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Graham Watson
onto Macroeconomics: UK economy, IB Economics June 4, 2018 2:21 PM
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Every region has been hit, says GMB – with London, Scotland and north-west worst affected
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Editorial: The chancellor is right to be planning for the long term, but voters won’t be patient if change isn’t felt soon
Graham Watson's insight:
This Guardian editorial looks at yesterday's announcement of greater spending for the North, and significant infrastructure investment in Birmingham, for example. It concludes that it's worthwhile but wonders whether the long-term benefits will be enough to alter the narrative about public spending.
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Chancellor Rachel Reeves says that more people will get winter fuel payment "this winter", but details of who is eligible remain unclear.
Graham Watson's insight:
And one area where there appears to have been a rethink is the Winter Fuel Allowance, with the Chancellor having announced that more people are going to be eligible for it this year. However, as is often the case, the devil will be in the detail.
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Focus on capital spending in northern cities and Midlands is recognition Labour needs better economic story for voters
Graham Watson's insight:
Increased transport spending for the regions - with £15bn going to public transport initiatives outside of London, generating a multiplier effect, dependent upon the extend to which local factors of production are used.
It should improve labour mobility and help with regard to regional inequality. It's also part of the current political narrative, in trying to reconnect the government with so-called "Red Wall" voters.
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Bank of England policymaking affected by US administration’s on-off trade decisions, Andrew Bailey tells MPs
Graham Watson's insight:
Andrew Bailey's been addressing the Treasury Select Committee and is of the view that the future direction of UK monetary policy is going to be less certain as a result of Trumponomics and the ongoing trade war. That's said the overall trajectory is going to be downwards, but the pace of rate cuts increasingly uncertain.
As you should be able to see, the prevailing level of uncertainty doesn't benefit anyone.
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With the NHS and defence getting more funding, cuts to other areas are inevitable, the influential think tank says.
Graham Watson's insight:
The IFS has noted that the forthcoming Spending Review is likely to highlight that increased health and defence spending has an opportunity cost in terms of lower levels of spending elsewhere, with the aid budget particularly affected.
One of the more interesting little nuggets that's highlighted by the article is the fact the public service productivity is below pre-Covid levels, so tackling this would seem to be an important part of the government's task in the years ahead.
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Alan Taylor voted for a 0.5-point cut last month and feels recent economic figures are led by one-off factors
Graham Watson's insight:
Whereas the Chief Economist of the Bank of England, Huw Pill, has suggested that interest rates might need to stay higher for longer given the current inflationary environment, another member of the MPC, Alan Taylor has suggested the opposite. His take is that the current spike in inflation has largely been caused by one-off factors and that the the future trajectory of interest rates will be lower.
The fact that there's such transparency in decision-making, and that there's permitted to be disagreement is, for me, a very healthy feature of central bank independence and monetary policy in the UK.
Who's right? Well, we'll have to wait and see - on the one hand, it looks like the economy is slowing, but on the other hand labour market data suggests that pay growth remains strong.
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The number of new vehicles made in the UK was the lowest figure for April - outside the pandemic - since 1952.
Graham Watson's insight:
A decline in car sales is clearly a concern for both the sector and the wider macroeconomic environment, and reflect increased global uncertainty. However, it's also often seen as an important leading indicator of economic growth, so it will be a cause for governmental concern too.
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The organisation, which has been assessing the UK economy, upgrades its growth forecast this year to 1.2%
Graham Watson's insight:
The Guardian focuses on the IMF's latest consideration of the UK economy and notes that as well as looking at the prospects for growth, there's also encouragement to ease its self-imposed fiscal rules, to allow it greater freedom to avoid the need for spending cuts.
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Annual rate of food price increases hits 2.8% driven by rising cost of fresh produce but price inflation for all goods is falling
Graham Watson's insight:
Food price inflation is up, with fresh produce, notably meat now more expensive than it was. Overall, the annual rate of food price inflation was 2.8% in April, although non-food prices mean that price inflation for all goods is marginally down.
Of course, last month inflation leapt to 3.5%, so the overall picture is pretty mixed - and given the overall fall in the cost of a monthly shop, you might argue that the headline of the article is a little bit misleading.
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Chancellor hopes investment in homes, transport and energy will stave off pressure from MPs and discontent among public
Graham Watson's insight:
It seems as though the government's fiscal rules are going to be tweaked to allow more investment. The key distinction that's going to be emphasised is between current and capital spending. The former is spending on the day-to-day aspects of government; the latter is effectively investment spending on infrastructure projects that generate returns over time.
The biggest winners are likely to be health and defence, although there's also going to be spending on prisons, nuclear power and housing, in line with Labour's manifesto pledges.
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Editorial: Without bold reform which makes the rich pull their weight, rising inequality risks eroding public trust and fracturing social stability
Graham Watson's insight:
Today's Guardian editorial raises the possibility of a wealth tax, arguing that it's necessary to reset the economy and promote social justice. They argue that the rich don't pay their fair share - although the top 10% of the population already pay 60% of all UK income tax receipts.
However, they also point out that, according to Tax Justice UK a 2% wealth tax on assets over £10m would generate £24bn per year.
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As pressure grows on chancellor to rethink constraints she imposed on herself, No 10 adds to her problems
Graham Watson's insight:
Phillip Inman suggests that one of the main implications of the jump in UK borrowing is that it might force the Chancellor to reconsider her self-imposed fiscal rules. The original hope was that the government would survive with fiscal headroom of around £10bn, but this is no longer the case, and faced with the prospect of further tax rises or spending cuts, it might be the case that, instead, there's thought given to altering the fiscal rules to permit greater borrowing and investment.
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Borrowing - the difference between spending and tax income - was £20.2bn, up £1bn from April last year.
Graham Watson's insight:
The public finances were worse than expected last month, with borrowing up to £20.2bn, up £1bn on last year and just over £2bn higher than analysts had predicted.
Overall, though, the article notes that "borrowing for the financial year that ended in March is now estimated to be £148.3bn, which is £3.7bn less than initially thought." However, at the same time that's £11bn higher than the OBR forecast, and this might have implications for future policymaking.
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The UK's statistics agency says April's inflation figure was too high after it was given incorrect road tax data.
Graham Watson's insight:
My, oh my. The beleaguered ONS has admitted that its inflation number for April is too high as a result of being given incorrect road tax data. Instead of being 3.5%, inflation should have been given as 3.4%.
This might seem like an inconsequential point; however, the ONS itself has admitted that its labour market data should be treated cautiously, and if we can't trust the data, this increases uncertainty which could act as a drag on economic activity.
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The Chancellor faces tough choices about spending across different government departments.
Graham Watson's insight:
The BBC notes that the government is in the process of undertaking a Spending Review and the results will be revealed in a week's time. The article looks at the function of a Spending Review and its likely outcome.
It's a pity that they don't use marginally more technical language to describe current expenditure and capital expenditure, or the government's fiscal rules which are also outlined.
As a result, although there seems to be relatively little that the government is going to be able to do spending wise, a number of announcements have already been made, notably with reference to defence spending, spending on regional public transport and infrastructure spending.
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The executive order raises import taxes for US firms buying from other countries - but the levy remains at 25% for the UK.
Graham Watson's insight:
And yet tariffs on UK metal exports, albeit the case that they are a tiny fraction of all steel entering the US, remain at 25% subject to the UK-US trade deal being ratified.
There's neither rhyme nor reason to any of this. Trying to give it economic coherence is simply not worth it.
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Government argues investment creates skilled jobs, but others say spending elsewhere would have more impact
Graham Watson's insight:
The phrase military Keynesianism has been coined to describe the increase in defence spending, but as this article makes clear this comes at an opportunity cost.
Yes, there's the possibility of this generating a multiplier effect, but will the size of the multiplier from military spending be higher or lower than a multiplier arising from spending on other things such as poverty reduction? You need to think about this - do the poor have a higher marginal propensity to consume than other groups? If so, doesn't that imply that such spending would do more to boost economic growth.
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Donald Trump says he will double tariffs on steel and aluminium imports to 50% from Wednesday.
Graham Watson's insight:
A UK-based focus on how President Trump's trade policy is damaging to a specific sector of the economy. In this case it's the steel industry which has seen a whimsical overnight doubling of tariffs, presented as though it's all part of some grand plan.
However, the uncertainty it causes means that almost everyone is losing out.
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The government says its overhaul of retirement savings will boost growth and pension pots.
Graham Watson's insight:
I suspect that, for most post-16 economists, talking about pensions isn't terribly exciting. However, bear with me. In this case, the creation of so-called 'megafunds' is designed to try and get these funds invested in investment in infrastructure.
The hope is that this is a win-win situation: increasing returns for people with money in those funds and also in boosting the nation's productive capacity and shifting LRAS rightwards.
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As a former chancellor, I know this challenge can only be met in a budget. But Starmer and Reeves must not waste their chance, says former UK prime minister Gordon Brown
Graham Watson's insight:
Gordon Brown writes in today's Guardian applauding the government's decision to delay the publication of its child poverty review. He argues that this will allow for a more comprehensive review, include more stakeholders and establish how best to pay for measures that might help lift some of the 4.5 million children in poverty out of poverty.
He also advocates cutting the two child limit on child poverty, arguing that the government needs to work harder to counter the narrative of previous Conservative governments and establish the facts. 70% of those children in poverty come from working families; one in two children in Birmingham and Manchester live in poverty. Those two statistics alone should serve as a call to action.
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In its annual health-check for the UK economy, the IMF predicted growth of 1.2%, a marginal upgrade to its previous forecast.
Graham Watson's insight:
The IMF have revised the UK's growth forecast upwards, suggesting that the economy is going to grow by 1.2% this year and 1.4% next - only a month ago, it had forecast this year's growth to be 1.1%.
However, the overarching theme is that there's a high degree of uncertainty in all of this, not only in global terms. The IMF's UK mission chief has warned that the government is going to have to balance tax and spending plans, but there is a positive note in that it also acknowledges that well targeted investment has the capacity to further increase growth.
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The government will no longer fund some courses for older learners in order to boost entry level training places.
Graham Watson's insight:
The government is planning a shake-up of vocational training in the hope of increasing the labour supply. The problem is that this is an area of education that has been chronically under-funded for a while, and there's a degree of scepticism about whether the latest changes will work. This time the focus is on creating more places for young people at an opportunity cost of less access to such courses for older learners.
It's an area that the UK lags behind many of its trading partners, not least in Europe.
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There is growing unease over the government’s direction – a way to restore confidence would be to scrap the ‘cruel’ two-child limit
Graham Watson's insight:
Heather Stewart looks at the government's apparent decision to reverse its removal of the Winter Fuel allowance, in the wake of a poor showing in the recent local elections. However, Stewart goes further in wondering if they're also going to scrap the two-child limit to Child Benefit as part of an ideological reset.
She thinks that an inherent part of Labour's ideology is centred upon the promotion of social justice and that doing this would reaffirm its commitment to this. However, it would come at a cost - both an opportunity cost and political cost, in that some would interpret it as an unwillingness to stick with unpopular decisions and that might also affect market perceptions of the government's credibility.
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New trade deal with EU could make 41 border control posts built after Brexit redundant
Graham Watson's insight:
Here's an cost of Brexit: the need for border control posts, with the recent UK-EU trade deal rendering them obsolete. As the article makes clear, one of the biggest such posts, at Portsmouth cost £25m and it's severely underused.
What a waste!
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April figure more than expected and comes despite chancellor’s increase in employment taxes
Graham Watson's insight:
The Guardian take on the public finance figures notes that their worse than expected state comes after a Budget that included tax rises. However, the issue is that government spending has continued to rise, not least because of benefit and pensions increases, meaning that "public sector net debt, the sum of every annual borrowing figure...[has risen to] 95.5% of GDP, one of its highest levels since the 1960s."
What this means in practical terms is likely to be further tax rises - possibly including a wealth tax - and pressure to cut spending.
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The changing nature of the UK labour market is flagged up by this Guardian article that highlights the fact that manufacturing employment has declined by 600,000. Of course, at the same time, the total number of jobs has increased, so it might be argued that this is of little consequence.
However, again, it's an interesting example of the importance of sources - this study was undertaken on behalf of a trade union, the GMB, who have a vested interest in the sector because it's among the most heavily unionised.