UK economy

By Professor Simon Deakin

Under the government’s current proposals for employment law reform, employees will be able to give up rights concerning unfair dismissal, redundancy pay, flexible working and time off for training in return for receiving shares in the company that employs them, gains on which will be exempt from capital gains tax.

It is right for the government to be encouraging worker ownership in companies; there is abundant evidence suggesting this improves labour productivity. What is completely unnecessary and counterproductive is to link this to the loss of employment protection rights. 

By Heleen Mees

There is a fierce debate over the origins of the disappointing economic growth seen in advanced economies. On one side there is former world chess champion and political activist Garry Kasparov and internet entrepreneur Peter Thiel, while on the other, there is Kenneth Rogoff, a Harvard economist.

Mr Rogoff, who authored This Time is Different: Eight Centuries of Financial Folly (2009) with Carmen Reinhart, argues that the systemic financial crisis is the root cause of the prolonged economic slump in the western world. In their research, Mr Rogoff and Ms Reinhart found economic growth following a systemic financial crisis to be about a full percentage point below trend growth.

Mr Kasparov and Mr Thiel, on the other side, disavow Mr Rogoff’s claim that the collapse of advanced-country growth is the result of the financial crisis. In their view, the flailing western economies reflect stagnating technological development and innovation, and without radical changes in innovation policy, advanced economies are unlikely to see any prolonged pickup in productivity growth. 

Alasdair Smith

There’s a developing consensus on the need to expand public investment in theUK. Private sector expenditure is depressed in the aftermath of the financial crisis of 2008. The prospects of export growth were never strong, and have been damaged by the problems in the eurozone. The  UK prime minister  and the CBI have joined Paul Krugman, Jonathan Portes, Martin Wolf and others in seeking a good old-fashioned stimulus from public investment to fill the gap.

However, the PM seems keen that the public investment should be privately financed (“the upfront investment in infrastructure should be ripe for a non-governmental approach” was one of the less ringing phrases in his March speech), and the CBI is reported to be lobbying ministers to underwrite the private funding of public infrastructure projects. 

By Eric Lonergan

Despite running a large budget deficit in each of the past three years, the net debt of the UK government has barely risen.

The distinction between gross and net debt is central to any consideration of a government’s solvency. Gross debt usually refers to the total stock of current non-contingent financial liabilities of government, principally bonds outstanding, and net debt subtracts liquid financial assets held by government departments, such as foreign exchange reserves or holdings of government bonds.

Net debt is the basis for any calculation of fiscal solvency, as long as the assets held by government are highly liquid. If departments within the government hold gilts, it makes sense to net them off the stock of debt, because the government is making interest and principal payments to itself. 

By Eswar Prasad and Karim Foda

The world economy is showing scattered signs of vigor but remains on life support, mostly provided by accommodative central banks. Concerns about spillover from a worsening of the European debt crisis and slowing growth in key emerging markets are putting a damper on consumer and business confidence. Equity markets are pulling back from a robust performance in the first quarter of this year as the sobering reality of a continued anemic recovery weakens investors’ optimism.

There are some positive signs in the latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER), but also much to worry about as the world economy continues to meander with no clear sense of direction. 

By Professor Simon Deakin, Director, Corporate Governance Research Programme, ESRC funded Centre for Business Research, University of Cambridge.

Long-term investment in infrastructure needs a better policy mix

George Osborne’s attempts to encourage British pension funds to invest more in infrastructure projects are to be applauded. Canadian and Australian pension funds have already invested heavily in infrastructure, but UK funds are still reluctant investors. Why?

British prime minister David Cameron tours Newton Heath rail depot. Getty images

British prime minister David Cameron tours Newton Heath rail depot. Getty images

Pension fund trustees have a fiduciary duty to get the best return for scheme members after taking due account of risk.  Government cannot and should not dictate how or where and how these funds invest their assets. If government wants pension funds to engage with the long term needs of the UK economy, it must first understand the particular pressures they face as investors. 

By Bill Martin

Has the UK’s economy been structurally weakened by the banking crisis? Policy makers think so – in spades. Despite the depth of recession and limp recovery, they believe that the gap between output and some notion of the economy’s productive potential is not that far from zero. The Office for Budget Responsibility concludes that most of the budget deficit is structural rather than cyclical and, until very recently, some members of the Bank of England’s Monetary Policy Committee were pressing for higher interest rates. Supply pessimists like former MPC member Andrew Sentance believe demand stimulus would serve only to push up inflation. 

By Eswar Prasad and Karim Foda

The world economy has hit a rough patch on the road to recovery and is in danger of skidding off course.

The latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER) reveals abundant cause for gloom. The general picture among G20 economies is one of slowing growth, swooning financial markets, and declining consumer and business confidence.

A series of adverse shocks, coupled with political wrangling that has stymied effective policymaking and added to uncertainty, has crippled growth in advanced economies. Emerging markets have maintained strong growth so far, but the battle against domestic inflation and weaknesses in major export markets are beginning to affect their growth as well.

Debt crises, weak employment growth and policy dithering in the major advanced economies have exacerbated global economic uncertainty. The perception of rising risk and inadequate policy responses has shaken financial markets and dented confidence around the world. Reflecting widespread anxiety and fear about global economic prospects and the lack of obvious policy solutions, stock markets around the world have taken a beating over the past summer. 

By Eswar Prasad and Mengjie Ding

Our analysis paints a sobering picture of worsening public debt dynamics and a sharply rising debt burden in advanced economies. These rising debt levels combined with heightened concerns about fiscal solvency now constitute a major threat to global financial stability.

Recent events in Greece, Ireland, Portugal and other economies on the periphery of the eurozone show the risks of debt buildups that are not tackled. Bond investors can quickly turn against a vulnerable country with high debt levels, leaving the country little breathing room to balance its fiscal books and precipitating a crisis.

Overall, the worldwide picture of government debt is not pretty. 

By Anat Admati and Martin Hellwig

Bankers on both sides of the Atlantic are lobbying furiously against stronger regulation. Authorities in different countries are reluctant to strengthen banking regulation as if the crisis never happened. The European Commission even hesitates to fully implement Basel III.

In this debate, many argue that global competition requires a “level playing field.” Following this argument, and concerned about the City’s competitiveness, the Interim Report of the UK’s Independent Commission on Banking avoids proposing tougher regulation for investment banks.

These “level playing field” arguments are invalid.