Pricing political stability

Government borrowing costs have little to do with a country’s debt level but quite a lot to do with its perceived stability. That is why a country like Japan, whose debt as a proportion of GDP is one of the highest in the world, pays interest at 0.03 percent on its bonds. Oil rich countries like Russia, Venezuela and Nigeria, with much lower levels of debt, pay significantly higher rates of interest; 7.5 percent for Russia, over 10 percent for Venezuela and a staggering 16 percent for Nigeria.

Countries with governments that might do something bonkers are perceived as a much greater risk than those with populations that pay their taxes and elect moderate governments. Stable and boring countries are a lot less risky. Most stable and boring of all are the Swiss who charge investors a small fee for lending money to their government.


Source: Trading Economics

But occasionally, even countries perceived to be strong and stable do something a bit crazy, like elect a volatile and clearly incompetent president. It is unlikely that Donald Trump will be able to do any lasting damage. The checks and balances of the American state will see to that. The cost of servicing US government debt is still therefore relatively low when compared to much of the rest of the world. Nevertheless, the fact that they could put someone like Mr Trump in the White House at all makes Americans seem that bit less reliable than they once were. Consequently, compared to other safe-bet countries, US borrowing costs have crept up.

Historically, though, all government bond yields are low. In uncertain times, people look for safe places to park their money. Government bonds provide such safe places and the more people there are who want to lend money to a government, the less that governments has to pay to borrow. Therefore, though it may look perverse, as UK government debt has risen, the interest rates on that debt have fallen. Both are, to an extent, consequences of the recession. Government borrowing went up but so did the search for safe assets.

Chart by Economics Help

Should we, then, be worried about Moody’s downgrading the UK government’s credit rating? In the short-term probably not. Ratings don’t seem to make much immediate difference to government borrowing costs.

Nevertheless, Moody’s assessment of the UK was scathing:

Moody’s believes that the UK government’s decision to leave the EU Single Market and customs union as of 29 March 2019 will be negative for the country’s medium-term economic growth prospects. Aside from the direct impact on the UK’s credit profile, the loss of economic strength will further exacerbate pressures on fiscal consolidation.

Growth has slowed in recent months, with average quarterly growth of just 0.26% in the first two quarters, versus an average of 0.6% over the 2014-2016 period. Private consumption has slowed sharply and business investment has been weak since 2016, most likely linked to the Brexit-related uncertainty. While future years may see some recovery, Moody’s expects growth of just 1% in 2018 following 1.5% this year and 2.25% on average in recent years.

More importantly for the UK’s credit profile, Moody’s does not expect growth to recover to its historic trend rate over the coming years. The UK is a relatively open economy, and the EU is by far its largest trading partner. Research by the National Institute of Economic and Social Research (NIESR) suggests that leaving the Single Market will result in substantially lower trade in goods and services with the EU. In a similar vein, both the NIESR and the Bank of England estimate that private investment will be materially lower in the coming years than in a non-Brexit scenario.

Moody’s is no longer confident that the UK government will be able to secure a replacement free trade agreement with the EU which substantially mitigates the negative economic impact of Brexit. While the government seeks a “deep and comprehensive free trade agreement” with the EU, even such a best-case scenario would not award the same access to the EU Single Market that the UK currently enjoys. It would likely impose additional costs, raise the regulatory and administrative burden on UK businesses and put at risk the close-knit supply chains that link the UK and the EU. Also, free trade arrangements do not as a standard cover trade in services — which account for close to 40% of the UK’s exports to the EU and 80% of Gross Value Added in the economy — given the prevalence of non-tariff trade restrictions and the need to align regulations and standards. In Moody’s view, the differences of outlook between the UK and the EU suggest that the most likely outcome is now a rather more limited free trade agreement which may exclude services: the UK’s desire to pursue its own regulatory policies and to avoid the jurisdiction of the European Court of Justice will make finding an agreement on services challenging. Moreover, any free trade agreement will likely take years to negotiate, prolonging the current uncertainty for businesses.

Aside from the direct impact on the UK’s credit profile, weakening growth prospects are likely to exacerbate the government’s evident fiscal challenges. And this is likely to be happening during a period in which policymakers will be increasingly distracted by the twin challenges of sustaining a domestic political consensus on how to operationalise Brexit and reaching agreement with EU counterparts.

In other words, Brexit has made a bad situation worse. Although the rate the UK pays on its borrowing is low, it now has a lot more debt relative to GDP than it has had for several decades. Even small rises in the costs of refinancing that debt will put extra pressure on public finances.

As I said before the Scottish referendum, there is a lot to be said for living in a 300 year-old country with a reputation for political stability. Voting to leave the EU dented that reputation. The government’s poor handling of the aftermath and the antics of some of our government ministers haven’t done anything to repair the situation. Sure, it’s still unlikely that a British government will do anything completely mad but we don’t look as strong and stable as we once did. Over time, the cost of government borrowing is likely to reflect that.

It is ironic, then, that some of the politicians who told us in 2010 that if we didn’t control the public debt the bond markets would slaughter us, are the same politicians who have brought us to this pass. Some of them want us to go further and quit the EU without paying anything. They tell us that electing Jeremy Corbyn would make the UK like Venezuela. Yet unilaterally repudiating an international treaty would be more Venezuelish than anything a UK government has done in decades. It would be a sure-fire way of making us look like a basket-case.

The rest of the world thinks we are a bit crazy but, for now, seems to be giving the UK the benefit of the doubt. The Brexit vote was an uncharacteristic outburst from a usually sober and rational nation. Despite the ridiculous posturing of some of our politicians, people still believe that something sensible will be sorted out eventually. But the closer we get to the Brexit deadline without any meaningful progress, the more risky the country will start to look. Being volatile, bonkers and a bit maverick might look like fun but there is a price to be paid for it.

Advertisements
Posted in Uncategorized | 2 Comments

Brexit – no job for dilettantes

“Is this really all we’ve come up with?” shouted the boss as his team stared dejectedly at the sparsely populated flip charts. “If we don’t get some creative ideas soon this will have been a complete waste of time.”

The strategy away day wasn’t going as well as he’d hoped. His part of the business was in trouble. He needed some new ideas quickly but his team weren’t coming up with anything. Shouting at them, which usually worked when he wanted to make people work faster, didn’t seem to be making them think any more creatively.

I am reminded of this every time I hear government ministers talking about Brexit. A bit of creativity, innovation and imagination together with some unspecified whizzy technology will mean that the complexities of leaving the EU can be easily dealt with. It can’t be beyond the wit of man, can it? This is just the sort of thing corporate executives say when they really haven’t a clue what to do next.

Rafael Behr wrote an excellent piece on this yesterday. The hard-line leavers in government, he says, don’t want to get into the messy details of leaving the EU and accuse those who attempt to do so of over-complicating things and creating obstacles:

Some Tories have moved on from the question of what needs doing – the referendum answered that with the single word “leave” – and are applying themselves to the problem of how it might be done: how to protect industries that rely on the single market; how to organise the Irish border; how to support agriculture without EU subsidy. Others shrink from that challenge. They find comfort in the saccharine simplicity of restating the original cause. “Hard” Brexit is the place to which some Tories retreat to avoid getting their hands dirty with compromise. If things go wrong, they can blame the pragmatists for sullying the dream.

The prime minister wasted a year indulging that tendency. One May loyalist describes frustration in cabinet committees when trying to get radical Brexit ministers to focus on detail. Every obstacle is belittled as a symptom of weak faith; every workaround is treated as a trap laid by unrepentant Europhiles seeking to abort the whole thing. No assurance by ex-remainers that they have accepted the referendum is trusted. This leads to a vicious cycle: the only people in government prepared to engage with the question of how Brexit might work are those who didn’t vote for it, which reinforces the zealots’ suspicion that the “softies” are closet saboteurs.

Detail is for sissies. How hard can it be?

In Britain we have long been seduced by the cult of the gentleman amateur – the swashbuckling chap who cuts through all the crap, ignores the boring functionaries and just gets things done. His modern equivalent is the disruptive innovator who circumvents the hierarchy, shakes everything up and trashes the industry’s long-held norms and beliefs. That the words Buccanneer and Brexiteer sound similar is no accident.

Boris Johnson, says Rafael Behr, doesn’t like his current job and he’s not very good at it. This, after all, is a man who doesn’t much care for detail. He has boasted about quitting his management consultancy job after a week:

Try as I might, I could not look at an overhead projection of a growth profit matrix and stay conscious.

I have some sympathy with this. Like many people, I have sometimes felt like chucking my job in after one too many PowerPoint presentations and I don’t like getting to grips with tedious detail either. My natural instinct is to look for the short cut or the new idea that will eliminate the need for mind-numbing processes. I’m one of those ‘surely it can’t be this hard’ types.

The trouble is, though, sometimes it is. What I have learnt over the years is that you often spend so long in the futile search for the disruptive idea, the paradigm shift or the next big thing that, had you devoted that time and energy to working through the messy detail, you would have solved the problem by now. Sometimes you have no choice but to do the boring stuff.

Brexit, I fear, is one of those times. It is riven with eye-wateringly complex detail nested within more eye-wateringly complex detail. There are hundreds of treaties and thousands regulations to be worked through. Thousands of lorries currently go through ports with little or no capacity for customs checks. As the Institute for Government pointed out, the customs point for Dover and the Channel Tunnel only has parking for 82 trucks because most of the trade for these ports is covered by the single market and customs union.

Perhaps one day X-ray machines, robots, airships and drones might be able to do all this but for now this is science fiction. Even if the UK’s new computerised customs system is implemented on time, its design was based on pre-Brexit assumptions. It may not be able to cope with the huge increase in customs declarations.

The further we move away from the EU, the more difficult it will be. The sort of clean-break Brexit advocated by Boris Johnson will require a hell of a lot of detailed work. I’m no expert on the construction of customs infrastructure but I’m guessing that it’s already too late to build enough capacity for 2019. Those who wanted the hardest Brexit were, for the most part, those who were eager for Article 50 to be triggered. If they had stopped to think about it, they should have been the ones arguing for the government to hang fire. A Brexit which sees the UK leaving the single market and customs union and starting out without a single trade deal with anyone, was always going to need far more planning and preparation than can be done within two years.

Yet it is the so-called hard Brexiters who are still maintaining the line that it’s not going to be that difficult and dismissing any suggestion that it might be. As Rafael Behr says:

Reality is coming on hard and fast. May’s true allies in confronting it are the people who warned all along that the impact would hurt. But she has a cabinet packed with people who insist that the collision is avoidable.

You can tell them by the Johnsonian way they twist queries about how it is done into rehashed arguments about why it must be done. And she has a party that prefers a game of hunt-the-saboteur to the boring homework of negotiation.

The time for flowery speeches peppered with classical references and Latin tags is over. This is no job for dilettantes. Those who can’t or won’t get to grips with projections, plans, numbers and tedious detail should go and find themselves something more interesting to do.

Posted in Uncategorized | 33 Comments

Who needs low-skill migrants anyway?

The Home Office document leaked to the Guardian suggests that, after Brexit, life will be tougher for those EU citizens coming to the UK to do lower skilled and lower paid work. While those in “high-skilled occupations” will be granted work permits for three to five years, those earning less than £18,600 a year will only be entitled to a 2 year visa and will no longer be allowed to bring their families to the UK.

The paper also calls for employers to give preference to UK workers and suggests that they should complete an “economic needs test” to confirm that no suitable applicants are available before recruiting EU citizens.

The document is not government policy and it is not yet clear who wrote it or even how many ministers or senior civil servants have seen it. Nevertheless, it tells us something about the thinking on which future immigration policies are likely to be based.

The paper seems to be based on the following assumptions:

  1. There will be a continuing supply of workers who want to come to the UK so much that they will be prepared to put up with whatever restrictions and inconvenience the government throws at them;
  2. There is a ready supply of UK workers able and willing to do the jobs that are currently done by EU migrants.

The first of these is highly questionable. The most recent immigration figures showed a sharp reduction in immigration from the EU. The falling value of our currency, better opportunities elsewhere, continuing uncertainty about their status and, most probably, the toxic atmosphere in the UK have led to a drop in the number of workers from the EU15 and EU8 countries.

Chart by Resolution Foundation

As Jonathan Portes says, before we have even taken back control, a lot of EU migrants have decided to leave anyway.

We’re not being more selective. It’s the immigrants who are being more selective. It’s not that we’re choosing to have fewer immigrants, it’s that fewer immigrants are choosing to come here.

Will there be plenty of British workers waiting to fill their jobs? Probably not. The idea that there is an army of workless people in the UK is even more out-of-date. The UK-born working-age population is no longer increasing. According to some estimates it has already peaked. In a speech last month, Bank of England MPC member Michael Saunders pointed out that unemployment is at a 40 year low and the underemployment associated with the recession is falling rapidly too. He concluded that there is very little spare capacity in the labour market. This, combined with the slowing down of migration from the EU, is already causing labour shortages in the most migrant-dependent industries.

Chart by bank of England using BoE and ONS data. The three industry sectors with the highest share of employment of EU nationals are manufacturing, accommodation and food services, and administrative and support services.

The authors of the Home Office paper may argue that they are simply reflecting the views of a majority of voters. As British Future’s report published earlier this week showed, people tend to think that the economy needs high skilled workers but that the number coming to do lower paid jobs should be cut back. We like doctors and scientists but we are not so keen on low skilled workers.

Or, at least, we are not keen on low skilled workers when they are called low skilled workers. Give them specific job titles, though, and attitudes tend to change.

It is striking, however, that even within this category respondents are able to make pragmatic concessions to secure the economic gains of migration: two-thirds of people (66%) would be happy for the number of seasonal workers coming to the UK – to work on farms, food processing factories or in hotels, for instance – to remain at current levels (55%) or increase (11%). That view is also held by more than half (55%) of Leave voters in the referendum, and 78% of those who backed Remain.

Digging down into the detail of attitudes to different kinds of lower- skilled migration there is further nuance. While the pubic would like to reduce low-skilled migration overall, there are numerous exceptions. Attitudes soften when people are asked to give their opinion about people migrating to do a particular job – whether that is care work, fruit-picking or waitressing.

But apart from the care workers, construction workers, waiters and fruitpickers, what have low skilled* EU migrants ever done for us?

It’s all very well to say, as some do, that we managed before (whenever ‘before’ was) without all these EU workers. Maybe we did but many of the things we now take for granted are dependent on migrant workers. As the FT’s Sarah O’Connor said, we’d miss those unskilled migrants if they stopped coming:

Have you ever noticed how supermarkets run out of fruit salads on sunny days when everyone decides they fancy a picnic? No? That’s because they rarely do.

I never really thought about the mechanics behind this until I interviewed a man who supplied temp workers to a British company that made bagged salads and fruit pots. Demand would fluctuate according to the weather, but British weather is notoriously changeable and fresh products have a short shelf life. So the company would only finalise its order for the number of temps it required for the night shift at 4pm on the day. Workers on standby would receive text messages: “you’re on for tonight” or “you’re off”.

Most of this hyper-flexible workforce had come to the UK from Europe. “We wouldn’t eat without eastern Europeans,” the man from the temp agency said confidently.

And if the rising cost of food and building work doesn’t worry you, the impact on the care sector should. Care homes are already experiencing recruitment difficulties. Lack of space in care homes has a knock-on effect on hospitals, which are themselves likely to suffer from staff shortages if EU migration is significantly reduced.

Just because these workers are low paid it doesn’t mean that they are not necessary. The government may be hell-bent on reducing the number of low-skill migrants but it isn’t telling us how it plans to deal with the consequences. People might not complain too much when they can’t get salad on a hot day but when their hospital is full and they can’t get help for their elderly relatives they will blame the government.

The government is under pressure to ‘do something’ about immigration. The trouble is, what it seems to be proposing is based on flawed assumptions and may well cause more problems than it solves. The fact is, we need these so-called lower skilled migrants as much as we need the engineers, scientists and doctors. But perhaps people won’t realise that until they have gone.

 

* The term ‘low skilled’ is contentious here. In a previous role I used to recruit care workers and I was amazed by their physical, mental and emotional resilience. If anyone thinks it is a low skilled job, I suggest they try being one for a day. However, it is these and the other jobs on this chart that will be designated low skill for migration purposes. What constitutes skill and whether it is high or low is a discussion for another day.

 

Posted in Uncategorized | 24 Comments

Summer is over: now Brexit gets serious

Throughout my seven years at senior school, we had the same headmaster. Every September he made the same speech on the first day of term. Half of the year’s work, he said, was done in the autumn term, between September and Christmas. We should put the lazy days of summer behind us. It was back-to-reality and hard work from now on.

I have long believed that something similar happens in business. This is the time of year when things get back to normal after the summer and there is a flurry of activity in the months before Christmas. After New Year people start sloping off on skiing holidays. That then shades into spring breaks and before you know it, it’s summer again. In the autumn, though, fewer people go away and the run up to Christmas is when a lot of the concentrated work gets done.

This autumn is also Brexit crunch time for a lot of firms. What might have seemed like an interesting intellectual exercise a few months ago is now starting to look a lot more real. At the end of September we will be 18 months away from leaving the EU. And as anyone who has ever run a major project knows, 18 months isn’t very long.

According to KPMG’s Brexit Navigator, the first decision-making deadlines are due this month. Any organisation that wants to set up an EU subsidiary, move people abroad or apply for EU regulatory licences needs to make those decisions this month if they are to have everything in place by 29 March 2019. It’s not only banks that will need to relocate staff. Pharmaceutical firms, airlines, media companies and the UK’s much celebrated games industry expect to move at least some of their people to the EU. Next July and August will probably be the Brexodus months. Many people will want to move at the turn of the school year. To be in place by March 2019 means moving next summer. That is less than a year away. Companies therefore need to start making decisions about relocation now.

August was a transition month for Brexit says Jill Rutter of the Institute for Government, the point at which both the government and the Labour Party acknowledged the need for some sort of transitional period after March 2019. The ticking clock has concentrated minds:

Why all this talk on transition now? On the Government side, it seems to reflect the increased power in the Cabinet of the Brexit pragmatists, most notably Hammond. He will be only too aware of the time needed for adjustment to cope with new processes at pinch-point ports – and will have heard the calls from the CBI and the Institute of Directors among others for early clarity on transition. Businesses are already warning that they need certainty about post-Brexit arrangements in the next few months.

Transition, not the final deal, is now the priority:

The Government also knows that the sooner a transition can be agreed, the less risk to business and the less it will incur nugatory spending on putting the mattresses at the foot of the cliff. Agreement on transition now is hugely more valuable than a last minute deal.

Therefore an off-the-shelf transition is looking more attractive as it can be done more quickly:

The other emerging recognition is that, whatever its demerits, a transition that mirrors (the other word of the summer) the status quo means one adjustment – not two – for business. The sheer complexity of negotiating a new deal for the transition and then a longer-term future partnership is just not worth the hassle. So, a time-limited period outside the EU’s political institutions but inside the economic ones offers an “off-the-shelf” answer.

Charles Grant, director of the Centre for European Reform, thinks that, despite all the posturing from hardliners, we will end up with the UK staying in the customs union and single market during the transition period. In other words, pretty much what we have now except with no vote. There simply isn’t time to negotiate and agree a bespoke settlement.

This would, he says, also get us over the money problem:

If the UK asked for a three-year transition and agreed to pay €10bn a year (roughly what it pays today), that would cover a large part of its share of unspent EU budgetary commitments. That would also ensure no hole in the EU budget in 2019 and 2020, the last two years of the current seven-year budget cycle – which would be a great relief to the European Commission.

An off-the-shelf transitional arrangement would certainly take the pressure off companies.  If trading rules are going to remain as they are for a few more years after 2019 there is less urgency. The trouble is, such a deal is far from certain and might yet take months to agree. This leaves businesses with a dilemma. Do they make arrangements for leaving the single market and customs union in 2019 or do they hang fire in the hope that something will be agreed?

As Faisal Islam said in his excellent summary of where we are at with Brexit, we are getting close to the point where companies will have to make a call:

[T]he clock is running down in another way too. The Government has been told by business leaders that they too will not wait around until Christmas before making decisions.

In the next three months, board meetings will occur where finance directors will put forward plans for the fiscal year 2018-2019. These plans will have to include an assessment of exactly what the legal position will be with the EU on 30 March 2019. If still unclear, many of these boards will have a responsibility to shareholders to activate ‘No Deal’ contingency plans that were prepared over the past year. This is most apparent in financial services, but is relevant across the economy.

Most organisations will do some sort of risk and impact assessment to determine how long they can afford to wait before making a decision. The longer we go without clarity on the transition phase, the more likely it is that companies will assume the worst and cut their losses. The clock is ticking and for many organisations the decision deadlines are getting dangerously close. As my old headmaster used to tell us, the autumn term is when the work gets serious.

 

Posted in Uncategorized | 14 Comments

Friction burns

Three reports on Brexit came out last week. Two of them were risible. The one by Economists for Free Trade (the re-branded Economists for Brexit), advocating what trade expert Samuel Lowe called “unilateral tariff disarmament“, has been well and truly ripped to pieces, even by Leave supporters.

In a similar vein, a report by the Institute of Economic Affairs  assured us that we will still be able to trade tariff-free with the EU after Brexit, even without a free trade agreement. This, as Samuel Lowe said, is simply wrong;

Once the UK leaves the EU, the EU is obliged by WTO rules to apply the same tariffs as it does to any other country without a free trade agreement. It can’t do anything else. Even I, merely an enthusiastic amateur, understand this.

Neither report is worth dwelling on but, sadly, that’s just what a lot of the media did. As a result, a  report with proper evidence, by people who know what they are talking about, was blown out of the headlines. In case you missed it, which you might have done with all the fuss about the other reports, the Institute for Government’s Frictionless Trade? explains why all the UK’s post-Brexit options will make trade more difficult than it is now and why, even so, some options are better than others.

Essentially, there are three reasons why EU countries operate customs checks on imported goods:

  1. To impose tariffs and quotas;
  2. To confirm the imports’ country of origin;
  3. To ensure compliance with EU regulations.

A free trade agreement (FTA) would get us over 1 but not 2 and 3. Therefore, even with a FTA with the European Union, goods coming from the UK would still be stopped at EU customs posts.

The EU needs to check on the origin of goods to stop people using countries with FTAs as a back door to the EU. Let’s say the UK negotiates a FTA with the EU and one with the USA but there is still no FTA between the EU and USA. Without customs controls for UK goods, it would be easy to export goods from the USA to the UK and from there to the EU without paying tariffs.

A customs union would get us over point 2. By levying a common external tariff, the EU could be sure that any goods imported into the UK have already paid tariffs, so there is no need to check for their origin.

But that still leaves point 3. The EU has strict rules (those famous EU regulations) especially on the import of food. Without inspections to confirm compliance, again assuming the above scenario, what would stop US companies exporting GM foods, hormone injected beef and chlorine washed chicken into the EU, via the UK?

To satisfy point 3, the UK would have to shadow EU regulations, effectively remaining part of the single market, with all the obligations that entails, such as free movement and payments to the EU. Once we do that, there is really no point in leaving the EU at all.

There is a 2.5 option, a customs union with a series of Mutual Recognition Agreements on standards, which could significantly reduce the amount of border checks but it would not eliminate them completely. This is what Michael Barnier meant when he said that there could not be frictionless trade once the UK had left the EU. Much of the discussion about the UK’s post Brexit relationship with the EU has focused on free trade agreements and tariffs but that is, at best, one third of the picture.

Whatever option we end up with, there will be significant disruption to supply chains. As the Institute for Government report says, the UK is not an island factory. It has been in the single market for 24 years and the EU for 44. This has enabled companies to specialise and so many have become part of European-wide supply chains. As a result, many of the UK’s exports are dependent on imports.

It is increasingly the case that, to export, the UK imports. In 2011, almost a quarter of the value of UK exports came from imports (up from 18% in 1995; see Figure 3). In those sectors where the UK is more closely integrated into a global value chain, the figure is significantly higher; 44% of the value of UK car exports comes from imported products.

Of the UK car industry’s car industry’s £64 billion output, £12 billion is spent importing goods from the EU. A third of its exports to the EU are in the form of parts to go into other EU made vehicles.

So although we might talk about making cars in Sunderland, for example, it is just one part of an international factory floor. Parts enter and leave multiple times on their journey towards coming together as a finished vehicle.

In most UK manufacturing sectors, trade is deeply integrated with the EU. Brexit therefore brings considerable risks:

This integration – and the economic activity arising from it – is what is at stake when we describe the risk of introducing costs into UK–EU supply chains.

The UK’s integration into global supply chains ows in two directions:

  • downstream integration – parts or inputs imported by the UK from other countries to be used for further production
  • upstream integration – parts or inputs exported by the UK to other countries to be used for further production.

In some sectors, this level of integration is extremely high, some two-thirds to three-quarters of their supply chain.

Any disruption to this value chain will increase costs. Many companies now operate on a just-in-time basis and don’t have much slack to allow for delays. Companies within the EU can mitigate this risk by sourcing more of their parts from other EU countries, where there is very little chance of a truck being stopped. They have plenty of other countries to choose from. UK companies, on the other hand will have to swallow the increased costs at the same time as losing markets in the EU.

As the IFG points out:

[E]ven minimal increases in the cost of moving individual parts back and forth across the EU–UK border could accumulate into significant overall increases in the cost of finished products. A study by Oxera in June 2016 found that around 8% of the cost of importing goods by sea arose from customs clearance.

Nissan and Jaguar, two of the UK’s largest car makers, hold only two hours’ of stock of some items at their sites, in order to minimise inventories and save on costs. Even the threat of delays would mean the companies would have to invest in holding more inventory or localising suppliers. UK suppliers of parts face the risk of missing out on ‘just-in-time’ contracts if they cannot guarantee delivery on time.

And finding markets elsewhere won’t make up for the loss.

There have been suggestions that any decrease in trade with the EU as a result of Brexit could be offset by an increase in UK trade with other partners. There are many problems with this approach, not least that the sheer size of the EU market for UK exports means that a small percentage decrease in EU trade has to be offset by very large percentage increases in trade elsewhere.

But that pivoting strategy will be even more di cult for UK exports of intermediate products. A nished car can be sold to an Australian or to a German. But a car part can only be sold to countries that have car factories – which Australia doesn’t. As we have seen, cross-border supply chains often mean that countries specialise in particular parts of industries and the industry of another country may not be adapted or may have no need for specialised UK products.

You can’t sell parts to people who don’t make stuff.

A free trade agreement, even one like the EU has negotiated with Canada, would remove the need for customs checks because the EU would want to confirm rules of origin and regulatory compliance. The report gives an example from the chemical industry.

Steve Elliott, Chief Executive of the Chemical Industries Association, has stated that ‘the cost of providing the technical proof that a chemical or any other manufactured product originates from the EU or the UK, bearing in mind that in our case there could be several stages of synthesis involved … would clearly outweigh the benefit of duty-free sales.

And the result of this:

A range of estimates collected in the Trade and Investment Balance of Competence Review shows that ‘British firms would be exposed to a combination of administrative and compliance costs linked to rules of origin, ranging (based on existing estimates) from 4 percent to perhaps 15 percent of the cost of goods sold.

Enough to make customers in the EU look elsewhere.

As Frances says, there is something very nineteenth century about a focus on tariffs and free trade agreements. The UK economy in 2017 doesn’t work like that any more. It is no longer the workshop of the world. It is a section within a vast production line that stretches across Europe. Disrupting that will do severe damage to all its parts but it will be easier for the rest of the EU to repair its parts than it will be for us to repair ours. The more obstacles we put in the way of trade, the worse it will be. Whatever happens, this is going to cost us dearly.

Posted in Uncategorized | 23 Comments

Sitcom Britain

I said years ago that if we ever had an authoritarian movement in Britain it would not have uniforms, goose-stepping marches and torchlight parades. It wouldn’t be that interesting. Ours would be a shabby poujadism, led by golf club bores, residents’ association busybodies and parish Pol Pots.

The boorish self-righteous know-all is a staple of British comedy, perhaps because every neighbourhood has at least one. It’s easy to imagine Terry MedfordMartin Bryce, Warden Hodges and Reggie Perrin’s brother-in-law Jimmy in your local UKIP branch. Basil Fawlty would have joined in the early years but left once they started letting in riffraff like Eddie Booth and Alf Garnett. But at least in the comedies even the most dislikable characters had some redeeming features and, in the end, they usually got their comeuppance, their own puffed-up stupidity eventually bringing about their downfall.

Alas, in 2017, this once-ridiculed tendency in our national culture is now calling the shots. As Rafael Behr said last week, to the rest of the world, Britain now looks urbane but unhinged. Sitcom characters, only without the comedy:

To succeed in Britain, radicalism eschews the fancy dress of martial bombast. Nigel Farage advanced the cause of Brexit not by banging podiums but by propping up the bar, nudging and winking at insurrection through a pint of ale.

Last week, the government produced two Brexit position papers described as foolish by a former government legal advisor and as destructive ambivalence by the FT. And those were just the polite reactions. As Chris Grey says, the reason for the incoherent and contradictory messages in these papers is the government’s attempt to walk a line between the national interest and the demands of the noisy Brexit fanatics:

Even the realpolitik of negotiating with the EU would not be so difficult were it not for the relentless pressure of the vociferous and ever-present Brexit ultras inside and outside the Tory party. They are so detached from reality and so implacable in their demands that even the government’s attempts to negotiate hard Brexit are regarded as a betrayal. Since they do not have to take any responsibility at all for the consequences they are free to oppose transitional periods, exit bills, or any kind of deal at all (see John Redwood here, for example). If May thought that she had bought their loyalty by rejecting the obvious, pragmatic, compromise of soft (single market) Brexit then she failed to understand that as with every concession made to them before it just produces an even wilder new demand.

This chorus, made up mostly of middle-aged men, shouts ‘treason’ at any attempt to translate Brexit into something that might limit the damage to Britain’s economy. They claim a monopoly on patriotism, wrapping themselves in the Union Jack and calling those that disagree with them anti-British.

Most distasteful of all, though, is the weaponising of ignorance. The snobbish and condescending suggestion that knowledge and expertise are somehow elitist and irrelevant to most people has taken our political debate to a new low. Plummy accents affect common cause with ‘ordinary folk’. We common plain-speaking chaps are fed up with experts, aren’t we, eh what? Oxford history graduates tweet things they surely know to be nonsense and Fellows of All Souls cast themselves as anti-Establishment. The strategy when confronted with inconvenient questions or facts, is to simply go red in the face and shout a lot, hoping to browbeat your opponent into submission. Some of the noisy old men on Twitter really don’t know what they are talking about. Worse, though, are the ones who pretend not to know things because knowing them would be inconvenient.

As if to emphasise the sitcom takeover of Britain, as soon as she came back from holiday our prime minister chose to become embroiled in the War of Big Ben’s Dong (oo-er missus). We may be 18 months away the most calamitous event to hit this country since the Second World War but our government can still find time to pontificate on a manufactured tabloid row. Never mind that the plan to repair Big Ben was signed off by parliamentary committees in 2015, that the bell has been silenced for refurbishment before or that doing delicate repair work with 120 decibel chimes going off every quarter-hour is self-evidently stupid, the pompous boors have to be appeased. Once again, those who know what they are talking about and who have done the painstaking planning are dismissed with typical bluster.

Some council jobsworths are planning to silence the town hall clock. The local rag is up in arms and retired colonels are writing letters to the Times. But don’t worry, Hyacinth Bucket and her residents’ committee are on the case. They’ll put these namby-pamby so-called experts in their place.

Hey, here’s an idea. An old Etonian hack, who has built his reputation by making up stories about foreigners and telling xenophobic jokes, somehow gets to be foreign secretary. He carries on exactly as before, which upsets lots of foreign politicians and diplomats. We could have European dignitaries with funny accents saying, “Ach so, zis is famous English joking, yah?” OK, it’s preposterous but it should get a few cheap laughs in the half hour between the serious programmes.

The trouble is, the joke is wearing thin. An aspect of our national culture that used to provide endless comedy material has gone mainstream. The bombastic, self-righteous middle-aged bore, revelling in his homespun philosophy and convinced that what he can see from his own doorstep represents a universal and timeless truth, is now calling the shots. The knowledgable and those with workable suggestions are shouted down. The people who used to provide us with midweek comedy laughs are now running the show and, when you get close up, they are really not very funny at all.

 

Posted in Uncategorized | 39 Comments

Minimum overtime pay: a nudge for lazy managers

The most interesting proposal in Matthew Taylor’s report on employment is this one:

Government should ask the Low Pay Commission (LPC), in its next remit, to advise on the impact of bringing in a higher National Minimum Wage for hours which are not guaranteed in a contract.

This new higher rate should be set at a level which incentivises employers to schedule guaranteed hours as far as reasonable within their business. Businesses would still have the ability to offer zero or short-hours contracts, or to request that an individual works longer hours than those guaranteed in their contract, but would have to compensate the most vulnerable workers (those on low wages) for the additional flexibility demanded of them.

For example, if an individual is on a contract which only guaranteed them 6 hours a week, but is regularly asked to work more than this, they should be entitled to the standard National Minimum or National Living Wage rate for the first 6 hours they worked in a week, and then this new higher rate for any hours beyond
that.

So the lower the number of contractual hours, the more hours a worker would be paid at a higher rate should they be required to work overtime. And, of course, if a worker is on a zero-hours contract, every hour is above their contractual hours would therefore be paid at the increased rate. If, for example, the minimum overtime rate were to be set at time-and-a-half, anyone on a zero hours contract would be paid 50 percent above the minimum wage for every hour they worked.

This is an ingenious way of saying to employers that it is still fine to employ people on zero hours but that they must pay for the privilege and, as Gavin Kelly says, share some of the benefits of flexibility with their workers. It also gives employers an incentive to guarantee hours, and therefore income, to employees. The higher the guaranteed hours, the less you have to pay out in overtime.

This measure would call the bluff of lazy employers. Is it really that crucial that employees can be called in at a moment’s notice or is it just because bosses can’t be bothered to plan?

A recent TUC report on insecure work found that those sectors which had seen higher increases in productivity over the last five years tended to be those which had experienced smaller increases in insecure employment.

The report emphasises that correlation doesn’t necessarily imply causation. It does not mean that insecure workers make a workplace less productive. It is likely, though, that low productivity and reliance on insecure forms of work are symptoms of the same problem. Low pay and flexible labour is what enables that long tail of poorly managed and low productivity organisations to exist. Some of them probably wouldn’t have started up in the first place without it. Why train people when you can rely on someone else to do it? Why invest when you can maintain your profits by throwing more poorly paid people at the problem? Why waste time on planning when you can call people in and then send them home without pay if they are not needed?

The UK’s employment framework, with its plentiful supply of cheap labour, relatively low employment protection and, until recently, very low risk of punishment for those that flout the law, encourages too many managers to take the low road, pushing risk onto their workers.

There are signs that high employment and the tight labour market is already encouraging firms to give workers more secure employment contracts. The Resolution Foundation believes the UK has passed peak insecurity, noting that most of the job growth over the past year has been due to full-time employment.

Nevertheless, a nudge in the form of Matthew Taylor’s minimum overtime rate might speed up the conversion of precarious jobs into ones with that bit more security. It would, at least, encourage managers to think about whether they really do need a job to be as casual and flexible as they think. It would be good to see this proposal enacted. It might just be the jolt our labour market needs.

Posted in Uncategorized | 3 Comments