Budget reflections

As we had read in the newspapers, the Office of Budget Responsibility decided to downgrade their forecasts for productivity, which led to a reduction in the growth forecasts. These growth forecasts have been up, down, up and now down a bit over the last two years as various assumptions have been changed. The latest version shows growth at 1.4% in 2018 and at 1.3% in 2019, down from 1.6% and 1.7% in the Spring forecast.  These forecasts relate mainly to the pre Brexit period, with growth rising again in 2021 and 2022 after exit.

Despite this revision the government is still on track to start to cut debt as a proportion of GDP from next year onwards. Public sector borrowing is now estimated at £49.9bn this year compared with the £58.3bn in the Spring forecast, and to fall in  cash terms for every year over the next five years. Revenues have been more buoyant than the forecasters expected.

The OBR may be right to reduce its productivity figure, as all major economies have experienced slower productivity growth than before the banking  crash of 2009. The UK has been particularly successful at creating many more jobs.  This will tend to reduce the average rate of productivity growth.  Productivity is measured by comparing the value of the output sold with the numbers of employees creating it. As an economy increases the share of certain services it will tend to slow the growth of productivity. Faster productivity growth with higher productivity numbers is generated by large investments in oil extraction, chemical plants, automated engineering works and the like where the amount of output per employee is very high reflecting the large amounts of capital equipment put in.

It does seem that the global number crunchers are having difficulty capturing the value and the efficiency of the new digital revolution. The big digital service providers are cutting prices of traditional activities and supplying substantial service free to the individual user. Is this fully captured in the way they calculate the figures?

Meanwhile the official forecasters have struggled by taking too pessimistic a view of Brexit. Their idea that investment and confidence would be hit badly affected their short term forecasts after the vote. Some of this has now been adjusted in the latest forecasts which assume business investment will resume growth from this year onwards after a pause in 2016. They now expect employment to rise each year a little as the economy continues to create extra jobs. They expect good growth in UK exports this year and next, with very little  growth in trade in 2020 and 2021.

Overall the forecasts look more sensible than the pessimistic ones in the summer of 2016. There could be more surprises on the upside, as there were today on the deficit this year and the tax revenues.

 

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A new UK fishing policy

I have long argued we should be able to produce a new UK fishing policy which is kinder to both our fish and our fishermen.

Fishing for Leave has come up with some interesting proposals designed to allow us to catch more fish for our own consumption whilst conserving more fish at the same time.

As they point out, it is not difficult to design a better policy than the long lasting Common Fisheries Policy. This was based on a quota system for each type of regulated fish. A fishing vessel had to throw back all dead fish that did not conform to the required limits on landings. It meant the UK fishery caught a lot of fish that had to be dumped dead.

After years of this damaging approach they decided to try to ban dumping. This is difficult to enforce without cameras on every boat in the right places. It also means when enforced  vessels are  banned from fishing as soon as they  hit quota problems on any given species.

Fishing for leave recommends a different approach. All fish caught should be landed and used. If we can eat all the fish caught we can  catch far fewer fish than needed with a discard policy in place, whilst landing more than under the old policy. The fishery would be protected by limiting days at sea for the fleet, to limit overall catches. In order to stop vessels pursuing too many fish of a particular kind because it is valuable or popular the system would include reducing days at sea for any vessel that did pursue too many fish of a species that was at risk.

This proposal looks like a good basis for forming a new policy. The aim must be to protect our fishery so it is there for the future. There has to be some way to prevent excessive exploitation leading to a bad decline in fish stocks. It should also aim to deliver a fishing industry that does supply us with the fish we want to eat. We always used to have a surplus of fish when we ran our own policy, and can do so again.

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Official figures for the UK contributions to the EU

The official HMT and OBR figures for 2016 shows the following

Total gross contributions       £23.148 billion    (£445m a week)

Gross contributions less rebate    £17.865 bn    (£343 m a week)

Gross contribution less rebate and monies paid back to the UK  through EU programmes    £11.73bn  (£225 m a week)

 

The gross contributions are made up from

Customs revenues      £3.347bn

VAT EU share   £3.647bn

GNI levy           £16.154bn

We need some new estimates of what customs levies would bring in were we to opt for the WTO model. Indicative figures are that the UK would levy £12bn on EU imports into the UK. This money would be available to give back to UK consumers as tax cuts and benefit increases, so customers were not worse off if they wished to continue to buy so much EU product.  The EU would levy £5bn on UK exports to the EU, which would still leave our products more competitive than two years ago before the rise of the Euro.

 

The WTO model the big attraction of no so called divorce bill.

 

 

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Better jobs

The UK economy has been good at creating many new jobs over the last seven years. It has been successful at taking unemployment down substantially. One of the main aims now should be to promote higher skilled and better paid jobs. This is the essence of  how to tackle the so called productivity problem.

It is  normally easier to get from a job to a better paid job, than to get from unemployment into work. It is possible for many to work with their employer. Good companies have schemes to foster training and to help employees achieve qualifications. This usually leads in turn to promotion within the firm.

There are many skilled areas where the UK is recruiting where we could do with more skilled young people from our own Colleges. Various companies and industries complain of a shortage of good people with the right skills. Often they turn to inviting in people from overseas to fill the gaps. The UK economy has been great at generating jobs for new migrants as well as for people already settled here.

Raising employee productivity can take place in several ways. The company may just get better at selling service or product, and raise the amount supplied per worker through good sales combined with processes that allow the existing workforce to service some of the growth. The value of the company’s output may rise for other reasons. When, for example, the oil price goes up the employees of the oil producers become more productive because the  value they each produce rises. A company may introduce better product or service which commands a higher prices which also boosts productivity.  A company may invest more capital in computing, automation or more modern process which can allow the same workforce to produce and sell more.

The UK has a great opportunity to replace more imports with domestic production given the improvement in our competitiveness in the last couple of years.

 

 

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So the EU budget rebate is at risk

In the endless referendum debates and interviews about the money I always stressed that the £350 m was an accurate official figure for the gross amount. I also quoted the various  net amounts if they were relevant to the specific question.

Quite often Remain speakers claimed we do not send the gross amount, but retain the rebate at home. We have further confirmation from the EU that we do send the gross amount and have to reclaim the rebate later. Now there are stories that the EU will not pay the last rebate owing. In that case we should only send the contribution net of estimated rebate.

We also read that the EU thinks we should accept some  future liability for Ukrainian loans from the EU. This reveals an interesting EU worry. EU policy towards the Ukraine has been problematic. The wide ranging Association Agreement was part of the reason for political change in Ukraine which led to the loss of Crimea and to a bitter civil war which damaged the economy. The EU and the IMF were drawn into offering substantial financial support for the troubled economy.

It is difficult to see why the UK when out of the EU should have to stand behind loans the EU has made when we will not be receiving any financial gains the EU might make on other assets.

If this  is the best the EU can come up with we should continue to plan  to leave under the WTO option. The UK should not make any concessions.

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Timing of postings

I moderate this site, when I can spare a few minutes to do so.

I post short contributions first.

I delete postings that make unsubstantiated allegations about named people or companies for legal reasons. Mr Corbyn gets the same protection as Mrs May.

I delete contributions using bad language or smearing groups of people. Links  from sources I have not checked will delay a posting and may result in deletion. A link to a source like ONS or the World Bank can be helpful and does not delay a posting.

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Housing at the centre of the debate

There has been a tussle going on over how to finance a larger housebuilding programme. The Prime Minister announced her intention to build more homes in her Conference speech, but was only able to agree modest sums of public money for the affordable housing she had in mind. The Treasury is seeking to limit the expenditure of taxpayer cash, and to look at other ways of relaxing the housing market to foster more development.

This week  we read that the independent Office of National Statistics who put the £70bn of Housing Association debt onto the government’s balance sheet in 2015 is now going to take it off. The Office is apparently now satisfied that the Housing Associations are sufficiently  independent of government so their debt is not part of the state’s obligations. This follows legislative changes concerning Housing Association finances and management.

This is significant because it removes Treasury concerns that more Housing Association borrowing impedes reducing state borrowing as a percentage of GDP, one of the government’s chosen targets. It will allow Housing Associations to borrow more to build more, subject to their own balance sheets and credit worthiness. It means that the Communities Secretary’s plea to borrow more at these current low interest rates to invest in housing has just got a bit easier for part of the housing sector.

Thursday we saw the PM out and about highlighting the housing issue. The Communities Secretary made a speech urging Councils to achieve more with their local plans. There remains the issue of the capacity of the housebuilding industry. Successful large companies dominate the activity, and have their own reasons to limit the pace of growth in their activity. They worry about maintaining standards, and recruiting and training sufficient skilled people. Local Colleges can help by putting on sufficient places for building trades courses, and promoting these to potential students.

As the government turns its attention to more affordable housing it is important it includes enough affordable housing to buy, as that is still the preferred tenure for most people. It also needs to expand shared ownership and rent to mortgage models to create additional pathways to ownership. The government should also bring forward its proposals for a new migration policy for post Brexit.

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David Davis was right to urge the EU to engage on the future relationship for their own sake

The EU is trying to stick with the idea that you can settle the Irish border issue without deciding the basis of our future trading. They  hope that by delaying trade talks they will get more money out of the UK. The Brexit Secretaary was right to offer no money and to remind them that a Free Trade deal is in their self interest.

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Germany still does not have a government with a majority

I wrote after the German election that after her large loss of votes and seats Mrs Merkel would find it difficult to form a coalition. Her own party polled just 26.8%. So it has proved. I drew a contrast with Mrs May and the Conservatives where the  vote went up to 42.4% and who could form a coalition with the DUP.

Two months on she missed the deadline for agreement yesterday.It was difficult enough keeping her coalition with the CDU’s sister party the CSU to take her up to 32.9% of the votes. To consolidate that she needed to reassure on migration which makes it more difficult to get the Greens into a government. The Free Democrats and the Greens also have substantial disagreements with each other over coal, energy generally and approach to business.

It is still possible they could reach an agreement, but the long delays  imply the best that could happen for Mrs Merkel is a weak government with limited capability given the big disagreements between the parties. If she fails to form a coalition her party may want a new leader and there might be another election.

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Why I am very positive about the UK economy post Brexit

As there is a concerted attempt to misrepresent my views on the prospects for the UK economy let me repeat why I am very positive about the UK post Brexit, as I have always said.

I see the UK as a great destination for inward investors and for domestic investors wishing to set up businesses, create jobs, build factories and new properties. Only a month ago I was  being criticised for daring to say we needed more realistic forecasts which would be more optimistic ones. My critics ignored the fact that I had disagreed with the Treasury and Bank of England view that the Brexit vote would plunge the UK into recession last winter and had been proved right by events.

It is those who cannot accept the resuit of the referendum who are being gloomy about UK prospects and constantly talking about businesses thinking of moving out. They have been wrong about commercial property and about the expansion plans of overseas investors in the UK

Brexit is full of opportunity for businesses already in the UK, for new businesses that can be set up in the UK, and for businesses thinking of investing from overseas. The UK has a large  balance of payments deficit which we can cut by making and growing more things for ourselves. The UK is very competitive at the current rate of exchange. Freed of the constraints of the EU agriculture and fishing policies we can start to reduce the huge deficit in food that we have built up with the EU over the years. The Common Fishing Policy has restricted the amount that can be landed by British vessels in UK ports. We could do better  by our fish and our fishermen with a UK fishing and conservation policy. Past quota policies damaged parts of our farming industry. A UK policy needs to include the promotion of more growing of our own food.

The swing lower  in the pound against the Euro both before and after the vote makes UK manufactured products like cars that much more competitive compared to EU imports, which should help our domestic industry. The UK is establishing  itself as a great centre for knowledge based industries in general, and for technology based companies in particular.Today there is an optimistic view of the prospects for the Oxford Cambridge corridor.

 

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  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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