Wonks: Prioritise HS3 Over HS2

George Osborne is advocating a new high speed rail line (dubbed ‘HS3’) for the North of England, running from Liverpool to Hull. But it’s much more than another pressure tactic designed to trouble Number 10. The plan itself has some merit…

Everyone agrees infrastructure investment is badly needed if the ‘Northern Powerhouse’ regeneration is to succeed. At the high end, estimates for HS3 construction reach £7 billion, but this pales in comparison to the spiralling costs of HS2, projected at £56 billion (a figure which experience shows underestimates the likely final costs). The comparative benefits of HS3 are significant. The line would slash freight transport on crucial industrial routes by between as much as four and seven hours, and would cut a journey from Leeds to Manchester to just 30 minutes; HS2 saves time but not as much. Wonks at the Institute for Public Policy Research found that HS3 would boost economic growth and should be prioritised over HS2. Seems like they should build HS3 first…

Wonks Pan Mayism: Job Losses, Higher Inflation, Living Beyond Our Means

Red Theresa’s manifesto means job losses, higher inflation and Britain living beyond its means for a quarter of a century, say the experts:

Institute of Economic Affairs:It’s concerning that we may be seeing the advent of a Conservative Party which fails to understand that economic and social problems are more likely to be eased by free market solutions than by increased state intervention, however well-intentioned… An increased burden of regulation and further government interference in price and wage setting will raise costs, undermine competition and reduce labour market flexibility, resulting in job losses and higher inflation. The delayed timetable for eliminating the budget deficit suggests that the Conservatives’ commitment to fiscal discipline is continuing to weaken.”

Centre For Policy Studies: “According to the Conservative Party’s fiscal target reported in the press today, the UK is set to reach a budget surplus by 2025-26. This will mean that the UK has lived beyond its means for a quarter of a century… this fiscal target is disappointing. It should be seen as a ‘worst case’ scenario. The next government must aim to achieve a budget surplus at an earlier date.”

Confederation of British Industry: “The Conservative manifesto has an Achilles heel – in a global race for talent and innovation UK firms risk being left in the starting blocks because of a blunt approach to immigration.”

Institute of Directors: “Businesses will worry that interventions will disrupt the normal flow of commerce… interventions in the labour market must be handled delicately, with trade-offs for businesses. Any new employment regulations must be consulted on in depth to ensure that they do not have unintended consequences. The manifesto states that the Party does not believe in ‘untrammelled free markets’, but they must also recognise that governments have limitations.”

Privately Tory MPs and Cabinet ministers know it, too…

May’s Energy Price Controls Savaged By Experts and Her Own Cabinet

Theresa May’s interventionist energy price cap has whacked share prices this morning: Centrica is trading at the lowest level for 15 months. The wonk world is savaging the policy:

Adam Smith Institute: “Freezing energy prices was a very bad idea when Ed Miliband proposed it. Yet two years after the electorate rejected it Theresa May is putting forward the same idea and rebranding it a ‘cap’. The facts on the ground haven’t changed, yet just like workers on boards and the living wage, Red Ed’s Zombie Policies are on the march.”

Institute of Economic Affairs:Introducing a cap on household energy prices would be a clumsy and counterproductive government intervention that could have an adverse effect on the energy market. A cap would likely backfire with companies finding some way around them: either by pushing prices higher now in anticipation of the cap or by increasing their lower prices to offset the cap at the top”

Centre for Policy Studies: “The claim that an energy price cap will save households £100 a year is by no means a guarantee. In fact, an intervention of this kind could be detrimental to competition in the market, meaning that this reform could end up doing more harm than good.”

Taxpayers’ Alliance: “Crude diktats such as this suggest that the government simply doesn’t understand the consequences of these ill-thought-out policies.”

Social Market Foundation: “Energy companies will inevitably recoup the costs of this cap elsewhere, which may mean higher prices for people who have shopped around and switched tariff to get themselves a better deal.”

CBI: “A major market intervention, such as a price cap, could lead to unintended consequences, for example dampening consumers’ desire to find the best deal on the market and hitting investor confidence.”

Market analysts RBC Europe: “This decision by May is clearly as much a political as it is an economic one. This intervention could create a worse deal for customers on average.”

Here were members of Theresa May’s Cabinet attacking Ed Miliband’s price cap in 2015:

Michael Fallon: “We have not seen intervention in industry on a scale like this since the 1970s when they tried to control the price of bread.”

Boris Johnson: “Miliband says he will imitate the catastrophic policies of the emperor Diocletian, by imposing a price freeze on energy bills for the 20 months succeeding the election.”

Don’t buy the Tory spin, this is the same sort of market intervention that caused the Tories to claim PM Miliband would lead Britain into a Venezuelan dystopia… 

New Free Schools Raise Local House Prices

The Centre for Policy Studies has a new report out today about How to Overcome Selection by House Price which deals with the issue raised nearly 20 years ago by the then Labour Education Minister Andrew Adonis: “Comprehensive schools have largely replaced selection by ability with selection by class and house price”. Good state schools are in middle-class areas with high house prices.

Which is why Michael Gove was determined to put free schools, which on average have higher standards, in the most deprived areas. Free schools are deliberately ten times more likely to be in poorer areas.

This has had an interesting side-effect according to a New Schools Network report: the average house price rise since 2011 in areas where a free school has opened is 73% more than in areas where there are no free schools. Guido suggests that highlighting this point might help overcome opposition to free schools more than any arguments about standards and social mobility…

Wonks Slam Hammond’s White Van Man Bashing Budget

Philip Hammond’s brutal Budget attack on Britain’s army of hardworking self-employed is going down like a cup of cold sick in the wonk world.

Centre for Policy Studies:

“Changes around national insurance and the tax-free dividend allowance will have an impact on UK competitiveness.”

Institute of Economic Affairs:

“It is right that the self-employed and employed should pay similar National Insurance Contributions – the Government should not set tax rates that artificially favour one form of employment over another. However, it would have been better to level the playing field by cutting NICs for the employed rather than raising those for self-employed. NICs are a tax on jobs and wages and reducing their burden would help many lower-income households.”

Taxpayers’ Alliance:

This should be done by cutting rates rather than hiking taxes on entrepreneurs.”

The Association of Independent Professionals and the Self-Employed:

“If you are one of the hardworking self-employed people who face a significant increase on your tax bill, you might feel that the Chancellor has it in for you. When you look at the additional support offered for business rates it appears as if the Chancellor is supporting SMEs by hitting entrepreneurs and the smallest of businesses.

“Adding in the reduction in Dividend Tax allowance, whether you work as a sole trader or through limited company you will be facing higher bills. The Chancellor shouldn’t forget that growth in self-employment has driven our labour market in recent years and punitive rises in tax will make many people have second thoughts about striking out on their own.”

Centre for Economics and Business Research:

“People who work for themselves and who set up and run companies should be encouraged. Instead the Chancellor has singled this group out for a £1,425m tax hike on the misleading ground that they pay less tax, ignoring the risks they take. Disdain to this group is a typical Treasury attitude. Many of the self employed are IT consultants and are especially critical to the economy.”

Institute of Directors:

“The ‘nothing to see here’ approach adopted by the Chancellor will only fly for so long. The Chancellor’s jokes may have been funnier than anybody expected, but it’ll be business leaders’ resilience that’ll be needed to ensure we’re still smiling in November.”

And just wait until you see tomorrow’s papers…

CPS Corporation Tax Report Reveals Labour Black Hole

This morning’s Centre for Policy Studies report will be worth noting when Corbyn responds to the Budget later. Their new research out today finds that reducing corporation tax from 28% to 20% has helped increase growth and profitability leading to a rise in receipts by 28% since 2011. Labour’s policy is to increase corporation tax to 21.5% to fund £15 billion of extra spending per year. Yet the CPS finds that such a hike would only raise £5 billion, leaving Labour with a £10 billion funding gap. 

Labour have pledged to spend the corporation tax money 11 times already: on the adult skills budget, supporting British steel, ending public sector pay restraint, reintroducing EMA, scrapping tuition fees, extending pension credit, reversing Universal Credit changes, pensions triple lock, social care, the NHS and PIPs. And now the experts say it won’t raise anything like as much as they need. Ammo for the Tories when Corbyn gets up to respond to Hammond…

Gove SpAd Henry Newman New Open Europe Director

Guido understands former Michael Gove SpAd Henry Newman has been appointed as the new Director of the Open Europe think tank. He replaces acting directors Raoul Ruparel, who left last year to work for David Davis, and Stephen Booth, who becomes Director of Research. Brainbox Newman is a sound hire, he has a very strong knowledge of Whitehall and is respected in the Lobby. Before advising Gove he worked for Francis Maude at the Cabinet Office during the reform of trade union Pilgrims. Open Europe is drying out, under Newman expect them to embrace leaving the EU and promote a liberal, outwardly-looking Brexit. Congratulations…

Bank of England Must Stop ‘Depending on Kindness of Strangers’ to Bolster Economy

We’re fast approaching the eighth anniversary of UK interest rates being lowered to 1%. This is unprecedented, as is QE. This “unconventional monetary policy” is having severe economic consequences, argues Brian Sturgess for the Centre for Policy Studies in Stop Depending on the Kindness of Strangers.

In the foreword, Sir Martin Jacomb writes: “The idea that credit should be cheap, that savings are pointless, and that borrowing levels do not matter, is contrary to common sense. Harm is being done to individuals, to businesses and to the next generation.”

Sturgess warns these policies have failed to stimulate economic growth and encouraged ‘zombie capitalism’ and the rebuilding of corporate balance sheets ahead of productive investment, among multiple other side effects, contributing to the kind of unfairness that Theresa May and Donald Trump have both highlighted. It’s time to grow up and return monetary policy to normal, or we could be in for even greater pain.

Content produced and sponsored by the Centre for Policy Studies.

IEA Wonk Could Be Trump’s EU Ambassador

Institute of Economic Affairs advisory council member Dr Ted Malloch is being interviewed by Donald Trump this week for the role of his EU ambassador. Theodore Roosevelt Malloch, to give his full name, is a distant relative of President Roosevelt who Maggie Thatcher once dubbed a “global sherpa” thanks to his decades of work at various economic conferences and institutions. It’s good news for Britain if Anglophile Malloch gets the job, he tells City AM:

“In the UK, Brexiteers can take heart from the victory of another anti-establishment figure. His political sympathies for Brexit could lead him to prioritise a trade agreement with the UK once the country leaves the EU. It will also ensure a stronger US-UK Special Relationship.”

And his views on Brussels are sound too. He told Brexit Central last year:

“The elite that dominates EU decision-making is managerial, bureaucratic and socialist,” he says, “with a view to higher taxation and redistribution of wealth — all qualities the EU elite tout proudly, despite growing populist sentiment among an increasingly economically pressed middle class in virtually every EU-participating country. The US and the UK have cast their lot in the same direction and the Anglosphere will not only survive but thrive…

Would they want the United States to join anything like the EU — a federal superstate that curtails sovereignty? Of course the answer is NO! We wouldn’t want that in any way, shape or form. And the British already decided not to become part of the flawed euro currency and the European Central Bank. So here’s an interesting and novel alternative no pundit is yet suggesting, and I say it only half facetiously: why not hook up our horses together?”

Make the special relationship great again…

Fabians: Labour’s “Looming Death”

report out this morning from the Fabians makes dire New Year reading for Jez. Catchily-titled “Stuck: How Labour is Too Weak to Win and Too Strong to Die” predicts electoral oblivion unless the party abandons the Corbynite left: 

“The politics of 2016 may have been frenetic but now an uneasy calm has descended on the Labour party…this is the calm of stalemate, of insignificance, even of looming death.”

Backed by YouGov numbers and its own seat projections it finds:

  • “Approaching half the people who voted Labour in 2015 no longer support the party”;
  • “Since 2015, the party has lost as many votes to the Liberal Democrats as it has to the two right-wing, pro-Brexit parties combined”;
  • “A disastrous election result for Labour would see the party lose around 90 MPs.”

The most interesting numbers show the flow of raw voters away from Labour:

It concludes: “It seems that Labour is equally vulnerable to losing support to another liberal-minded, pro-European party; and to the socially conservative, Euro-sceptic parties.”

This shows Labour losing votes in every possible direction, with the Tories gaining from every possible direction…

Gloomy Wonks are EU-Funded Europhiles

Britain will be “older, more unequal and blighted by Brexit”, according to a gloomy new report from the IPPR think tank. Apparently there will be a decade of disaster and misery caused by the Leave vote. Two things the Guardian didn’t include in their write-up: The IPPR was formerly run by the head of the Remain campaign Will Straw. It is funded by the EU. Probably worth mentioning…

Cable’s Ex-SpAd Giles Wilkes Heading to Downing Street

Usually reliable sources tell Guido that Giles Wilkes, the ex-SpAd to Vince Cable who is currently writing the Lex column and FT leaders, is joining Downing Street in the New Year. He will be covering the corporate governance and industrial strategy policy brief. His appointment shows how far the government has moved on from the free market neo-liberalism of the last three decades…

Nice guy. Big Remainer and Lib Dem obviously. Giles is vehemently opposed to Brexit and tightening up on immigration – so his policy differences with the PM are only on the core goals of Downing Street. As an ex-wonk from CentreForum he can be too clever by half, he was one of the few LibDems who thought tuition fees were the right thing to do, so he has the required classic political awareness and sensitivity of an autistic wonk. Obviously being an “expert economist” and former bookmaker he managed to publicly lose a bet to Guido on the direction of inflation…

His appointment will infuriate the right of the Conservative Party. Wilkes once described tax cuts as “gambling with taxpayers money”. Giles seems not to understand that it is their money in the first place. Mind you he did apologise for calling Guido “innumerate” after he lost that bet to him.

Guido was unable to confirm the appointment at the time of going to pixel despite reaching out to Wilkes.

N.B. SpAds wondering what he will be like to work with can watch him pontificating about SpAds here.

Adam SPLIFF Institute: Legalising Cannabis Could Add £1 Billion to Treasury Tax Pot

cannabisAfter California voted to legalise cannabis, several MPs are backing the Adam Smith Institute’s new report calling for the same. It is a terrible tragedy that people get criminal records and go to jail for smoking something less harmful than alcohol…

Sam Bowman, the Executive Director, said making criminals of otherwise law-abiding  people “makes an ass of the law” and the only sensible approach is to legalise and regulate a product used regularly by millions of Britons. The ASI report: The Tide Effect says the tax revenue could add £1 billion to the Treasury pot and the £50m a year it costs dealing with cannabis offenders could be slashed. Worrying that the ASI is seeking new things for the government to tax…

Brexit Inflation and Interest Rate Signals

carney-cpi

The Bank of England’s inflation target is 2.0% – with the fall in the pound inflation is set to overshoot to between 2.5% and 4.5% depending which rune reading economist you believe. When the 2% target is missed by 1% or more Carney has to write to the Chancellor explaining why he has missed his target. He’s been writing those letters for most of his term…

Inflation has now crept up to 1% after knocking along at zero for a while. Even at the extreme end of forecasts inflation will not reach the levels seen before the great taming of inflation in the 80s. (Unless the QE unwinding is a disaster, which is not impossible.) Having read many papers on the subject Guido is none the wiser as to how the world’s Central Banks can go cold turkey from the QE opiate without a very bad come down. In any event, at these levels interest rate policy is now symbolic, market loan rates are increasingly detached from base rates. Firms are not going to make or break investment decisions because base rates are 0.25% or 0.5%.* May is right that we need to see rates rising, to head off inflation and to boost confidence.

Nothing would more clearly signal that the Brexit apocalypse is not upon us than the Bank raising base rates. Normalisation of monetary policy has to happen. Or at least the Bank should signal the beginning of normalisation…

*Fans of reflexivity and paradox will contemplate the post-referendum rate cut with joy. Carney implies it boosted the economy, critics say it was unnecessary. Did it boost confidence that the Bank of England was ready to do whatever or was it a way for Carney to claim credit for his gloomy predictions not coming true?

IEA LAUNCHES £50,000 PRIZE

The Institute of Economic Affairs has just launched the Richard Koch Breakthrough Prize.

First prize of £50,000 will be awarded to the best and most innovative entry outlining a ‘Free-Market Breakthrough’ policy to tackle poverty in the UK.

There will be runner up prizes of £7,500 each, and a student prize of £2,500. Judging panel includes former Liberal Democrat MP Jeremy Browne (chair) and the Rt Hon Iain Duncan Smith.

The deadline for entries is Monday, 9 January 2017.

To learn more about the Richard Koch Breakthrough Prize and the entry requirements, click here – and watch the video below!

OECD OMG GDP! Brexit Recession Forecast Reversed

oecd-omg

“Not a single serious economist does not think Brexit will be bad for the economy” was the message from George Osborne when he cited the OECD, IMF and the OBR to back up his arguments that Britain would require an emergency budget and that there would be a worldwide economic shock if Britain voted to Brexit. Yesterday the OECD said it got it got the recession forecast wrong and the ONS confirmed none of the latest data suggests the recession that was predicted by 71% of City economists after the referendum vote. That is worse than astrology hence the Sun’s cracked crystal ball. It is actually worse than just flipping a coin.

All this proves once again that economists are as prone to fashion as any other artists. Economic forecasting is not a mathematical hard science, despite the complicated formulas of which they are so fond. It is a question of judgement. Another area which similarly has too many variables to forecast with confidence yet has almost unanimity among those who claim expertise in the subject is “climate science”. The expert practioners in this area also predict doom and disaster. Do you think they could be related?

Centrist Think-Tank Concludes There’s No Progressive Majority

dead-centre

This morning the centrist, cross-party Social Market Foundation held a well attended seminar headlined by Chuka Umunna, Nicky Morgan and Nick Clegg. It felt like a wake for the Labour Party. SMF claims – on the back of research from Opinium – that there’s no progressive left-leaning majority in the country – the majority of voters hold “traditionally right-wing views” that will guarantee a “healthy majority” in the future for the right-wing parties.

The wonks categorised voters’ attitudes into eight political tribes/parties that share very distinctive political views. Despite the majority of voters self-describing as “centrist“, most voters actually identified with centre-right and right-wing political attitudes.

From the report:

On the whole, our analysis makes more cheerful reading for those on the right, than on the centre or the left. The two largest tribes, making up around 50% of the population, hold a range of traditionally right wing views, ofering a solid foundation on which to aim for the 40-42% of the vote which normally guarantees a healthy majority under our electoral system. These groups share a desire to see immigration reduced to below 100k a year and were both solidly pro-Leave in the EU referendum.

The progressive tribes are fragmented, disagreeing on openness to the world and attitudes towards the welfare state and taxation. This is bad news for the current Labour Party as the think-tank finds massive differences between so-called “Democratic Socialists” and “Community” party voter blocs – traditionally known as Labour supporters – while both tribes agree on socialist policies towards capitalism, they diverge on supporting the EU or having an internationalist approach.

SMF also implies that the centre-ground is now being occupied by traditional right-wing politics. So did Cameron succeed in occupying the centre-ground or did the Conservative Party’s modernisers end up pulling the centre-ground rightwards?

City Boys Staying in London

surprise

Mark Carney is up in front of the Treasury Select Committee this afternoon where he is going to have to explain why he cut rates and re-started QE prematurely to Jacob Rees Mogg, who thinks “He acted too early in my view. There was not sufficient evidence at that point that further monetary stimulus was needed and there are adverse consequences of abnormally low interest rates as well as beneficial consequences.” As the Citigroup surprise index (above) shows, most City expert economists got it wrong on a Brexit recession. In the last week alone Morgan Stanley, JP Morgan and Credit Suisse have reverse-ferreted on their Brexit recession predictions. None have accepted Guido’s £1,000 wager offer…

fundmanagers-staying

On a similar theme it is worth reading the Centre for Policy Studies analysis out today on the pros and cons of Brexit for the financial services. Just as the consensus on a Brexit recession was misplaced (even Remain campaign financing investment bank JP Morgan has now conceded they were wrong) so too will the “City will lose out to Paris / Frankfurt / Dublin” consensus soon dissolve.  The above chart from Prequin shows that not many Masters of the Universe are keen to enjoy the Frankfurt nightlife…

What the City does want is “passporting”, assurance that the Square Mile’s firms will still be able to trade across the EU. The majority of the City’s exports in financial services (60%) go to countries outside the EU – not surprising when not one of the top 10 financial centres is in the EU. China and India are already choosing to do their capital market transactions in London, these are the growth markets of the future. In reality it is likely that if “passporting” obstacles were to be deliberately constructed, they could if necessary be circumvented by booking trades through EU based subsidaries. Zurich is the biggest financial centre on mainland Europe, it has bilateral deals with the EU, the City will want the same…  

IEA: Osborne’s Living Wage Hits Poor, Young, Minorities, Consumers, Taxpayers

go

George Osborne’s Living Wage is likely to see those it is supposed to help lose out, according to a new report from the Institute of Economic Affairs. The IEA finds that modest minimum wage increases may not cause higher unemployment, but large increases will. Who are the losers? The young, unskilled, minorities and those in the regions:

“Minimum wage increases are always potentially a trade-off, between raising pay for those fortunate enough to keep their jobs and hours against the potential reduction in labour demand. Any significant reduction in demand will hit young and unskilled workers, particularly those from minority groups, hardest. It is also likely to have a bigger impact in some parts of the country than others… the ‘bite’ of the National Minimum Wage has been considerably deeper in Northern Ireland and the East Midlands than in London.”

Higher unemployment is a long-term consequence:

“the longer-run impact of the minimum wage might be to generate larger reductions in employment”

And low-paid earners don’t actually benefit as they lose out in other ways:

“firms such as B&Q and Waitrose have been accused of lowering premium pay for weekends and other ‘unsocial hours’, while Caffe Nero staff seem to have lost the perk of free paninis – showing that minimum wage increases are no ‘free lunch’. Those gaining from pay increases therefore lose out in other ways than jobs or hours lost”

The report concludes that someone ultimately has to pay for any sharp minimum wage increase:

“the cost can only be borne by consumers paying more, shareholders getting reduced dividends, or taxpayers paying more”

The Living Wage might make political sense – it leaves Labour with nowhere to go – but the evidence is it hinders those it is supposed to help…

Vote Leave Chief Launching New Brexit Site, Taxpayers’ Alliance Reshuffles

Vote Leave chief Matthew Elliott is back at Business for Britain post-referendum, and Guido hears he will be setting up a new website called BrexitCentral. Former Lobby journalist Jonathan Isaby is leaving the Taxpayers’ Alliance to join as editor. It sounds like the site will offer plenty of comment and analysis – there is a gap in the market for some proper wonkish insight making sure Brexit means Brexit.[…] Read the rest

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Len McCluskey speaks from the Corbynista alternative universe:

“To the whingers and whiners who say we didn’t win, I say this. We did win.”

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