Showing posts from tagged with: United Kingdom

Stable Growth likely to Continue

Posted by Tim Congdon in News Archive | 0 comments

In my last monthly e-mailed note (on 28th June) I said that money growth patterns in the four leading advanced country jurisdictions (USA, Eurozone, Japan and the UK) were more or less perfect. To recall, “4% a year is a more or less ideal rate of broad money growth in developed countries, with a trend rate of output growth of 1% - 2% and an aim to keep inflation around 2%. Amazingly, and no doubt more by happenstance than design, 4% a year is at present common to the USA, the Eurozone, Japan (just about) and the UK.” Well, not much has happened since then to alter the assessment. The picture is as follows,2016-08-25_11-45-20The numbers  for China and India, the two big developing countries (both with trend growth rates of output of over 5% a year), are as follows2016-08-25_11-47-55  

Global money round-up in mid-2016

Posted by Tim Congdon in News Archive | 0 comments

The victory for the Leave campaign in the UK’s referendum on EU membership has dominated financial news since 23rd June. It is of course a major event, not least because numerous forecasts of a mini-recession in the UK are now to be tested. The evidence so far is mixed, with the latest survey from the Confederation of British Industry (published a few days before 23rd June) reporting a rise in the balance of companies planning to expand output in the next three months. Elsewhere the main features are, first, in the developed countries continued growth of broad money at the almost ideal annual rate of 4%, and, second, in China and India signs of a slowdown in broad money growth. The slowdown in both China and India has come about suddenly, and may soon disappear from the data and not prove  meaningful.  On  the  other  hand,  the  slowdown  could  last  a  few months, perhaps even more. Once a money slowdown/acceleration persists for six months or longer, it starts to matter to the cyclical prospect. My overall assessment is – despite the Brexit shenanigans – the global monetary background remains consistent with steady growth in world demand and output in late 2016 and into 2017. Far too much fuss is being made about Brexit. The UK’s share of world output (when output is measured on a so-called “purchasing power parity” basis) is modest, less than 2½ per cent.   The credit downgrades faced by British banks have created possible funding strain for them, recalling the crisis of late 2008. The problem needs to be countered by the provision of long-term refinancing facilities from the Bank of England, just as Draghi handled a similar challenge in the Eurozone in December 2011  

The Leave campaign has been about the recovery of British control over British business etc

Posted by Alec Tritton in News Archive | 0 comments

Brexit-lite and Brexit proper

Post-Brexit discussion suffers from a serious vacuum. Although the British people have voted by a narrow margin to leave the European Union, the next prime minister has not been appointed, and no one knows exactly how he/she and his/her team will organize the negotiations. Two main options (both with many potential variants) are emerging,
  • Brexit-lite (“the Norwegian/Swiss option, plus or minus”. The government gives priority to maintaining access to the EU’s Single Market, although seeking  (like Norway and Switzerland) to restore parliamentary sovereignty and judiicial supremacy (i.e., that the highest court in the UK is its own Supreme Court, not the European Court of Justice in Luxembourg). Control over new regulations would be with the UK Parliament, but EU regulation would have to be respected in much of the economy and not just on exports to the EU. The UK would pay some money (“danegeld”) to the EU. Given the politics of the situation, the UK would want significant concessions on “freedom of movement”, so that it did indeed control its borders, but something like “freedom of movement for workers only” night be devised.
  • Brexit proper. The government says that access to the Single Market is not essential, as the UK can trade satisfactorily with the EU under World Trade Organization rules. It says this, even if UK exports would be subject to the “common external tariff”. Of course the UK restores parliamentary sovereignty and judicial supremacy. It also oversees all new business regulation, although exports to the EU must anyhow comply with EU regulation. The UK pays no money to the EU and recovers full control of its borders.
It would over-simplify matters to say that Brexit-lite is the preferred option for the Eurosceptic Tories, while Brexit proper is the approach favoured by UKIP. But an over-simplification of that sort would not be outright misleading. My surmise is that the prime minister will be Boris Johnson and that the outcome will be Brexit-lite. If the prime minister is Theresa May, the outcome will be Brexit-extremely-lite. UKIP will protest that the British people have again been betrayed and deceived, but its vote share in the 2020 general election is very difficult to conjecture. The size of the danegeld will be a sensitive issue. (My further surmise is that, with the EU’s economic importance [and hence its share of UK exports] declining Brexit-lite may become Brexit proper in due course, perhaps after another decade or two. But who knows? Questions are being raised about the EU’s own internal cohesion.)  

How high is UKIP’s support at present? Is it really changing the face of British politics?

Posted by Tim Congdon in News Archive | 0 comments

The UK Independence Party claims to be ‘changing the face of British politics’. The big support it received in the May 2013 county council elections certainly came as a shock to the three so-called ‘main’ parties, with one of these parties – the Liberal Democrats – receiving far fewer votes than UKIP. (The LibDems had 14% of the vote and UKIP 23%, and UKIP was in fact only 2% behind the Conservatives.) However, opinion polls tend to show UKIP support at only just into the double digits per cent and not much above the LibDems. Are the opinion polls telling the truth? UKIP is doing far better in local government elections than in the opinion polls. In the following note I compare opinion poll and local election results since late August. In the 47 local government elections analysed the UKIP vote share was 19.0% and its average result where it stood was 20.8%. (But note that this 20.8% was lower than the 2nd May figure! Admittedly, the difference is small.) By contrast, the UKIP share in the 59 opinion polls compiled by UK Polling Report in this period was 11.6%. On this basis, the opinion polls are seriously understating the size of the prospective UKIP vote in both the European elections of 2014 and the general election of 2015. It also needs to be emphasized that the UKIP share in local government elections has climbed from 3.1% in 2010 to 19% plus in 2013. If it continued to make gains at this sort of rate, it would certainly be ‘a major party’ in the 2015 general election and could even win it. For clarity, this is not what I expect, but for some years to come fluctuations in the UKIP vote share, around a rising trend, are likely to disrupt the thee-party, Lib-Lab-Con pattern of British politics which began in the 1980s. (This pattern began with the formation and rise of the Social Democrats, and their eventual absorption into the Liberal Party.) It is unclear whether a four-party pattern (Labour, Conservatives, UKIP and LibDems) or a three-party pattern will now develop, but a case can be made that UKIP will supplant the LibDems as the third party.  

Immigration and the UK labour market

Posted by Tim Congdon in News Archive | 0 comments

Heavy net immigration into the UK has occurred in the last 15 years, reflecting the impetus of mostly administrative changes at the start of the last Labour government in 1997. (No major announcement was made and no public debate was held on the desirability of this new development in British life.) A particularly important new trend was inaugurated about a decade ago. Following a decision by the then prime minister, Tony Blair, the UK would not impose any restrictions on the inward movement of workers from eight East European countries when they joined the European Union in May 2004. Since spring 2004 UK-born employment in the UK’s labour market has fallen, whereas foreign-born employment has increased by about 1.8 million. Roughly half of the 1.8 million come from the so-called ‘EUA8’ countries, i..e, the eight accession countries of May 2004. The mere recital of figures does not demonstrate a causal connection, but more detailed work (such as on regional employment patterns) does suggest that UK workers have lost jobs because of the influx of foreign workers. On 1sJanuary 2014 people from Bulgaria and Romania – which together have a population of about 30 million people – will be free to come to the UK, and to live and work here. The following note – which is chapter 4 of the 2013 edition of my study for the UK Independence Party on How much does the European Union cost Britain? – discusses these developments in more detail.  

The costs of regulation

Posted by Tim Congdon in News Archive | 0 comments

From a constitutional standpoint, the European Union is a monstrosity. Powers have been ceded to EU institutions  that  place  them  above  the  member  nations  in  the  constitutional  hierarchy.  These institutions are, in effect, federal bodies that  constitute a ‘government’  for  the  EU as a  whole. Nevertheless, the member nations have retained trappings of statehood, and in particular continue to have their own military forces, their own legal systems and their own fiscal prerogatives. Critically, most taxes are raised and most public expenditure is administered at the national level. EEC expenditure was a mere 0.03% of member states’ aggregate gross domestic product in 1960, and had climbed to 0.53% of that figure in 1973 on the UK’s accession. The ratio has subsequently risen to slightly more than 1% of EU GDP, as we saw in the last chapter. But it is striking that Germany – the main sponsor of European integration – has over the last 20 years been one of the member states most opposed to additional spending in the union’s name. At the Edinburgh meeting of the European Council in 1992 Germany actively supported a spending ceiling of 1.27% of aggregate member nations’ GDP.1 On the face of it the EU has two layers of government, one at the national level and the other for the union as a whole. But the word ‘layer’ implies, falsely, that a clear and definitive understanding has been established on the proper relationship between the two. In fact, EU member states are in the dysfunctional situation of having two distinct governments, one in the national capital and the other in Brussels, with their relative powers and responsibilities largely unsettled. The EU bureaucracy has been unable to wrench the key fiscal prerogatives, the powers to tax and spend, from the member states. To compensate for this failure, it has tried to expand its influence by pressing for more European ‘laws’. The heart of the process is that the European Commission proposes new ‘directives’ and ‘regulations’ to the Council of Ministers. Successive treaties have weakened the power of individual  nations  to  block  new  EU  legislation  that  they  dislike.  Particularly  since  the  Single European  Act  of  1986 the  nation  states  have  become  increasingly feeble  in restraining the  EU juggernaut. Over the 55 years of its existence the European Commission has authored thousands of directives and regulations that have the force of law across the EU. At the last count the EU’s various legislative enactments – which are termed the acquis communitaire – covered over 120,000 pages. As far as the EU is concerned, the acquis is sacrosanct and must be adopted by all new member states without cavil. Directives and regulations are the main expression of EU authority, and nowadays infiltrate every nook and cranny of national life. In the words of Lord Denning over 20 years ago, ‘Our sovereignty has been taken away by the European Court of Justice…No longer is European law an incoming tide flowing up the estuaries of England. It is now like a tidal wave bringing down our sea walls and flowing inland over our fields and houses—to the dismay of all.’2  

Low interest rates make high public debt manageable

Posted by Tim Congdon in Uncategorised | 0 comments

Britain’s governing Conservative-LibDem coalition was formed shortly after the 2010 general election in order, above all, to bring the public finances under control.  George  Osborne’s  goal  was  to  restore  a  balanced  budget  by  the 2015/16 fiscal year. It is now clear that a large fiscal deficit will be recorded in 2014 and 2015, and that the ratio of debt to GDP will continue to rise until the end of the present government. In that sense he has failed. Government spending has not been cut, but it has been contained and its level is more or less in line with that envisaged three years ago. But revenues have been lower than expected. The growth of the economy, and hence the growth of the tax base and revenues, have been disappointing. General government gross debt is now about 87½% of gross domestic product and will keep on rising, perhaps to about 95% of GDP, in the next few years. All being well, its ratio to GDP should then stabilize and even start to fall. (Net public debt is smaller, representing about 75% of GDP.) This level of public debt is much higher than on average over the last 25 years or so, as the chart on the next page demonstrates. However, the UK’s public debt position is at present quite manageable. Interest rates and gilt yields are so low that debt interest  payments  are  modest  relative  to  GDP.  The  position  would  alter radically if investors started to demand a reasonable return on their holdings of government debt. Net interest payments appear at present to be about £30b. a year, i.e., with an average rate of interest on the debt of about 2½%. If real gilt yields were to return to the figures seen in the 1980s, the average rate of interest would need to be about 7½% and the debt interest burden would approach £100b. That would necessitate a reappraisal of fiscal/budgetary policy.  

The UK’s poor productivity performance in the Great Recession and its aftermath: how is it to be explained?

Posted by Tim Congdon in News Archive | 0 comments

The supply-side performance of the UK economy deteriorated in the Great Recession of 2008 and 2009, and has remained unimpressive in the hesitant recovery that has followed it. In the year to the third quarter 2007, which saw the run on Northern Rock and so heralded the financial strains of the Great Recession, national output was booming. As measured by gross value added in real terms, it rose by 4.7 per cent. From then until the third quarter of 2012 the average value of the annual change in national output was negative at minus 0.2 per cent. In other words, at the time of writing (April 2013) output remains below its level five years ago, an outcome so weak that it has no precedent in the period of modern quarterly national accounts that began in 1955. However, employment has been surprisingly resilient in the Great Recession and has recently reached a new all-time peak. As the change in output can be viewed as the sum of the change in employment and the change in output per person employed (or ‘productivity’), it is clear that the central disappointment of these years has been the stagnation of productivity. The accompanying table below shows that in the five years to autumn 2012 productivity typically fell by 0.4 per cent a year, whereas in the preceding 45 years it rose on average by about 2 ½ per cent a year. The question to be discussed here is ‘why?’.  

The UK political scene ahead of the Eastleigh by-election

Posted by Tim Congdon in News Archive | 0 comments

Disillusionment with politics – or at any rate with the current political elite – is rife in Britain at present. The UK Independence Party has made astonishing gains in the last three years. In the 2010 general election it received about 3% of  the  vote,  but  opinion  polls  and  canvassing  returns  show  that  in  the Eastleigh by-election (result due on Thursday, 28th February) it should achieve more than 15% of the vote and its share may even approach 25%. British politics is in flux. In the following remarks, which are based on an e- mail distributed to UKIP supporters* earlier today, I analyse prime minister Cameron’s disastrous strategy to ‘modernise’ and ‘rebrand’ the Conservative Party.   The result of that strategy has been to alienate support from an important Conservative constituency, namely the Cs and Ds (the lower middle class and working class) who – when they do not vote Labour – are often particularly ‘right-wing’ in their  political orientation. (The  ‘patriotic working class’, etc.) The Cameron strategy has been responsible for upsetting many true conservatives who dislike/deplore the prime minister’s politically-correct agenda on social issues. My surmise are that

i. the Conservatives will lose heavily in the 2015 general election and then split, with the majority of the party moving in favour of withdrawal from the EU, and

ii. the polarisation in British politics in the next few years will be less on class lines and increasingly on the European issue

* I was runner-up in the 2010 UKIP leadership election and am therefore biased. I am of course not going to hide this.  

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