Gerry Lyons: What are the economic and policy implications of the war in Ukraine – and what do they mean for the UK?

8 Mar

Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.

Russia is not an economic super-power. It is the world’s largest country by landmass. Its population is large, at 145 million, but is falling. Ahead of this crisis, it was the eleventh biggest economy in the world, while the UK is fifth. Russia’s income per head is low. Its military (defence) spending is similar in dollar terms to the UK’s, although higher in relation to the size of its economy. In addition to being a military power, with nuclear capabilities, Russia is a major commodity and energy producer.

According to the International Energy Agency (IEA), Russia produced 10.72 million barrels per day (mbpd) of oil in 2021, second only to the US, at 16.39 mbpd. Russia produces more than Saudi Arabia, but exports less than her. Russia’s importance in terms of gas is even more significant, accounting for 45 per cent of the EU’s gas imports and 40 per cent of its consumption last year.

The most significant economic impact of the war will be contagion through higher energy prices. Ahead of the conflict, gas prices were already elevated and oil prices had been trending higher. War adds a risk premium into the prices of both.

Other commodity prices are already higher, particularly wheat, given Ukraine’s importance as a wheat producer. In 2019, I gave the keynote speech at the annual Ukrainian Financial Forum in Kiev, and it was noteworthy then how the economy was reforming, with a range of key exports including metals, minerals, agricultural products, a shift into digital exports, and also that roughly two-thirds of its public debt was foreign-owned. It is depressing that this move towards openness has been stopped in its tracks.

For many countries – including the UK – this rise in energy and food prices is occurring in an environment of rising inflation, not helped by lax monetary policy last year. Now, UK inflation will peak higher, possibly breaching 10 per cent, and persist for far longer, casting light on how low the Bank of England’s policy rate of 0.5 per cent is.

Financial markets are selling off sharply. This both reflects uncertainty about where the war might lead militarily and concern about future growth.

While high energy prices add to inflation, they also sharply squeeze peoples’ disposal incomes and add to firms’ costs. Also, while higher interest rates may be needed to curb inflation, these may slow the world economy later this year and early next. Recession is even possible for the UK.

Financial markets have repriced the outlook for interest rates: the direction has not changed, but the pace and scale of expected tightening has. Markets now see rates rising less rapidly than previously expected.

Another impact from the war is via sanctions. The scale of sanctions will see a deep recession in Russia. As Russia’s military spending is fiscally led, this may dampen its ability to spend more in this area. But there is little historical evidence of economic sanctions halting an aggressor’s military plans.

How will these sanctions impact the UK? Russia is the UK’s nineteenth largest trading partner with total annual bilateral trade of £15.9 billion. Russia is our 26th biggest export market and 15th in countries we import from.

Russia as an export market for luxury goods will be closed. Annual UK exports are £4.3 billion: cars being the largest item at £386 million, medicines and pharmaceuticals £272 million and capital machinery £199 million. Annual imports are £11.6 billion, with the largest items being: oil £3.6 billion, non-ferrous metals £1.3 billion, and gas £559 million, plus a vast array of other goods.

There will be an impact on financial flows. The UK has invested heavily in Russia and many firms may have to write-off these investments. By 2020, the stock of UK direct investment into Russia was £11.2 billion. By contrast, total foreign direct investment from Russia into the UK was £681 million. Although this is only 0.7 per cent of the total stock it may understate the Russian influence. The phrase “Londongrad” has been attributed to the City since the introduction of the golden visa in 2008 and the continuation of Russian involvement ever since.

This is an association we should seek to ditch – while bearing in mind the importance to differentiate between Russia and the Putin regime. Being open, transparent, non-discriminatory, not retrospective, and abiding by the supremacy of English Common Law are important in ensuring there are no unintended consequences from actions we take now. That is, we should punish the Putin regime whilst enhancing the reputation of the City.

In terms of wider financial flows, the UK financial sector does not appear heavily exposed to Russia. The Bank for International Settlements shows total international bank lending to Russia of $121.5 billion, of which the largest was $25.3 billion from Italy, $25.2 billion from France and $17.5 billion from Italy. The UK’s exposure was $3 billion, so relatively low.

The exclusion of Russia from international capital markets should have a profound impact on its economy. London’s role as a global financial centre should not be impacted.

A critical component of the sanctions was to cut many Russian banks off from the west’s global payments system: SWIFT. The impact of this, however, was slightly diluted because of Western Europe’s dependency upon Russian gas and the need to still be able to pay for this; hence some Russian banks are still able to access the system.

Critically, though, a key decision was taken to exclude the Russian central bank and thus limit its ability to access the large amount of foreign exchange reserves it had accumulated, over previous years, the bulk of which are housed in central banks outside Russia. This measure, like crossing the Rubicon, could have profound longer-term consequences. There is little doubt it adds to the financial and economic pressure on Russia.

It could accelerate the move towards a global currency system not dominated by the dollar and a payments system not dominated by the west. China, in particular, is keen for an alternative to the dollar dominated system. Also, Russia and China have both developed their own versions of SWIFT in recent years. Furthermore, we are already in an environment where, regardless of this war or wider geopolitical issues, there is a race underway across countries to develop new global central bank digital currencies.

Another aspect is global defence spending. The war strengthens the case for increased military spending, illustrated most vividly by Germany’s announcement it will increase defence spending to NATO’s target of two per cent expenditure of GDP. The UK already achieves this target, but may yet decide to boost defence spending further. The war also shows the importance of soft power and controlling the narrative, with the BBC being an important tool internationally in tackling disinformation from Russia

Many countries will be impacted by the humanitarian fall-out. The recent UN World Migration Report noted that there are 281 million international migrants. This represents an increase of, on average, six million per year globally over the last decade. Thus, if as some fear, there are five million migrants from Ukraine (population 44 million) it would be huge.

The war, plus sanctions, will trigger an implosion in both the Russian and Ukrainian economies. There will, however, be significant contagion too, via higher energy prices. The UK will witness higher inflation now and an economic slowdown – and possible recession – over the next year.

Rachael Finch: Net Zero and energy security. If we go too fast for the first, we won’t get the second. Indeed, we may get neither.

4 Mar

Rachael Finch is a former British Army Officer and works in the defence sector. She is currently a Deputy Chairman of the Conservative Women’s Organisation West Midlands.

When Russia is negotiating with Western countries over the crisis in Ukraine, it is doing so knowing it is in control of 41 per cent of the EU’s gas supply. Having also built up its foreign currency reserves to defend itself from Western sanctions, and with no Western political appetite to commit troops to the crisis, Moscow is in a strong position.

In the long-term, Henry Smith, writing for this website, is likely right: Net Zero, by reducing dependence on natural gas, will weaken Russia’s position.

However, in the short-to-medium-term, the transition to Net Zero will transform geopolitics before a world powered by green energy can take shape. When we consider that almost 60 per cent of Russia’s exports comprise petroleum or coal products, it’s hardly surprising that Vladimir Putin is not the world’s most vocal environmental campaigner.

Consequently, the UK Government needs to look beyond the long-term environmental challenges of global warming, and address the nearer-term geopolitical risks that are present. Geopolitical risks create uncertainty in energy markets as reliability is questioned, pushing up prices for consumers and creating resistance to Net Zero goals.

The move away from oil and gas as sources of power will not happen overnight, and during this period, petrostates will continue to profit from their exports of fossil fuels. However, the combination of pressure on investors to divest from carbon-based fuels and the uncertainty about the future of fossil fuels may result in declining investment in oil and gas.

If oil supplies fall faster than oil demand as a consequence, fuel shortages and higher and more volatile oil prices will be here to stay for a while. Notably, the current increase in UK gas prices is due to a drop in gas supply at the same time as an increase in demand.

Higher oil prices result in higher revenues for petrostates such as Russia, or Saudi Arabia. In addition, as the transition to so-called clean energy develops, the overall reduction in the demand for oil combined with the need to keep costs as low as possible may result in higher-cost producers, such as Canada, being priced out of the market. This leaves room for states that produce cheaper oil, such as Saudi Arabia, to fill the gap increasing their geopolitical clout.

The same logic applies to gas markets. And for Europe, this means an increasing dependence on Russian gas: Russia’s importance to Europe will increase in the short-to-medium term if the Nord Stream 2 pipeline eventually comes online. If Putin wants to push back against the expansion of NATO in Eastern Europe, now is a good time for him to do it.

However, it’s not only fossil fuel exports that could increase Moscow’s geopolitical clout. According to the International Energy Authority, global nuclear energy generation will need to double between now and 2050 if the world is to achieve net zero emissions by the same date.

Many of the nuclear reactors planned or under construction outside Russia are being built by Russian companies. China is also a relatively large investor in nuclear power, meaning that both Moscow and Beijing will increasingly be able to influence industry norms and impose global standards in their favour.

China also controls many inputs required for clean energy technology, dominating both mining and the processing and refining of critical minerals, such as copper, cobalt, lithium, nickel and rare earth metals. An increase in the demand for clean technology will further increase China’s geopolitical influence. China has previously shown its ability to (mis)use this influence when it blocked the export of critical minerals to Japan in 2010 over the disagreement about the East China Sea. It could do so again.

It may seem as though localising supply chains is a way to fix these tensions. Despite the Green Party’s utopic advocacy for reducing emissions in the UK’s imports to zero, the reality is a net-zero global economy will need large supply chains for components, products and global trade in low-carbon fuels and minerals.

Global competition is needed to encourage innovation and to develop new markets, reducing prices for consumers. But, increasing electrification, be it for vehicles or heating, will likely result in more local production due to the difficulties with transporting electricity over long distances. Although local supply chains can be beneficial for security and employment reasons, too much localisation reduces diversification, creates vulnerabilities and raises prices for UK consumers.

Moreover, China’s recent increased use of ‘home-grown’ coal as an energy source is driven in part by the shortage of gas on global markets and the need for more energy security. Germany has also found itself in a similar position after its ban on nuclear power. Localising power supply chains doesn’t necessarily result in a reduction of carbon emissions.

Decarbonisation also poses problems for developing countries. The COP26 highlighted this with lower-income countries calling for developed nations to pay for historical damage allegedly caused by greenhouse gas emissions.

Whether you agree with this statement or not, developed and developing nations have diverging future goals which will increase tensions. The latter need growth to raise their populations out of poverty in the most economically efficient way. The former, by trying to stop the use of fossil fuels to deal with global warming, are preventing this happening. When the reality of life is a diesel-generator backed power grid that keeps blacking out, an electric car is not a sought after item.

For many developing countries, the way out of poverty may involve extracting hydrocarbon resources. However, developed nations are putting pressure on financial institutions not to support extractive projects, but by not assisting with an alternative, the tensions will grow.

China, on the other hand, is providing finance to countries like Cote d’Ivoire, helping to develop their extractive industries and by doing so is feeding internal Chinese demand for raw materials. As far as many developing countries are concerned, rolling back globalisation could do far more damage in relieving poverty and living standards than continued global warming.

The transition to a world powered by clean energy is radical and it will be messy. If, on the way to achieving Net Zero, national energy security conflicts with responses to global warming, there is a real risk of friction on the road to a green planet.

International climate leadership needs to mitigate the national security implications of a transition to green energy, in addition to making promises and signing agreements. Nuclear power and continuing investment in oil and gas reserves are essential tools in dealing with energy market volatility and the inevitable periods of disconnect between supply and demand of fuels; it’s good to see the government beginning to recognise this.

Supply chains need to be diversified to reduce reliance on one main provider – competitive markets are essential in this regard, as well as keeping prices lower for the UK consumer. And there will be a need to support communities dependent on fossil fuels, both domestically and internationally.

New green technologies will solve technical problems, but they will also encourage states to maximise their own interests and policymakers would be naive not to recognise this. However, perhaps the greatest risk of Net Zero is that if the conflict between global warming and national security is ignored, that the transition to a greener planet won’t take place at all.

Stephen Booth: The Government’s regulatory reform plans. We know a lot about the principles…but not much about the practice.

10 Feb

Stephen Booth is Head of the Britain in the World Project at Policy Exchange.

Regulatory reform tends to receive far less attention than government policies on taxation and spending, but it is just as vital to the UK’s economic success and the country’s post-Brexit future.

Last week, the Government published The Benefits of Brexit: how the UK is taking advantage of leaving the EU to mark the second anniversary of the UK’s withdrawal from the EU. The document sets out how the Government is using post-Brexit freedoms to implement new policies in different sectors. From immigration to trade, and agricultural policy to government subsidies.

The White Paper also identifies future opportunities to develop distinct post-Brexit regulatory and policy approaches across a range of headings including: science, data, and technology; business and industry; infrastructure and levelling up; climate, the environment and agriculture; and Global Britain. Many of the opportunities identified correspond to those outlined in last year’s Policy Exchange report Post-Brexit freedoms and opportunities for the UK.

Critics have a point when they note that, so far, the Government’s rhetoric has been appreciably more ambitious than its actions. Regulatory reform is complex and individual reforms, be it to data protection or agricultural land management, are always likely to be politically contested.

Fundamental changes require a strong political focus because there are inevitably tensions between industry, consumers, government, and regulators. The pandemic and the fraught negotiations over the Northern Ireland Protocol have understandably used up much of the political oxygen and impetus required to drive changes through.

For example, in the financial services sector, reforming the Solvency II regime for insurance regulation has long been seen as an opportunity to diverge from EU rules for competitive advantage and to free up more capital to invest in long-term infrastructure projects.

However, the industry has warned that the Treasury and the independent regulator have been pulling in different directions. There is a risk that the UK ends up being less ambitious and less competitive than the EU, which is pursuing its own reforms of the rules.

Aside from individual rules, the major post-Brexit opportunity is to improve how the UK regulates, through reforms to the wider regulatory regime. This includes looking at the relationships between industry, customers, elected politicians and regulators. The impact of regulation on the UK’s global competitiveness is another crucial factor.  For example, the Treasury has proposed giving the UK’s financial regulators a greater focus on growth and competitiveness in new statutory objectives.

Systemic and cultural change takes time. However, the prize on offer is a regulatory system that is more –

  • Agile and dynamic, allowing regulators to act quickly and decisively, as we saw in the development and authorisation of covid vaccines;
  • Proportionate, sensibly weighing consumer/citizens’ welfare against innovation and investment;
  • Responsive and accountable to UK interests, without the need for qualified majority voting among EU nations or co-decision with the European Parliament.
  • Focused on the challenges and opportunities of the future, on new technologies and new consumer realities.

The Benefits of Brexit paper provides the Government’s response to a wide-ranging consultation on reforming the better regulation frameworkand sets out five new regulatory principles to make the UK the “best regulated economy in the world”.

There are several welcome statements of intent outlined under these principles: regulating only where absolutely necessary, ensuring regulators have the right powers and duties, working more collaboratively with businesses to ensure there is a clear feedback loop between the regulated and the regulators, a target to cut the cost of EU inherited red tape, and a greater focus on reviewing the real-world impact of regulation that has been implemented.

However, there is little detail about how the Government intends to put these principles into practice. Ministers announced over a year ago that the current Business Impact Target, which measures the costs of regulation to business, would be replaced. But we still have little sense of what the new system to measure the impact of regulation will be.

Meanwhile, the White Paper’s £1 billion target to reduce the costs of inherited EU red tape to business appears relatively unambitious. But the real problem with such a target is that there is no agreed baseline of total regulatory costs against which to even assess the level of ambition. Last year’s consultation raised the prospect of measuring and baselining the total regulatory burden in the UK, as Canada, Denmark and the Netherlands have done, but there is no mention of such an exercise in last week’s White Paper.

The Government has also ruled out a return to the ‘one-in, two-out’ policy adopted by previous governments. The case for such a regime is that it enforces regulatory discipline by requiring departments to identify regulatory savings before introducing new rules.

However, it can also be argued that ‘one in, two out’ is a blunt instrument. Poor regulation should be identified and amended or repealed as a matter of course, rather than overlooked or deliberately kept until an offset for a new regulation is needed. The central question is how to ensure that departments and regulators are incentivised to routinely root out poor or overly burdensome regulation.

This poses another fundamental question, which is one of political oversight and application. Lord Frost was the driving force for this agenda across government from the Cabinet Office and, in the weeks after his departure, it was unclear where responsibility for regulatory reform would reside. This week Jacob Rees-Mogg has been given the responsibility in a new Cabinet Office role as Minister for Brexit Opportunities and Government Efficiency. Such an agenda requires long-term commitment throughout government and, ultimately, strong support from the Prime Minister.

The Government has set out principles which promise a more coherent and modern regulatory regime. The challenge now is to move from these statements of intent to implementation and tangible reforms. Over the next six months, Policy Exchange’s Re-engineering Regulation Project will take evidence from those in the private and public sector, and provide the concrete policies required to turn such a vision into a reality.

Tony Danker: Now is the moment for the Government to go for growth

3 Feb

Tony Danker is Director-General of the Confederation of British Industry

For business leaders, the past few weeks have felt like peak politics. But this week has marked a shift back to economics. And it is most welcome.

Yesterday saw the publication of the long-awaited Levelling Up White Paper, with its transformational aspirations. Today there are energy price announcements and an interest rate decision. Economics is coming to the fore once more.

For me, the biggest takeaway from yesterday’s PMQs is that the debate about long term growth has now reached primetime. Here at the CBI, we’ve been banging this drum for a while now. We partnered with the Campaign for Economic Growth at Conservative Party conference back in the Autumn because we wanted the government to focus more on business investment to drive the economy. And today I was joined by the brilliant Robert Colvile from the Centre for Policy Studies at a joint CBI-CPS event to answer the question: are we actually serious about growth?

The UK currently has the fastest growing economy in the G7, but it doesn’t tell the whole story. V-shaped recoveries around black swan events are no time for credit or blame. The downward nosedive is not an accurate judgement of economic performance; and nor is the climb.

The truth of the matter, as set out in black and white by the OBR, is that we’re looking at post-recovery growth of just 1.3-1.7 per cent. For a country that has demonstrated it can do growth at around 2.5 per cent, this is not ambitious enough.

And let’s be honest, without higher, sustainable growth the ambitious, levelling-up goals set out yesterday, from improvements to public services and much more besides, will be all the harder to achieve unless we can get growth going again.

Let’s look a little closer at the bind we’re in – and importantly – how we can escape being caught in a trap.

Lumping more onto the UK’s tax burden – already at the highest sustained level seen in peacetime – cannot be the answer. The evidence is clear that raising taxes stifles growth, and cutting them drives it.

We’re not talking growth at any cost and by any means. And we’ve not lost sight of the need for fiscal responsibility. We’re talking sustainable, long-term growth stemming from greater investment, innovation and productivity.

Just as companies can’t afford not to invest in growth, nor can countries. It’s not just about money – it’s about ambition and imagination too.

And there’s never been a better time to go for growth, because right now we’re at a unique moment: when once-in-a-lifetime events have coalesced to create a burning platform for change.

One of those is Brexit. I am a big believer in the opportunity of post-Brexit Britain. I think it gives us the platform we need to push the UK’s huge economic potential and the freedom to make big bets. It can awake us from the flatlining productivity that took hold after the financial crisis.

Another is the pandemic, which has driven huge acceleration in tech and digital adoption.

And finally, we have the opportunity that flows from our world-leading position on decarbonisation. There is a wall of investment to fund decarbonisation – backed by firms with over $130 trillion in assets. British businesses are begging Conservative politicians to see the enormous economic prizes available go to those who move fast.

All this means this is our moment.

So how do we seize it? By harnessing the creativity and initiative which birthed the Super Deduction, new skills bootcamps and offshore wind investment – measures which spurned orthodoxy in public policy and showcased the boldness and vision we need.

The first step should be a permanent Investment Deduction, succeeding the Super Deduction and mitigating the looming Corporation Tax rise. It would act as a long-term incentive to invest and grow enterprise, with businesses acting across many fronts in service of the nation.

Achieving the Prime Minister’s vision of the UK as a science superpower requires nurturing a workforce fit for the future. So, how about building on the Apprenticeship Levy with a new Skills Challenge Fund to invest in the high-value skills businesses really need.

We also need to get serious now about generating more of the skills we need at home – so we’re less reliant on immigration. Nadhim Zahawi is onto something with his new Unit for Future Skills, examining where skills gaps exist. Let’s supercharge that and build an independent Council for Future Skills. It could optimise training towards future economic demand and recommend visas to overcome shortages in home-grown talent, setting the Shortage Occupation List.

On energy, ending uncertainty on hydrogen and schemes like carbon capture and storage will enable the UK to lead in global green markets.

Meanwhile, let’s build on Monday’s Benefits of Brexit paper by establishing a new Office for Future Regulation to allow a post-Brexit UK to become the smartest and most future-focused regulator in the world, with a clear remit to target competitiveness, investment and innovation.

The focus of this new body should be the big bets for our economy. Set free to be agile, now we are no longer bound by EU-wide consultation and compromise. Proportionate, so that it strikes a better balance between investment and consumer protection. And more dynamic, allowing regulators to act quickly and decisively, as we saw with the vaccine, when the MHRA saw the UK lead worldwide.

This is not all on Government. Business has a key role, and the CBI will be promoting serious growth to firms across the country. We will ask them to increase business investment. In net zero. In innovation and digital transformation. In exports. In skills. In workforce health and wellbeing. And we will gather them in clusters around the country to deliver levelling up the only way it can be done – by the private sector through better skills, jobs and wages.

Business leaders – of all sizes and sectors – will respond because they are serious about growth.

So let’s get serious, together. Let’s unite, creating sustainable growth – the only real answer to our cost-of-living crisis, rising energy prices and high inflation. Growth that propels the UK beyond recovery to a new era of prosperity.

After a disappointing decade for UK investment and productivity, this is our second chance. Let history show that, this time, we seized the moment.

 

Theresa Villiers: Regulatory reform – and what the Government must now do to win that Brexit Bonus

31 Jan

Theresa Villiers is a former Environment Secretary, and is MP for Chipping Barnet.

Two years on from leaving the EU, it is time the Government made the most of our new-found freedoms and reshaped our approach to regulation, so that we can drive growth, economic investment and competition into every corner of the UK.

The public put their faith in the Conservatives, not only to ‘get Brexit done’ but also to improve their lives and their communities. It is completely understandable that for much of the past two years, the devastating effects of Covid have dominated Government activities and consumed bandwidth that would normally be devoted to different areas of policy and reform.

However, now that we appear to be over the worst of Omicron, and hopefully returning to something approaching normality, we must refocus back on the core issue of driving growth and investment and improving living standards across the country.

If we are to deliver the long-term economic growth that benefits all communities (and opens the way for tax cuts), we must recognise that unleashing productive investment from the financial services sector is crucial. The UK is home to some of the most innovative companies and thoughtful investors in the world. It is up to the Government to create the optimal conditions to allow our business leaders and entrepreneurs to reach their potential. That is a key means to increase prosperity and opportunity, and to raise living standards for all.

However, aspects of our regulatory system can act as a barrier to this potential wave of investment. The complexity of regulations – many of which originated from the EU – and their gold-plating by regulators, means that long term investment can end up being directed more towards very large companies that don’t need the funds than to, for example, urban regeneration in our cities.

A perfect example is Solvency II. This is an EU law designed to provide a one-size-fits-all framework for all EU insurers to bring consistency to the way they hold capital to protect policyholder benefits. The rules, which are extremely risk-averse, continue to force UK-based insurers to hold too much capital back, preventing that funding from flowing into a range of much needed projects that could deliver real change in our communities.

For example, new research by Pension Insurance Corporation describes how £20 billion of additional investment over the next decade through reform of Solvency II could be channelled into the building of new social and affordable homes, improving existing social housing stock, as well as on renewable energy projects and urban regeneration.

This could enable the Government to claim a major Brexit bonus, demonstrating to people how the UK, as a sovereign nation, can re-write an unnecessarily complex and risk-averse EU law to the benefit of communities from Barnet to Bolsover.

Solvency II is just one of many EU laws copied on to the UK statute book after Brexit which we need to assess to see whether they are still fit for purpose. But with Lord Frost’s departure from government, we need urgent clarity on who has responsibility for this vital task. With EU relations now wrapped back into the Foreign Office, no Minister appears to have the lead responsibility for post-Brexit regulatory reform since Lord Frost’s resignation.

Past experience shows that drives to remove unnecessary regulatory red tape soon run into the sand if they are not driven with determination at the most senior level in Government. As things stand, we are in great danger of missing one of the most important opportunities Brexit has given us.

In the first instance, a Secretary of State should be made responsible for the Brexit Opportunities Unit which currently resides in the Cabinet Office and is tasked with identifying our economic and political opportunities post Brexit.

Secondly, and as I and colleagues on the Taskforce on Innovation, Growth and Regulatory Reform recommended to Government in our recent report, UK regulators should have stronger duties to promote innovation, investment and competition – as well as consumer protection – pushing them to play a much more active role in supporting growth. The Prudential Regulatory Authority (PRA), which oversees insurance companies, for example, should take a more evenly balanced approach to reforming Solvency II to ensure that there is increased investment in productive assets.

Thirdly, we need to ensure MPs are properly resourced both to scrutinise regulators and hold them to account. Strengthening the select committee system to ensure more effective use of economic impact assessments and metrics will help parliamentarians ensure that regulators really are replacing the EU model with a new, more innovative and proportionate UK regulatory framework.

This would mean that our country really can start to bank that Brexit bonus. At the moment, we face the ironic situation that EU may actually overtake us on Solvency II reform if regulators continue to drag their feet, potentially making us less competitive. As we emerge from the pandemic, long-term investment in our communities across our whole United Kingdom should be at the top of our priority list, and Solvency II reform can give a big boost to our efforts to deliver this. The opportunities are there for us to seize, but we must act now.

Rocio Concha: If the Government wants to build back better, it must put the consumer at the centre

9 Aug

Rocio Concha is Director of Policy and Advocacy at Which?

As we start to look ahead to beyond the pandemic, the Government will have to grapple with how to stimulate an economic recovery and form public policy agendas for a society that in many ways looks different compared to 18 months ago. While there will be a natural focus on investment, innovation and competition, it would be a fundamental mistake to overlook the vital role which consumers have to play.

Because it will be everyday people that drive our economic recovery. The more confident they feel, the more they are likely to spend and shop around, to stimulate competition and to support innovation by trying new products and services – all things which the UK, and businesses large and small, are relying on to bounce back.

The challenge for the government is a daunting one – and the increase in the time we now spend online is illustrative of the delicate balancing act they must achieve. The ability to work, bank and shop remotely offers huge convenience. Many of the changes people have made to their lives will be here to stay. Yet the increasing move to a digital world has presented problems and risks, such as the significant increase in online scams, that haven’t yet been adequately addressed.

Harnessing the positives and neutralising the risks that have arisen for consumers won’t be easy. Changes that may have taken years have happened almost overnight in some cases and that needs to be caught up with.

At Which?, we believe the government should empower consumers to lead our economic recovery, and there are many ways it can do this. Building on already existing legislation or consultations, there are three areas where Ministers can make markets work more fairly, and bring an end to rogue business practices that all too often see everyday people get ripped off.

First, competition and consumer policy requires reform to give such regulators as the Competition and Markets Authority (CMA) sharper teeth, with proper powers to act as deterrents for unscrupulous companies that break consumer laws. In practice, that means swift and effective redress when customers are wronged, and proper accountability for businesses using unfair practices in dealing with consumers – as some have during the pandemic.

In the digital space, a handful of dominant tech giants, including Facebook and Google, can no longer be allowed to stymie competition and reduce innovation in the sector. The newly-formed Digital Markets Unit, operating out of the CMA, is a step in the right direction – but it won’t protect consumers unless it is equipped with the necessary enforcement powers, including the ability to hand down heavy fines.

Second, if consumers are to feel more confident engaging with new technology and new markets, then they will need to feel safe being online. It is no coincidence that fraud has surged by a third compared to last year. Yet with some of the most sophisticated technology in the world, there are measures that giant online platforms – such as those named above – which so many of us use everyday, can and must do to prevent the avalanche of fake adverts that makes it far too easy for fraudsters to target victims from appearing on their sites in the first place.

Which? research earlier this year found that four in ten investment scams begin online. The government has taken positive action to tackle aspects of online safety by introducing the draft Online Safety Bill – but, as it stands, it will fall short of swiftly dealing with all online fraud. Unless it provides online platforms with the legal responsibility to prevent, identify and remove fake and fraudulent content on their sites, including paid for ads, then fraudsters will continue to exploit their systems and services to carry out a crime that can cause a devastating amount of financial and emotional harm for its victims.

Third, as numerous new tech products furnish our homes, customers must be confident that they are safe to use. Smart gadgets and devices can bring huge benefits to consumers’ lives, but these products must be properly safeguarded with strong security protections to prevent cyberattacks.

The Government’s upcoming Product Security and Telecommunications Infrastructure Bill will scrutinise this. However, if Ministers are serious about cracking down on insecure and unsafe products in our homes, online marketplaces and retailers must be given additional legal obligations in the Bill for ensuring the safety and security of the products sold on their sites – and for customers to get appropriate redress when they buy faulty products.

Taking action in these three areas means that the Government needn’t magic legislation out of thin air to begin empowering and protecting consumers. Indeed, the government pledged to give the CMA enhanced powers to tackle rip-offs in its manifesto.

Here are the foundations from which to make people feel confident that the economy is working for them. To do so would really build back better.

John Redwood: Why now that we have left the EU are we still yoked to Maastrict austerity?

26 Apr

Sir John Redwood is MP for Wokingham, and is a former Secretary of State for Wales.

The UK economy is currently being run on the Maastricht rules as if we had not left the EU. The Office for Budget Responsibility made clear in its March report that whilst it awaits the Government’s conclusions on a new fiscal framework, the economy will be guided by the two familiar requirements that we get the running deficit down below three per cent of GDP, and that state debt as a percentage of GDP is declining all the time it is above the 60 per cent level.

It is clear that the whole five year budget in question is dominated by the perceived need to get state debt falling as a percentage of the economy by the end of the forecast period. This has led to a range of measures to increase the tax take, with a large increase in the Corporation Tax rate, and a big increase in the numbers of people paying higher rate income tax through freezing allowances.

My critics will argue that because we were outside the Euro we never had to follow the Maastricht rules. The truth is we did. We still do because we have never changed the rules, even though now we are free to do so.

We faithfully reported each year on progress with hitting the debt rules, and made clear that policy was primarily steered by the need to control debt. That was the central driver of George Osborne’s so-called austerity economics. The latest Government figures after Brexit continue to report our progress against these EU rules. This quote from the OBR’s March Report shows nothing has yet changed:

“The Chancellor has not set new fiscal targets in this Budget (despite two of the existing ones expiring this month) and is instead proceeding with the review of the fiscal framework proposed in last year’s Budget. But the absence of formal fiscal targets does not mean that the Chancellor has not been guided by particular metrics when selecting his medium-term Budget policies. The tax rises and spending cuts he has announced are sufficient to eliminate all but a £0.9 billion current budget deficit in 2025-26, while they are just enough to see underlying public sector net debt as a share of GDP fall by a similarly small margin of £0.7 billion in 2024-25 and £4.1 billion in 2025-26.”

I rest my case.

Requiring states to keep their overall state borrowing low makes a lot of sense in a single currency area where different governments have the right to borrow in a common currency. They need to avoid the free rider problem, whereby some states run up excessive debts, taking advantage of a low interest rate facilitated by the prudence of others.

The UK has no such problem. The UK as a single state with its own currency and central bank cannot take advantage of others. It does of course have to decide how much to borrow with affordability in mind. Borrow too much, and the interest bill could become unaffordable. Borrow excessively, and lenders could start demanding penal terms.

This means the best type of control over debt build-up for the UK should be a control over the size and growth of the interest burden. The UK has a tradition of borrowing long, and can do so in current markets. This protects taxpayers against sudden rises in rates, and reduces any strain from refinancing the debt. The Government has used debt interest targets, and should draw up a new realistic one. Given the way debt interest has fallen despite the increase in debt, this should not prove difficult.

The idea that we should carry on controlling the economy by state debt as a percentage of GDP is particularly silly given the great monetary experiment the UK along with the USA, the ECB and the Bank of Japan is carrying out.

The state-owned Central Bank is buying up large quantities of the state debt. Claiming that the gross debt is still a real debt is therefore wrong. The Treasury pays interest on nearly £975 billion of the debt to the Bank which it owns. If I had bought in my own mortgage but still kept paying the interest, I would not regard it as a real debt in the way I did before I bought in the loan, since I would be paying myself. Despite this obvious anomaly, the Budget is constructed on the basis that we need to get gross debt down, not the debt net of that owned by the state itself.

So what should we use as guides for economic policy? To a control on state interest payments to others, we should add a growth target and we should keep the important two per cent inflation target as a restraint on excessive credit and money expansion. The growth target should encompass aims to increase employment and productivity. What we need is to promote a higher wage, higher productivity economy. Our economic targets should reflect those aims.

The current state debt target is acting a constraint on faster growth. Offering tax rises and threats of tax rises for the years ahead damages confidence and deters new job creation and new investment. The UK’s productive capacity has been damaged by years in the single market where we lost out in many areas from steel to consumer electronics and from temperate food production to electricity generation.

We now need a favourable tax regime on self employment, investment, enterprise and individual incomes to promote a substantial increase in our productive capacity. The state debt control implies more of the same old policies which we had to follow in the later single market years which did not do enough to boost high paid jobs through industrial investment and higher productivity.

David Gauke: My Budget advice to the Chancellor. Raise income tax, not corporation tax.

27 Feb

David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the recent general election.

If there is one tax that the Chancellor is likely to increase when he stands up to deliver his Budget on Wednesday, it is corporation tax. Speculation that the corporation tax rate is going to rise has been running for months and if the Treasury wanted to dispel such speculation it could have done so. In contrast to George Osborne’s time as Chancellor – when reductions from 28 per cent to 17 per cent were announced – Rishi Sunak is expected to announce a Corporation Tax rate in the region of 23 to 25 per cent.

Is this a good idea? My view – as the Minister of Tax throughout the Osborne Chancellorship – is that it is not. But it is worth examining the arguments for and against such an approach.

The first argument that will be made is that we might not need tax rises at all. I wish that this was true but sadly this is unrealistic. It is true to say that we can live with higher levels of debt than was the case in the past. Interest rates are low and likely to remain so. Even if they increase, the long dated maturity of our debt gives us a chance to respond. The markets are happy to lend to us, the risk of a sovereign debt crisis is remote. The Covid crisis is the type of event in which governments should be willing to borrow and the consequences can and should be dealt with over a long period of time. In short, we needn’t be in a hurry to pay off the Covid-19 debt.

Even accepting all of this – that ‘this time is different’ – there is still an issue. Even after we are put the economic consequences of Covid-19 behind us, the OBR forecasts a deficit of £100 billion or 4 per cent of GDP. Our debt to GDP ratio would continue growing. Given these forecasts assume tight control over public spending that will be hard to deliver and the significant demographic challenges that face the country in the 2030s, some kind of fiscal tightening in the form of tax rises will be necessary eventually.

The second argument is that now is not the time. I would agree that now is not the time for a fiscal tightening. The economy is currently shrinking and unemployment is likely to increase substantially in the months ahead. The markets are not jittery so there is less of a pressing need to take action. Nonetheless, the Government could increase some taxes without engaging in a fiscal tightening if long term tax increases are accompanied by short term tax cuts or spending rises. So one can announce and even implement tax rises without engaging in an immediate fiscal tightening.

There is also a political issue. Delaying action on fiscal consolidation might make economic sense but it would push tax increases into the last years of a Parliament. Leave it a year or so and the Chancellor might find that his Parliamentary colleagues – not least the Right Honourable Member for the marginal seat of Uxbridge and South Ruislip – might become rather resistant. Now might be the last chance to take action.

The third unconvincing argument is that cutting corporation tax has not cost us any money and increasing it will not raise you any money. Look at how corporation tax revenues have increased since 2010, the argument goes. Sadly, life is more complicated than that. Yes, rates have fallen and revenue has increased but corporation tax receipts reflects where we are on the economic cycle (in 2010, businesses were not making much by way of profits and if they were they had big losses to offset). Furthermore, the post-2010 reforms were Lawsonian in their approach in broadening the base at the same time as lowering the rate (so these were not simply cuts). In addition, lower corporation tax rates have unintended behavioural changes in that more people pay themselves through companies (diverting tax revenues from income tax and national insurance contributions). To put it another way, increasing corporation tax rates really will bring in more revenue.

So, to summarise, it will be necessary to increase tax revenue, it is reasonable to make a careful start on that process now (albeit in a way that does not tighten fiscal policy in the short term) and that increasing the corporation tax rate will bring in additional revenue. I could also add that, of all the potential revenue-raisers, this is likely to be politically less painful than other options. Even businesses will not squeal much because, for many of them, making a profit appears to be a remote eventuality and paying more tax on those profits would be a relatively nice problem to have.

It would still be a bad idea.

Why? If we are going to raise more in taxes – and we are already at historically high levels – we need to have a debate about which taxes are least damaging to economic growth. Over the long term, corporation tax ranks as being one of the worst.

Corporation tax is a tax on profits. Profits are the return on investment; the higher the tax on profits, the lower the rate of return. All other things being equal, the lower the rate of return on investment, the less investment you get.

There is also a tendency to think that corporation tax is something that is paid by, well, corporations. At one level that is true but – to state the bleeding obvious – all taxes are paid by people in the end. Corporation tax is ultimately paid by shareholders in lower dividends, consumers in higher prices and employees in lower wages. There is plenty of evidence to suggest that in an open economy like the UK, it is the workers who lose out the most. Investment goes elsewhere, productivity does not increase as quickly as it would otherwise do and, in the end, wages and salaries reflect productivity.

It is no coincidence that, in the era of globalisation, corporation tax rates have fallen around the world. I spent much of my time as a Treasury minister trying to persuade international businesses to locate more investment and activity in the UK as a consequence of the competitiveness of our corporate tax system. We were starting to see success but there was always a question as to whether the UK was truly committed to corporation tax competitiveness in the way that, say, the Republic of Ireland was. Given the current speculation, it was a fair question. On top of Brexit, a sharp hike in corporation tax rates will be yet another blow to our international reputation as a place in which to do business.

If we need more tax revenue – and we do – we have to make use of our big, broad-based revenue raisers – income tax, national insurance contributions and VAT. The manifesto pledge made in 2019 not to increase the rates of these taxes was unwise at the time but it was made in good faith. However, much has happened since and the Government would be justified in recognising that. Attempting to fill the fiscal black hole by swingeing increases in corporation tax will reduce business investment and damage our international competitiveness. Not for the first time, the politically expedient choice will come with a painful economic cost.

Philip Davies: Our frontline staff are vital to our economic recovery, and we must do more to support them.

6 Dec

Philip Davies is MP for Shipley & Co-Chairman of the APPG on Customer Service

Ten months on from the start of the Coronavirus pandemic, we continue to face daily challenges as we navigate its far reaching impacts on our economy and society.

Since the start of the crisis, we’ve seen inspiring examples of the nation come together, with moving tributes to the NHS and those who have worked tirelessly to keep us safe. Yet, amongst these shows of support, a concerning trend has emerged across the country – with instances of hostility toward frontline staff on the rise.

Research from the Institute of Customer Service indicates that over half of customer-facing staff have experienced abuse from customers since the pandemic began. The worrying figures span every sector – from retail to public transport networks and even financial services. As we deal with the impact of new restrictions and the onset of the busy festive season, it’s more important than ever that we step up and protect our frontline workers.

The new localised tier system will, in itself, present new challenges, as increasingly frustrated customers kick back against restrictions. As customers looking to enjoy traditional Christmas festivities are told they can only enjoy their drinks with a “substantial meal”, and those looking for last-minute Christmas presents are presented with long queues as stores try to ensure social distancing guidelines are met, I fear that the dwindling patience of the public could put our customer-facing staff at even greater risk of abuse.

I am working with the Institute of Customer Service on a campaign, “Service with Respect”, which encourages businesses and the government to do more to protect these workers.

Alongside my colleague, the Labour MP Chris Evans, and over 100 big-name brands, including O2, Boots and Nationwide, we are calling for the introduction of a specific offence for anyone who abuses customer facing staff.

We’re also encouraging organisations across the county to invest in additional training for their employees, to ensure they are adequately prepared for the ever changing requirements of their roles as we continue to navigate these challenging times.

Through a series of All-Party Parliamentary Group meetings, we have heard concerning and wide-ranging reports from across the nation – with instances ranging from verbal abuse, being shouted and sworn at, to more extreme cases of physical violence.

With 80 per cent of the UK’s employees working in the service sector, the scale of the issue is extremely concerning: and research shows it is not limited simply to face to face interactions. Those working in contact centres have reported occurrences of hostility through phone and online chat services. Combined with increased workloads as the number of vulnerable customers rises, the potential psychological impacts of such behaviour should not be ignored.

In Parliament, I recently asked the Home Secretary what steps her Department is taking to ensure that customer service staff are protected from abuse during the Covid-19 lockdown.

In response, she outlined that any such abuse is unacceptable, and that the Government is working closely with the National Retail Crime Steering Group to deliver a programme of work aiming to provide better support to victims, improve reporting, increase data sharing and raise awareness of this crime.

Whilst this initial response is welcomed, and it’s encouraging to see the issue being taken seriously, I fear this narrow view on the retail sector alone does not go far enough. Our research has clearly shown that instances of hostility span multiple sectors, and the plight of those outside of retail risks being overlooked.

Any form of abuse, in all aspects of life, is completely unacceptable, but we should remind ourselves that these workers have been operating on the frontline since the beginning of the pandemic. They have kept our nation running in the most difficult of times – keeping our building lights on, shelves stocked and basic power and water supplies running. We all have a duty to ensure they have the training and respect they deserve to safely carry out their crucial roles.

With different tiered restrictions remaining in place across the country, the role of customer facing staff continues to expand, with many taking on additional responsibilities for ensuring social distancing measures are adhered to and hygiene requirements met. In the face of a progressively frustrated and restless customer base as we approach the busy Christmas season, there is reason that these concerning instances of abuse could continue to rise.

The pandemic continues to bring daily challenges across all aspects of our lives. Yet as we try to rebuild, customer-facing staff will be vital to our recovery, and we must show them they are a valued part of our nation. And this starts by enabling them to do their work safely, effectively and free from the fear of abuse.

Sunak opts to suck it and see

25 Nov

We must be thankful that no-one is forecasting that Government borrowing will rise to record levels this year.  Or Rishi Sunak wouldn’t have been in a position to announce that Government spending will rise at its fastest rate for 15 years.

Apologies for the sarcasm – which isn’t aimed at the Chancellor’s measures, but is meant instead to provide an introduction to the thinking behind them.

One response to a ballooning deficit is to cut the rate of growth of spending.  That’s what the Coalition did after 2010, when the deficit hit seven per cent of GDP.

The Office for Budget Responsibility is forecasting a peak of 19 per this year.  But Sunak’s response is to raise the rate of spending.  Why?

Because in 2010 George Osborne judged the deficit to be structural (he was right), and his successor judges this one to be exceptional (he’s right, too).

It is almost entirely a product of the pandemic and what has followed.  It is in this context that the OBR forecasts the economy to shrink by 11 per cent this year and unemployment to hit 2.6 million next year.

In these circumstances, the Chancellor has found it impossible to produce the four year spending review he hoped for, and has been forced to issue one for a single year instead.

Furthermore, his statement was only one side of the tax and spending coin. Today, we got the spending.  In the Spring, we will get the Budget – and the tax.

Given all this, it will be very odd if Sunak turns up then with large-scale tax rises to raise revenue quickly.  The foundation of his measures today appears to be: suck it and see.

Broadly speaking, the spending package suggests that the Chancellor is going for growth.  That’s the logic of the infrastructure spending, the coming review of regulation, the new northern bank and the enlarged Restart programme.

The Levelling-Up Fund is a classic Treasury exercise in the English centralist tradition, with its central feature of bids from the provinces to Westminster for money.  So it is in a country with relatively few local taxes.

On that point, Sunak announced “extra flexibility for Council Tax and Adult Social Care precept”.  Local authorities will like that, council taxpayers not so much.

It’s worth stressing that the OBR’s forecasts, like all such animals, shouldn’t be taken too seriously.  Our columnist Ryan Bourne debunked its record on this site earlier this week.

If you walk down the sunny side of the street, you will smack your lips at the thought of a Roaring Twenties effect, as employment recovers, consumers spend, the hospitality sector booms and people pile into holidays abroad.

And it may be that post-Covid changes even out for the better, with a shift in activity and spending from city centres to the suburbs and countryside, together with music, art, theatre and all the rest of it.

That might not be such a bad things for towns and their centres, at which the new Levelling Up Fund is partly aimed.  Our columnist James Frayne believes they are a core concern for provincial voters, and government listens to him.

If on the other hand you stick to the shady side, you will point to the economic equivalent of Long Covid: fearsome economic and social bills for damaged mental health, postponed operations, lost educational opportunities.

All that is a big minus for levelling-up – because it’s the disabled, poor and disadvantaged who have been hit hardest by restrictions and lockdowns, especially if they work in the private sector.

The background in recent years is not encouraging.  Since the financial crash exploded, we haven’t grown at more than 2.6 per cent a year.  That suggests recovery may be sticky.

Sunak’s persuasive manner, grip of detail and spare eloquence have served him well during this crisis.  Others holding his post would not have survived roughly ten major finance annoucements in less than a year.

It’s not as though he hasn’t sometimes had to recast his plans – as in October, when he pumped more money into his Job Support Scheme.

And if the economics of his strategy are straightforward enough, its politics was sometimes a bit odd.  If the Government’s overall plan in the short-term is expansionary, why raise the minimum wage but curb public sector pay?

If spending on nearly everything else is rising, why crack down on the 0.7 per cent aid spend?  Doing so because you think aid is wasted or the target is wasteful is one thing.

But that wasn’t the basis of Sunak’s decision – since, after all, he said that the Government intends to return to 0.7 per cent “when the fiscal situation allows”.

The Chancellor also left a big unresolved question hanging in the air.  What will the Government do about the Universal Credit uplift?  Will it be extended or not?

The sense of a statement with contradictory messages was picked up Rob Covile of the Centre for Policy Studies.  (The Treasury would do well when the Budget approaches to look at its supply side ideas.)

“Feels slightly like Treasury couldn’t decide whether the message was ‘tighten belts’ or ‘we’re still spending’,” he tweeted. “So we’re getting two or three minutes of each in turn.”

That first element in the Chancellor’s statement, plus the OBR’s horrid short-term forecasts, comes at a bad time for the Government.

For tomorrow, the toughened tiering details are announced. Lots of Conservative MPs won’t like them.  The detail of which tiers apply in which areas will be published, too.  Many Tory MPs will like those even less.

Graham Brady, Steve Baker, Mark Harper, and the Covid Recovery Group will say that the economic damage of restrictions is so severe that the Commons should not vote for more – at least, without an impact assessment.

They may not be alone.  “These measures may be a short-term strategy, but they cannot be a long-term one,” Jeremy Wright declared in the Commons during the recent debate on the lockdown regulations.

He and Edward Timpson (another ex-Minister) plus other MPs backed the Government but, sounded a cautionary note.

Will the prospect of vaccines be sufficient to rally the doubters round?  Or will they take a leaf from the book of Theresa May, who savaged the regulations during the same debate?

We shall see – but Ministers are not helping themselves by dodging requests for that impact assessment, urged by this site and others, and the subject of a dogged campaign by Mel Stride, Chair of the Treasury Select Committee.

All in all, Sunak is shaping up to go for growth.  Good for him.  Nonetheless, he must watch and wait to see how and when the economy rebounds.  Brady and company are less patient.