

How about that economic inheritance? I don’t blame Reeves for describing it as the worst any chancellor has ever faced. No opposition chancellor says it will be a breeze.

It is, though, wide of the mark. Yes, Hunt stole some of Labour’s clothing, stealing its policy on non-doms which he previously said would be harmful. And yes, one of the ways that Reeves must lower expectations is on public spending. Sticking to the 1 per cent a year real-terms target for public spending in future years will be tough, even with efficiency savings, particularly with the NHS as the cuckoo in the spending nest, claiming an ever-growing share.

Continue reading “Hunt leaves things better – but Labour may reap the benefits”