Trade wars and the car industry

Mr Trump regularly condemns the German car industry for selling too many cars to the USA. He thinks it unfair that there is a 10% tariff on US cars into the EU but only a 2.5% tariff on cars into the USA. Surely it would be better and fairer if the EU removed its tariff completely or took it down to a relatively unimportant 2.5%? The US has opened a formal S 301 review of car trade and will doubtless find that there are trade problems that need to be remedied.

This part of the trade war is not yet fully joined. The USA are still busy trying to get decent reform from China, where trade terms are skewed in China’s favour and where China allows abuse of intellectual property. This set of actions followed a comprehensive report into China’s handling of IP under a S 301 enquiry. China has promised more enforcement of IP protections, and more market opening. This will benefit the UK as well as the USA, as under WTO rules China has to offer the same improved terms to all members.Now Mr Trump is talking about a 20% tariff on EU cars anyway

If the EU accepts Mr Trump’s case about the lack of fair trade in cars then that means the end of the 10% tariff for all WTO members. That too will be a good outcome for the UK as we leave the EU. The sooner we are free to wield vote and voice for fairer and freer trade the better. This is a time of change for world trade where the UK could make a great contribution to reform. The WTO has made clear that there is a vacancy for a substantial country to lead the case for freer trade within the WTO framework. They point to substantial gains anyway fro m last year’s Facilitation of Trade Agreement which they think will cut costs of trade substantially.

Mr Trump asks how it is that the US has a massive trade deficit and Germany and China have massive trade surpluses. He points out that the US has many fine companies with great technology and great skill levels . He thinks the terms of trade are unfair, and need amending.

The UK too has a large current account deficit. Part of this comes from  the substantial EU contributions and overseas aid we pay out. Stopping the EU payments will reduce our deficit by around 15%. The EU has always done more to open goods markets where Germany is strong, and less to open service markets where the UK is stronger.

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The Bank of England wants to slow the UK economy some more

Mr Haldane’s decision to vote for an immediate interest rate rise this week shows the Bank remains split and uncertain about its forecasts. They are still trying to get over their hopeless forecasts of recession in 2016-17 which was never likely. As Chief Economist he should understand that the tough actions of the FPC of the Bank have slowed credit and activity substantially over the last year. Money growth is very sluggish.
The car market has been brought down by withholding perfectly safe car loans from potential buyers.  The decisions they took to cancel commercial bank facilities, to raise rates by 0.25%, to restrict consumer  credit, and to toughen mortgage criteria have all played their part in slowing the UK to just 0.1% growth in Quarter 1. Quarter 2 will doubtless be a  bit better, but they should not be thinking of more monetary tightening until quarterly growth gets back up to 0.6% or more. There is no likelihood of overheating given current levels of growth and sluggish money and credit. The slow performance in Q1 was not just weather related but points to the effects of policy actions taken. The Treasury has reinforced these problems with their tax attack on Buy to Let and higher priced properties in the 2016 budget and their tax attack on dearer cars in the 2017 budget, along with the general policy moves against diesels.

Some say there is a bit of wage inflation around. It is true the government has boosted low end wages through its Living Wage policy. It is to be hoped that low end wages will rise a bit more as employers compete for labour. It is also  be hoped that firms invest a bit more so the people they employ can be more productive, earn higher wages, and see machines do more of the routine work. The Business department who spend a lot of time agonising over what might go wrong for the car industry when we leave the EU should get on with the day job, defending the car industry against domestic policy changes that clearly damage output whilst we are still fully in the EU. Why have they not spoken out about the bid drop in diesel sales?

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2010-17 Huge increase in tax revenue, increase in public spending, deficit well down

The BBC want to peddle myths about austerity. On thursday I heard the World at One programme devoted to telling us there had been a big austerity drive in the public sector since 2010. They used the old Treasury figure that 80% of the adjustment to get the deficit down was made by public spending cuts, and 20% by increased taxes. The entire programme was devoted to this thesis, without any cash numbers for either revenue or spending being mentioned throughout!

So let me have another go at explaining what actually happened.  There was a huge increase in tax paid which cut the deficit and allowed some increase in total public spending. Most of the tax rise came from growth in the economy, with some help from lower Income Tax rates. Judged by the numbers 100% of the deficit reduction came from more tax revenue. Of course some individual programmes were cut, but overall spending rose substantially in cash terms. The benefits bill is well up despite a good fall in unemployment. Health and education, large spending programmes, were protected from reductions. Payments to the EU and in Overseas Aid went up substantially.

In 2009-10 the state spent £669.7bn on current and capital public spending. it raised just £490.3 bn of this in tax. There were some additional receipts, leaving borrowing of a massive £156.4bn

In 2017-18  (Budget figures) the state spent £795.3bn. That is £125.6bn more than in 2009-10, a cash increase of 18.75%, a bit above inflation.

In 2017-18 the state collected a massive £692.8bn in tax revenue, an increase of £202.5bn or 41.3% above 2009-10 levels. As a result state borrowing fell to just £39.5bn, again after allowing for some other receipts.

In other words the deficit came down thanks to huge revenue increases.

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Airbus will need UK wings to fly

Brexit is no threat to Airbus. The UK will willingly honour its contracts to supply the wings.

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Well said, US Ambassador. We will do well from Brexit

It is a timely reminder to the gloomy parts of the UK establishment. Brexit is full of opportunities. The Chancellor tells us the Treasury is not against Brexit, so will they cheer up and stop trying to recreate every feature of our membership of the EU as we leave?

Lets speed it up. Some of us want things to be better and want to get on with the changes.  The Treasury should be leading the demands to get our money back as soon as possible, not saying we need to go on paying them.

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Where are we on the road to Brexit?

It has been a slow process so far, thanks to the delay imposed by the courts over sending the Article 50 letter.

There were always four tasks to complete for exit after the referendum decision. We have now completed the first two.

We have sent a formal notification to leave. This fulfils all the Treaty requirements to leave, and has a date of 29 March 2019 for our departure. It means our departure is valid in international law.

We have now passed legislation to ensure the UK Parliament and courts take back control the day we leave the EU. This also ensures legal continuity, providing that all current EU law remains in force as UK law on exit day, which had to be that same 29 March 2019 date.

We now need to see if there is a deal concerning our future relationship that the government thinks is worthwhile. The EU wishes us to sign a Withdrawal Agreement, but this is not a legal requirement of the Treaty and would presumably only occur if the UK government is satisfied that its terms are reasonable and it is complemented by a good future relationship agreement.

The final act will be Parliament’s decision as to whether we should accept the government’s deal and implement that in UK law, or whether we should leave without a deal.

Some have sought to turn the Parliamentary decision on the final deal into a vote between the deal and not leaving the EU, rather than a vote on whether to leave with or without the deal on offer. This was the underlying agenda to the arguments about a “meaningful vote”. It was finally wisely agreed not to put instructions to Parliament on how we should proceed after the deal has or has not been concluded into law.

It is difficult to understand why some want Parliament to be able to veto Brexit at the end of the process. After all the referendum decision was made by the people, and the Parliament voted overwhelmingly to leave when it voted for the Article 50 letter to be sent. The UK would be in an exceptionally weak or absurd position if Parliament vetoed the deal on offer and vetoed leaving without a deal. Why would the EU want to improve its offer in those circumstances? And how and why would the EU take the UK back into membership on current terms?

The anti Brexit forces claim to be new champions of Parliamentary sovereignty after all those years when they were busy giving it away to Brussels. They have to accept that Parliament has decided to leave and made that clear when it sent the letter. They also need to remember that 3 times now the Commons has voted by large majorities against staying in the single market and customs union. A mature sovereign body has to recognise when it has made a decision.

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The government’s flexible friend

UK PUBLIC FINANCES

 

At the Budget (March 2017) The Treasury forecast £58.3bn of borrowings in 2017-18.

The out-turn was 30% lower, at £40.5bn

At the same Budget the Treasury forecast £40.8bn borrowings in 2018-19. This has since been reduced to a forecast £37.1bn. Early figures suggest the Treasury has again overestimated the borrowing.

The Treasury also say they need to reduce the outstanding debt, which is at £1800 bn. or 85.1% of GDP. They need to remember this is a gross figure. The UK state has bought in £435 bn of debt which it therefore no longer owes. The state net debt is £1365bn or 64.5% of GDP. This is a relatively low figure for advanced nations, and eminently sustainable.

The government did not herald tax rate rises in the Manifesto, and there is no need for them to finance the NHS and other priorities. In some cases lower tax rates could bring in greater revenues, as the cut in top rate Income tax did. What is needed is a policy to promote faster growth from the current slower growth brought on by monetary tightening and tax rises on homes and cars.

The NHS spending can be paid for by a mixture of the proceeds of growth and the savings on EU contributions. In the short term borrowing can be allowed to go up to forecast levels, as it has been running well below official forecasts for some time.

 

Update: Today’s figures for May confirm the trend to undershoot. They have now lowered 2017/18 further to £39.5bn, some £18.8bn below their forecast!  The year to date  2018-19 is 25% down on 2017-18 so far, though that is just two months.  Receipts on income and wealth are up by a large 6%, with spending growing by 2.5% plus a 4.5% increase in benefit costs.

 

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How much money do we save when we leave the EU?

I see some contributors here are out to belittle the amount of money we save when we leave the EU. Let me set out the official figures again:

OBR March 2018  p217 EU financial settlement

 

2019 figures (assuming we still pay full amount that year)

GNI based contribution   17.7bn Euro

VAT payments to EU         3.4bn Euro

Own resources (customs)   3.8bnEuro

TOTAL GROSS CONTRIBUTION   24.9bn Euro

UK rebate      4.7bn Euro

Public sector receipts  (money back)  6.3bn Euro

NET CONTRIBUTION   (Gross payments minus rebate and cash back) 13.9bn E   (£12bn)

We could save all this if we leave with no  deal or an improved deal. If we leave with Withdrawal commitments we will save all this once the transition and leaving payment is over.

 

 

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The Bank succeeds in slowing money and credit – nothing to do with Brexit

The Bank of England has taken a lot of action to tighten money and credit since early last year. As this gets little attention I thought it might be helpful to remind people what it has done:

 

  1. Increased rates from 0.25% to 0.5%
  2. Cancelled the Term Funding Scheme which allowed banks to borrow at low rates to lend on to the UK economy  (£127bn used by end of scheme in April 2018)
  3. Increased Counter Cyclical Capital Buffer banks have to hold to 1% from November 2018 to reduce bank lending for any given amount of bank capital
  4. Toughened “prudent affordability limits” on home loans
  5. Imposed new tight limits of mortgages above 4.5 times income
  6. Warned against credit card zero interest rate promotions
  7. Required tougher standards for car loans related to future value of vehicle
  8. Warned that Central London office properties were expensive
  9. Set out to “tighten consumer credit conditions”

Given this, as predicted here, it is not surprising the UK economy has slowed. Similar action is not being taken in the USA or the Eurozone. The Eurozone continues with zero interest rates and still more Quantitative easing. The USA is deregulating banks to allow more credit, and undertaking a major fiscal stimulus  though it is raising rates.

Posted in Uncategorized | 125 Comments

Health spending, tax and that Brexit dividend

There has been a long running argument within government over health spending and how to pay for future increases. That is why I wrote about efficiency and quality last week, and set out the case against a hypothecated health tax sometime ago on this site.

I am pleased to report that the idea for a hypothecated new Health Tax seems to have been dropped. I explained how such a tax  would not  be enough on its own, how there would still be plenty of arguments about how much extra money the NHS needed as well as the hypothecated tax, and how you cannot throttle back health care simply because one particular tax has fallen short.

I am also pleased to report that those of us who argued a substantial part of the Brexit dividend should be used to meet increased future health costs have also been  persuasive. There will be an extra £12bn a year available for spending and tax cuts once we have terminated our payments., I am in favour of doing this immediately  after March 29 next year, unless the EU suddenly comes up with a good deal which is worth letting them have a bit more of our money after we have left.

There is still work to  be done on whether there is any need for extra borrowing. That will depend on how fast the economy grows and how quickly the revenue increases. Lowering tax rates would help raise more revenue in several cases, which would be a welcome boost to the economy with beneficial consequences for future spending. When the US is going for a top Income Tax rate of 37% and  Italy for a top rate of 20% the UK needs to stay competitive to ensure enough well paid and successful business people stay here and pay their taxes here to help our public services. The UK economy needs a fiscal boost to offset the monetary tightening administered by the authorities since March 2017.

It is also important to grant increased spending for the NHS on the basis of something for something for something. Just granting a blanket increase could result in wasteful spending, as we saw in the big increases in the middle Labour years before they had to slash public spending generally after the crash.

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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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