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.
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.
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.
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
On Thursday, the Institute for Fiscal Studies delivered its verdict on the Budget. If you prefer prose, I recommend director Paul Johnson’s lucid explanation. But for pithiness, you can’t beat this slide from Gemma Tetlow’s presentation:
For all the chancellor’s talk of investing for the long-term, the evidence from the IFS suggests that he is doing the opposite: funding permanent tax cuts through temporary schemes and to-be-determined spending cuts. Read more
In spite of his genuinely radical pensions reforms, George Osborne’s Budget had a familiar underlying theme: austerity will be with us, or at least some of us, for the rest of the decade. In this respect, the next parliament will be like the last.
However, the way the public finances are measured will change. The below is quite wonkish but it could have an important political consequence, making it more likely that the chancellor will meet the second part of his “fiscal mandate” – that public sector net debt excluding financial transactions is falling as a share of GDP by 2015/16, despite nothing having changed in the real world.
I’ll try to make the following as painless as possible. Read more