The Treasury and Bank of England should prepare for a three-pronged economic shock from ‘no deal’

a post by Jack Leslie for the Resolution Foundation blog

It’s a well-worn trope that no one knows what the economic impact of a no deal Brexit would be. And for good reason. The scale of disruption at the border, in supply chains and in the wider economy, is impossible to predict with any accuracy. Much would depend on the timing and the success of the government’s preparations.

This is why estimates of the hit to the economy have varied so widely. The OECD has forecast the UK’s economy could be 3 per cent smaller by 2022 after a no deal. The Bank of England thinks it could be as much as 6 per cent in a ‘disorderly’ Brexit. That would be catastrophic, though still far smaller than the 12 per cent hit to the economy in the two years following the financial crisis.

Given all this uncertainty, the natural reaction for economic policy makers might be to throw up their hands in defeat and decide to work out how best to support the economy if and when a no deal exit happens. But any delay risks making the impact of no deal worse.

So can the Treasury and the Bank of England prepare, even though no one knows how big the hit will be? Yes, is the unequivocal answer in new Resolution Foundation research.

You can continue reading the blog post or go straight to the PDF of the 35-page briefing

Dealing with no deal
Understanding the policy implications of leaving the EU without a formal agreement Richard Hughes, Jack Leslie, Cara Pacitti & James Smith (September 2019)

---

Artificial intelligence in the UK: Prospects and Challenges

New Report from McKinsey GI [with grateful thanks to the South West Skills Newsletter for this item]

Advances in artificial intelligence (AI) technologies are pushing the frontier of what machines are capable of doing in the private, public, and social sectors. These technologies have already diffused into many businesses and sectors, and they have the potential to transform operations and business models, eventually powering higher productivity and growth across economies.

No other country comes close to the United States and China, the world’s powers in the deploymentof AI, but the United Kingdom is one of Europe’s leaders.

In this briefing note, we build on previous research on AI globally and in Europe. We explore the prospective benefits to the economy and companies that could result from scaling up AI,and we outline the priorities for businesses in the United Kingdom that seek to reap those benefits.

Full text (PDF 12pp)

---

What Fitch got right – the case for slower adjustment

via ToUChstone blog: A public policy blog from the TUC by Duncan Weldon

On Friday Fitch joined Moody’s in downgrading the UK from AAA to AA. My thoughts on this are much the same as I thought at the last downgrade – this is of no economic importance even if it is politically embarrassing for the Chancellor. The wider point is that retaining the AAA should never have been a target for fiscal policy makers.

Whilst my views of the calibre of rating agencies analysis throughout the crisis has been pretty much in line with that of Jonathan Portes, I thought one nugget of information in Fitch’s statement was worth highlighting.

Continue reading

for those who are not sure about the AAA etc here’s a link that explains (a bit). http://www.investopedia.com/terms/a/aaa.asp

---

Where have all the wages gone? lost pay and profits outside financial services

a TouchStone Extra report by Howard Reed (Landman Economics) and Jacob Mohun Himmelweit (research fellow, New Economics Foundation)

Executive summary

This is a report about the share of wages in national income (“the wage share”) in the UK. Over the last 35 years there has been a substantial shift from wages to profits in the UK economy. Data from the Office for National Statistics show that between 1977 and 2008 the wage share fell from 59 per cent of national income to 53 per cent, while the share of profits in national income rose from 25 per cent to 29 per cent. At the same time, average (median) earnings failed to keep pace with growth in national income (as measured by gross domestic product (GDP)). If wages had kept pace with growth in overall UK output between 1980 and 2010, median annual earnings for full-time workers would now be around £7,000 higher than they actually are. The fall in the share of wages in national income accounts for just over a third of this gap, with the other two-thirds due to earnings becoming more unequal.

Taking account of increased employer National Insurance contributions and pension contributions (which form part of employee compensation in the national accounts), the fall in the wage share is even more pronounced. A comparison with other countries using data from the OECD shows that, while most countries have experienced a declining share of wages in national income over the last four decades, the decline in the wage share in the UK is particularly high by international standards.

Empirical research on the determinants of the falling wage share using cross-country panel data suggests that four different factors are responsible:

• technological change
• globalisation (increased liberalisation of product markets and increased mobility of capital across national boundaries)
• financialisation (the increased role of financial activity and rising prominence of financial institutions in national economies)
• reductions in the bargaining power of labour.

However, the relative importance of each explanatory factor is disputed. Research from the IMF and the European Commission argues that technological change is the primary determinant of the wage share, but more recent academic research that includes financialisation as an explanatory variable finds that increased role of financial activity in the economy is the most important driver of falling wage share.

Further investigation of the factors explaining the increase in the profit share over the last 30 years shows that the share of total profits accounted for by financial sector firms increased dramatically from around one per cent in the 1950s and 1960s to around 15 per cent in the years 2008 to 2010. The whole of the upward trend in the profit share over the last 30 years is attributable to the increased profitability of the financial sector. At the same time, investigation of trends in the wage share by industry show that the overall fall in the wage share over the last three decades has largely been driven by contraction of the industries where wage share is relatively high, and expansion of industries where the wage share is relatively low, rather than falls in the wage share in individual industries. These figures underline the importance of the ‘financialisation’ of the UK as a driver of recent trends in the UK economy, and underline the magnitude of the task facing politicians seeking to ‘rebalance’ the UK economy, with a greater role for the manufacturing industry and non-financial services; over recent decades the UK economy has been heading in the opposite direction – with financial services responsible for an ever-greater proportion of operating surplus.

In terms of the distributional impact of a shift from wages to profits, our analysis of recent data from the UK Family Resources Survey (the most accurate source of survey data on incomes in the UK) shows that income from investments is distributed far more unequally than income from wages. Each pound of family income that comes from investments makes a contribution to inequality among working-age families that is four times greater than a pound of income from gross earnings. This suggests that the falling wage share is likely to be associated with an increase in income inequality. Analysis of UK data on inequality over time confirms this; during the 1980s inequality increased markedly, and the wage share fell at the same time.

Some economists have argued that an increase in the profit share is good for economic growth because increased profitability leads to additional funds for business investment. However, the data for the UK from 1975 onwards show a negative correlation between the profit share and the level of business investment. At the same time, business expenditure on research and development – a key measure of innovation (which is essential for economic growth) – has been falling as a share of GDP since the mid-1980s.

An alternative economic argument is that, because the propensity to consume out of wage income is higher than the propensity to consume out of profit income, a higher wage share should increase growth because demand increases had – hence firms increase their investments in anticipation of being able to sell extra output. This story seems consistent with recent UK evidence, and also with most cross-country empirical work on the relationship between wage share and growth, which shows a positive relationship between the wage share and increases in output.

Full text (PDF 36pp)

---

Growing Pains: How to restore economic growth and rebalance the UK economy

A paper by Glyn Gaskarth published by Civitas  (December 2012)

Executive Summary

The UK growth review does not fully address the structural problems the UK economy faces. Both the Growth Review and the Trade and Investment White Paper prioritize measures which directly harm UK growth and exports. Diplomatically supporting Less Developed Countries (LDCs) defence of their domestic protectionism restricts the market for British goods in those countries. Environmental measures such as the soon to be introduced carbon price floor make energy more expensive for UK firms and export UK jobs to countries which often have much lower environmental standards. The retention of the anti bribery rules make it very difficult for UK firms to trade in high growth emerging markets many of which have very high levels of domestic corruption.

Attempts to reduce regulation exist more in rhetoric than in practice. Rules such as the one in one out rule for new regulation are not universally enforced. Additional business costs are being imposed by the coalition government. Efforts to increase UK airport capacity are being blocked. Energy policy is not delivering sufficient capacity to meet projected demand. The benchmarks in the Growth Review seem to be set deliberately low and/or general so that they may be easily achieved. The Government gives the impression that deficit reduction alone will solve the UK’s problems, it will not. Britain needs to develop a clear plan which does not affect the rate of reduction in UK public expenditure but does increase the long term growth rate of the UK economy. To discover how we looked at proposals made by fourteen groups from across the political spectrum.

The Confederation of British Industry proposes making equity finance tax deductable, establishing an aggregation platform for small businesses to raise bond finance and introducing a National Exports Strategy with an export enabling test for all regulation. The Federation of Small Businesses urge the government to bypass the existing banks, create a Post Bank to lend to local businesses and introduce a Community Reinvestment Act to direct bank funding to poorer communities. UNITE and UNISON urge a clamp down on tax avoidance and the introduction of a Robin Hood tax on financial transactions to end public spending reductions and provide financial assistance to repair the balance sheets of indebted households. Reform advocate reductions in health and welfare expenditure and a broadening of the tax base to fund tax simplification and reduction.

The British Chambers of Commerce proposes a long term manufacturing strategy for the UK, the formation of a British Business Bank and a government procurement strategy which recognizes the costs of UK regulation when selecting government suppliers. Policy Exchange want increases in the ISA allowance to encourage private investors to invest in small firms debt, the abolition of national pay bargaining to increase public sector efficiency and planning reform to allow the construction of new ‘Garden Cities.’ The Institute of Public Policy Research seeks to increase aggregate demand and the long term growth potential of the economy by increasing quantitative easing and additional infrastructure spending funded by tax increases such as a mansion tax. NESTA in cooperation with he Work Foundation identify six barriers to growth that potential high growth firms and existing high growth firms say need to be overcome to convert more of the former into the latter.

The Social Market Foundation believe the government should increase the efficiency of public spending and boost demand by spending less on items with a low fiscal multiplier such as the winter fuel allowance and more on items with a high fiscal multiplier such as infrastructure investment. The Centre for Policy Studies advocate measures to increase house building, which helped Britain’s economy perform well in the 1930’s, suspending the National Minimum Wage for under 21-year-olds to tackle youth unemployment and more rapid increases in the personal tax free allowance.

The TaxPayers’ Alliance and the Institute of Directors urge the adoption of a programme of tax reduction and simplification by introducing spending targeting to reduce public expenditure, which would fund the abolition of eight taxes, the merger of national insurance and income tax and the greater localization of taxation and expenditure to increase public sector efficiency. The IMF supports the targeting of funds to the most indebted households to help them to repair their balance sheets and resume consumption levels. The OECD propose structural reforms including reducing welfare payments, controlling health expenditure, reforming planning regulations and targeting resources at improving the education of the poorest to reduce education inequality in the UK. Civitas recommend a British industrial policy to aid British firms to develop comparative advantages in the marketplace and to build a stronger UK manufacturing sector.

To ascertain how other countries are dealing with the Great Recession I chose three countries which have each returned to economic growth. The United States has experienced high productivity growth and more rapid bank deleveraging than similarly indebted states. German labour market reform and industrial policy are analyzed to consider how this nation has increased its proportion of world exports while the UK’s has declined. Israeli success at innovation is considered to identify how that small country became a world leader in ICT with greater Venture Capital Investment per capita than America and more countries on the NASDAQ than the whole of Europe combined. Each of these case studies helped inform the fifteen proposals I have identified for immediate adoption by the Government which are listed below.

1. The UK should not exceed international regulatory standards unless the enhanced UK regulation can be shown to not damage UK economic growth. This rule should apply not merely to the scope of the regulation but also to whether competitor nations are effectively enforcing the rules they have signed up to. Areas requiring immediate reform include:
   • The Bribery Laws which should be amended to exclude application to countries not in the OECD.
   • Bank capital requirements which should be reduced to the internationally agreed standards to allow more lending.
   • The Carbon Price Floor which should not be introduced.
2. Cease UK diplomatic support for trade protectionism against UK goods by Less Developed Countries and push for full market access as a condition of opening the EU market to these countries.
3. Cease the subsidy for green industry and develop a comprehensive energy policy to exploit the UK potential in shale gas.
4. A British Business Bank should be launched using the funds from the Green Investment Bank, which should be abolished, and the sale of shares in UK state owned banks. This new entity should be given the explicit function of providing funds to small and medium sized enterprises denied access to private bank finance with private institutions being given the right of first refusal.
5. International development aid should be eliminated and the funds used to endow a UK infrastructure bank with a set charter instructing it to finance enhancements in UK road, rail and energy infrastructure.
6. Spending targeting should be adopted in addition to targets relating to the debt to GDP ratio and the elimination of the structural deficit to enhance the government’s deficit cutting credentials and ensure the UK government deficit is reduced on schedule.
7. Merge Income Tax, Employers National Insurance and Employees National Insurance into a single tax rate for all workers under 65 before 2015 to simplify the personal taxation system.
8. The one-in-one-out rule should be increased to a one-in-two-out rule and extended to cover all UK regulation with no exemptions and enforcement of the rule by all departments should be subject to an annual statement before Parliament with a new system of fines being applied to departments which do not implement the policy in full.
9. End the opposition to Heathrow expansion, allow the construction of an additional runway and work with private operators to expand the number of flights to emerging markets arriving in London and the regional airports.
10. Cancel High Speed rail and divert a proportion of this funding to improve the existing rail commuter links into our major cities, widen platforms, increase the number of carriages and cap fare increases and a proportion to make up the funding for a UK infrastructure bank taken from the Green Investment Bank which itself was raised by the sale of High Speed rail licences.
11. Privatise the existing UK Motorway Network and introduce a toll based system combined with the elimination of fuel duty and road tax. Use the funds raised through privatization to further reduce UK indebtedness and the income raised from taxing the new private entity to allow for the maintenance of the local road network.
12. Introduce a triple lock for welfare payments pledging to increase them by the lower of three indicators, inflation, average earnings or 2.5 per cent until 2015 (excluding those on disability benefit). Earmark any savings to reduce the basic rate of income tax to increase work incentives for poorer citizens.
13. Regionalise the national minimum wage to ensure the incentive to work is maintained in areas where private sector wages are low and match this with full implementation of the governments cap on immigration into the UK to reduce the competition these low wage workers face.
14. Reform the planning system to provide cash incentives to households affected by development to back construction, increase the thresholds those wishing to block planning applications must exceed and introduce reviews of the planning burdens imposed by each local authority with financial penalties for those which do not reduce regulatory costs.
15. Review the UK’s association with the European Union and negotiate the repatriation of powers to decide UK employment and social policies or withdraw from the EU.

Background

In November 2010 Chancellor of the Exchequer George Osborne and Business Secretary Vince Cable initiated a Growth Review to increase UK economic growth. The background was not fortuitous. The government deficit, the difference between tax revenues and public expenditure in the fiscal year, was 11 per cent of GDP in 2009-10.¹ Government was borrowing one pound in every four it spent.² Government debt, the sum total of present and past borrowings not yet repaid and accumulated interest, was set to increase to 74.4 per cent of GDP by 2014-15 from 44 per cent of GDP in 2008-09.³ Increasing the rate of UK economic growth offered the coalition a less painful means of adjustment, possibly reducing the amount of cuts to public expenditure and increases in taxation necessary to balance the budget.

Two years after the Growth Review began UK economic output remains around 3 per cent below its peak and the National Institute of Economic and Social Research do not predict it will surpass the 2008 level of economic output until 2014.⁴ The Government deficit has been reduced by a quarter, mainly through tax increases and reductions in capital expenditure. The deadline to eliminate the structural deficit, the gap between tax revenues and spending that will not be addressed by a return to trend rate economic growth, has been postponed from 2014-15 to 2016-17. Plans to stop Government debt still rising as a share of GDP by the end of the Parliament are in danger. Reductions in Government consumption spending have barely begun. They will need to be deeper and last longer than originally forecast. The deficit reduction plan is essential but it alone is not enough to restore the UK to economic health.

Excuses can be made for the current economic woes. The previous government badly mismanaged the economy. In 2010 the IMF estimated the UK had the highest structural deficit in the OECD.⁵ Britain entered the crisis with a high structural deficit, recently revised up, of 5.2 per cent of GDP in 2007/08.⁶ The opposition Labour party is vocal in opposing each proposed reduction in government expenditure but more quiet on how they would close the deficit without matching reductions in public expenditure or further increasing taxes. The Eurozone is the UK’s major export market and its continued stagnation will affect UK growth in the short term. The IMF note that “economies with the strongest trade ties to Europe have generally seen the largest downgrades” but the British public expects economic growth to resume.⁷ The coalition did not create this economic crisis. They now own it. We need a proper roadmap for economic growth rather than excuses for continued hardship.

________________
¹ HM Treasury, Budget 2010, Budget Report: Deficit Reduction: Rebalancing the UK economy, P8.
² HM Treasury, Key Spending Review Announcements
³ HM Treasury, Budget 2010, June 2010
⁴ National Institute of Economic and Social Research, Estimates of Monthly GDP, 9 October 2012
⁵ HM Treasury, Budget 2010, P9
⁶ The Telegraph, Labour ran a structural deficit in 2007, 25 October 2012
⁷ IMF, World Economic Outlook, April 2012: Growth Resuming, Dangers Remain, P49

Full text (PDF 122pp)

---

A Path Back to Growth

an IPPR publication by Tony Dolphin, Senior Economist and Associate Director for Economic Policy

Executive Summary

The UK economy is back in recession and needs to find a path that will return it to a higher growth track in the medium term. To not do so will make it harder for the country to tackle the legacies of the financial crisis, including high youth unemployment and government borrowing. In the face of serious headwinds from the eurozone, current policies – even after taking into account new initiatives such as funding for lending and the plan to guarantee up to £40 billion of spending on infrastructure projects – are unlikely to deliver the desired outcome. More effort is required to boost demand in the short term and to ensure that the economy’s growth potential is supported in the medium term.

The debate about the role of government policy in the UK’s return to recession and about Plan A or Plan A+ or Plan B has become a sterile one, focused too narrowly on the Coalition’s fiscal plans. A path back to growth will require a change in fiscal policy, but on its own this will be insufficient. To be effective, policymakers need to make a number of complementary shifts in policy.

These shifts should be designed to reduce uncertainty about the economic outlook. This will encourage households to consume and business to invest and to hire more workers. Private sector companies will only be engines of growth in the UK if they can foresee a positive outlook and healthy returns on their investments. That is patently not the case at present.

Growth on its own is not enough. It needs to be accompanied by reform to address long-standing weaknesses in the UK economy: underinvestment, vulnerability to external shocks, poor export performance and persistent inequalities. The path back to growth should also be a path to a different kind of British capitalism.

The roadmap for growth should have six elements:

1. an increase in the scale of quantitative easing
2. fiscal measures to boost growth in the short term combined with a reaffirmation of the plan to eliminate the deficit in the medium term
3. additional infrastructure spending
4. measures to make household debt restructuring easier
5. measures to keep the long-term unemployed in touch with the labour market
6. an active industrial policy.

Each of these elements would reinforce the others and increase the chances of a return to sustained growth in the UK over the next year (or, in a worst-case scenario, minimise the impact of a deepening crisis in the eurozone).

Full text (PDF 24pp)

---

State of the UK leisure industry: a driver for growth

a research report by Oliver Wyman (management consulting firm) for BISL (Business in Sport and Leisure) published June 2012

Executive summary

The UK’s leisure industry is a key contributor to the nation and its economy. It provides more than one in twelve of all jobs, and more than one in five jobs for 16-25 year olds; it accounts for around 7% of total tax receipts; and it includes some of the world’s leading leisure businesses. But until now, the leisure industry has not been clearly defined, and its true importance has rarely been acknowledged.

This report, commissioned by BISL and based on research by Oliver Wyman, paints the first comprehensive picture of the economic size, scale and importance of the leisure industry. BISL believes it demonstrates that the industry is too important to remain undefined, under-represented, and misunderstood by government.

The report shows that the UK leisure industry:

• Employs 2.6m people, representing 9% of total UK employment. This is more than manufacturing, transport, construction or financial services
• Generates over £200 billion of revenue when accounting for direct contributions (£117 billion) and indirect contributions (£102 billion)
• Provides jobs for 730,000 16-25 year olds, representing 21% of 16-25 year olds in employment, more than manufacturing, construction and financial services combined
• Has a strong female workforce with 44% of management positions in the leisure industry held by women and the majority of the leisure workforce being female
• Attracts a large proportion of part-time and flexible workers – 46% of employees in the leisure industry are on part-time contracts
• Offers attractive career options for both skilled and unskilled workers, with few barriers to career progression and advancement
• Has been an incubator for entrepreneurship: 66% of leisure industry businesses are small- and medium-sized enterprises (SMEs), and the business start-up rate is 20% higher than the UK average
• Is a world leader in leisure: UK businesses have been at the forefront of innovation and growth, and the UK accounts for a disproportionate share of leaders in the global leisure market
• Provides a wide range of leisure activities for millions of consumers across the country in a safe, secure, and responsible environment
• Generates almost twice as much tax revenue for the Treasury as its share of the economy might suggest – the industry contributes 7% of UK tax while representing 4% of the nation’s GVA
• a thriving leisure industry is also essential for capturing the full economic benefit from major sporting events hosted in the UK, starting with the 2012 Olympic and paralympic Games. Offering a broad range of attractive leisure activities encourages discretionary spending both by UK residents and by visitors

However, BISL believes that the leisure industry has now reached a crucial juncture. Combined with tough macroeconomic conditions, government policies are constraining growth, and limiting opportunities to create jobs at a time when the economy most needs them:

• Government policy since 2010 has exacerbated economic headwinds by imposing an additional £3.2bn of tax and regulatory costs per year on the industry and its customers – a figure estimated to rise to £3.9bn per year by 2014
• Whereas the leisure industry had been generating 41,000 new jobs every year between 1998 and 2007 – nearly double the rate of growth of retail, construction and transport – employment has been declining since the onset of the financial crisis. 11,000 jobs were lost between 2008 and 2010
• The leisure industry employs a high proportion of young, female, and part-time workers, and provides a livelihood for many small business owners – these groups have been hard hit in recent years

BISL believes the leisure industry can play a major role in creating new jobs and delivering economic growth. BISL recognises the industry has its role to play in reigniting growth – focusing on innovation, mastering brand management and fully exploiting international opportunities – in an ever safer, more responsible and sustainable environment. With this aim in mind, and based on a series of workshops and interviews with CEOs and other industry leaders, BISL is calling for a new strategy for government designed to help the leisure industry develop, improve its skill base, and encourage entrepreneurship, employment and innovation.

In Section 4, BISL sets out a number of recommendations by which government could better support the leisure industry and enable the leisure industry to make an even greater contribution to the economy in future:

• Incentivising businesses to employ more 16-to-25-year-olds from the ‘NEET’ (Not in Education, Employment or Training) category through a controlled exemption from NIC (National Insurance Contribution). In return, the leisure industry will provide transferable training or apprenticeships, and benefit from NIC exemption if they subsequently employ the individual
• Making a Cabinet minister responsible for championing the growth of the leisure industry. BISL proposes that, as the government is currently configured, this should be the Secretary of State for Culture, Media and Sport
• Bringing VAT rates closer to European benchmarks to increase the industry’s ability to compete in the tourism market, starting with the sub-sectors of the leisure industry able to generate the fastest payback
• Reducing the licensing and regulatory red tape that is currently hindering growth of the industry, in particular restaurants, pubs, night clubs, and betting and gaming businesses
• Building simpler, cheaper and more transparent local procurement processes to enable more sports and leisure facilities to be provided, and to attract greater investment

BISL supports the general direction of government policy changes to planning guidelines and employment legislation – we outline specific suggestions in these areas in Section 4 of the report.

BISL believes these proposals can help both the leisure industry and the economy of the UK as a whole. Specifically, BISL believes they will:

• Reignite job growth in the Industry
• Provide up to 440,000 new jobs by 2020, particularly focused on young people, female, part-time and low skilled workers
• Drive an additional 30,000 new high quality training positions over the next three years for young people currently not in education, employment or training
• Save UK businesses and the government up to £600m per year through more efficient planning and procurement processes

We look forward to an open dialogue with government about taking forward these recommendations – and ensuring that the UK leisure industry fulfils its potential to drive economic growth, and to provide new jobs.

Full text (PDF 86pp)
Printed copy £250

---