Bim Afolami: After the reshuffle, back to the future – NHS queues, rising energy bills, and higher prices

20 Sep

Bim Afolami is MP for Hitchin & Harpenden.

As the Prime Minister said at Cabinet on Friday morning, it is “half time” in this Parliament. We have two more years to deliver on our election pledges before shaping up for the next election. Covid has basically taken up the vast majority of this Parliament so far, not only preventing us from focusing on our wider domestic agenda (though, very importantly, we have delivered Brexit), but also creating new problems, such as lan extra £350 billion in public debt and huge NHS waiting lists.

By two years from now, levelling -p needs to be noticed on the ground, people need more money in their pockets, and public services need to be consistently improving. Is this going to be straightforward to deliver? In a word, no.

The Government reshuffle was a significant start on moving forwards. Much has rightly been made of the importance of Michael Gove’s new beefed-up MHCLG – now LUHC: the department for Levelling Up, Housing and Communities – with responsibility for housing, local government, devolution and the Union.

Education has severe challenges, from the difficulties of our exam system to the need to rebalance public spending from our universities towards the further education sector. Both Michael Gove (LUHC Secretary) and Nadhim Zahawi (Education Secretary) are extremely capable, with very good new junior ministers in their departments – in particular Neil O’Brien in LUHC and Alex Burghart in Education. But the stakes are high. If these departments fail over the next two years, the Government will fail too. We don’t have long to start delivering.

However, the most important domestic department for the next two years is the Department of Health. The public has gradually grown to trust us with the NHS, ignoring the propaganda from the Labour Party and the doctors’ and nurses’ unions. The most significant aspect of the Health and Social Care Levy which passed the Commons last week was the implicit realisation that the political risk of potential NHS failure is even worse than the risk of being seen as a Conservative Party who broke a manifesto commitment not to raise taxes. (Even though a pandemic was not in the manifesto!)

The NHS’s problems are of acute public and political importance. Since the start of the pandemic, the number of people waiting for NHS treatment in England has grown by a fifth. Some 5.3 million people were waiting for treatment in May 2021, up from 4.4 million in February 2020. There has been a particularly sharp increase in the number of people waiting for longer than a year.

Yet the number of people on the waiting list is expected to rise much further. Sajid Javid has warned that it is ‘going to get a lot worse before it gets better’, and could grow to 13 million.

The challenge here is monumental, and the department is also pushing through the Health and Care bill, which it seeks to remove barriers to integrating services to improve health outcomes and reduce health inequalities.

On top of all of this, we are not fully out of the woods on Covid yet, and doctors warn of a difficult winter with significant flu and RSV cases. This is a Department that may hold the fate of the Government in its hands.

The economy is facing its own headwinds too. Yes, we are bouncing back after Covid – according to the International Monetary Fund’s latest World Economic Outlook report, the UK economy will expand seven per cent this year, a sharp increase from the 5.3 per cent predicted in the Fund’s previous report in April. This is fastest in the G7.

However, the ghost of inflation past stalks us. I wrote about this here (in June, and worries about rising prices and costs of living are growing. One key aspect of inflation is energy prices, especially in the winter. Household energy bills are to rise after prices on the UK’s wholesale electricity market soared to a record high last month. The average market price reached £107.50/MWh – up 14 per cent on July, and well above the previous record of £96/MWh recorded in the run-up to the 2008 global financial crisis.

Last month, the industry regulator Ofgem announced it would lift the maximum price cap on energy deals by more than 12 per cent, after a sharp rise in the market price for gas and electricity. This increase is driven by a rise of over 50 per cent in energy costs over the last six months, with gas prices hitting a record high as the world emerges from lockdown. Coupled with rapidly rising costs for many foodstuffs, cars, and consumer goods (largely due to a combination of global macroeconomic factors), it is likely that most voters will feel a real pinch this autumn.

The Just About Managings (remember them!) will have a much tougher time. This will be especially the case if the Bank of England seeks to spike the rise in inflation in the coming months with a rise in interest rates (though at the moment I think this is unlikely). Shortages of certain foods and other key goods, largely due to damaged supply chains after Covid and not enough HGV drivers, are growing in the short term. This not only likely to put up prices, but also become a very visible and real problem for ordinary people who just go about their daily lives without thinking much about politics: i.e. most voters. This will come at political cost, particularly if the press builds up public anxiety about Christmas shopping which leads to a degree of stockpiling.

The difficulties with rising prices and energy bills will coincide with the much awaited Net Zero strategy (expected in mid-October) followed by COP26 in November. The net zero strategy will have to answer the knottiest questions on the environmental agenda such as: how are we going to replace boilers in millions of homes or better insulate buildings? How are we going to manage the shift away from petrol and diesel cars?

Whilst I am confident that there are huge economic opportunities over the medium term, in the short term there will be certain costs. Though these costs are a necessary part of implementing this critically important task of getting to net zero, being seen to impose greater costs at a time of rising prices will be politically challenging.

The next year brings rising prices, higher energy bills, and NHS difficulties. This will not be an easy atmosphere for the Government, and the Party, to operate in.

A new market in long-term fixed rate mortgages?

14 Sep

At one end of the age spectrum, Britain has older people in need of social care.  At the other, younger people who want to own their own homes.  The best one can say of Ministers’ attempts to help both to date is that these are a work in progress.

The social care plan that will be voted on these evening will do nothing much to improve the provision or quality of care, whether delivered in one’s own home or elsewhere.  It may not deal even partly, let alone wholly, with the problem it aims to address – namely, having to sell the family home to help pay for care.

This is because it’s more than likely, when the new Health and Social Care Levy kicks in during 2023, that the money raised from it will flow to health – that’s to say the NHS, the capacity of which to consume resources is inexhaustible – rather than social care.

None the less, we raise half a cheer for the Government for potentially ensuring that some people at least will no longer have to sell their houses to help fund care costs.  Even if the proposals that have been announced so far won’t deliver the Conservative Manifesto commitment of ensuring that “nobody needing care should be forced to sell their home to pay for it“.

Since the levy will be a form of national insurance, it will largely be paid by younger people.  So the generation that can’t afford to own their own home will have even less disposable income than they did before.

Which takes us to Ministers’ housing plans.  The Health and Social Care Levy scheme has been drawn up at short notice, and the Government is rushing it through Parliament speedily.  Neither condition applies to the housing measures.

The Planning Bill pledged in the Queen’s Speech hasn’t come to the Commons or Lords yet – and no wonder, since its terms are essentially being negotiated between Ministers and Conservative backbenchers (plus senior councillors).  Pre-election, any prospect of loosening Green Belt restrictions was seen off.  Post-election, Tory MPs did for the housing algorithm.

It is reported that the Government will now abandon the zoning system it had planned, plus targets for housebuilding.  One take is that such a retreat would damage Ministers’ aspiration to see more homes built.  Another is that is would make little difference.

This is because housebuilding numbers have been increasing during recent years: in 2019/20, 243,770 homes were delivered – the highest annual number in over 30 years, and the seventh year in a row that the number of homes delivered rose.  Furthermore, the Government has already persuaded Parliament to back an expansion of permitted development rights.

Developers will be able add two storeys to existing buildings without planning permission, and turn premises into homes.  There is a push for street votes to expand properties – see Bob Blackman’s recent piece on this site – as an alternative to concreting land.

Whatever happens next, any Minister who sought to solve all of Britain’s housing problems by building more would be the ultimate one-club golfer, since more homes wouldn’t address the other factors in the mix: limited space, smaller families, high immigration, powerful developers, a long tradition of property rights, a complex planning system, curtailed post-crash lending and new Net Zero requirements.

And if boosting home ownership is an aim of policy – as it should be – what we wrote in the ConservativeHome Manifesto, the best part of ten years ago, still applies.

“No matter how fast we can make land and construction capacity available, the money markets can always move faster – pumping cheap credit into property investments. Any government move to undermine sensible planning protections only serves to set off the feeding frenzy.”

Ministers have tried to help younger people get in on the act through Help to Buy (launched by the Coalition) and the 95 per cent mortgage guarantee (unveiled in the last Budget by the Chancellor).

But home ownership has only drifted up marginally in recent years – to 65 per cent in 2018 compared to its 71 per cent high in 2003.  And when one turns to who owns what, it’s a tale of two generations: last year, only nine per cent of owners were aged between 25 and 34; a whopping great 36 per cent were 65 or older.

One of the clubs that the Government wants to see used is long-term fixed rate mortgages. “We will encourage a new market in long-term fixed rate mortgages which slash the cost of deposits,” that 2019 manifesto said.

It doesn’t follow that, because some of its other commitments haven’t been honoured (such as the pledge not to raise national insurance), this one won’t be delivered.  However, the keys to making it happen lie not so much in the Treasury as in the Bank of England, and the new requirements that it placed on getting a mortgage in the wake of the financial crash.

The Government’s interest in long-term fixed rate mortgages owes much to the Centre for Policy Studies, and in particular to the case put forward in a report for the think tank by Graham Edwards.

He argues that, because of the certainty that these mortgages offer, they don’t need to be stress-tested – and so can be offered with the 95 per cent loan to value rates that were the norm before the financial crisis.

What about the danger of negative equity?  The counter-case is that, while this is always present, there was a minimal increase in default rates in the wake of the crash.  What if wages grew more slowly than the mortgage costs?  Edwards’ answer is that “there is still a lot of scope for borrowers to absorb the increase in housing cost before they reach a point of financial stress”.

It will be claimed that the Conservatives are fixated by home ownership – just as, returning to social care, the Prime Minister is concentrated on people selling their homes to help pay for it.

In theory, it is open to the Government to stress one Tory viewpoint, that “there’s no such thing as a free lunch” to the exclusion of another, that “wealth should cascade down the generations”.  But in practice, Ministers can’t be indifferent to younger people’s desire to own their own homes, at least if they wants them to have a stake in the capitalist system that the Conservatives support.

Nor can it ignore the wish of older ones to pass on family homes – at least, if the Party’s experience in the 2017 election is anything to go by.

As we say, Ministers need to deploy different clubs if they are to negotiate the course of “building beautifully”: smaller developers, migration control, more supply, control on costs (including those emerging as a consequence of Net Zero).  But these won’t be enough to deliver higher home ownership, too.

For that, the Government will need to help rebalance the playing field between those who own property and those who don’t, which requires help from the Bank of England and the financial institutions.  Otherwise, younger people, bereft of alternatives, will have an growing interest in levelling-down, not levelling-up.  In other words, in a housing market crash.

Philip Booth: Beware of the return of inflation

9 Sep

Philip Booth is Director of the Vinson Centre for the Public Understanding of Economics.

There seems to be a shortage of everything. Hauliers cannot recruit truck drivers; care homes cannot recruit enough care staff; there is a shortage of chefs; construction workers are in short supply as are many building supplies. Ikea is worried that it will not have stocks of many key items.

It is quite possible that some of these difficulties are caused by Covid. However, in many cases, these problems have been building up for a long time. We are used to challenges in staff recruitment in particular areas of the country in the public sector because national wage bargaining means that wages do not respond to supply, demand and differences in living costs. But we have not had shortages on such a widespread scale for decades.

Many economists have been arguing that these all problems are a drag on growth. However, such pervasive and widespread shortages would seem to suggest that we have an economy that is running out of capacity.

It is highly likely that the problems we face across so many sectors of the economy are indicators of nascent inflation. There are other indicators too. Commodity prices are roaring ahead. In the last 14 months, the Bloomberg index of commodity prices has increased by around one-third. Shipping costs have also been soaring.

Andrew Bailey has argued that recent increases in inflation are temporary and that “it is important not to over-react to temporarily strong growth and inflation”. And many others have cited the increase in commodity and shipping prices as being a temporary phenomenon that will pass through.

If we look at these data individually, these kinds of explanations might hold water. Shipping costs can spike. A relative shortage of particular commodities can cause their prices to rise rapidly if supply is slow to respond. And, from time to time, for all sorts of reasons, there might be a shortage of labour in particular industries – especially if training times are long. But the problems in the economy today are widespread and pervasive.

As the old saying goes, inflation arises from “too much money chasing too few goods”. Since the beginning of the Covid episode, we have had a huge increase in the money supply, with £300 billion of new money being printed. Covid caused a supply problem, since the Government effectively banned economic activity of certain types, and we all changed our working habits. We saw in the 1970s what happened when supply-side problems were addressed by the printing of money. Perhaps the same is going to happen again.

Inflation works its way through the system in different ways, depending on the circumstances. One of the problems of the way in which we teach economics is that we tend to focus on equilibria – the theoretical end points of economic processes. However, it is the process itself that is more important. If we print money, all other things being equal, we will end up with a higher price level. But, if central bankers are to be ahead of the game, they need to focus on the processes by which the higher price level comes about.

Inflation expectations are, in the jargon, “well anchored” at the Government’s target. This means that most people expect inflation to be two per cent per annum in the long term. Wage negotiations reflect this. So, when there is an increase in demand caused by an increase in the supply of money, various things can happen, but one thing that does not happen quickly is an increase in wages.

Typically, prices in highly efficient markets with good information flows rise first – house prices, other asset prices, prices of commodities and shipping costs. However, businesses see a rise in demand for their goods and services, and they increase their demand for inputs such as labour and raw materials.

The final prices that businesses charge tend to be sticky: businesses do not like putting up prices. And the wages of the labour that businesses employ tend to be especially sticky (with so much focus on paying staff, the statutory minimum wage is not helping here). Businesses are all planning as if there has been an increase in demand for their own products, but they can’t all increase supply. The results is shortages – not just in the odd industry caused by disruption in specific sectors, but in large parts of the economy.

We all want more cappuccinos, more housing space, more goods on the supermarket shelves, more restaurant meals, more care for the elderly and so on. But there are simply not the real resources to produce all the things that we are demanding and paying for with printed money.

Eventually, this is “resolved” by a rise in prices in the wider economy and a rise in wages – in other words, by inflation. But this can take a while to happen. This will choke off the demand for goods and services and the demand for labour; and it will do so in some industries more than in others. As a result, wages in some sectors will probably rise significantly.

If the Bank of England quickly catches up with what is going on, this process might be relatively benign. But, if it does not, four per cent or five per cent inflation for a couple of years could cause real problems. Interest rates of 7-10 per cent needed to bring inflation back down again could destroy businesses and bankrupt mortgage-holders in large numbers.

All his would also create considerable discomfort for the Government. We might think we are a long way from the events of the 1970s. However, we should remember that the events of the 1970s started in the 1960s. Twenty-seven per cent inflation did not happen overnight.

Ryan Bourne: Furlough might have averted mass layoffs. But the Government’s next challenge is the reallocation economy.

11 Aug

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

What is the biggest challenge currently facing the UK’s jobs market? Not “mass unemployment,” as was feared as Covid-19 ravaged and lockdowns closed businesses last year. No, the concern today – according to the Governor of the Bank of England – is labour shortages.

Last Thursday, Andrew Bailey said, “The challenge of avoiding a steep rise in unemployment has been replaced by that of ensuring a flow of labour into jobs. I want to emphasise that this is a crucial challenge.” This is acknowledgement of one of the pains of what I call the “reallocation economy.”

In spring 2020, the furlough scheme was designed to avert mass layoffs and protect job relationships until things reopened. The idea was that government social insurance to pay wages would help firms “bridge” through a temporary shutdown, allowing them to retain workers and so protecting the productive capacity of the economy. Last spring, as many as 8.9 million jobs had wages subsidised by the taxpayer at the peak.

The Chancellor, and most pundits, will say it worked, albeit lasting longer than expected. Official unemployment peaked just 5.2 per cent last year, against 14.8 per cent in the United States. Now, with furlough winding down, just 1.1 to 1.6 million are left on the scheme, and with almost half of these on “flexible furloughs.”

Though many of these subsidised jobs may be non-viable as support ends, the Treasury will look at the huge 862,000 vacancies in the country and think: we have avoided a jobs disaster and now have a clear glidepath back to full employment.

So what’s the problem? Well, you can’t just “pause” an economy for a year in a world of ever-changing preferences, demands, and technologies. Research already showed larger job changes between sectors and occupations up until January than seen in the Great Recession.

It seems likely Covid-19 will have lasting effects on our preferences, where and how we want to work, and where we are able to travel too. As our lives re-normalise, this and a bounceback in service industries will see many workers temporarily finding themselves in the “wrong” jobs given new trends, or in the wrong places, and or with the wrong skills.

The result of this will be an extended period of teething problems as labour markets adjust to these new realities. There’s always substantial churn in jobs anyway, as workers and activities are reallocated over time. But this change is likely to be far more dramatic given the partial freeze of much of the economy. Rigidities in wages and an unwillingness to move risk creating temporary shortages and wage and price volatility along the way.

To be sure, this seems a better problem than mass unemployment. But Bailey is right: it’s a headwind to growth. Reallocation is a process, and often a slow one. Businesses have to attract and train new workers. Workers have to search for roles. People or firms have to move locations. And companies have to decide whether to risk taking on permanent new employees or undertaking new investments. All this limits the productive capacity of the economy.

The U.S. experienced some of these challenges with its earlier reopening. Leisure and hospitality saw particularly severe shortages of available workers through summer, due to ongoing worries about Covid-19, generous government benefits to the unemployed, and people reassessing their work ambitions.

Average hourly wages surged in these sectors and are still 10 per cent up on February 2020 as labour supply failed to meet growing demand. Businesses paid big signing-on bonuses and raised wages to entice workers to them, but that hasn’t always been enough to fulfil consumer needs: some restaurants couldn’t profitably open every day.

There’s suggestive evidence of similar difficulties in the UK. A British Chamber of Commerce survey for Q2 found that as a growing number of businesses sought to hire again, 70 per cent were having difficulties finding staff, with figures as high as 82 per cent and 76 per cent in construction and hotels and catering.

ONS data for June shows 102,000 vacancies in accommodation and food services–its highest ever recorded level. Pubs and restaurants had to pay temporary workers much higher wages and bonuses to get staff in June. The number of vacancies is surging too in arts, entertainment and recreation and real estate.

Many other factors will contribute to this reallocation challenge than just reopening services though. Surveys show the pandemic has led to a broader “rethinking” by the public about their work roles–perhaps unsurprising given the disruption we’ve seen.

An Aviva poll found 60 per cent of workers say they intend to “learn new skills, gain qualifications or change their career” due to the pandemic. It’s been well-documented that large numbers of young people have opted for extended stints in higher education too. Only a fraction of all this will need to occur for large shifts in local and sector labour supplies.

Other workers are willing to stay with employers, but demanding “let me work from home or I’ll quit.” Nick Bloom’s research suggests a modal desire from office workers for two to three days home working per week. As businesses experiment, some workers will not be happy with their arrangements and move on, while companies must decide whether to adjust to these preferences by widening the geographical net on remote hiring.

Any permanent shift in where work occurs as things crystallise will have sharp consequences for the spatial location of city’s service industries, such as eateries, entertainment, and bars, as well as reductions in demand for inner-city office cleaning, security, and delivery. The process of these support and service workers finding new roles, moving, and re-training will take time too.

Now when politicians hear the word “economic challenge,” their instinct is to dream up a policy to “deal with it.” And after over a year of subsidising jobs, it will be tempting for the Chancellor and Prime Minister to consider incentives, nudges, and public statements to try to force a return to the economy of February 2020, or else to devise new laws to entrench what workers want (see the new demands for a “right” to flexible working).

But beyond removing furlough and other policies that delay reallocation, the Government has no special insight about what’s best for the long-term. How to get the right workers to the right places will only be “addressed” by the experimentation and coordination that comes from market activity, and the reaction to the signals of profitability, wages, and prices.

Though relief helped avert mass layoffs, we will see a hangover as the economy adjusts to new realities. Not because “relief” was or is inadequate, but because the crisis has disrupted so much.

Howard Flight: It’s time for the Bank of England to take its foot off the accelerator

2 Aug

Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.

The Bank of England and Treasury were correct to adopt Keynesian stimulant measures when the Covid bombshell hit. The economy was kept afloat, where otherwise there would likely have been an economic collapse.

As Andy Haldane has argued, it is now pretty clear that the time has come to start to phase out these stimulatory measures, as not to do so poses a dangerous risk of rising inflation that could force the Bank of England to execute an economic ‘handbrake turn’ in sharply reigning in the loose monetary policy.

It is, however, always difficult ‘getting off the opium’. The danger is that the Bank goes on expanding money supply/QE, with negative interest rates and rising inflation. It certainly looks as if Haldane has got it right and Andrew Bailey and the Bank of England have it wrong.

It is now time to start tightening monetary conditions (albeit not aggressively) and scaling back the emergency stimulus so as to keep inflation under control.

It looks as if the Monetary Policy Committee (MPC) is gearing up to scale back the emergency stimulus. The House of Lords Economic Affairs Committee Report – “Quantitve easing – a dangerous addiction” – has had significant impact on the MPC and the market. It is reasonable for the Bank not to want to see the economy retracting, but inflation is the result of too much money chasing too few goods, which looks as if this is where we are.

The Bank of England argues that the current nudging up of interest rates towards three per cent expected next year is caused by transient factors, especially the global increase in oil prices – albeit that rises in oil prices have been a major cause of inflation over several cycles of the last 30 years. The Bank of England Report made no mention of the recent surge in UK monetary growth. CPI inflation has already jumped to 2.5 per cent in June and will rise further in the coming months; and prices are now going up e.g. the review of railway charges.

The Bank of England Report made no mention of the recent surge in monetary growth or of the measures of money supply conditions in the MPC policy statement. The MPC is still planning more stimuli by completing the purchase of the £150bn of gilts under QE policy.

Economic recovery and the pickup in inflation have been stronger than the MPC or the Bank of England expected. With conditions having changed, policy should also change, and it is apparent that injecting more stimulus now may be unwise. It is time to end QE next month and to scale back gilt purchases. A managed and relatively modest tightening should not derail economic recovery. In fact, it should deliver a more sustainable recovery. As Haldane has made so clear, now is the time for a gentle change of direction.

The Bank’s response has been that it has been important not to overreact; the British economy is not yet fully recovered and the jump in prices has been caused by bottlenecks and Covid distortions; which are not permanent.

Bailey has made it very clear that he does not want the Bank to react to what he identifies as temporary strong growth and inflation, in order to ensure the recovery is not undermined by premature tightening. He expects the rise in inflation to over three per cent next year to be temporary. But it is not good enough to hope that inflation will return to two per cent in two years, if it hits five per cent first. The fact is that the economic recovery and the pickup in inflation have both been stronger than the MPC expected when it made the decision to expand QE last year.

Bailey expects the rise in inflation to be temporary and claims his reasons are strong and well founded. Haldane believes the economy has already regained its pre-Covid size and so is increasingly at risk of overheating.

The danger is that inflation rises to over three per cent later this year, where Bailey’s claims that this is only temporary and that the Bank should not react by tightening, cutting back QE, or raising interest rates and that it should keep stimulating the economy are likely to be met with widespread scepticism in the markets. His recent “good news” was that the economy is only some five per cent smaller than it was 18 months ago, and that the gap is closing quite rapidly. If so, it is a good reason to phase out the expansionary measures.

My money is on Haldane and starting gentle tightening now. With the extent of gilt interest rate servicing required, it will be crucial to keep interest rates as low as possible.

Jayne Adye: It’s time to move beyond Brussels on financial services

26 Jul

Jayne Adye is the Director of the leading grassroots, cross-Party, Eurosceptic campaign Get Britain Out.

Since the UK finally left the EU at the end of 2020, there has been an almost universal focus on the problems created by the Northern Ireland Protocol, as well as the abandonment of UK fishing communities. However, despite being this country’s single biggest export to both the EU and the rest of the world, the financial services industry has seemingly been entirely ignored.

In the last month Rishi Sunak, Lord Frost, and Andrew Bailey, the Governor of the Bank of England, have all confirmed a deal on financial services equivalence with the EU somehow appears to be dead in the water.

The EU’s justification for the lack of progress is the UK’s refusal to commit to “dynamic alignment with EU regulatory changes” for years to come. Why should we accept these demands when this is not a requisite which the EU has forced on any other countries they have equivalence deals with – for example the USA, China and Singapore – so why single out the UK?

Despite this clear pattern of unreasonable rejection, the UK Government has been unwilling to take any real action to move beyond this stalemate, leaving businesses and investors unable to properly plan for our future.

Yes, the Chancellor tried to get the ball rolling this month with his speech at Mansion House, announcing the world’s first Green Bond (a fixed-income instrument designed to support specific climate-related or environmental projects) ahead of the ahead of the COP26 Climate Conference, scheduled to be held in Glasgow from October 31 – November 12 this year.

Unfortunately, the Chancellor’s detail was limited, with interest rates for the bonds not announced and a greater focus on making sure businesses report the impact they have on the environment. While this is a good start, it barely scratches the surface of the possibilities available to the UK and the Chancellor does not seem to be making any substantial attempts to change the regulations enforced on us by the EU.

Thankfully, because the City of London is such a significant player on the world stage, the stalemate and lack of cooperation from the EU is never going to end the dominance which the UK has enjoyed for so long. To use the mainstream media’s favourite term, “Despite Brexit…”, London is still the top financial services hub in Europe and has even reclaimed the top spot for European share trading which was held by Amsterdam for a short time recently – in spite of the EU attempting to block London-based firms doing business in the EU.

In other words, even though some additional barriers have been created, companies and individuals still want to choose the expertise and experience which exists in London, rather than move to the EU – contrary to what many had claimed.

So, with the UK’s advantages over the EU being so clear, why do we seem stuck in the mud when it comes to implementing the advantages of Brexit? Right now the Government appears to be unwilling to diverge from the EU, seemingly for no other reason than “not rocking the boat” and “upsetting the EU” while we negotiate other areas of concern – primarily Northern Ireland, as the Government announced last week with their ambitious call for a total renegotiation of the NI Protocol.

This tip-toeing over glass on these issues simply cannot continue. Yes, London has maintained its position in the world, but if the Government wants to reach the full potential of Brexit, then this must mean bringing about serious change and not simply accepting the status quo. Nobody stays at the top by doing nothing. As an independent country, we cannot deprive ourselves of opportunities to thrive because it might annoy the European Union.

Quite frankly, anyone who makes this argument for the Government’s lack of action has not been paying attention. We currently seem to be sitting idly by, wasting time by continuing to abide by EU legislation, and in return the EU is not showing us any leniency or “goodwill”. Instead, it is trying to carve off Northern Ireland from this country – recently rejecting our proposals for renegotiation in just three hours; hitting us with multiple legal threats; and now it is demanding an extra £2 billion as part of a “Divorce Bill” (which was only agreed because of the UK’s desire to show goodwill).

The EU clearly has no interest in “playing nicely”, so it is about time we stopped the charades and got on with putting out own interests first – whether that be triggering Article 16 of the NI Protocol or slashing EU financial services regulation.

Companies have flocked to the UK for decades because of their trust in our economic system and the “light-touch” regulation which drives it. This has been diluted through our EU Membership, but it is something we can recover from.

There are swathes of EU regulations governing financial services and investment which we actually opposed at the time of their creation – such as the Solvency 2 laws on investment risks; and the Alternative Investment Fund Managers Directive – both of these create swathes of bureaucracy which stymie innovation and try to remove any chance of businesses taking risks – risks which help drive an economy forward at a higher rate and create more competition.

No, this doesn’t mean financial services should be an industry devoid of scrutiny or regulation. This is about shaping a system which encourages new businesses and is prepared for the future, rather than being stuck in the past, tied to a sclerotic EU legislative process which lags behind the rest of the world.

The UK has the chance to cement itself “as the most advanced and exciting country for financial services in the world”, as Sunak described at Mansion House. However, the Government must have the courage to reach out, grab this chance and bring about real regulatory change quickly. Whether this is by encouraging FinTech, green investment or digital trade, our exit from the European Union has come at an opportune time when fresh thinking and a new regulatory approach can allow the United Kingdom to reach its full economic potential.

It is clear a “good deal” with the EU is not on the cards anytime soon, so the Chancellor must not lose this opportunity to push forward and really Get Britain Out of the mindset where we worry about how our every move might affect the relationship we already have with the EU. We are now an independent sovereign nation, and it is time this Government started acting like we want to forge ahead to really explore the advantages of a truly Global Britain.

Duncan Simpson: With the Covid bill standing at £372 billion, the Government’s spending spree looks increasingly unsustainable

26 Jul

Duncan Simpson is Research Director at the Taxpayers Alliance.

Two recent reports from the public accounts committee should give politicians plenty of food for thought over recess. The first looks at the expenditures associated with Covid-19 (whose lifetime costs are now expected to reach £372 billion).

The difference between the outlays already made (such as for the furlough scheme) and those expected to be made in the future can partially be explained by the liabilities that taxpayers might face for commercial loans backed by the Government. The committee was “alarmed to learn” that of the £92 billion worth of loans guaranteed by the HM Treasury, £26 billion might not be paid back.

Separately, the committee has also shed some light on the procurement of personal protective equipment. The committee identified waste levels as being “unacceptably high”, with £2.1 billion worth of items being unsuitable for medical settings. Fast decisions are crucial in a crisis, but bad decisions leave taxpayers shortchanged.

When you put the PAC reports into the wider context of the public finances, things get even more alarming. Public sector national debt stood at £2.2 trillion in May 2021 – or just under 100 per cent of GDP. That’s the highest level it’s been since March 1961.

Quantitative easing – the Bank of England bond-buying programme – has now grown to £0.9 trillion. The House of Lords economic affairs committee recently noted that “no central bank has managed successfully to reverse its asset purchases over the medium to long-term, and the key issue as they look to halt or reverse quantitative easing is whether it will trigger panic in financial markets that spills over into the real economy.” If we weren’t into the unknown before Covid-19, we very much are now.

There is some reasonably good news on the debt stock, however. The UK’s gilts are much longer-dated than many other advanced economies: just shy of 60 per cent of those in issue (excluding index-linked bonds) don’t mature for at least another seven years. This means that the Government is relatively unaffected by short-term interest rate increases. And since advanced economies’ central banks have not indicated any sharp ratcheting up of rates, this could well provide (some) welcome respite.

Inflation, however, could throw a spanner in the works. The main measure of inflation – CPIH – was last this high in February 2018. If this trend continues, higher general prices could well force the Bank of England into tighter monetary policy. This will make both debt servicing and government spending plans harder still.

But the big policy debates leave even more dark clouds on the horizon. Much of Westminster seems hell bent on pursuing net zero without considering the costs. What this will likely entail is a whacking up of families’ outgoings.

For instance, one potential plan to prohibit the sale of gas boilers – thereby eventually forcing most households to switch to heat pump alternatives – could cost between £6,000 and £18,000 apiece. A standard gas boiler retails for around £2,000. The well-heeled don’t seem to appreciate the everyday pressures on their finances that most households face.

Equally, banning the sale of petrol and diesel cars by 2030 could cost families dear. The market for electric vehicles will of course grow and the costs come down as new models and competitors enter the market.

Likewise, many US car manufacturers have seen the writing on the wall and have all but stopped research and development into new internal combustion engines. But again, the thought of coughing up for a new motor will rightly worry millions of Britons. After all, 61 per cent of journeys were still undertaken by car in England during 2019.

Levelling up too presents risks to taxpayers. Though still quite ill-defined (something to do with being near a football pitch, I think), plans to increase investment spending are eye-popping.

Forecasts from the Office for Budget Responsibility show that public sector net investment will reach £70 billion by the end of this parliament. In real terms, it will have increased by two thirds in ten years. Relative to the size of the economy, that is the same as the heady, free market paradise that was Jim Callaghan’s administration or the final year of Clement Attlee’s.

When you mix together Covid spending, a large and growing debt stock, quantitative easing, potential inflation risks and enormous spending commitments, the Government’s future choices risk putting taxpayers onto an even more unsustainable footing than they currently are on.

And politics is all about choices. Some of them are difficult, but taking the easy route – spending lots of money you don’t have – can vanquish a reputation for economic competence.

So the Government must be upfront about the trade-offs in its policy programme. It should also be responsible. Perhaps it’s an excellent idea to embark on an infrastructure spending programme; but we need to hear more about where the Government will save money to pay for it, instead of endlessly raiding taxpayers’ pockets for more cash when the tax burden is already at a 70-year high.

The Comprehensive Spending Review in November gives the government a chance to do exactly that.

Daniel Hannan: London was always going to be fine post-Brexit. But now we must cut EU rules and allow it to prosper.

7 Jul

Lord Hannan of Kingsclere is a Conservative peer, writer and columnist. He was a Conservative MEP from 1999 to 2020, and is now President of the Initiative for Free Trade.

Brexit was never going to kill the City. It is a measure of how demented our culture war became after 2016 that that notion was ever seriously entertained. London gained the top spot through strong property rights, incorruptible courts, secure contracts, light-touch regulation and low taxes. Everyone understood that the system was impartial, that the rules would not be rigged against foreign companies, that all were equal under the law.

Those features allowed London to retain its pre-eminence despite the decline of sterling as a global currency, despite the Second World War, and despite the economic collapse of the 1970s. Companies from around the world recognised that the best and cheapest money markets were disproportionately concentrated in the Square Mile. EEC membership had little to do with it.

Eurocrats never saw things that way, of course. In their eyes, London was a parasite, moving money around while honest Europeans did the more “real” work of making cars, producing chemicals and ploughing fields. Brexit, they believed, was an opportunity to shift jobs to Paris, Frankfurt and Milan, and to divert the accompanying tax revenues to their own coffers.

Emmanuel Macron came to London and pitched directly for companies to relocate. His ministers set up offices to advise on the transition. Frankfurt expanded its English-language schools.

Meanwhile, Brussels set out to be as bellicose as possible. UK-based firms found that the letter of the law was suddenly being forced on them with a perversity that their Japanese or American rivals were spared. At the same time, the EU refused to grant equivalence to British financial services providers.

Equivalence – essentially an agreement to trust each other’s regulators – is a normal courtesy among advanced economies. The EU offers it to Brazilian, Chinese and Mexican companies. Britain, naturally, offers it to the EU. But the EU evidently believed that refusing to reciprocate might somehow asphyxiate London.

It didn’t work. This would have been obvious had it not been for the hysterical tone of Britain’s Europhile broadcasters, determined as they were to show that Brexit had been a catastrophe.

Every relocation of a UK job to the Continent was drooled over with a kind of excited despair, while almost no attention was paid to jobs moving the other way – or, indeed, new jobs being created. When, as a result of EU restrictions, Amsterdam briefly overtook London in the volume of shares being traded, there was terrific excitement; when London reclaimed its place last week, coverage was muted.

The EU’s strategy is self-harming. Protectionism always makes the state applying it poorer. Making it harder for continental firms to access London finance does more damage to the continental firms than to London. It also signals to the world that Brussels discriminates on the basis of nationality, subordinating prosperity to prejudice.

Had the EU been more adroit, it might have sought to make itself more attractive. Instead of denying Britain equivalence, it would have looked for ways to lower its own taxes and to reassure the world that it would not tilt the scales against foreign companies. But, for whatever reason, it cannot bring itself to think that way.

Don’t imagine for a moment, though, that London’s dominance is guaranteed. The City has no automatic right to the top slot. It must earn that place anew every day. Brexit doesn’t just allow the City to make its regulatory regime more competitive; it obliges it to do so.

As Andrew Bailey, the Governor of the Bank of England, put it earlier this year: “I’m afraid a world in which the EU dictates and determines what rules and standards we have in the UK is not going to work”.

There was an argument – a weak argument, in my view, but an argument – for matching some EU standards for the sake of equivalence. But when Brussels won’t recognise even our current rules, which are identical to its own, there is no argument whatever for holding back.

We should begin by repealing those EU rules which were opposed by the industry when they were brought in, even if, having now assimilated the compliance costs, some established actors have lost interest in repeal. We need to think of future businesses as well as existing ones. We should undo the parts of the EU’s MiFID 2 and Solvency 2 regimes that we opposed at the time, and scrap the Alternative Investment Fund Managers Directive and the short-selling ban.

More broadly, we need lighter-touch regulation. Many of our rules are still aimed at preventing the 2008 crash, rather than at facilitating future growth in fintech, green investment and digital trade. At the very least, we should make competitiveness an explicit part of the regulators’ mandate – certainly no less than stability, confidence or consumer protection. Other regulators, such as Singapore’s, take it for granted that boosting competitiveness is part of their role.

And let’s not be shy about cutting taxes in ways that will attract investment and so, over time, increase revenue. It is hard, on Laffer curve grounds, to justify the bank corporation tax surcharge or stamp duty on share trading. We also need to end the absurd rule which limits bonuses – thus whacking up bankers’ basic salaries and reducing the link between performance and pay.

Some of these reforms might be unpopular. But, with our public finances in the state they are in, we can’t afford to subordinate our recovery to the prejudices of focus groups. Financial services are, to Britain, what tourism is to the Maldives. As our mediaeval wealth rested on wool, so our modern wealth rests on banking, insurance and investment. I’m not asking you to like bankers and hedgies; I’m just asking you to recognise that they pay 10 per cent of Britain’s taxes.

The PM wants to show that Brexit has tangible benefits, and commissioned Iain Duncan Smith, George Freeman and Theresa Villiers to look at ways to raise our competitiveness. Their report in May set out a measured and realistic plan to do precisely this.

But, as anyone who has worked in politics will tell you, the real challenge is turning your vision into hard policies over the head of an often change-averse civil service. “Between the idea and the reality,” wrote T S Eliot, “Between the motion and the act falls the Shadow”. Between the speech and the implementation, between the report and the legislation, between the ambition and the deregulation – falls the Shadow.

Neil Stock: The planning system is a socialist construct. It desperately needs updating for the modern age.

31 May

Neil Stock OBE is Leader of Tendring District Council and Chairman of the Essex Leaders and Chief Executives Group. He is a peer mentor for the Local Government Association (LGA).

The planning system, as it currently exists in this country, is a socialist construct, borne of a different time when the government of the day sought to own or control every aspect of life, right down to what a landowner could do with their own property.

History records that in the aftermath of the Second World War, a new Labour government swept into power and delivered a radical agenda of nationalisation and state control. The Bank of England, the railways and aviation, coal, gas and electricity, the steel industry, the car industry, even Thomas Cook the travel firm, were all nationalised. Healthcare was nationalised. And so was the right of a landowner to develop their land.

Planning as an ideology was very on-trend in post-war politics; socialist republics and Soviet-style planned economies were popping up all over the place. What planning aimed to achieve was to ensure that the state dictated and controlled every aspect of its citizens’ lives. Not just the type and style of housing and where it was built but also the infrastructure such as roads and transport, healthcare and education, and the mix of retail and commercial premises.

But Britain has changed fundamentally and profoundly since the war ended almost 80 years ago; the past almost literally is a foreign country. Margaret Thatcher famously swept away most of the remaining vestiges of socialism back in the 1980s. Industries were re-privatised; nationalisation was reversed, and no serious political party is advocating its return. It is not even controversial to assert that socialism has been proven to be a failure in every single administration that has ever tried it.

But state control of what can be built and where development is allowed is still with us, and the legislation introduced by the Town and Country Planning Act 1947 is still remarkably unchanged to this day.

Planning policy, what can be built and where, is determined by local plans drawn up by local planning authorities (the local council). The process of creating a new local plan takes many years and involves endless and repeated consultation exercises. This is supposedly a democratic exercise, since local councillors have the final say on the draft plan that is submitted to one of Her Majesty’s planning inspectors. They will then carry out an exhaustive public enquiry before dictating the final wording of the plan, which may or may not bear any resemblance to what the councillors had previously agreed.

With the local plan now in place a developer lucky enough to be in possession of a piece of land deemed suitable for development then submits a planning application. Again, this is ultimately supposed to be a democratic decision, as although typically 90 – 95 per cent of all applications are determined by council planning officers, the big ones and the controversial ones will go to the planning committee where elected councillors will make the decision.

But if the applicant does not like the decision they can appeal, and another of HM planning inspectors will make another independent but wholly undemocratic decision. The right of appeal, it should be noted, is reserved only for applicants who have been refused. Objectors who are opposing an application have no such right of appeal, which all helps to undermine the credibility of the system.

The artificial nature of the planning system means that distorted market forces take effect. House prices in the UK are among the highest anywhere in the world as the amount of land that can be built on is dictated entirely by the planning system. That restriction of supply has naturally led to a gross over-inflation of land values, and the exclusion from the dream of home ownership for large swathes of society.

The restricted supply of land has also led to developers trying to squeeze as many dwellings as they can onto the only available plots with results that, to be frank, have not always been pretty.

Ask anyone to identify buildings that inspire them or houses they would love to own, and the chances are the overwhelming majority of the properties they name will have been built pre 1948 and hence before planning laws were introduced. This country has one of the proudest histories of architectural design, constructional heritage and truly outstanding buildings, but it all seemed to come to a crashing halt with the introduction of planning permission.

Planning, to be blunt about it, has simply not worked; it has not facilitated good design, nor has it created vibrant, prosperous communities. Planning inspectors routinely overturn the decisions of democratically-mandated councillors, objectors have no right of appeal, and developers have to scratch around trying to develop the tiny amount of land that does eventually get permission. And of course, the end user, those many people seeking decent affordable housing have been let down most of all.

Before the 1947 act developers could pretty much build anything they wanted on any piece of land they owned. But they did not; they built, on the whole, thoughtfully and with great care. Mindful of the asset they were hoping to create and the end-user they wanted to want it. They certainly did not concrete over every field and green open space; it would have been economically suicidal to do so and entirely counter-productive. Too much development is just as bad for the market as too little.

Almost 80 years on we are long overdue for a radical new approach, and that is why one sentence in this year’s Queen’s Speech shone out like a beacon of hope and salvation: “Laws to modernise the planning system, so that more homes can be built, will be brought forward.” Upon that one short set of words rest the hopes of anyone who really cares about decent homes and about building a better Britain, fit for the future.

It is interesting to note that only 1.1 per cent of England is currently residential; we often think that this country is hugely overcrowded but that is only because the planning system has led to intensive urbanisation and forced the concentration of housing into tiny bits of land within or adjacent to existing development. All the land identified in local plans for new development is a miniscule amount of the actual undeveloped land in this country.

Of course, we do not want all our rolling fields and wide-open spaces to be built on, but we all recognise the need for new homes, and we want them to be decent homes, well designed and well built, that fit nicely into their environment, and supported by appropriate infrastructure. Housing will always be expensive, but it should not be unattainable. We want people to be motivated to strive to work hard and succeed in pursuit of their dream of owning their own home.

We need a new planning system. We need to clearly identify areas that are wholly inappropriate for new development; national parks, flood risk areas, areas of outstanding natural beauty, and so on. We need to identify areas where any new development would need to be subject to extremely sensitive design criteria such as conservation areas or historic town centres.

And we also need to identify broad areas where the presumption is that development will happen. Local design codes should be drawn up to ensure that the new buildings fit appropriately into the environment. And we also need a meaningful system whereby local objectors – yes, even the NIMBYs – can make their case and be properly heard.

I am very much looking forward to the publication of the new white paper!

Aamer Sarfraz: Other countries have started work on digital currencies. It’s time the UK got going too.

13 Apr

Lord Sarfraz is a Conservative member of the House of Lords and a Member of the Science and Technology Committee.

Today in the House of Lords, I will be speaking about a digital pound. Specifically, on this occasion, I will be asking the Government what assessment it has made of a UK Central Bank Digital Currency (CBDC).

There is already much thinking that has already gone into this. The Bank of England’s CBDC discussion paper, published last year, started the ball rolling for a digital pound.

A digital pound, backed by the Bank of England, could be a major win for individuals and businesses. With a digital pound, held in an electronic wallet, many bank fees could be eliminated, and foreign currency exchange risks substantially reduced. Importantly, such a currency could compete with Bitcoin’s market share, which currently stands at approximately US$1 trillion. It is estimated by the FCA that 1.9 million adults in the UK already own cryptocurrencies, and this number is growing.

A successful digital pound will need to be built with the right technology. The Bank of England has several options, including using a decentralised distributed ledger, like other cryptocurrencies. However, the very principle of “decentralisation” will not come naturally to any “central” bank. Most importantly, central banks will need to work with each to ensure their various CBDC’s operate on the same technology standards. Otherwise, we will have the same problem we have with fiat – a pound note doesn’t fit in a US vending machine.

Other countries are already forging ahead with plans for a digital currency. Japan’s Central Bank has launched a one-year digital currency trial this year. Furthermore, this week the Chinese government has officially started to issue digital yuan to 750,000 recipients. Other central banks around the world are also experimenting with digital currencies of their own. There are already several GBP-pegged stablecoins in the market. We now need to pick up the pace on a Bank of England issued digital currency.

Alongside issues of supply, there is clear demand for stable digital currencies. Tether, a stablecoin pegged to the US dollar, already has a US$45 billion market cap. However, CBDC’s will not mark the end of Bitcoin, nor should that be our objective. Bitcoin will still be the “people’s digital currency”, uninfluenced by central banks or governments. Without the success of Bitcoin, we would never have been thinking about a digital pound in the first place.

The rationale for the emergence of a digital pound is that the current banking system has several drawbacks. Over the past few decades, commercial banks have diversified their revenue sources.  As a result, “non-interest income”, mostly in the form of bank fees, have become an important source of income. Bank fees are charged on all sorts of things – account maintenance, overdrafts, cashier checks, reference letters, returned cheques, and wire transfers to name a few. There are entire online comparison sites helping consumers navigate bank fees.

Individuals making or receiving overseas payments, and those travelling overseas for both business and pleasure, get hit especially hard. They are faced with foreign currency losses (often twice during a trip – on departure and return), foreign ATM fees, traveller’s cheques issuance fees, fees for sending or receiving money, and fees for overseas transactions. Similarly, businesses that are buying and selling overseas, have to manage foreign currency risks and pay substantial transaction fees.

While some challenger banks are doing a good job reducing transaction fees, many still earn considerable non-interest income. They would say, quite rightly, that regulatory and compliance costs have skyrocketed, which result in the need to find additional sources of revenue.

A digital pound could be even more powerful when combined with smart contracts. Take the example of trade finance. In today’s archaic system, international trade is entirely dependent on banks, without whom costly letters of credit – the principal instrument in import and export – cannot be opened. Letters of credit were used by the Medici Bank in the 14th century, and are still in use today.  A smart contract, programmed into a digital wallet, could mean importers and exporters could use their digital pounds to conduct trade without banks.

Any solution afforded by the emergency of a digital currency would be part of the UK’s burgeoning fintech sector. The UK has already established a strong fintech sector and it could become even stronger. It has built on the UK’s historic strengths in financial services, which contributes an estimated £132 billion to the UK economy, corresponding to 6.9 per cent of the economy. The UK’s fintech market generates over £11 billion in annual revenues, and claims 10 per cent of market share globally. It is no surprise that 71 per cent of all British people interact with at least one fintech, which is higher than the global average of 64 per cent.

The Kalifa review reported in late February proposed five key recommendations. One of those was focused on creating a new regulatory framework for emerging technology, and this would include virtual currencies. The report’s author explained: “Fintech is not a niche within financial services. Nor is it a sub-sector. It is a permanent, technological revolution, that is changing the way we do finance.”

Fintech has already brought benefits for people in everyday life, and the UK has become a particularly strong hub for its development. Looking ahead, a digital pound could bring benefits for both consumers and businesses and the UK must move faster in exploring the mechanics and regulatory system of such an innovation.