Economy

In the excitement of the 650 people shouting about probably inaccurate economic forecasts that passes for a major state event, it can be easy to miss the big picture.

This big picture has three aspects.

First, we are only in the fifth year of what the government says is a decade of “fiscal consolidation”. By the time this process is complete, someone born on the day that Lehman Brothers collapsed will be attending secondary school.

Second, there will be further spending cuts. These could see the size of the UK state as a share of the economy return to levels last seen when Neville Chamberlain was prime minister, according to the Office for Budget Responsibility.

Third, the government’s economic plans don’t really add up. In the next parliament, taxes will have to rise, fiscal targets will have to missed, or spending will to have to be cut in a way that is even more brutal than currently expected. Read more

Since Scots voted against independence on September 18 the Scottish National party has surged in opinion polls and appointed a new, popular leader; pro-independence journalists have launched a newspaper, The National; and the Scottish government is preparing to wield more power than any other devolved parliament in Europe.

“No” voters could be forgiven for considering theirs a pyrrhic victory. After all, 55 per cent of Scottish voters opted against independence. Nevertheless, this was not a vote for the status quo. A majority of Scots want more devolution. The leaders of three biggest (for now) UK political parties belatedly then rashly promised as much on the eve of the independence referendum. On Thursday, the Smith Commission, charged with working out the details of further devolution, will issue its recommendations.

Although the comparison is imperfect, the recommendations will mark the point when Scotland becomes, in fiscal terms, the Basque Country of the United Kingdom.


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In his conference speech, David Cameron said a Conservative government released from coalition would make two changes to income tax by 2020. He presented the first – a rise in the amount of money people earn before they pay income tax to £12,500 – as a tax cut for minimum wage workers. He presented the second – a rise in the level at which workers start paying the 40p rate of income tax to £50,000 – as a tax cut for the middle class. Neither change is quite what Mr Cameron says it is.

The chart below suggests how much people making various incomes stand to benefit from the changes. (Source: Ben Richards.) Treat it as illustrative: the exact numbers will depend, among other things, on when the cuts are introduced. But it shows how the bulk of the benefits would be skewed towards those in the top quarter of earners.

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The Parisian arriving in London by train alights at a resplendent station. St Pancras, and the adjacent King’s Cross, make Gare du Nord look like a provincial hub. The surrounding area, once a ramshackle collection of properties, is gleaming with new hotels, offices and prime accommodation. It is a clear sign of how London’s economic geography has changed in the 21st century. The inner city has developed rapidly. Poverty is moving to the outskirts of the capital. As its core grows faster than its periphery, London is becoming more like Paris. Read more

Many people make irrational, uninformed and potentially devastating decisions about what they do with their money. They can be bamboozled or defrauded by those with better information or cruel intentions. The financial crisis was only the most acute reminder of how pervasive poor decision-making can be when it comes to money.

From today, pupils aged 14-16 in the UK will be taught “financial literacy” as part of the national curriculum. They will be taught about credit and debt, savings and pensions, and public finance. (It is like the FT graduate scheme on a massive scale.) The hope is that this will better equip youngsters to make smart decisions about what to do – and what not to do – with their money as they go through their lives.

Will it work?  Read more

On Tuesday morning George Osborne was asked by the BBC’s Evan Davis whether he’d rather fund Crossrail 2 or trans-Pennine rail, assuming that both projects had a positive benefit to cost ratio. Politicians tend to shun hypothetical questions but the Chancellor of the Exchequer used this one to make the following argument:

‘I hope we don’t have to make a choice between the two. I think the real choice in our country is actually spending money on this big economic infrastructure, transpennine rail links, Crossrail 2 in London and the like, and spending money on, for example, welfare payments which are not generating either a real economic return and at the same time, are trapping people in poverty.’

Whenever someone mentions what the “real” this or that is, be careful. There are many choices involved in how the British state should spends its tax revenues and indeed what size the state should be in the first place. To reduce them to one “real” choice representing a fraction of overall spend is like saying that the real choice I face is between a Heart of Midlothian season ticket and feeding myself. (Essentials, both.)  Read more

An independent Scotland would not have to join the EU. But most Scots want Scotland to be an EU member and it is a central plank of SNP policy. There is no precedent, however, for what happens if part of a member state becomes independent and wishes to remain part of the EU. (Greenland, Germany and Czechoslovakia are all relevant but different cases.) This is one reason why both sides have been vigorously engaging in claim and counter-claim over EU law.

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I don’t want to get carried away – it is all too easy to admire someone’s goal and their tenacity while forgetting to evaluate them based on their results and in their historical context. At this point, it takes Govian willpower to say that his structural reforms to the education system have been a success – for three reasons.

Firstly, and rather obviously, we hardly know anything about the performance of children that have attended free schools, or those who have been taught under the Gove era. Ofsted reviews of free school suggest they are no better than others. What we know about the features of the best performing schools across the world (mostly teacher quality but also data-driven classrooms, high aspirations, longer hours, etc.) are only sporadically apparent in the first waves of free schools.

Secondly, the National Audit Office and others have raised serious concerns over the transparency of the selection process, free schools’ availability where they are most needed, and the looming trouble in the department’s capital budget. Collateral damage from a battle against an incalcitrant bureaucracy? Perhaps. When you blast a blob goo comes out. But one can not read these reports and celebrate success.

Thirdly, Mr Gove may have been the most radical reformer in the coalition but his changes should be seen in their proper context. Checking them against Thatcher’s legacy is important. So too is realising that they are a turbocharged version of the reforms began under the Blair government – free schools are academies. (Literally – they are academies under law.) I sense a tendency among some Conservatives to confuse how Mr Gove revolutionised the party’s views on education with him being the first and only person in the country to want to shake up the schools system.  Read more

Today’s young people are less likely to booze, take drugs or commit crimes than previous generations. They are sober, serious and staid. Socially, their maturity belies their years. But as a new report makes clear, the Great Recession has made them economically juvenile: in receipt of more support from the state and from their parents. Young people are growing up faster and slower than their forebears.

In their annual survey on living standards in Britain, the Institute for Fiscal Studies and the Joseph Rowntree Foundation suggest that the fastest growing type of inequality over the past five years has been between the young and the old, rather than between the rich and the poor or London and the rest of the country. (There is of course overlap here, and the IFS says the rich-poor divide will soon widen.) This rupture promises to affect the future of Britain’s economy for generations to come.
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Not a single track has been laid for High Speed 2 and yet George Osborne is already talking about “High Speed 3″, an extension of the project to link Manchester and Leeds. In a speech on Monday in Manchester, the chancellor spoke of his support for a “Northern powerhouse”: a conurbation to rival London, connected by transport links such as HS3, and governed by independent mayors. It is an excellent idea.

Although there will be a temptation to see Mr Osborne’s speech as simply another part of the HS2 debate, that would be simplistic. It represents the coming together of different conceptions of the future for British cities – and as ever political necessities.


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Not content with writing brilliantly about one wizard, JK Rowling has blogged about Alex Salmond. In a post on her website the Harry Potter author explains why she is donating £1m to the No campaign – and will be voting against Scottish independence.

I encourage anyone interested in the referendum on Scottish independence to read Ms Rowling. She expresses more clearly than most unionists the idea that patriotism is compatible with scepticism of independence. Ms Rowling may also help to explain why the Yes campaign is struggling to convince women. Hers is a proud, quiet and pragmatic defence of Scotland within the UK, one that will chime with many voters.  Read more

Christian Wolmar has written a short history of High Speed Rail 2 for the London Review of Books. “What is the point of HS2?”, he asks. The transport commentator is an opponent of the project, which passed through another legislative tunnel on Monday evening. Nevertheless, his essay is a sober account of why HS2 is going ahead, despite the protean arguments of its supporters. For anyone beguiled by the voodoo economics of both sides of the debate, it is an essential read.

Wolmar contests that the shifting claims made for HS2 reflect its haphazard origins. None of the major rail reviews of the Labour government recommended a north-south line, Wolmar says. He argues that the creation in 2009 of High Speed Two, the government-sponsored company in charge of the project, was partly a political response to Conservative support for the idea and partly a response to environmental concerns about expanding Heathrow. Under the stewardship of Andrew Adonis, Labour’s fervent reformer, it soon became a central part of its economic response to the crisis. The coalition government adopted it as an emblem of the Conservative party’s modernisation and, incongruously, a way of both “rebalancing” the geography of the economy and winning a “global race”. Read more

On Wednesday, the latest official employment data released by the Office for National Statistics showed a fall in the unemployment rate to 6.9 per cent and a rise in the growth rate of one measure of annual earnings. Strong stuff. Important stuff, too – and not only for the Bank of England and what’s left of its forward guidance policy. The relationship between wages and prices is politically important; the government has been keenly waiting for the day that pay outpaces inflation.

Is this the day? Not quite.

This is perhaps the most important chart from the ONS release. It shows the annual growth rates of CPI inflation (yellow line) and pay including (dark blue line) and excluding (light blue line) bonuses for the past five years. The latest pay data refer to the annualised growth over the three months from December to February. As you can see on the right hand side of this graph, for the first time in about four years, there is convergence: total pay (including bonuses) for employees was 1.7 per cent higher than a year earlier and CPI inflation in February was also 1.7 per cent.

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Dynamic modelling sounds like something Cara Delivinge might do as she scatters hashtags across Instagram. But it is actually even more subversive and exciting than our Cara. If the advocates of this mathematical economic modelling technique get their way, then it could transform how public policy is assessed in Britain. In doing so, it could make arguing for tax cuts and a smaller state a lot easier.

Let’s look back to the Autumn Statement. In its response to the chancellor’s annual announcements, The Taxpayers’ Alliance highlighted three areas where it says there are “weaknesses in tax policy”. Predictably, one weakness is that taxes are too high. Another is that there are too many of them. But the third recommendation is more esoteric. The pressure group said that “dynamic modelling” should be used for “all fiscal policy changes announced by the government”.

What is so important about this?

One clue comes in the form of a paper released on Monday by the Treasury and HM Revenue & Customs into the coalition’s policies on fuel duty, the tax on refined petrol, diesel and other fuels.  Read more

I studied for an undergraduate degree in England and for a masters in the US. In America, I learnt of the debt some of my fellow students had taken on. The English system I had studied under from 2003 to 2006, and which ended in 2012, seemed relatively generous. But after reading Thursday’s report by the Institute of Fiscal Studies into what the new system of student funding means for future graduates from English universities, I suspect that the idea that the average American graduate is more indebted may soon no longer hold. Graduates of English universities could shortly become the most indebted in the world. Read more

Iain Mansfield has won the “Brexit” prize, a competition run by the Institute of Economic Affairs think-tank to find the best way for how Britain could leave the EU. The diplomat has also written a fantasy novel called Imperial Visions. I would love to say that Mansfield confused his non-fiction and fiction but that would be harsh; his essay is thoughtful and more reasoned than the headlines greeting it suggest.

But ultimately, I think Mansfield is slightly too generous to his own analytic case in some places. But it is not as if he says that Brexit would bring a more prosperous future. Rather, he thinks it’s a wash. After reading this essay – one meant to outline the best course for UK withdrawal from the EU – I am left more convinced, rather than less, that the burden of proof remains with those proposing Brexit.

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Every week or so, in my previous job as comment editor, I would chat to Sir Samuel Brittan about his column. “Sam”, as he prefers, would have two or six suggestions and he was too polite to let on whether the conversation was mere courtesy. Despite his uncanny ability to arrive at my desk five minutes before deadline, it was invariably one of my favourite moments; the FT can be a special place to work.

I would occasionally suggest to Sam that he write about, say, the latest development in the eurozone crisis or the most recent announcement by the UK government. He would give the uncanny impression of someone contemplating what I had said. But soon enough, I had been enlightened as to the irrelevance of the emphemeral. More than once, Sam explained as follows: “I’m more interested in ideas.” Read more

On Tuesday, official data showed that UK inflation, as measured by the Consumer Price Index, rose by 1.7 per cent in the year to February, a slower pace than the 1.9 per cent reported last month. Employee earnings adjusted for CPI fell at their slowest pace since April 2010. If “real wages” were to rise this year, the government hopes this fact would protect it from attacks by the opposition Labour party about the cost of living. The gap between inflation and earnings is more than simply a technical matter.

However, that makes the technicalities more important to understand. The analytical debate about “real wages” tends to focus on measures of wages. But how inflation is measured obviously matters, too. This chart from the Resolution Foundation shows two forecasts for real weekly median earnings – one using CPI and the other using RPI-J, a supplementary measure that includes housing costs and has a controversial history.

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The pension reforms announced at the Budget have jolted Westminster from its pre-election ennui. Conservatives and Liberal Democrats are cock-a-hoop. But “It has been a disorienting few days for the opposition”, as Rafael Behr writes.

This is what can happen when a new policy is as uncompromisingly ideological as the change to annuities. Most of the objectives for government policy are not inherently divisive; parties tend to disagree over means rather than ends. In this case, however, the chancellor succeeded in making whether one supports or opposes the idea of voluntary annuities a case study in moral discombobulation. Read more

I like it when one chart demolishes two myths.

The graph below from Citi’s Michael Saunders shows how the coalition government has consistently delayed its fiscal tightening.

This suggests how the chancellor has been less dogged in pursuit of “plan A” than often believed. If you were being kind you could say it was a sign of pragmatism. But it also indicates how, contrary to the Budget rhetoric about responsibility, George Osborne is funding some tax cuts with temporary revenue-raisers and unspecified spending cuts. Ironically, it is the sort of financial short-termism depicted above that worries the morte thoughtful critics of the chancellor’s pensions changes. Read more