Ryan Bourne: A government that wants to Build Back Better must address supply-side constraints on the economy

26 Jan

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

Well, so long, “Plan B.” In jettisoning some of the most intrusive remaining Covid-19 restrictions, England (with the home nations to follow) could soon rival parts of the U.S. in being the most “normalised” policy environments in the developed world. Yes, mandatory self-isolation for those testing positive will remain, for now. But as with the vaccine rollout, Britain appears now to be leading the world into the new approach of “learning to live with the virus.”

This will bring with it an economic fillip, albeit disrupted in near-term statistics by Omicron. We have certainly been in need of one. Though headline GDP figures across countries can be misleading about the impact of the pandemic given measurement differences, an analysis by The Economist combining five indicators – GDP, household income per person, share prices, investment, and public debt – found that through September last year Britain had been the second most adversely affected major economy from the pandemic, behind only Spain.

In its ranking of 23 OECD countries, Britain was deemed third worst for the fall in household income (behind Austria and Spain), third worst for the decline in share prices (behind Chile and Spain), worst for the fall in investment, and second worst (behind Spain) for the public debt surge. With Covid-19 deaths per capita here relatively high – above all other major European or G7 economies except for the U.S., Belgium and Italy – we suffered a pandemic double-whammy of both poor health outcomes and a big economic hit.

Does analysing the change in these variables mislead about how the UK shapes up internationally after Covid? Perhaps. It’s not as if the public health crisis was the only thing happening during this time. And it’s important to remember that looking at changes to economic variables in the pandemic can hide that Britain entered it with significant structural strengths too.

In mid-2019, The FT’s Chris Giles was able to write that incoming Chancellor Sajid Javid enjoyed unemployment at its lowest rate since 1974, with the share of 16- to 64-year-olds in work at close to record levels, inflation bang on target, average earnings growing at their highest rate for 11 years, and public borrowing modest. The biggest ongoing economic weakness then was clearly productivity – with GDP per hour worked around 15 per cent lower than seen in France or the U.S., after a decade of weak economic growth.

So the UK entered the crisis with many macroeconomic variables healthy. Even the shock of the pandemic has therefore left the country’s headline statistics looking largely unremarkable in comparison with other economies.

UK unemployment is still low by international standards, for example. At 4.1 per cent for September through December 2021, the UK’s rate was similar to the U.S., and bettered only by Japan (2.8 per cent) and Germany (3.2 per cent) within the G7. The employment rate for 16-64 year olds of 75.5 per cent, although still 1.1 percentage points below its pre-crisis peak, is similarly only exceeded by the Scandinavian countries, Germany, and the Netherlands within Europe and then Japan too in the G7.

Pandemic-induced disruption and rising energy prices (on the supply-side) and huge macroeconomic stimulus (on the demand-side) has left us worried about inflation and a cost-of-living crisis. But, again, this is not an affliction unique to Britain, belying the idea it is mainly caused by Brexit. At 5.4 per cent in the 12 months to December, consumer price index inflation was almost identical to EU-wide inflation (5.3 per cent), and lower than some countries within it, such as Germany. Compared to G7 countries, the UK was decisively average too, with only Japan and France with significantly lower rates.

On GDP, it’s true that – putting measurement differences aside – the UK had one of the biggest headline falls in output during the pandemic. GDP in Q3 2021 was still 1.5 per cent below the pre-crisis peak, with only Japan having suffered a worse performance among G7 countries. But the OECD expects faster UK growth going forwards. And as economist Julian Jessop has noted, it’s highly likely that the UK will be doing better than the eurozone in terms of GDP relative to its pre-crisis peak through 2022, although still lagging far behind the U.S.

What about the public finances? Well, up to September 2021, the IMF had calculated that the UK had the third biggest total Covid-19 fiscal support package, amounting to a massive 19.3 per cent of GDP, and so behind only New Zealand and the United States. It’s therefore no surprise that public net debt has surged to new highs in peacetime. And yet, within the G7, the only country with a gross debt-to-GDP level lower than the UK is Germany and the UK is slap bang in the middle of the seven for its projected primary budget deficit this year.

The after-shocks associated with Covid-19 might be felt for years to come, through disruption to demand patterns, experiments with more home working, a spatial reallocation of activity and lingering effects on attitudes to risk. But the UK’s broad macroeconomic situation is not dissimilar to that of many other comparable countries. And that should make us ponder a few lessons from elsewhere as we tackle the immediate challenges we face.

In particular, the country that has stood out in suffering a worse inflation problem than the UK is the U.S. – where households were showered with cash such that the government effectively delivered a money drop to households. So why the guys at the Social Market Foundation appear to be urging the Chancellor to introduce a £500 “Rishi Cost of Living Allowance” as if that’s a cure to inflation here is beyond me.

Unemployment spiked very high and then plummeted in the U.S. below all G7 countries bar Germany and Japan – showing the long-term virtues of flexible labour markets. If Britain wants to regain its full, robust employment performance of 2019, it should beware new policies prioritising worker “security” over continuing a liberal hiring and firing environment as things normalise.

But, most of all, the UK’s key economic challenge – weak growth – remains and becomes even more pertinent given Covid-19-induced constraints. The pandemic has tested to destruction the idea that macroeconomic problems can be solved by throwing more and more stimulus and “demand” at things. If the Government is serious about “Building Back Better”, it needs to do the hard yards in thinking about the supply-side constraints on the economy and how to turn more demand into real growth, rather than rising prices.

Howard Flight: We should be optimistic about the UK’s 2021/22 economic recovery

1 Mar

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

It looks to me as if the UK economy is going to perform markedly better than currently, generally forecast – provided, that is, there are not further unwanted lockdowns.

The IMF forecast is also positive, forecasting an upturn from a 3.5 per cent contraction for Global GDP last year to a 5.5 per cent expansion this year. Again, this does of course hang on a successful Pan EU, vaccine rollout. With the 2020 downturn twice as deep as that which followed the Lehman collapse, so the 2021/22 recovery should be all the greater.

The strongest growth forecast remains the US at 5.1 per cent growth, reflecting particular massive stimulus support from government. Japan’s growth forecast increased marginally to 3.1 per cent with 8.1 per cent and 11.5 per cent, respectively, for China and India. The relatively smaller but faster growing Asian economies – Indonesia and Malaysia – will grow at 8.3 per cent – with the Asian economies now representing a third of the world economy.

In the case of the UK, however, the IMF forecast continues to understate. The IMF is the global lender of last resort and the single most influential institute of economic governments. Last year the IMF forecast the UK economy contracting by 10 per cent – the biggest fall of the G7 countries.

It is correct the UK was particularly susceptible to the Coronavirus pandemic, reflecting the international nature and population density of London. But the key factor responsible for the misleading figures is that the UK public sector includes in its GDP growth data, in a way relating not to spending, as with other nations, but to outcomes.

This means that when schools are closed and NHS operations are down, as during the lockdown, government consumption expenditure – a huge chunk of any advanced economy – drops off a cliff for GDP measurement purposes – even though State spending as a whole is growing fast.

As a result, the irony is that this is why the UK public sector registered a double-digit percentage contraction in our 2020 GDP numbers, while growing fast across the Eurozone.

For purposes of comparison, an expansion of 10 per cent should have been allowed for. The outlook for the real economy for the coming year should therefore be substantially positive. The IMF forecast of 4.5 per cent, and not adjusted for the public sector distortions is only marginally ahead of the Eurozone at 4.2 per cent. The actual, comparable rate allowing for these distortions looks to be of the order of 10 per cent – reflecting the vast vaccine rollout occurring and the fulfilment of massive pent up demand.

The IMF numbers do not acknowledge this conceptual wrinkle stemming from Britain implementing internationally agreed methodological changes before other major economies: and if they did the UK’s 2020 GDP contraction would be near the middle of the G7 pack. The IMF estimate is that the UK economy will expand by 4.5 per cent this year, only slightly faster than the Eurozone. With lockdown continuing into 2021 the same statistical anomaly relating to GDP, when school and health services were disrupted is impacting on current growth numbers as viewed by the IMF.

Of particular importance in accommodating economic recovery is that the G7 can now apparently live with much higher levels of public sector debt, post the Coronavirus crisis. Fiscal rules clearly need some rethinking. But for the next two years, measured meaningfully, the UK should be the fasted growing of the G7 economies. Also, the world will realise that Brexit is no disaster but rather a big positive which could harness growth.

It is forecast that an early end to Covid rules would lift the economy by £26 billion on top of the stimulus from the UK’s advanced vaccination programme.

David Skelton: The Government must not forget that it was working class voters who delivered the 2019 majority

17 Nov

David Skelton is the author of Little Platoons: How a revived One Nation can empower England’s forgotten towns and redraw the political map.

Last December, people who wouldn’t even have considered voting for us ten, or even five, years ago put their cross in the Tory box for the first time ever. Constituencies that had been Labour since their formation voted Conservative with remarkable swings. These voters had long been forgotten by the newly gentrified left and, in the aftermath of the referendum, had often become the butt of sneering and snobbery.

Working class voters, who had seen their economic and political priorities ignored by politicians of all parties for decades, saw that their concerns were being at long last listened to. They entrusted us with their votes, sometimes enthusiastically, sometimes warily, in the hope not only that their Brexit vote would be implemented at last, but also that, as a government, we would prioritise improving their lives and their communities. We should take that trust that was placed in us very seriously indeed.

A working-class Tory agenda is economically and politically the right direction to take

We should reflect on this trust that was placed in us and the basic political maths as we ponder the excellent question posed by Rachel Wolf on these pages on Saturday. In a nutshell, this question was whether we use the present “reset” to focus on the working class voters who delivered the 2019 majority or shift priorities towards the more affluent in a revival of a politics aimed at middle class metropolitans. For political, economic and moral reasons, the only correct path is to retain our focus on the working class voters who backed us in such numbers last year.

Politically, this new electoral coalition delivered the biggest Conservative majority in over thirty years. Only an electoral coalition centred on winning working class constituencies enabled us to do this and only this coalition would enable us to win another big majority in four years time. So-called “DE” voters backed Labour over the Tories for the first time and we had a 15 per cent lead over Labour amongst “C2” voters.

This allowed us to make some remarkable gains, from my home town of Consett to Andy Burnham’s old seat in Leigh – both symbolic of a “Labourism” that isn’t coming back. Electoral coalitions can’t be turned on and off like a light switch and we must continue the present focus. Maintaining this focus on these working class voters is the only realistic route towards a lasting Conservative majority and an enduring realignment.

We remain the custodians of the trust that was placed in us and we must repay it by delivering the substantial, positive and lasting change that we promised. This kind of change – boosting long-forgotten parts of our imbalanced economy – would also make our economy more productive and the country as a whole more prosperous. When parts of the country are held back from fulfilling their economic potential, that is a problem that impacts everybody. We must redouble our efforts to level up and genuinely create One Nation.

A One-Nation agenda of improved town centres, rising real wages, better jobs and improved infrastructure

In Little Platoons, published last year, I set out how an ambitious agenda of reform could transform long-forgotten towns, through infrastructure spending, transformation of town centres and a policy of reindustrialisation. We have made great strides so far but we now need to go even further and even faster, particularly as both the health and economic impact of Covid-19 risks impacting working class communities in the North more than prosperous communities in the South.

As James Frayne suggested last week, one of the key priorities should be making sure that town centres start to look and feel better over the next few years. Rather than being pockmarked with empty shops, bookies and discount shops, high streets must become symbols of community pride. Town centres should become community hubs – places for people to shop, businesses to set up (rather than in distant out of town business parks) and for families and young people to meet up and come together. Revived town centres should leave as lasting an impression of local and civic pride as the likes of Birmingham City Hall and the majestic Grey Street in Newcastle.

Just as people should see a difference in their town centres by the end of Boris’s first full term in office, they should also see a difference to their pay packets and their local economy. Despite the Covid associated economic hit, there must be a focus on creating economic revival in “Red Wall” areas.

As I made clear here a few weeks ago, our impending freedom from EU regulation will give us greater scope to use industrial strategy to help revive post industrial towns and promote a policy of reindustrialisation, including being leaders in green industry.

This should include aiming to shift the type of jobs that predominate in these towns from low-paid, insecure work to making them a central part of a high-skills, high-productivity, high-wage, tech-driven economy. We should enable local leaders to do whatever it takes, including through the tax system, to encourage industrial investment in their areas.

Part of the case I made in Little Platoons is that a direct government lever for revival is by relocating great swathes of the Civil Service to the North and the Midlands. An impressive report by the Northern Policy Foundation, published this week, shows that such an agenda would put “rocket boosters” under levelling-up and allow local areas to benefit from the agglomeration effect of relocating key arms of government.

We should also be stepping up investment in infrastructure programmes, to ensure that towns as well as cities have world class road, rail and digital infrastructure. We should consider how light rail can make a difference to people in “Red Wall” towns and also mustn’t forget about the importance of high quality, reliable and inexpensive bus services to local people. When even the deficit hawks at the IMF are arguing that now is the time to invest in infrastructure, we should be prepared to show audacity and imagination with big infrastructure projects for the North.

A relentless focus on making change happen

We must have a relentless focus on making this change happen. Levelling up should go through everything we do. Every day, ministers should ask themselves how their decisions are improving the lives of working people and to advance the levelling up agenda. And we should manage and track the levelling up agenda against these key metrics of improved town centres, rising wages, better jobs and improved infrastructure.

This is a One Nation government and levelling up is a definitively One Nation policy. As Damian Green argued as part of this series on Monday, building one nation is a conservative, not a libertarian, project. That means we should be prepared to use the power of the state to tackle regional economic inequalities (the GDP per head in the City of London is 19 times that in County Durham) and restore hope and economic vibrancy to long forgotten places.

We must make it our defining mission to repay the trust that working class voters placed in us and ensure that their lives are better and their towns are better places in which to live. If we do so, the realignment will be a lasting one. Now, more than ever, we must double down on levelling up.

Neil O’Brien: Here are three urgent responses to China’s growing power – which we will soon have an opportunity to make

19 Oct

Neil O’Brien is MP for Harborough.

Are we, in fact, losing the competition with China?

Consider current events. The IMF predicts China will be the only country with a positive growth rate this year. Since 2004 the UK’s share of world manufacturing halved from four per cent to two per cent, while China’s rose from nine per cent to 28 per cent.

Being a surveillance state has proved handy in the crisis: detecting a dozen Coronavirus cases, the Chinese city of Qingdao is testing its entire population of nine million people for Covid-19 over a period of five days.

Whether it’s the holographic windows on the Beijing subway, or the scary videos of the People’s Liberation Army showing off its new mobile drone swarms, the sense that we are being overtaken is palpable.

So is the increasingly authoritarian and militaristic nature of the Chinese regime. Every day the Chinese press is full of two things. First, ever more lavish praise for Xi Jinping, now officially elevated to “People’s Leader”, and increasingly exercising one-man rule. Second, increasingly dire threats to other countries that dare to cross China.

This week it was the turn of Canada, which was warned not to accept refugees from Hong Hong on pain of having more Canadian citizens arrested in China. There’s a steadily louder drumbeat of threats to crush Taiwan: the other day Xi called on troops to “focus all [your] minds and energy on preparing for war”, and Taiwan revealed it had been forced to scramble jets 2,972 times against Chinese aircraft incursions this year.

A new and not very friendly superpower is emerging.  How should we respond?

In the next month or two we should see the publication of the Integrated Review.  This is a big improvement on previous Strategic Defence Reviews in that it goes wider, to think about economic competition, not just military rivalry.

The Review is a big deal, and in a world with no virus it would be headline news.

Other countries are considering the same issues. The EU now officially describes China as a “systemic rival” and “strategic competitor”, while the US is taking a huge amount of actions (on a cross party basis) to protect its interests from China.

While we’ve had less debate in the UK, we face exactly the same challenge.

In a speech last week, the head of MI5 noted that while Beijing’s espionage efforts typically take the form of “hacking commercially sensitive information or commercially sensitive data, and intellectual property”, UK spies have also detected attempts by Chinese counterparts to influence UK politics. China is “changing the climate,” he said:

“Sometimes our role is to spot the hidden State hand in the pursuit of promising UK companies whose acquisition might dent our future prosperity and security. On China, we need expansive teamwork – a broad conversation across government and crucially beyond, to reach wise judgements around how the UK interacts with China on both opportunities and risks.”

This is sensible. So what should the Integrated Review do on China?  For me there are three big things.

First, we need an Australian style counter-influence unit to combat attempts to meddle in our politics

Like the Australian equivalent, it should be empowered to tackle a range of issues. Top London lobbying firms paid by hostile states for starters.  We wouldn’t have let the Soviet Union hire Saatchi & Saatchi in the cold war, so why don’t lobbyists have to declare payments from arms of the Chinese state now?

Universities could use more oversight and guidance too – witness the Chinese cash-for-influence scandal at Jesus College Cambridge. The same issues apply in think tanks, businesses and even the House of Lords. China is quick to snap up ex-permanent secretaries and even ex-spies. We need a coordinated approach.

Second, we need a new partnership with firms and universities to protect our economic and technology security. 

At the moment, we have a completely one-sided relationship, in which China can help itself to whatever university research it wants from the UK, buy up any interesting technology firm and even get our universities to work for branches of their military – an approach described in Beijing as ‘picking flowers in foreign lands to make honey in China’.

Through coercive joint ventures and corporate espionage, China can perform a sort of supermarket sweep on the intellectual property of the west.  Meanwhile China bans investment in swathes of its economy, locks up people suspected of leaking industrial secrets and has just passed tight new laws on the export of key technologies.

It’s a modern version of the same mercantilism that saw China guard the secrets of silk-making for hundreds of years, but the real question is why we allow a one way transfer of technology?

A new unit in Number Ten or the Treasury should coordinate relationships with industry to help identify who is sniffing around new technologies – perhaps we need a UK version of the US Business Entrepreneurs Networks which help US government build up market intelligence.

We also need greater transparency on who is working with our universities. At present we don’t even collect data on who is funding them from overseas.  Many firms would love help to counter hacking of their secrets or advice on tie-ups with Chinese firms.  There should be an obvious place to turn to in government to get it.

Third, we need an “Office for the Future”.

China’s growing dominance isn’t just built on exploiting naive western countries, but on a relentless focus on research and industrial strategy which we should learn from. However, in government I felt that the different bodies which are currently supposed to help us think about technology add up to less than the sum of their parts.

Collectively the Government Office for Science, the Council for Science and Technology, UKRI, BEIS the Research Councils and learned societies have many brilliant people, but the system lacks a controlling mind or plan.

Some of this is about the wider civil service, and we should learn from Singapore: the world’s best civil service. Some of it is about our growing our pitiful level of investment in R&D, which has sunk over the decades just as China’s grew.

But we also need a plan. We need some part of government to be aware of the significance of new technologies and emerging firms before they have been snaffled and carted of to China or anywhere else. Research funding in government isn’t industrially-focussed enough. We need a unit to think commercially about where we should concentrate research investment, and where we shouldn’t. To work out what we need to do to be ready to catch the wave of new opportunities, in the way that Beijing is so good at.

In a new book, “The Wake-Up Call”, John Micklethwait and Adrian Wooldridge sketch out how the virus has exposed the challenges facing the UK and other western countries, and the scale of the challenge we’re facing.

It reminds me a bit of the late 1970s, when Helmut Schmidt, then West Germany’s Chancellor, declared: “England is no longer a developed country,” and Nick Henderson’s famous leaked telegram highlighted our rapid descent.  Eventually we get angry enough to do something about it, and elected Margaret Thatcher.

This time the problems are different and we are already in government. But the urgency is just the same. Let us hope that the Integrated Review can be part of the wake-up call we need.

Hugo de Burgh: We owe it to future generations of Brits to work with China

6 Jul

Professor Hugo de Burgh is Director of the China Media Centre. He is the author of China’s Media in the Emerging World Order, has held office in three Conservative associations, and stood in unwinnable seats several times.

China is our third largest market and the one with the greatest potential. China is the country with which we must work if we are to have any impact on the resolution of global problems from environment to nuclear proliferation. China can accelerate the development of African and Central Asian economies, mitigating the risks to Europe that come from population explosion there without adequate economic growth. China is the largest economy in the world and already influential in a majority of countries.

For all these reasons, it is patriotic and reasonable for British leaders to find a way to work with China, which they will only do if they understand China as it is. Among other eminent Brits who started with a morbid suspicion of China, I have accompanied Boris Johnson and Jeremy Paxman on extended visits, and watched the scales fall from their eyes as they understood the enormity of the challenges facing Chinese government and the absurdity of imagining that its leaders wasted a moment thinking about conquering the world.

The reverse is the case. They are determined not to be conquered by the world. In the past, China built a Great Wall to keep out foreigners; today China is initiating the Belt and Road initiative to secure their back as they restore their civilisation, threatened from the east.

Fantasising about regime change in China, some US politicians make outlandish accusations. Had they talked to a few Chinese punters, followed social media or watched chat shows on TV, they could not possibly claim that China is a totalitarian country. Had they read Pew’s surveys of public opinion they would realise that the Chinese are, overall, more satisfied with their governance than European citizens, to say nothing of the USA. And are you surprised? While Europe and the USA are beset by economic and political troubles, Chinese people see ahead of them only more wealth, health and social mobility.

We need to recognise that demonisation of China is a weapon with which some US politicians deflect attention from their own failings and reflect their commercial jealousy. Both our National Cyber Security Centre and GCHQ have maintained until now that Huawei’s involvement in the UK poses no security risk that cannot be managed. Otherwise why would the US trade Department last week reauthorize US companies to work with Huawei, even as Donald Trump bullies other countries not to?

Robert Zoellick, a US former Deputy Secretary of State, is among the calmer heads to remind us just how positive a collaborator China is: that it recognises climate change issues, is in the forefront of environment innovation and has worked hard on endangered species; cooperates with the IMF over stimulation; provides more UN peacekeepers than the other members of the Security Council combined.

He points out that between 2000 and 2018 China supported 182 of the 190 Security Council resolutions imposing sanctions on nations which violated international rules or norms; China collaborated on the Iran and North Korea proliferation treaties.

Zoellick is not given to dire warnings about how dysfunctional it will be if the West really manages to ‘cut China off’, but they are implied in his general remarks about China, restated at a recent Henry Jackson webinar. China, he reminds us, is the biggest contributor to global growth; the fastest growing market for United States products; no longer manipulates the exchange rate; and, in response to our pleas, has improved its legal system. All in all, Zoellick tells us that cooperation with China “does produce results” but we should not take China’s cooperation for granted, “it could be very different”.

At home in Blighty, those calling for “a reckoning with China”, demanding a COBRA-like committee to mull over retaliation, wanting to “hold China to account” should ask themselves whether our businesses, for many of whom China is their most important market, want matters to become “very different”.

As to Hong Kong, the whole world must be astounded at the descendants of nineteenth century imperialists sending out paper gunboats commanding that China order its affairs according to our desires. A long time ago as a student, I demonstrated against colonial rule and police corruption in Hong Kong, and can still feel the truncheon on my back. In the face of much more vicious violence than anything we democracy activists attempted, Beijing has been restrained. In Northern Ireland, when security deteriorated, the UK imposed direct rule and fiercely rejected US interference on the IRA side. Over Hong Kong, we should try to see how interfering former imperialists look to most Asians, let alone to Chinese.

There are aspects of Chinese policies that we do not like, just as there are aspects of US policies that we abhor. The China Research Group is right to be concerned about cyber security and human rights. The way forward is to deal with China as a partner in the solution of common issues, such as terrorism in Xinjiang and Afghanistan. We have always worked with regimes with different standards when it suits our national interest. And respecting and being respected by China is in our national interest.

In the words of Kevin Rudd, the former Australian Prime Minister: Over 30 years China has pulled off the ‘the English industrial revolution and the global information revolution combusting simultaneously and compressed into not 300 years but 30’. There is a lot to learn and if we are to develop and prosper in the world ahead, we must be part of this. We should also celebrate that China’s rise is bringing better nourishment, greater life expectancy, education and security to hundreds of millions around the world.

Fulminating at China’s internal affairs and rejecting Chinese investment in order to please its commercial rivals will have no effect beyond signalling our impotence and arrogance; they are of no benefit to Britain and have no place in a long-term plan for Britain to prosper in the Asian century. Our government must develop a strategic approach to China. We owe it to future generations of Brits to work with China.